Trading Houses: A practical guide

TRADING HOUSES: A PRACTICAL GUIDE

CONTENTS
INTRODUCTION A. TRADING HOUSES 1. What is a trading house? 2. What use are trading houses? 3. Who creates trading houses? 4. How is a trading house created? 5. The services that trading houses provide. 6. The organisation of a trading house. 7. The economics of a trading house. 8. The role of governments in encouraging trading houses. 9. Choosing the right trading house. 10. Creating a sound relationship. 11. The Memorandum of Understanding. 12. Trading houses in the next millenium. 4 6 8 10 14 20 23 25 29 32 36 39

B. TRADING HOUSE ASSOCIATIONS 1. The role of trading house associations. 2. Promoting the business of trading houses. 3. Training. 4. Codes of Good Business Practices. 5. Counseling, Advising, Arbitrating. 6. Validating and Benchmarking. 7. Databases and Networking. 8. Producing Studies, Reports and Research. 9. Exchanging Best Practices. 10. Acting as a spokesman and a channel of communication. 42 42 44 45 46 47 48 49 50 51

Part A

TRADING HOUSES

1. What is a trading house?

Trading houses are of various types and forms. They exist in a number of countries and their activities and organization vary according to the historical background and the scenario in which they operate as well as national priorities and government policies. They are known by different names in different countries: Trading Houses in Canada and Hong Kong, Sogo Shosha and Semen Shosha in Japan, Comercializadoras in Latin America, Oprateur Spcialis en Commerce Extrieur in France, Export Management Company and Export Trading Company in the USA, Export Houses in India, etc. For example the Japanese Sogo Shosha, which have evolved organically over time are different to the Indian Export Houses which came into being comparatively recently as a response to policy initiatives of the government. And these, in turn, are quite different to the Export Management Companies of the USA or the trading houses of Canada, which grew out of the necessities of their own contexts. A definition that covers most cases is: International trading houses are commercial intermediaries specialized in the long term development of trade in goods and services supplied mainly by other parties. They focus on exporting, importing and third country trading as their core activity and use overseas marketing organization and infrastructure as well as procurement networks to service suppliers and customers. They procure locally and sell internationally, they procure internationally and sell locally and they also procure internationally and sell internationally. They have the flexibility and the agility to work in many markets with many products simultaneously as international marketing is their core business. Trading houses serve as commercial intermediaries between suppliers and buyers located in different countries. To this end they adopt the role of merchants, consortia managers and trade facilitators of various sorts. As merchants they buy and sell on their own account and earn a margin. They may also act as agents on behalf of manufacturers or on behalf of the buyers, earning a commission for their various services. Some are supply-driven in the sense that they receive their impetus from manufacturers who wish to sell while others are demand-driven in that they receive their impetus from customers who wish to buy.

They are often certified by or registered with their governments or their trade associations as organizations possessing requisite capabilities for performing their roles. Sometimes receive special support from their governments. Trading houses have contributed substantially to the growth of trade and to the economic development of their countries. They have demonstrated the ability to promote the export of goods and services from SMEs because of their strong capabilities in international marketing, procurement, vendor development and trade support services including international communication networks and access to databases and on-line procurement systems. To provide these value adding services trading houses create appropriate infrastructure. Their overseas presence often comprises of showrooms, warehouses and after-sale service facilities apart from the marketing staff. The overseas organisation serves as antennae for the trading house and also as a spring board for launching into new activities.

2. What use are trading houses?

The emerging integrated global economy is resulting in an unprecedented freedom in the movement of goods and services. This presents opportunities as well as threats to individual economies. Strong and specialized international trading institutions will be required to exploit the opportunities and minimize the threats. This is one reason why countries are building and developing trading houses. Another is that trading houses mainly deal with products and services supplied by small and medium enterprises (SMEs), because the large enterprises generally look after their exports themselves. The export of goods and services supplied by SMEs enhances economic welfare in many ways. These include creating employment with less investment per job, dispersal of economic activity into rural areas, more employment for women who cannot work far from home, promoting local crafts, inducting better management practices into SMEs, improving their product quality, competitiveness, etc. Moreover additional foreign currency is earned not only because more goods are exported but also because a wider range of goods is exported. In fact SMEs produce mainly value added finished products when shoes are exported instead of leather or dresses instead of fabric or furniture instead of timber, more foreign currency is earned apart from more employment being created. Not only is exporting good for SMEs and their societies, it will soon become essential for them to have a feel of the global market because soon they will face foreign competition even in their home markets. Because promoting export of products made by SMEs is beneficial various countries have tried in different ways to help SMEs to export. Their governments subsidize marketing visits, participation in trade fairs, subsidize finance, provide advice on things like quality, packaging, designs, markets, etc. A lot of money is spent on such governmental support and it is probable that the results do not justify the expense. What the SME needs is hands-on help for actually selling the products and getting paid. Now various developing economies, economies in transition as well as developed economies are turning their attention to encouraging the creation and growth of trading houses to promote SME exports.

Trading houses help both manufacturers and buyers

MANUFACTURERS Goods collected and payments made at doorstep. Better price realizations because of overseas marketing organization. All risks and hassles of exporting avoided. Global network for techno-commercial information. Market entry at lower cost. Long term business perspective.

BUYERS Proven record of reliability for quality, prices and delivery. Lower costs because of bulk buying of products and services as well as procurement network. One stop shopping facility. Assured after-sale services. Lower transportation and handling costs. Long term business perspective.

Suppliers benefit from getting at their disposal the facility of the vast international marketing infrastructure of the Trading House, its data bases and information networks, its expertise in specialized functions such as finance, procurement, technology, commercial and legal affairs. Also the Trading house looks after all matters relating to the interface with the buyer, from presenting the merchandise to realizing the payment. The Trading house because of its size can obtain the benefit of economies of scale in purchasing, transporting, shipping, insuring and borrowing funds. A part of this benefit is passed on to the manufacturer for improving competitiveness. Customers benefit from dealing with a company which has a proven record of reliability in international trading as well as a commitment to long term relationships. Buyers thus get confidence regarding the supply of their goods in accordance with commitments of quality and delivery. Also since Trading Houses often deal in a range of products they provide a "one-stop" shopping facility. The Trading houses organization overseas assures the foreign buyer of continued service in his home country.

3. Who creates trading houses?

Trading houses have grown in different countries in various ways depending on the economic, political and social compulsions of their situations. They have been established by various entities such as: a) Private entrepreneurial effort b) Governmental initiative c) A co-operative of suppliers a) Private entrepreneurial effort. Most trading houses are created by private entrepreneurial effort. However starting such trading houses is not easy because many problems have to be overcome. Trading houses are in a risky activity and it is not easy to convince financiers to invest money in a business which requires the creation of expensive infrastructure and up-front expenses while the collateral available is often intangible. Moreover the trading margins are generally small while the profitability of the business can be affected by remote factors occurring anywhere in the world over which the trading house may have no control. Therefore most trading houses started by private entrepreneurial effort are restricted by internally generated funds and hence are small to begin with. Also their growth is restricted by internal financing. Yet the nature of the trading house business, which involves small margins and large sales, demands a certain economic size. This is the paradox faced by the trading house established by private entrepreneurial effort. To overcome this many governments have adopted fiscal and other policies to encourage the creation and growth of trading houses by private entrepreneurial effort. b) Governmental initiative Because of the hesitation of private entrepreneurial effort to establish large trading houses in many countries the government itself has invested in the creation of state owned or state promoted trading houses. Also some policy makers believe that public-sector trading houses have some advantages over private sector trading houses. They feel that while the private sector trading houses are solely profitdriven, public-sector trading houses can be given a mandate that is more serviceoriented There are many examples of such state promoted trading houses in all kinds of economies developing, in transition and developed.

