An important selling technique to alleviate high prices and capital shortages for capital equipment is the leasing system. The concept of equipment leasing has become increasingly important as a means of selling capital equipment in overseas markets. In fact, an estimated $50 billion worth (original costs) of US made and foreign made equipment is on lease in western Europe.
The system of leasing used by industrial exporters is similar to the typical lease contracts used in the United States. Terms of the leases usually run one to five years, with payment made monthly or annually, included in the rental fee are servicing, repairs and spare parts. Just as contracts for domestic and overseas leasing arrangement are similar so are the basic motivations and the shortcoming. For example:
1) Leasing open the door to large segment of nominally financed foreign firms that can be sold on a lease option but might be unable to buy for cash.
2) Leasing can ease the problems of selling new, experimental equipment because less risk is involved for the users.
3) Leasing helps guarantee better maintenance and services on overseas equipment.
4) Equipment leased and in use helps to sell other companies in that country.
5) Lease revenue tends to be more stable for a period of time than direct sales would be.
The disadvantages or shortcoming take on an international flavor. Besides the inherent disadvantages of leasing, some problems are compounded by international relationships. In a country beset with inflation, lease contract that includes maintenance and supply (as most do) can lead to heavy losses towards the end of the contract period. Further countries where leasing is most attractive are those where spiraling inflation is most likely to occur. The added problems of currency devaluation, expropriation or other political risks are operative longer than if the sale of the same equipment is made outright. In light of these perils, leasing incurs greater risk than do outright sale; however there is a definite trend toward increased use of this method of selling internationally.
Counter trade as a Pricing Tool:
Counter trade is a pricing tool that every international marketer must be ready to employ, and the willingness to accept a counter trade will often give the company a competitive advantage. The challenges of counter trade must be viewed from the same perspective as all other variations in international trade. Marketers must be aware of which markets will be likely to require counter trades just as they must be aware of social customs and legal requirements. Assessing this factor along with all other market factors will enhance a marketer’s competitive position.
One of the earliest barter arrangements occurred between Russia and PepsiCo before the ruble was convertible and before most companies was trading with Russia. PepsiCo wanted to beat Coca-Cola into the Russian market. The only way possible was for PepsiCo to be willing to accept vodka (sold under the brand name Stolichnaya) from Russia and bottled wines (sold under the brand name of Premiat) from Romania to finance Pepsi-Cola bottling plants in those countries. From all indications this has been a very profitable arrangements from Russia, Romania and PepsiCo continues to use counter trade to expand its bottling plants. In a recent agreement between PepsiCo and Ukraine, Pepsi agreed to market $1 billion worth of Ukrainian made commercial sips over an eight year period. Some of the proceeds from the ship sales will be reinvested in the ship building venture and some will be used to buy soft drink equipment and build five Pepsi bottling plants in Ukraine. PepsiCo dominates the cola market in Russia and all the former Soviet Republics in part because of its executive counter trade agreement with Russia which locked Coca- Cola out of the Russian cola market for more than 12 years. After the Soviet Union was dismembered the Russian economy crashed and most of the Russian payment system broke down into barter operation. Truckloads of aspirin were swapped by one company, and then traded for poultry which in turn was bartered for lumber, in turn to be exchanged for X ray equipment from Kazakhstan – all to settle debts. Many of these transactions involved regional electricity companies that were owed money by virtually everyone.
Source: International Marketing