INTERNATIONAL BUSINESS ENVIRONMENT & TRADE

1. Introduction

The present report is going to be on the discussion of the international business environment and trade on electrical machinery. ASD Ltd. is a UK based electrical machinery manufacturing company which is going to ship electric motors to India based company PT electrical. The shipping laws and regulations for transferring products over the sea will be described in this report. Several documents needed for this operation such as internal sale contracts, bill of lading, marine insurance and many more will be discussed in this report. Besides, this report is going to discuss the payment methods and bank involvements of both the countries for the financial transaction of this deal.

2. Background

ASD Ltd. is one of the most reputed electrical machinery manufacturers of the UK and they made machines such as motors, transformers, alternators and other electrical equipment. PT Electricals is the distributor and retailer of electrical machinery in India (Gordy et al. 2019). The after purchase servicing of the machinery is the responsibility of PT Electricals. Thus, ASD Ltd. manufactures these machines and exports them to PT Electricals in India and this export is mainly done using the sea. However, a logistics company named Mediterranean Shipping Company (MSC) is going to export these products from one UK to India. Financial transactions between these companies are done through banks and in the UK; HSBC handles the whole transaction of the money to the state bank of India in India.

Electric motors are utilized for several purposes such as in factories for electric machinery, household purposes, blowers, pumps, alternators, compressors and many more. Electrical machinery is one of the common export materials from the UK to India. This electrical equipment is essential for industries and thus other industries are depending upon these materials. As discussed by Mann (2018), in this digital era, most of the products are run by AI and IoT however, in heavy industries there is still no substitute for electrical motors. The demand for these instruments is huge in India as it is the basic equipment that is needed in most electrical operations.

Figure 1: India’s trade with the UK

(Source: Gordy et al. 2019)

3. Shipping scenario

3.1 Company details

PT Electricals placed an order of 3000 electric motors to ASD Ltd. who has been doing business for the past 5 years. Thus, the exporting company in this shipping scenario is ASD Ltd. and the importing company is PT Electricals. The below table is going to show the details of these companies: [Refer to Appendix 1]

Table 1: Export and import companies

(Source: Created by Author)

3.2 Product details

In this shipment, 3000 piece electrical motors are shipped within 3000 distinct boxes. A pack of 100 motors are then packed in one big box to reduce the shipping complexities. The lengths of this product are 1.2 ft, width is 1 ft and height is 0.8 ft. The lengths of the box containing these products are 1.3 ft, width is 1.1 ft and height is 0.9 ft. The boxes are made of tights such that the products are not damaged. The container that contains these products needed to contain at least 100 motors each and thus the length is 130 ft, width is 120 ft and height is 100 ft. There are 30 such containers that are used to adjust all the products. There are rubber cushions between the box and the motor such that it can handle vibrations at the time of shipping. These boxes are loaded and unloaded by the logistics company who take care of the whole shipment procedure. [Refer to Appendix 2]

Figure 2: Picture of products along with dimension

(Source: Mikhailova, 2019)

4. Carrier Quotation

Mediterranean Shipping Company (MSC) is the logistics company that handles the shipping of motors from the UK to India for ASD Ltd. (Mikhailova, 2019). This company has selected a sea route that is short and compatible with this shipment. [Refer to Appendix 3]

This shipment is going to follow the shortest sea routes from the UK to India via the South Atlantic Ocean and the Indian Ocean. There are many shipping companies such as GAC UK, DFC worldwide, Evergreen marine UK Ltd, Shippo Ltd. and many more that are in this same industry. As discussed by Psaraftis (2019), MSC is the largest company which is based in Switzerland however, it operates in the UK. It has over 70000 employees that operate a business in 155 countries across the globe. They have 520 vessels and the shipments charge is reasonable as per the market. This company is compared with other shipments companies in the table below:

Table 2: Comparison of logistics companies

(Source: Psaraftis, 2019)

5. International sale contracts

International sales contracts are essential for doing business with other countries (Arifin et al. 2018). There are two types of international sale contracts and these are Free Onboard (FOB) and Cost, Insurance and Freight (CIF). Arbitration Act of 1996 is going to analyse the disputes in the contracts and this law help to resolve the disputes in the contracts. In this present scenario, these companies are going to have a CIF agreement between them. [Refer to Appendix 4]

FOB

• The different FOB contracts and these are to detail shipping scenario are:
• The classic FOB contracts
• The seller cannot be forced to make advance shipping agreements.
• The seller is not bound to pay the cost of the freight or the insurance.