However state run trading houses often suffer from inefficiency as well as the disadvantages of bureaucratic and political interference. Continued rotation of administrators in and out of the trading house causes dislocations and confusion. Where public sector trading houses have been created and managed with the active involvement of businessmen, the results have often been better than those created and managed solely by bureaucrats. c) A co-operative of suppliers There are many examples of successful trading houses created through a cooperative effort, generally of producers. A trading house is considered a preferable alternative to a co-operative. Such trading houses created through the co-operatve effort of producers have fared well in certain countries like the UK, Israel and some Scandinavian countries, particularly in sectors specializing in agricultural and horticultural products. The advantage of such trading houses is that suppliers are involved in the export marketing process and can get close to foreign consumers and markets. This is useful to them for following changes in customer preferences and keeping in touch with new methods and technologies. Often small producers co-operate to form a trading house so that large orders can be accepted. The capability of accepting large orders is crucial, especially today, because of the growing concentration and centralization of buying, particularly in the commodity, raw material and agricultural markets. Such trading houses can promote a brand-name which is of great use to the suppliers. The catch is that in order for a trading house created by a cooperative effort to be successful the founding members have to cooperate, and this is not always easy. For certain types of products it is more likely that there will be competition and conflict instead. In some countries, small entrepreneurs are particularly individualistic and find it difficult to agree to a common agenda. To overcome this sometimes a governmental organisation gets involved as a catalyst, at least in the early stage of the formation of the trading house.

4. How is a trading house created?

Having seen the manner in which trading houses have been established in different countries we can learn from the experiences of the past about how to avoid mistakes made by others, in the future. For creating a trading house we recommend the following step by step approach: The Gut Feeling and the Prefeasibility Study The Feasibility Study The Project Report Raising Capital Building the Organisation Developing the Infrastructure

The Gut Feeling and the Prefeasibility Study. Often an entrepreneurial gut feeling, which is a personal impression of the economic climate, sparks off the initial interest in developing a trading house. If it is felt that the creation of a trading house would be advantageous, then the entrepreneur conducts, or commissions, a pre-feasibility study. The pre-feasibility study provides a general overview of the proposed business area, including the existing scenario as well as a description of the opportunities available and the infrastructure necessary to exploit them. It also sets down the various assumptions that have been made in determining the viability of the project. It thus provides a list of important questions that would need to be answered in the Feasibility Study - the next stage. The Feasibility Study The Feasibility Study is an analysis of the economic viability of the project and it considers topics such as the objectives, structure and activities of the proposed trading house as well as its financing and its organisation. It contains the Business Plan together with the Marketing Plan, the Human Resources Plan, the Finance Plan etc. Finally it contains projections of performance such as Profit & Loss Statements, Balance Sheets and Cash Flows together with a risk analysis. The actual preparation of a feasibility study may take between three to six months

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The Project Report The Project Report is a detailed version of the Feasibility Study, backed by the appropriate data and empirical support. It also provides a resource for the promoter, the financiers and others to know exactly what the project entails. While the feasibility study indicates the viability of the business proposal, the information contained therein will not be detailed or specific. The project report supplies the supporting data for the indications given in the feasibility study. For example, while the feasibility study may simply state the projected total cost of equipment, the project report would provide a full itemised list of the equipment, including specifications, source of supply and price supported by a valid pro forma invoices. Similarly, staffing costs would be broken down into a list providing the details of each job, with a brief description of the responsibilities, qualifications and remuneration for each post. The Project Report would also contain the detailed implementation schedules defining the sequence of activities required to implement the project within specified time frames and with allocated responsibilities. The project report serves to prove to the financiers, including the promoters themselves, that the financial performance as set out in the feasibility study is achievable. It is better if the people who would ultimately be responsible for running the trading house are associated with the preparation of the project report. Raising Capital For a new trading house one of the initial problems to be overcome is the raising of finance. The problem here is that as trading houses are involved in merchant activities rather than manufacturing activities they do not have many fixed assets to offer as collateral. In fact their main assets are their people, their skills and their reputation. At the same time they are active in a risky business where the gestation period may be long because it takes time for the trading house to reach the economic size after which its profitability can increase. Secondly, in case the equity base is to be large, it may be necessary to raise finance through stock issues aimed at financial institutions, business organisations or the public. Apart from equity there will also be a component of debt financing. Raising equity or debt requires the preparation of a Prospectus for raising capital. The other financial need of trading houses is for working capital. Normally commercially oriented financial institutions are hesitant to fund trading houses because of the large risks involved.

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The financing problem is felt most acutely in the earlier stages of a trading houses existence when it has a large requirement of funds for building expensive overseas marketing infrastructure and support services while struggling with low margins on a small turnover. For these reasons in many countries the government has stepped in by encouraging the creation of government sponsored Export and Import Banks and encouraged the creation of venture capital funds. Also some governments encourage commercial banks to provide pre-shipment and post-shipment credit at rates which keep the operations of the trading houses internationally competitive. In many countries these schemes involve commercial banks setting aside certain quotas for providing finance for international trading. This helps trading houses because they can borrow in bulk and lend in small lots to their manufacturers. The financial structure of the trading house greatly influences its viability and therefore care should be taken not to over-capitalize or under-capitalize the company in relation to its Business Plan. An appropriate debt to equity ratio will help the trading house to give a decent return on capital, which will make it easier to raise funds in the future as well as build its credibility. Building the Organisation This involves developing the management, organisation, human resources and systems of the trading house. The design and structure of the organisation including the HRD plans, organisation charts job descriptions, responsibilities and working procedures would be derived from the project report. All this is not as difficult as finding the right people for the positions. The importance of Human Resource Development in a trading house can not be over-stressed. In fact the principal asset that a trading house has is its people. By carefully selecting and training them throughout their careers, a trading house builds its strength for the future. A trading house requires personnel of high calibre, who can adapt to the multifaceted challenges of the international marketplace. While people with the requisite technical skills are readily available, it is difficult to find people capable of dealing with different cultures and ways of thinking. Trading houses, particularly in Asia, are stressing long-term human resource development through a cadre based management structure. This involves recruiting promising youngsters as techno-commercial executives and then training them comprehensively throughout their careers.

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Developing the Infrastructure The next step is the creation of the infrastructure which is required for providing value-adding services to buyers and to suppliers. The infrastructure requirements of course depend on the products and markets in which the trading house intends to operate as well as the depth in which it wants to involve itself in the business. The developing of infrastructure involves the procurement and adaptation of the most appropriate electronic hardware and software, info-tech and communication resources, office space, as well as the equipment for the warehouses, workshops and showrooms in the home country and abroad.

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5.

