(Reprinted from BarterNews issue #36, 1996.)

Countertrade--An Innovative Approach to Marketing

By: Dan West, Chairman American Countertrade Association

Countertrade re-emerged as a significant marketing tool in the late 1970s, and Monsanto has been actively involved in countertrade since that time. However much to the surprise of many people, Monsanto's first countertrade transaction actually occurred in 1935.

We sold saccharin to a company in northern China. They were unable to pay for the saccharin in currency, but what they did have to offer was frozen mackerel. Not being a company that was willing to miss a sale, we took the mackerel in trade. From this beginning, Monsanto has grown to a point where it now supports in excess of $200 million a year.

Definition

When I first became involved in countertrade in the early 1980s there was not a lot of lexicon for countertrade. Countertraders had difficulty communicating with each other. In fact, there was not an agreement as to whether counter trade was one word or two words. We have now agreed that countertrade is one word, and several lexicons have been written.

However, since countertrade is an ever expanding field, the definition of countertrade continues to change and broaden. I view countertrade in it's broadest sense. It is nothing more or less than listening very closely to your international customers' needs and meeting those needs. It can take several different forms, such as generating hard currency for them to buy your products; or the sharing of information-- either marketing or technology. In today's quality environment, countertrade is a total quality activity.

The actual countertrade can take many different forms. The first form is barter. This form of countertrade has received a lot of press; however, it is the least practiced. Barter is a simultaneous two-way trade. In other words, I'll give two glass beads for your one shell. This is one of the oldest forms of countertrade...the least practiced, but the most written about.

The second type is offsets. They pertain mostly to military and commercial aircraft sales. The name comes from the fact that part of the cost of the product is offset by purchasing products in the country where the goods are being sold.

Offsets are divided into two parts. First, direct offsets: McDonnell Douglas sold MD 82 mid-size passenger aircraft to China. The contract included provisions for the Chinese to manufacture aircraft components such as doors to be used for landing gears, passengers, and cargo.

The second form of offsets is indirect offset. These are goods that are not used in the products sold to that country. A good example: the price of DC-9s sold to Yugoslavia was indirectly offset by the purchases of Elan skis.

The third type of countertrade is clearing accounts. This form normally occurs between Eastern European countries and the LDC's (less developed countries). The LDC ships products to one East European nation, creating an accounts payable entry on that country's trade books (country A owes US$ for this product).

Country A can then satisfy the entry with either its own products or it can be satisfied by another country that comes along and buys country A's debt. For example, we may sell product to Brazil and receive payment from one of Brazil's trading partners. Sometimes it is part cash and part products from that country.

The fourth type of countertrade is compensation--also known as cooperation or buy-back. In an effort to promote an understandable lexicon, I prefer to call it compensation. This is where a company agrees to build a plant or to sell technology into a country. The company then gets compensated for technology or capital with exported products produced by that plant.

The last type of countertrade is counterpurchase. Counterpurchase is an agreement between two business units to buy from each other in carrying amounts over varying periods of time. This transaction creates hard currency that is then used in turn to purchase products.

The Use Of Countertrade

Now that we have laid a foundation to communicate with each other on the different forms that countertrade can take, the next questions that get asked are, "How big is it?" and "What is its size?" Forecasting the size of countertrade is very difficult because countertrade information is not collected and recorded in any one place.

There have been many estimates put forth by the U.S. government, the United Nations and various independent studies. The general consensus is that countertrade is somewhere between 10% and 20% of all world trade.

A recent study at the Center for Advanced Purchasing Studies found that in the companies that answered the survey, countertrade rose 74% as a portion of sales agreements. (The survey covered a four year period ending in 1989.)

In other words, in 1985, 5% of the sales contracts involved countertrade; and by 1989, 9% of the sales contracts involved countertrade. In terms of total dollar volume, countertrade grew 30% from $13.6 billion in 1985 to $17.7 billion in 1989. This study also had some other very interesting findings:

With all these positive vibrations, why is countertrade not used more often? There is a lot of misinformation in the press, and this colors the image of countertrade. The press seems to focus on the situations that went bad, rather than on the positive aspect. How many times have we read references to the "Polish hams" being served in the company cafeteria?

I spent a great deal of time in an interview with a national financial newspaper explaining the benefits of countertrade, only to have the headline writer title the article, "The Shadowy World of Countertrade."