Type 2 FOB contracts

• The seller is bound to make all the shipments arrangements.
• The seller is responsible for placing goods on the vessel.
• The contract of the carrier is done with the seller (Mardiah et al. 2017).
• The buyer is only a third party of the contracts between the seller and the carrier.

Type 3 FOB contracts

• The buyer makes all the shipments arrangements
• The seller will be responsible for taking the goods to the vessel at their own expense.
• The contract will be done between the carrier and the buyer and the further responsibility of the goods are taken by the buyer.

CIF

This is an international sales contract where the overall price of the goods includes insurance and freight costs. As depicted by Shaw et al. (2018), the seller includes all the prices such as the price of the products, the insurance cost of the products and vessel freight cost for the shipment of the product and then gives the estimation to the seller. In this contract, shipping goods and the overall cost of marine insurance and shipment is agreed upon and signed by both parties. The bill of lading is issued by the carriage as a document of receiving the material. [Refer to Appendix 5]

A contract of carriage and commercial invoice is then produced by the carrier for the shipment of the goods. According to Arooj and Alemara (2019), this type of contract is beneficial from the seller’s end as they are familiar with the local logistics companies and can fix the prices of logistics in a better way. This is also beneficial for the seller as the overall cost of the goods is reduced due to the contacts of sellers with the logistics companies. The buyer’s goal is to receive the goods at the destination port and bear all the costs of the goods.

ADS Ltd. is going to contact MSC for shipments of these motors. The bill of lading is going to be signed between ADS Ltd and MSC. They will take the goods to the vessel and will sign all the commercial invoices and bills of lading. In this case, PT Electricals are going to receive the goods and they will be responsible for paying the logistics charges and other charges.

6. Bill of Lading

Carriage of Goods by Sea 1992 defines Bill of lading as a commercial invoice where major two things are mentioned, one is the list of the goods that are picked by the shippers for delivery and the other is the receipt for the sellers that the products are now the responsibility of the carriage company (Plomaritou and Voudouris, 2019). The cardinal purposes of bills of lading are:

• It acts as evidence for the carriage company that the contract was given by the seller or the buyer of the product.
• This serves as a receipt for the sellers that the sellers have transferred the products to the carriage company (Seo et al. 2018).
• It serves as the materials list where all the details of the products are mentioned and approved by both the seller and the carriage company.
• This helps buyers to check the products with a signed contract and the delivered products.

Figure 3: Example invoice of the bill of lading

(Source: Seo et al. 2018)

The bill of lading is going to be made with all the details of the motors shipped including the number of motors, their dimensions, weights and other parameters. This is going to be signed between ADS Ltd. and MSC as evidence of an agreement between these companies (Ahmadi et al. 2017). This receipt will be sent to PT electrical as proof of sending the motors. This bill of lading is going to be provided to the PT electrical by the carriage company MSC for approving and checking all the products as per the list. PT Electricals will pay carriage charges per the CIF contracts. [Refer to Appendix 6]

In this deal, a straight bill of lading will be produced for the simplicity of the shipments. A straight bill of lading indicates that the recipient name mentioned in the bill can receive the shipment. No one else can receive the shipment which reduces the chance of fraud. In this bill, the receiver name will be a particular representative of PT electrical and thus only that representative of PT electrical can receive this shipment.

7. Marine Insurance

Marine insurance follows the same strategy and policies as any other insurance however it is specially set up for ships, boats and cargo ships. As mentioned in the Hague Convention of 1924 marine insurance is essential for transporting goods over the sea due to the high risk of this transport medium. This is one of the most essential documents for this deal as the financial risks of ASD Ltd and PT electrical both are at stake at the time of shipment. The products are in the sea which is the riskiest transport medium. There are high possibilities of natural disasters in the sea which can cause accidents. Besides, these insurances protect sellers and buyers from piracy, cross border shoots and many more aspects which cause damage to the products (Zhu, 2020). Different types of marines insurances are given below:

• Hull insurance- This insurance covers all the elements such as furniture, equipment of the ship and is naturally done by the owner of the cargo (Miller et al. 2016).
• Protection & Indemnity (P&I) Insurance- This insurance covers the liability of the thirds party and the shipping material owned by the carriage company.
• Liability Insurance- This type of insurance protects all the materials of the third party which is a liability for the carriage company.