The services that trading houses provide

A manufacturer going through a trading house gets many services which enable its products to be sold in foreign countries. The trading house will deal with the foreign customer, negotiate the commercial terms, secure the order, arrange delivery of the goods, obtain payment from the customer and pay the manufacturer. Thus, for the manufacturer, the transaction is like a local sale. The manufacturer being responsible for manufacturing the product according to stipulated specifications and the trading house for all the arrangements for export. The trading house will underwrite the payment to the manufacturer as long as the goods are supplied in accordance with the Purchase Order. trading houses vary considerably in their activities and functions. However typical trading houses would provide many of the following services: Market selection and market research Customer identification and evaluation Commercial and technical negotiations Vendor development Product/packaging adaptation and technology upgrading Imports, particularly of items required for export production Financial arrangements including securing credits Counter-Trading Protection against export risks including insurance Ensuring payments Export documentation and shipping Managing crises and disasters Dealing with claims After-sale service and spare-parts availability Project exports, consortia and tender business Creating distribution networks abroad Special relations with the government

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Market selection and market research. trading houses have data bases and information networks as well as a presence in overseas markets. They use these continually to scan for opportunities world-wide. They search for demand/supply gaps, locate availability of finance, study the long term plans of organizations and governments, price trends and even political scenarios. Their play a key role in monitoring the competition. These companies therefore know which product to sell where. Customer identification and evaluation. The trading house's offices overseas collect information about potential customers and their credit worthiness, reliability and reputation. They closely study their customers, their current activities and future plans and make efforts to build with them relationships of confidence, trust and friendship. Commercial and technical negotiations. trading houses are efficient in making business offers through their marketing organization backed with their electronic databases, communication systems and networks. They have the experience and competence to carry out all the commercial work relating to export. The manufacturer makes the technocommercial offer to the trading house which then negotiates all the terms, secures the order, arranges delivery of the goods, pays the manufacturer and obtains the payment from the customer. Moreover the trading house's presence in the overseas market enables it to obtain better prices and other terms. Vendor development. The trading house also has an organization in the home country comprising of geographically dispersed regional facilities to facilitate vendor development and procurement. This organization identifies and develops manufacturers and also ensures that the long term arrangements are satisfactorily implemented Product/packaging adaptation and technology upgrading. trading houses continually keep associate manufacturers informed about developments in foreign countries related to the technical features of the product, production techniques, design changes and packaging methods. For this service they use their overseas network and specialized product experts who are well traveled and who attend the major international fairs and exhibitions.

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Imports, particularly of items required for export production. trading houses use their foreign offices and networks for imports as well as for exports. They are able to negotiate favorable terms because of bulk buying and presence in the market. This helps manufacturers who generally require some imported components and materials for export production. Often these imported goods are stocked by the trading house in customs bonded warehouses and supplied to the manufacturer when required. Financial arrangements including securing credits. trading houses borrow in bulk from financial institutions at comparatively low rates of interest and help to finance the transaction with cheaper funds. Trading Houses also provide financial assistance to the manufacturer through arranging deferred payments, financial guarantees and advance payments. Counter-Trading. Counter-trade leverages governmental, and sometimes other imports, to generate reciprocity by requiring foreign suppliers to buy products and services from the home country. Counter trade is best handled by trading houses because they have the size, range and infrastructure to deal with its diverse requirements. Counter-trade opens up new and large opportunities for manufacturers to have their products exported. Protection against export risks including insurance. The risk in exports is a factor which inhibits manufacturers. trading houses are continually involved in ascertaining the risks in foreign trade and know how to minimize these risks. They have gathered rich and varied experience as well as expertise in risk management which no single manufacturer would have been able to accumulate. With their established track records they get better terms from insuring organizations. Also they have access to expert advice on currency exchange rate fluctuations and are able to minimize these risks as well. Ensuring payments. Collecting dues is a regular activity of trading houses for which they have specialists. In fact with their experience, databases, and information networks, they are in a position to avoid the problem of bad debts. They are routinely in

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touch with major international credit rating agencies, banks, etc. for checking out foreign customers. Again, because of size they obtain these services at low rates. Export documentation and shipping. Trade documents must be carefully prepared so that there are no problems in transportation, shipping, clearing customs, obtaining payment as well as handling any subsequent claims. trading houses have well staffed and well equipped documentation and shipping departments and this is a major service provided to manufacturers. They have knowledge and experience which enables them to select the best modes of transport in terms of cost and quality of service. They can consolidate cargo which may often be going to its own warehouse overseas, thus lowering costs. Managing crises and disasters. Export activity is dependent on number of variable factors many beyond the exporter's control. This sometimes leads to unforeseen occurrences, for example the inability of a supplier to deliver at the last moment resulting in the Trading House having to locate an alternative source, or a buyer being unable to accept delivery of ordered goods requiring that an alternative customer be found soon. trading houses would have had experience of many such dangers and would have developed capabilities of dealing with them. Disasters that could have sunk a manufacturer are managed by a trading house. Dealing with claims. Since trading houses are committed to international Trading on a long term basis they build credibility and a reputation for honoring their commitments, particularly with respect to quality and delivery. All precautions are taken by trading houses to avoid claims. However if a claim is raised they will ensure that it is dealt with promptly and efficiently. There are sometimes frivolous or unreasonable claims made by unscrupulous buyers. trading houses have the expertise and the clout to deal with such matters, thus providing much needed protection to the manufacturer. After-sale service and spare-parts availability. trading houses often export items that require after sale service. They will ensure that adequate arrangements for after-sale service, and stocking of spare-parts and repairs and maintenance are in place before they export such products. Often

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it is the trading house itself which creates the facilities abroad for after-sale service. Manufacturers who associate with trading houses are therefore saved from expense and effort by getting at their disposal the after-sale service facilities arranged by the trading house. Project exports, consortia and tender business. trading houses play a vital role when the foreign customers requirement is for goods and services to be supplied by a number of different organizations, often against a tender. Here the trading house takes on the overall responsibility as Principal and subcontracts the supply of various products and services to a number of companies, including, if necessary, companies abroad.This is a function of the trading house which is useful for manufacturers because often the manufacturers would not even know about the existence of a tender, particularly if the tender pertained to a large project or supply of a range of products of which the manufacturers product formed only a small part. Moreover the chance of success is much greater if a manufacturer ties up with a trading house because of the latters experience in dealing with project exports and tenders. A trading house is dealing with such businesses continually and has developed the knack of assessing chances of success; it is unlikely to waste time and effort on bids that are not likely to succeed. Creating distribution networks abroad. trading house's long-term involvement with exporting carefully chosen products to chosen markets, makes it possible for them to go further than just doing one-off deals. In fact, even at the stage when the trading house is preparing its market entry strategy for a product, it is already developing long term plans for selling the product through appropriate distribution channels. It chooses suitable locally available channels. For certain products it could create its own channels including a warehouse for just-in-time delivery to customers. Such arrangements would be expensive for individual manufacturers. Special relations with the government. Governments use trading houses for achieving national goals. In many countries committed and trusted trading houses work closely with the governments in formulating and implementing the nations trading objectives. This helps governments as they can pass on some of the administrative and monitoring work to trading house Associations which have the requisite expertise and infrastructure.

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The services described here help manufacturers to get their products into foreign markets. If the manufacturers were to arrange these services for themselves they would cost more.

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6. The organisation of a trading house

The manner in which a trading house organises itself depends on its particular needs, its history and on the context in which it operates. Thus there can be no generalised description about the organisational structure of trading houses. For example, the Sogo Sosha of Japan opted for being in many product lines in many countries and involved themselves in importing, exporting as well as third country trading while also providing financial services for the trading activities. The Canadian trading houses and export management companies of the USA preferred to be more focused in terms of products and markets and to confine themselves to simple trading. The Export Houses of India were created because of policy initiatives of the government and were driven by incentives to organise themselves in a manner which enabled them to work towards the governments preset objectives such as promoting the exports of non-traditional, value-added products and products made by small manufacturers. The organisation designs of different types of trading houses reflect the way they involve themselves in international trading. There are, however, some resemblances in certain important aspects in the organisational structures of many trading houses which makes it possible to describe a typical organisation.