Another newspaper headline read, "Barter Makes an Unwelcome Comeback on World Trade Scene." The entire article was on countertrade; however, the headline writer thought the two terms were synonymous. This article goes on to state, "From being an almost clandestine way of doing less than real business, countertrade is now involved in anywhere up to 10% of world trade."

As you can see, the business press has a difficult time seeing the advantages of countertrade versus the advantages seen by companies that are involved in countertrade. Many of the difficulties and problems in countertrade can be solved, or in fact never even arise, if countertrade is offered in a proactive form rather than the "Oh, by the way" form.

The "Oh, by the way" occurs after the sale has been made and the customer says, "Oh, by the way, I don't have the money to pay for your product--we are going to countertrade."

The Growth Of Countertrade

The growth of countertrade is fueled by several factors. First, in addition to looking at the advantages for the company that countertrades, one must also look at what advantages a country gets from countertrade. These are:

• Additional hard currency generation.
• Marketing expertise that they may not otherwise have. This point is brought out in a recent Wall Street Journal article which describes how McDonnell Douglas had helped to bring a foreign-based snack food product to Spain.
• Technology advances that the country would not otherwise have.

The global demand for international credit is the second growth factor. The need for credit is increasing at a time when banks are less willing or able to finance these transactions. This forces many purchasers and exporters to turn to countertrade to finance the business transaction.

However, international banks are short of capital to meet standards set by the bank for International Settlement in Basel, Switzerland. By 1993, international banks were required to have a minimum capital to risk asset of 8%. Europe's 12 largest banks already have met this 8% target, versus only three of the Japanese top 12 banks, and 11 of the U.S.'s 12 largest banks.

John Reed, Chairmen of Citicorp, said in a letter to share holders that banks "are cutting back and there is a global reduction of credit and liquidity." As a result, there is less money for trade finance.

The next growth factor is that the demand for consumer goods has increased with the opening of Eastern Europe and the government changes in Latin America. The demand for consumer goods far outstrips many countries' ability to generate hard currency to pay for these goods.

And last, convertibility will not diminish the growth of countertrade since convertibility does not necessarily mean availability of the hard currencies. Country advantages, bank credit crunch, growing demand for consumer goods, and convertibility will push the demand for countertrade to new heights.

All of these things--country advantages, bank credit crunch, growing demand for consumer goods and convertibility--will push the demand for countertrade to new heights.

The Future Of Countertrade

The countertrade profession is in its infancy in corporations. It can be equated to where the distribution and freight departments were 15 years ago versus where they are now, when they are referred to as the "corporate logistics departments."

Frank Horwitz of UniSource Global Corporation in New York said it best when he said, "In the future the in-house countertrade organization will become the coordinating point for the business team, assuming responsibility for all activities other than the sale itself."

The countertrade organization will utilize internal assets such as corporate purchasing, future investments, licensing and technology transfers to get their job done. In other words, the countertrade department becomes a "basket" of assets. We will also see an increased professionalism in countertrade, as it is now beginning to be taught as a means of market success in business schools.

Countertrade is being promoted through corporate newsletters, company magazines, and staff meetings as a way to gain market access. Countertrade, along with superior quality, financing and pricing, is the key element in international contracts.

Countertrade Help

If you would like to explore the areas of countertrade or you are currently having a countertrade situation, you can get help from the American Countertrade Association located in St. Louis. The purpose of the association is countertrade education and networking, for the benefit of international sales.

Countertrade Examples

Finally, a few examples of countertrade. The first is the well known Pepsi/USSR trade whereby Pepsi-Cola delivers syrup that is paid for with Stolichnaya Vodka. Pepsi has the marketing rights of all Stolichnaya Vodka in the U.S.

Recently Pepsi has made another innovative step by taking 17 submarines, a cruiser, a frigate, and a destroyer in payment for Pepsi products. In turn, this rag tag fleet of 20 naval vessels will be sold for scrap steel, thereby paying for Pepsi products being moved to the Soviet Union.

In another instance, Fisher Controls International, a subsidiary of Monsanto, counterpurchased ball bearings and chair frames to be sold in Western E urope in a countertrade opportunity for control valves sold to Romania.

This countertrade purchase activity set Fisher apart from its competitors, and enabled it to be awarded the contract. In another case, Monsanto is helping one of its customers in Argentina gain increased exports goods of finished goods. The exported goods contain Monsanto products, which results in increased sales.

When countertrade is used in a proactive manner, it becomes a total quality activity of "meeting your customers needs." We all know this results in increased sales and profits.