Figure 4: Type of Marine insurances

(Source: Created by author)

PT electrical need to pay the liability insurance cost for this shipment is under this insurance all the products are secured by the insurance from any damages. [Refer to Appendix 7]

8. Payment

8.1 Bill of exchange

Bill of exchange Act of 1882 defines the bill of exchange as a draft or a contract between two parties where one party needs to pay the demanded amount by the other party after a certain amount of time (Huang and Yang, 2019). This bill of exchange is generated mainly for business purposes where both companies are agreed to sign a deal for a fixed amount that is not negotiable in future. The parties signed the deal as proof of the agreement. [Refer to Appendix 8]

In this flowchart, there are two banks one is the vendor’s bank which will be the bank used by ASD Ltd. and another is the customer’s bank which will be the bank used by PT electrical. The invoice to pay the amount along with the bill of exchange is going to be submitted to PT electrical by ASD Ltd. for payment. The BOE is going to be submitted to the vendor’s bank for payment. PT Electricals is going to deposit the money to the customer’s bank and after exchange records; the money is going to be sent to the vendor’s banks from where ASD Ltd. can take the money. [Refer to Appendix 9]

Comparison of banks

HSBC is the largest bank in the UK which has more customers’ satisfaction levels than Barclays, Royal Bank of Scotland and many more banks. Besides, this bank is best and transfer money faster than other banks. This bank is more convenient as in India there are also branches and operating units of HSBC banks (Huang and Yang, 2019). Therefore, ease of money transfer, high customer satisfaction and networks in India are the main advantage of these banks compare to other banks in the UK.

State bank of India (SBI) is India’s biggest bank in terms of branches and customers. In India, SBI holds the maximum number of ATMs and provide maximum security than other banks such as HDFC, ICICI, Allahabad banks and many more. The money transaction and security of money is maximum than other banks as it is a public sector bank. As this bank has the maximum number of branches in India the money transaction become easier than other banks. However, the interest rate of this bank is lower than the private banks such as Axis Bank, ICICI banks.

Figure 5: Several banks in the UK

(Source: Huang and Yang, 2019)

8.2 Letter of credit

A letter of credit is a document issued by the bank after receiving a legitimate payment from another bank (Jiang and Tie, 2019). In this case, HSBC has been chosen as the bank that will be used by the seller. This bank has been chosen as it is the largest bank in the UK which has many international networks as it is an international bank. In the case of Buyer State bank of India has been chosen as the largest public sector bank of India. The interest rate and transactions cost of these backs are lowered than other banks such as Standard chartered, royal bank of Scotland and many others.

Figure 6: Flowchart of letter of credit

(Source: Huang and Yang, 2019)

The letter of credit generation procedure starts with the confirmation of the manufacturing and of the products. PT electrics are going to deposit the money to the State bank of India and then it sends the credit to the HSBC bank (Higgs, 2018). However, HSBC bank is going to provide the letter of credit to ASD ltd as a confirmation of payment. Then ASD Ltd. needs to present a document to the banks which will be further sent to PT Electricals for the confirmation of the pavement. After receiving the letter of credit ASD sell will deliver the goods and can withdraw the money with evidence of the delivery. [Refer to Appendix 10]

9. Conclusion

Based on the above discussion it can be said that electrical motors are going to be delivered from ASD ltd to PT Electricals. It has been seen that a CIF sales contract is going to be signed between them. International shipments are going to be done by MSC which will issue the bill of lading. Banks such as HSBC and State bank of India are going to be involved in the payments method for the security of the payment and they will generate letters of credit. It has been seen that the bill of exchange is going to be utilized for agreements of the payments between these two companies.

10. Shipping Laws

Table 3: Shipping Laws

(Source: Song and Cullinane, 2017)

References

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