A Typical Organisation Structure Generally the trading house has strong marketing and vendor development departments backed by trade support services. The marketing department may focus on specific products or it may focus on specific markets. This depends on the orientation of the trading house. In addition the trading house has a presence in foreign countries consisting of for example, representational offices, subsidiary companies, warehouses, showrooms, after-sale service and spare parts stocking facilities, etc. It also would have a procurement department in the home country to source products as well as to develop and service vendors. The trade support services would include sections for Finance, Law, HRD, Shipping, Documentation, Insurance as well as large databases of marketing and commercial intelligence gathered through networking with relevant organisations internationally. The marketing and procurement departments, the overseas organisation and the trade support services at the Head Office are knit together in various ways 20

depending on their specific requirements. For example, a trading house which deals in a number of different products would emphasise specialised product-wise marketing departments whereas a trading house which concentrates on one product but exports to many markets would emphasise the specialised country-wise marketing departments. A Trading house whose major role is to procure from a widely dispersed area within the country, would emphasise the role of the procurement department. The Top Management The top management of the trading house is the President. The main outputs of the Presidents office are the Business Plan including the country-product matrix, the Organisation Chart and the Human Recourses Development Plan. These are created by the President in consultation with colleagues and are continually reviewed and up-dated. The long-term evolving Business Plan creates a coherent vision of the trading house as well its goals. This is the prerequisite for getting the different parts of this complex organisation to pull together. The Business Plan sets the targets and the milestones so that the trading house can keep itself on track. Whereas the Business Plan indicates directions the Organisation Chart indicates structure. It sets out the responsibilities and reporting systems. It should cover not only the current organisation but also the projected organisation which would be required in the future for implementing the Business Plan. It thus provides the basis for the companys HRD programme. The Human Resource Development Programme is derived from the Business Plan and the projected Organisation Charts. It forms the basis of the trading houses recruitment and training programs. Key Operating Managers The key operating managers responsible for the functioning of the trading house are the Product Manager based in the home country, the Country Manager based in the foreign country and the Regional Manager based at various locations in the home country. The Product Manager at home is responsible for making the sales budget and achieving it. He is responsible for all aspects of marketing his product, developing and maintaining the data bases and being the nodal point for all techno-commercial knowledge on his product. The Country Manager abroad looks after the interests of the trading house in a foreign country. He collects information about the country, its policies, its economics, its culture, its systems, etc. He identifies customers and learns about their purchasing policies. He finds out about duty structures, mark-ups, channels of distribution etc., and advises the Product Manager at home. The Regional Manager in various localities in the home country is responsible for activities such as procurement, vendor development and vendor relations,

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negotiating terms of business with vendors inspection and quality control and timely delivery of ordered goods. He liaises closely with the Product Manager. He plays the front line role in those activities of the Trading house which are related to developing the capabilities of SMEs. The Product Manager, The Country Manager and the Regional Manager have their own budgets which are derived from and intermeshed with each other and related to the Business Plan.

The backbone of the organisation The backbone of the trading house organisation is its cadre of techno- commercial executives. These executives are continually trained throughout their career for shouldering higher responsibilities and their growth and development is supervised and monitored by a HRD office. They are made to gain experience in marketing, procurement as well as specialized trade support services. They spend a few years at home in procurement, then a few years abroad in marketing, then again a few years at home in procurement, and so on, at progressively higher levels of responsibility. The continuous movement every few years of these techno-commercial executives does cause some dislocation and inconvenience at the operating level but the top management in any case enforces it - in the overall interest of developing its human resources and a management team rich in international experience.

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7. The economics of a trading house

The important feature of the financial situation of trading houses is the long gestation period before the company becomes profitable. This is because large capital expenses have to be incurred up front for creating overseas infrastructure, while operating with low margins in a very risky business. However after the trading house has reached a certain economic size and business stability its profitability can increase quickly and substantially. Any governmental assistance extended to the trading house especially during the initial period would contribute to reducing the gestation period. In cases where the trading house takes title to the goods that it exports the income of the trading house is the trading margin. This is the difference between the price paid to the manufacturer and the price realised from the foreign customer after deducting actual transportation, freight and insurance costs, if these are to be borne by the trading house. In cases where the trading house does not take title to the goods but merely acts as an agent, the income is the commission. The income of the trading house has to be small in order to maintain the competitiveness of traded goods in the international market where there are suppliers from all over the world. From this income the trading house has to meet its establishment expenses, cover the costs of its value adding services as well as generate a profit for financing future growth and to reward its shareholders. Therefore the trading house necessarily has to generate large sales volumes in order to be able to provide services and to grow. The trading house must operate with low margins while the cost of creating organisational infrastructure abroad and at home is huge. The risks are high in international trading. A trading houses business plans can turn sour from a variety of causes that can occur anywhere in the world and over which the trading house has no control whatsoever. At the same time it has to keep creating the overseas infrastructure in order to build up large sales and all this while it is earning razor thin margins. In this situation local entrepreneurs and financial institutions would have little interest in promoting trading houses. There would probably be more attractive opportunities available in the domestic market for their efforts and for their money. It is difficult for an trading house to raise finance particularly since its assets are mainly in its people, its contacts and its reputation and credibility in foreign markets which cannot serve as collateral for loans.

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The policy of trading houses therefore is to generate large volumes as well as rotate funds frequently. Moreover they try and arrange trade financing as much as possible which involves getting credits from suppliers and advances from customers. Also trading houses try to diversify into many products and markets so that they get the additional advantage of more flexibility. They can, for example, distribute their overhead costs on different products groups depending on the ability of the products to bear this expense in different markets. It is mainly for these reasons that trading houses need to be a large. It is found that the profitability of well managed trading houses rapidly improves after they have reached a critical size. Studies show that for the trading house to grow rapidly governmental support is helpful, at least in the formative years. The reason is that till the trading house reaches an economic size it would probably not be profitable, and to reach that economic size many difficulties, mainly financial, have to be overcome. It should not be thought that only in developing economies do trading houses need government assistance. It is well known that even in Japan, the Sogo Sosha have during their earlier years received substantial support from their government. This support has been provided in a variety of ways including canalizing of governmental imports through them. This support helped the Sogo Sosha to achieve the size required to be effective in international trading. External assistance is however required to speed up the growth process only in the initial stages till the trading house has reached an economic size. Later, as the trading house finds its business feet, the support can be gradually withdrawn. Having created facilities overseas such as showrooms, warehouses, after sale service facilities etc. the trading houses profitability can improve substantially over time because a larger range of products helps to spread the overhead costs. In fact it is quite possible that some of these products may never have been exported had it not been for the trading houses initial investment in creating the overseas infrastructure. This shows how the national governments support to the trading house in the initial years enables it to reap the benefit of increased exports later.

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8. The role of governments in encouraging trading houses

Promoting SME exports is recognised by policy makers throughout the world as a valuable activity because it generates employment, alleviates poverty, encourages dispersal of industries away from urban areas, improves the status of women in the workforce, benefits the environment and results in sustainable growth. To encourage the growth of trading houses, policy makers can choose from various options. These options involve different degrees of the governments involvement. Increasing Awareness about trading houses Establishing Effective Policies and Incentives Creating a Public-Sector trading houses

Increasing Awareness about trading houses The least-involved option for the government is to increase awareness of the nature and objectives of trading houses and the role they play in promoting exports of SMEs. This involves publicizing the nature of a trading houses and removing misconceptions. SMEs are often wary of exports because of the perceived complexities of such operations. So they need to be informed about how trading houses can take care of these complexities on their behalf. Also many SMEs are concerned about committing their sales to a commercial intermediary because they fear exploitation. Governments can help through support in providing information about the role of trading houses in developing SME exports and removing misconceptions in a systematic manner. An effective method of doing this is to encourage the associations of trading houses to formulate Codes of Conduct as well as disseminate a list of services provided by trading houses. The governments may also publicize lists of government certified trading houses which can contribute to SME export development. The government may also encourage dialogue between SMEs and trading houses through trade fairs and workshops. This has been found to an effective way of letting the partners know what they can gain through a mutually beneficial partnership. 25

Establishing Effective Policies and Incentives

If there is insufficient private sector interest or ability in the trading house business there is the second option of creating a package of incentives to facilitate their formation and growth. Trading houses are in a risky business involving large investments and unsure returns. Commercial firms and financial institutions are apprehensive of such lines of business. Though successful trading houses provide substantial advantages for their countries they themselves lead a hazardous and precarious life at the beginning. So government may consider the second option of creating a package of policies and incentives to encourage their establishment and growth. To frame appropriate policies the government may consider the following: The cost of a trading house development programme needs to be viewed in the light of the governments existing programmes for promoting SME exports. Governments are incurring large expenses in providing a range of export developmental services to SMEs such as export promotion boards, marketing and information bureaux, financing the cost of trade delegations, fairs, and common facility centers. It may be worthwhile for governments to ascertain the amount thus spent compared to the additional exports that have been generated as a result of these initiatives. It will be noticed that a trading house, is a cost-effective way of encouraging SME exports. Framing the policy should involve the knowledge and experience of various organisations such as chambers of commerce, export promotion councils, economic research organisations, academic institutions, potential trading houses and political associations. This can be done by encouraging debates, study groups and workshops. The policy itself may contain two major components- the eligibility criteria for recognition as a trading house, and the incentives to be offered to trading houses for performing certain tasks. The criteria for eligibility could include: size, growth rate, diversity of product range, availability of overseas marketing infrastructure, performance in introducing new products, success in popularising local brand names and helping SME exports. The incentives could include tax exemptions, special import licenses for otherwise non-importable goods, and grants towards specific export promotion projects, etc. While framing policies there is often a temptation for policy makers to mandate that trading houses only perform difficult tasks. For example, that they should only be involved in the export of non-traditional value-added products to non-traditional markets. Such mandates discourage the growth and efficacy of trading houses. The example of the Soga Sosha in Japan suggests that the most effective trading houses are involved in commodities and raw materials to a greater extent than they are involved in finished goods and value-added products. Actually for the Soga Sosha, 26

the chief source of income is in imports rather than exports and in dealing with large companies rather than with SMEs. Trading houses have to be nurtured over time to provide the best results. It is important to note that patience on the part of the policy maker is crucial to the success of a trading house development programme, because the efficacy of trading houses improves with size and time. Again, it is worth noting that the Soga Sosha of Japan have reached their current levels of success after more than a hundred years of development. Policy makers should construct a policy that can adapt to the changing global environment, while still providing a permanence that does not disturb the trading houses long-term planning. Creating a Public-Sector trading houses

Finally, the government may choose the third option of establishing a trading house in the public sector. Some policy makers have felt that public-sector trading houses have some advantages over private sector trading houses, They feel that while the private sector trading houses are solely profit-driven, public-sector trading houses can be given a mandate that is more service-oriented. Both private and public trading houses are market-focused and there are successful examples of both types. However, where government trading houses have been created and managed with the active involvement of businessmen, the results have often been better than those created and managed solely by bureaucrats. The advantage of the public sector trading houses is its malleability with respect to government plans. However like most public-sector enterprises, a trading houses operated by the government faces the problems posed by inefficiency. Lack of the performance-oriented drive that motivates the private sector can cause public-sector institutions to be less effective. Continued rotation of administrators in and out of the trading houses causes dislocations and confusion. There is, of course, no easy solution to this problem but governments should be aware of it when they consider establishing a public-sector trading houses. The Government and the trading houses- A Successful Working Relationship The government can look forward to a fruitful relationship with the trading houses. Examples of the special ties between the government and trading houses abound in countries like Japan and the Pacific rim. In many countries, trading houses executives interact closely with their government counterparts and discuss their

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plans and their difficulties. Governments are known to use trading houses as extensions of their own departments and utilize the trading houses services in administering certain initiatives, especially in the SME sector. Ideally the trading houses are selected according to relevant eligibility criteria - this enables policy makers to trust these companies, and use them for developmental objectives. trading houses often have special growth plans in particular markets and products, which can gain impetus from the encouragement of the government. For example, an trading houses, seeking to popularize a national brand name abroad, would have to work closely with the government to design a plan of action. Governmental support could include the visit of a minister or even head-of-state to the target market, an event like a cultural festival, a special line of credit, a trade fair, and so on. The government, in turn, can use the trading houses for developmental work, particularly in the area of SME exports. For example, a government may have a scheme that allows the duty-free import of inputs required for export goods. Such a scheme would put an enormous burden on the governments administrative machinery because the connection between the imports and the corresponding exports have to be monitored. This burden can be transferred to an trading houses, which has the resources and the network to do the necessary monitoring. Because the trading houses is, itself, closely monitored by the government, there is no risk associated with this delegation of responsibility. This arrangement also augments the ties between the trading houses and SMEs. The close trading houses- government relationship is exemplified in Japan, where the special links between the Soga Sosha and the government are well-known. Many of the most ambitious plans of these companies are worked out in consultation with the Japanese government and with their tacit cooperation and support. Another example is the Team Canada relationship of the Canadian Commercial Corporation with their government. The Canadian authorities use their influence and the exporting community its commercial strength in order to glean business from the international market.

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9. Choosing the right trading house

How does a manufacturer go about choosing a trading house? Names and addresses of Trading Houses, together with a brief description of their activities are available from trading house associations, chambers of commerce, trade promotion offices of the government, etc. The manufacturer should also to dig out further information about the Trading House, information of the kind that is not normally available in directories. The manufacturer would need to tap both formal and informal sources to find out about the reputation of the company, its track-record, its strengths and its limitations. The manufacturer should be in a position to specify his needs and define his objectives and then match these with the attributes of the Trading House. The attributes that it may look at are, for example, size, product/market expertise, types of services offered, quality of management and reputation. Is the trading house large or small? In which products is it strong? What is its market orientation? Which services does it provide best? The managements experience, quality and reputation. chambers of commerce Has it interest in my product?

Is the trading house large or small? A large Trading House may be suitable for an manufacturer involved in agroproducts where the sheer bulk of the Trading House gives it an enormous clout in negotiating favorable terms. However a smaller Trading House would be more beneficial to an manufacturer involved in the production of fashion articles such as ladies handbags, where quick response and personalized service are important.

In which products is it strong? Often a Trading House is oriented strongly towards a single product group, say engineering goods, while another is strongly oriented towards another product 29

group, say textiles. The manufacturer should obviously choose the Trading House whose focus is on products similar to his own. Product expertise is an important qualification of the Trading House particularly if the product of the manufacturer is technically sophisticated. Trading Houses themselves have specialists in various product groups and they should be capable of selling such products. In any case most enlightened Trading Houses associate the supporting manufacturer very closely in sales presentations, in respect of products with high-tech specifications. What is its market orientation? Trading Houses do not have equal strengths in all markets. They generally concentrate on a few types of markets depending on their main product orientation. For example a Trading House mainly exporting small-scale projects may have developed a deep knowledge only of emerging countries and may not be appropriate for an manufacturer who would like to export knitwear to Europe. Sometimes manufacturers who are already exporting also use the services of a Trading House to enter another market. They would obviously consider the Trading Houses strengths in specific markets. Which services does it provide best? A Trading Houses bias toward particular types of product groups would create an ability to provide certain services better than others. For example a Trading House which specializes in exporting vehicles and has therefore created an after-sale service organization in foreign countries would be attractive for a manufacturer of a product which also requires after-sale service. However the same Trading House may not interest an exporter of flowers. The managements experience, quality and reputation. With respect to quality of management there is not only the matter of competence and efficiency but also of the Trading Houses philosophy, vision and approach. It would make for a smoother working relationship if these were to match those of the manufacturer since the two would be working closely together and it is important that they should get on well. The reputation of the Trading House is not only important from the point of view of safeguarding the manufacturer but also for success in marketing its product. In the marketplace often a person is judged by the company he keeps, and so is the case with products. Since a manufacturer may be unknown in the foreign market, foreign customers would buy on the strength of the Trading Houses reputation. The

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reputation of the organization presenting the product goes a long way in ensuring that it at least gets to be considered by the foreign customer. Has it interest in my product? Even if all the above attributes are present in the Trading House these will not add up too much if there is not an interest in the Trading House for the product. The manufacturer should particularly check whether the management of the Trading House is motivated by his product. If the manufacturer finds a lack of interest and commitment then it would be better to search out another Trading House.

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10. Creating a sound relationship

The compulsions of international trading are such that the Trading House, which is the manufacturers exporting arm, will need to have the full confidence of the manufacturer and vice versa. Therefore there must be trust between the two partners. Apart from mutual trust there needs to be an appreciation of each others point of view and a commitment to fulfil the respective roles. The best drafted agreement will fail in the absence of these preconditions. Here are some areas to watch: Trust and Mutual Understanding Complete trust and understanding between the two will be required. It will certainly happen that the partners have to take decisions and make commitments very fast, often over the telephone, when they are thousands of miles apart. Therefore they must be able to rely on and trust each others judgement. It is not easy to build this trust. It is created through demonstrated good conduct towards each other over time. Also it is essential that both the trading house and the manufacturer understand each others situation. Particularly it is the trading house which has to make a special effort to see things from the manufacturer's point of view. This is because in many countries there have been cases of traders exploiting small manufacturers, since time immemorial. There is therefore a deeply ingrained idea in the minds of manufacturers that traders are not to be trusted. The modern forward looking trading house, which has no intention of exploiting the manufacturer, has unfortunately inherited this legacy and has to find a way of coping with it.

Responsibilities. The responsibility of each partner is spelt out in the Memorandum of Understanding (MOU). Mainly the trading house deals with the foreign customer and the manufacturer produces the goods. In the actual working relationship however, their are often instances of one party or the other not fulfilling their responsibilities. For example, the manufacturer may not execute the trading house's purchase order in respect of quality or delivery time. Or the trading house may fail to provide adequate marketing effort to obtain orders at good prices and to negotiate favorable terms. If the trading house and the manufacturer do not fulfill their responsibilities this will undermine the relationship.

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Long Term View. Both the manufacturer and the trading house need to see the relationship as a long term arrangement. A recurring problem arising between manufacturers and trading houses is the suspicion that one party or the other will take a short term view and break the arrangement by cutting out the other party. Sometimes, after the product has been established in a foreign market with the services of a trading house, manufacturers are tempted to try and cut out the Trading House and approach the foreign customer directly. Sometimes the trading house, after having developed a market for a manufacturers product, may be tempted to cut out the original manufacturer and establish other sources for the product. To make the relationship a success it is imperative that both parties are committed to the objectives. A concern of trading houses is that often manufacturers are not seriously committed to exports and are looking to exports only because of a temporary shortfall in capacity utilization caused by of some problem in the domestic market. As soon as the situation in the domestic market improves these manufacturers may renege on their export commitments. Similarly manufacturers are concerned that trading houses may use them as stepping stones for achieving short term objectives. Most problems that occur between trading houses and manufacturers are generally concerned with immediate or short term situations. In the "heat of the moment" either party is likely to loose sight of the long term objectives because of short term problems. It is the maturity and the vision of the management of the trading house and of the manufacturer, which will enable them to ride over the rough patches which inevitably crop up in business relationships. Fair Practices To build a strong relationship between the trading house and the manufacturer both should follow fair practices in their dealings with each other. Sometimes manufacturers fear being exploited by the trader. This often arises because the manufacturer does not know the trading house's selling price and may therefore have the impression that the trading house is making an exorbitant profit out of proportion to the services provided. To avoid such suspicions and to build long term relationships based on trust modern trading houses are now being more open and transparent with respect to their pricing policies.

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This transparent style which involves taking the manufacturer fully into confidence, is being adopted by some of the leading trading houses and the result is mutually beneficial long-term relationships. Here are a few examples of irritants that can damage the relationship: Trading houses may get samples developed by one unit and then give the Purchase Order to another unit from whom they get a better price or in which they have some other interest. Manufacturers may get sample specifications or prototypes from a trading house and then approach another trading house with the counter sample and offer. Manufacturers may divert finance or materials supplied to them for executing an export order by a trading house, to other uses. If the manufacturer is selling a large proportion of its production through the trading house then the latter may be tempted to dictate payment terms that are advantageous mainly to itself. Trading houses may use a manufacturer's weakness to delay payments beyond contracted dates, to improve their own cash flows. Trading houses may even register a brand name for the product and get the manufacturer at their mercy.

Value addition Both the trading house and the manufacturer can contribute to strengthen the relationship by adding value to transactions. The trading house can provide value adding services so that its contribution to the transaction is not merely the fortuitously obtained name and address of a foreign customer. They can contribute to the exporting process by providing services such as sorting, inspection and packing facilities, developing in-house design studios or testing laboratories, as well as developing warehousing facilities, after sale service centers and showrooms in the foreign countries apart from involving themselves in financing the transaction. Similarly manufacturers can strengthen the partnership by being efficient suppliers. Trading houses realize that working with an efficient manufacturer can be rewarding. Such manufacturers are hard to come by, and the manufacturer who performs well is likely to build a profitable relationship. Therefore it is important for the manufacturer to supply goods as per commitments. Also the manufacturer should describe the product accurately to the trading house indicating its advantages as well as its limitations. Many large manufacturers create their own export departments and do their own export marketing. Therefore trading houses increasingly have to offer their services

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to small manufacturers. So reliable manufacturers are on a strong wicket in this game and have much to gain by strengthening their capabilities. Transparency, frankness, trust and fair play on both sides as well as a commitment to achieving the set goals through the partnership will create the appropriate atmosphere.

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11. The Memorandum of Understanding

The trading house and the manufacturer would do well to discuss all the issues involved in the relationship beforehand and make a written Memorandum of Understanding (MOU). This serves to clarify matters and avoid misunderstandings later. The drafting of the MOU can result in contentious arguments but it is useful to get all points clarified and put in writing before the start of business. If there is a spirit of mutual give and take and if both parties are looking for long term gains from the partnership then most issues do get resolved, often through compromise. The MOU should cover all the important matters relating to the arrangement, particularly: Goals. Territories and Products. Definition of responsibilities. Exclusivity/Non-exclusivity. Sharing of expenses and of income. Payment terms. Validity period and termination arrangements.

Goals. It is essential that the trading house and the manufacturer are on the same wave length as far as the issue of goals and approaches is concerned. There will be arguments here because the manufacturer would insist that goals are quantified and with time limits. The trading house would prefer flexibility and fewer commitments. The manner in which the goals are to be achieved should also be discussed with the manufacturer and approval obtained so that supportive backing is available for all the programs. Preferably a systematic monitoring mechanism should be accepted. Territories and Products. The parties list the countries to which specified products may be exported. Here conflicts may arise because the manufacturer may not be ready to "put all its eggs

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in one basket". It would like to keep the number of territories and products to be covered by the arrangement to a minimum, and keep its options open for the future. The trading house, on the other hand, is keen on getting the maximum number of territories and products covered by the arrangement since it is going to be spending money up front on market development and would like to improve the chances of earning its money back by having the possibility of dealing in a larger number of products to many markets. The manufacturer would like the trading house to handle the most difficult territories and products and to hold back the easier ones, perhaps with the intention of handling these itself directly. The trading house would naturally have different views on this matter. Definition of responsibilities. This part of the MOU deals with the manner in which the work of the team is to be organized, particularly the sharing of specific responsibilities and tasks. The major division of responsibilities would be that the manufacturer, by and large, looks after the manufacturing and the trading house after the exporting. All tasks involved in the exporting process should be listed and responsibilities assigned. Exclusivity / Non-exclusivity. This part of the MOU deals with whether the manufacturer and the trading house would deal with other organizations in the same markets and same products. This point causes much argument. The trading house of course would insist that it should have the exclusive right to handle the manufacturers products in the specified markets. The manufacturer prefers flexibility and does not want to tie itself down to an exclusive arrangement which has not yet proved its viability. This issue becomes particularly ticklish when the trading house insists that the manufacturer exports to a particular market only through it while it is not able to reciprocate by promising that it will not obtain such products from other manufacturers. The manufacturer perceives this as unfair while the trading house points out that the manufacturers capacity may not be sufficient to meet large orders. Sharing of expenses and income. This subject can generally be dealt with in quite a straight forward way by listing out the heads of expenses and income and the manner of sharing them. But here

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too there are often gray areas and it is useful to cover as many eventualities as possible during the negotiations stage to avoid misunderstandings later. Such eventualities include times when for example, costs of product development, of promotion or of sampling are unusually high or when there are quality or late delivery complaints due to controversial reasons. Payment terms. This part of the MOU deals with when and how the manufacturer will be paid. The payment terms clause is significant because it has a direct impact on the cash-flow situation of both the manufacturer as well as the trading house. The payment terms incorporated into the MOU should be such that the partnership obtains maximum advantage from the strengths of the two parties while the disadvantages of the weaknesses are minimized. If the trading house's cost of funds is cheaper than the manufacturer's it is economical for the production to be financed by advance payments from the trading house to the manufacturer. In such cases the trading house assumes a quasi banking role and becomes concerned about matters such as collateral, guarantees, etc. Sometimes manufacturers, particularly small manufacturers, have access to subsidized credit and this can be taken advantage of in the payment terms. Another aspect to be considered is of course the financial position of the two parties. Validity period and termination arrangements. Here again there is often a clash of interests with the trading house preferring a longer validity period so that it can reap the rewards of its investments and efforts over a longer time span, and the manufacturer preferring to get back as soon as possible the option of being able to decide on a future course of action for a market. As mentioned earlier, contentious arguments would take place while making the MOU but it is better to have these sorted out before hand rather than face the possibility of a break in the relationship at a later date when problems arise which are not covered by an understanding reached earlier.

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12. Trading houses In The next Millenium

Like most business institutions trading houses will develop and transform themselves to cope with the requirements of the integrated global market of the 21st century. The traditional trader describe earlier as the 10% middleman who earned his living only through a secret list of customers, will probably disappear. With the developments in information technology very little such information will be secret. So the emphasis will shift to providing value adding services. What will be the main features of this transformation? Top executives of leading trading houses from different countries were asked about their view of the trading house of the future. Most agreed that : Trading houses would seek out opportunities for networking with external organisations, including other trading houses, and forge strategic alliances, rather than restrict growth to their individual potentialities. The modus operandi of trading houses will be more transparent. Gone will be the days when trading houses reaped profits by being privy to "confidential information. Trade financing would be a major activity of trading houses and would indicate their confidence in and commitment to export programmes. The ability to assess risks and take business decisions quickly will be crucial. With on-line electronic bidding replacing traditional tendering procedures decisions will have to be made at competitive speed. Merchant trading as a core activity would be supplemented by other activities including investments in export and import oriented manufacturing in the home country as well as in foreign countries. Information technology, involving the collection, transmission and analysis of data would be at the forefront of trading house development. Exporting would be treated as a part of a larger trading programme which would include importing, third country trading, barters, counter trading, etc. The overseas marketing infrastructure will be an important indicator of a trading houses position relative to its competitors. The quality of an trading houses human resources would be its strength. HRD will be the main concern of the trading houses top management. Support from national governments except in the formative periods will be minimal as governments downsize and focus on their main priorities.

The above responses are about large trading houses. What about the small trading houses? The answers given indicate that there will always be niche products and markets where the capabilities of the small trading house are stronger than the capabilities of the big trading house. The small trading house may not possess the

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large overseas infrastructure or the financial clout of the big trading house but it does have other strengths such as quick response, low overheads, flexibility, customization, capabilities to handle small orders, high motivation, personal service, etc. So small trading houses will have an important role to play complementing the activities of their larger colleagues and often working in collaboration with them.

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Part B TRADING HOUSE ASSOCIATIONS

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1. The role of trading house associations

This section is about how trading house associations can help in the development of trading houses and encourage them to pursue plans which benefit society as well as themselves. Many governments all over the world are down sizing. Therefore they are seeking agencies which can help them in the pursuit of national objectives. In the area of developing exports, mainly from SMEs, trading house associations can play a key role in implementing national policies. They can do this more efficiently and at lower cost than the government. This is because they are closer to the grassroots level and understand clearly the realities on the ground. Moreover, since they have lower overhead costs they can manage programs more economically. Apart from this trading houses themselves require a nodal agency to perform certain functions and provide various services. The services that trading house associations can deliver include: Promoting the business of trading houses. Training. Codes of Good Business Practices. Counseling, Advising, Arbitrating. Validating and Benchmarking. Establishing databases and networking arrangements with other organisations. Producing Studies, Reports and Research. Exchanging Best Practices. Acting as a spokesman and a channel of communication.

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2. Promoting the business of Trading houses

Trading house associations help to promote the business of their members through organizing trade missions, visits of business delegations, trade fairs, buyer-seller meets, etc. These associations are well placed to help their members to make business connections and create business partnerships. They can perform the functions of: Understanding the collaboration requirements of their members. Identifying suitable partners through their networking organizations. Short listing and screening potential partners. Match making through arranging meetings. Providing further assistance to make the collaboration a success.

Such services are particularly useful to small trading houses who could gain considerably from partnerships but are not able to manage the travel etc. involved. Trading house associations can also negotiate favorable terms for all their members with organisations which supply products or services to trading houses, such as transportation, insurance, clearing and forwarding, etc. This improves the profitability of their members. Some trading house associations are creating networking arrangements with international financial institutions and multilateral trade bodies to promote the role trading houses in projects funded by these agencies.

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3. Training
Many trading house associations are involving themselves in providing training in subjects connected with international trade. They are well suited to provide such training because of their closeness to trading and to traders. They are able to use executives of trading houses for teaching and their courses are enriched by real life examples and actual situations. Moreover the trading house association itself is continually involved in the policies and practices of international trade as a part of its routine work. Hence the courses provide by it are up to date and deal with the situation which is current. This makes their courses more practical than courses provided by academic institutions. For example the Quebec Association of Trading Houses (AMCEQ) has been conducting practical, down to earth trade training programmes for the last eleven years, in English and in French. They have developed an appropriate syllabus and curriculum as well as training aids such as printed course materials, a video, as well as the delivery arrangements including teachers and tutors. AMCEQ now plans to develop trade training projects in developing countries in association with multilateral trade organisations. (Details of training by AMCEQ)

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4. Codes of Good Business Practices

In the emerging global economy international trading houses can make a major contribution to enhancing world trade and economic development. To fulfill this role effectively they need to be regarded by the commercial and financial community, by the government and policy-makers, by the media, by their own employees as well as the public at large as reliable, decent and useful citizens of society who render services based on ethical principles, with diligence and care. Trading house associations help in bringing this about by playing a role in the promotion of ethical behavior in the trading profession as one of their major objectives. Specifically they encourage the adoption of a Code of Good Business Practices for trading houses. Once the Code is adopted the parties with whom trading houses interact are assured that they are dealing with entities that can be trusted to conduct themselves according to stated and known standards of ethical conduct. This assurance is further strengthened when it is notified by the trading house association that a breach of the Code of Good Business Practices would disqualify a trading house from being a member of the association, as well as get adverse publicity. Apart from producing a Code of Good Business Practice for their members which consists of broad and widely accepted general principles, trading house associations can encourage individual members to produce their own more detailed operational hand books which serve as guides for their employees in specific situations for making decisions and taking actions. An employee of a trading house would thus have a handbook which helps him to be in conformity with the Code of Good Business Practices. The trading house associations could validate members who have introduced such operational handbooks which are in harmony with their Code of Good Business Practices by making mention of this in their directories. These activities of the trading house association serve to raise the status of trading houses in the business world and improve their credibility and hence their business. Therefore some trading house associations are already involved in this activity.

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5. Counseling , Advising and Arbitrating

Trading house associations are uniquely placed to provide advisory and consultancy services to organizations concerned with various aspects of international trade including policies, institutions, techniques and technologies. The trading house associations are able to do this because they derive strengths from the capabilities of their members and their networking partners. Also the services that trading house associations provide bring then routinely in contact with the various issues of trading such as marketing, financing, transportation, etc. Often the staff of the association are persons with hands-on experience in actual trading and have done consultancy assignments for multilateral and national organizations. Trading house associations can provide advisory and consultancy services in various aspects of international trade including policies, institutions, techniques and technologies; particularly in the area of promoting the export of products made by SMEs. Generally trading house associations can provide advisory and consultancy services in the following areas: Helping to promote the development of trading houses and trading house associations. Training people both on site and through distance teaching in the practice of international trade. Helping associations to create Codes of Conduct for their members so that working relationships are facilitated. Providing information about Best Practices being followed internationally with respect to policies, procedures and systems. Linking trading house associations with networks and databases so that their members gain from international connections. Promoting the business of members of associations through planned business promotion visits and meetings through a process including screening and match-making.

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6. Validating and Benchmarking

Trading house associations can certify their members after verifying details of their businesses. Such details include information about sales, products, markets, financing, ownership, employees, references, a description of the trading house, etc. Validation helps individual trading houses to build their credibility. It also helps the customers of trading houses as well as their associate manufacturers because they are able to receive validated information about the trading house with which they are proposing to deal. The information which trading house associations collect for purposes of validation has many other uses as well. For example these associations can use this information to help trading houses to improve their performance by encouraging benchmarking between trading houses nationally and internationally. Through such benchmarking trading houses can compare their own key performance ratios with other similar trading houses. In the manufacturing sector this is now routine. In the trading sector it will soon catch on as trading houses become less secretive about their business results. Also the trading house association is the agency which can organize awards and prizes for outstanding performance.

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7. Databases and Networking

Trading house associations provide a useful service by creating and maintaining databases which can be used by their members and by other organisations. Particularly the government requires meaningful and accurate data so that it can formulate sound and helpful policies. Also trading house associations being the nodal agency in a country representing the trading community are ideally placed to create linkages with other organisations. This can benefit the members of all the concerned organizations national and international. For example the Federation of Indian Export Organisations (FIEO) through its association with WFTA has gained for its members all the advantages of services offered by WFTA and its members. In fact the networking function of trading house associations expands the reach of its individual members so that they get access to services being provided by the networking partners all over the world.

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8. Producing Studies, Reports and Research

The nearness of trading house associations to the grassroots level of trading makes them eminently suitable to carry out studies and produce reports on various issues relating to international trade. National governments, multilateral bodies, international financial institutions and research institutions of various kinds. therefore commission trading house associations to do such work for them. Trading house associations also make studies for the benefit of their own members. For example they may undertake surveys or studies relating to the requirements of their members which will help these members to improve their own performance using the results of such studies. Often trading house associations collaborate with similar organisations in other countries for making such studies which adds to the value of this service. Through these networking partners in other countries trading house associations can organize the commissioning of studies by agencies whose credentials for such work have been checked out. This is particularly useful to small trading houses who want in depth information about a particular business but do not know how to obtain it.

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9. Exchanging Best Practices

Most trading house associations continually communicate with their governments with respect to policies and procedures affecting trade. Governments as well as associations want progressive policies and efficient procedures to be adopted in their countries, and are continually interacting to improve them. Trading house associations can play a role here by keeping abreast of the Best Practices being followed in various member countries with respect to policies and procedures affecting trade. By exchanging information about Best Practices being followed in various countries with respect to policies and procedures the members of these associations gain from others experiences. This also helps national associations to make suggestions to their policy-makers effectively and backed by international experience. This helps the trading house movement to become more effective through co-operation and also helps trading activity to become more efficient.

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10. Acting as a spokesman and a channel of communication

An important function of trading house associations is to act as channel of communication between the trading house community and other bodies such as the government, policy makers, the media as well as various national and international institutions. As international trade policy-making shifts from the national level to the international level trading houses find it difficult to have their voices heard at policy making deliberations. Trading house associations provide a channel for the views of the trading community to be heard at all policy making levels. Also international policy making bodies and multilateral trade organisations need a channel of communication through which they can explain their thinking to the trading community as well as receive useful and practical feed back. Trading house associations provide this platform by serving as a two-way channel of communication between such bodies and the trading community.

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