- What worked out well during the planning stage, negotiation stage and/ or the operational stage of their international venture?
- What were the areas of improvement (things that didnt work well) during the planning stage, negotiation stage and/ or the operational stage of their international venture?
Overcoming Obstacles Rare Gems Don't Shine Brightly in Vietnam A bank in the United States, First Midwestern National Bank, was approached by the principal of a company which designed, manufactured and distributed jewelry made from natural gems and stones. The company, Wisconsin Fine Jewelry (WFJ), is known to the bank, and they have had a satisfactory relationship for several years. The company has approached the bank about an opportunity to sell and transport raw precious jade mined in the U.S. and Canada to Vietnam. The buyer, Saigon Jewels, has offered to provide a letter of guarantee from a reputable bank covering the shipment of several thousand tonnes of raw jade by sea. Saigon is proposing payment over a three-year term. The management of WFJ is requesting assistance from First Midwestern Bank in assessing the situation and in structuring and financing the transaction. However, WFJ was not entirely forthcoming on all the details of the negotiations that had taken place to date. It did not inform the bank that in its discussions with the Vietnamese, WFJ had undertaken to buy back finished polished stones and jewelry from Saigon over the course of three years at a set, fixed price. The Raw Details The underlying transaction was to cover the sale of about 10,000 tonnes of raw, unfinished jade, to be shipped in one single shipment by sea. The total value of the sale was to be USD 3 million and the Incoterms 2020 rules used were Cost Insurance and Freight (CIF). Wisconsin Fine Jewelry assured First Midwestern that it could supply the jade and had arranged for safe shipment in a special chartered vessel. WFJ sought help and advice on the terms it should insist on from the Vietnamese and it requested advice on how best to achieve immediate funding for the longer- term payment commitments. The Trade Financing Structure First Midwestern was well regarded for its trade financing skills and had a reasonable reputation in the market, locally and regionally. While the transaction was unusual and involved a country it had little experience with the bank was anxious to impress WFJ and win the mandate to do the deal because of its size, likely revenue and the opportunity for additional future business. It proposed the following: The Bank of Saigon would issue an irrevocable letter of credit to be advised through First Midwestern with a request to add its confirmation. The total value was to be USD 3 million, to be payable in three equal installments of USD 1 million: one at sight, another twelve months later and the third a year later. The letter of credit was to call for three drafts (bills of exchange) to be drawn on the advising bank, to be accepted by it after shipment and presentation of documents to the bank in full conformity with the letter of credit. The first draft was to be payable three months after final shipment of all the jade, while the second and third payments were to be due for payment in twelve-month intervals after the date of the first payment. First Midwestern would undertake to confirm the documentary credit (D/C) if requested by the issuing bank. The bank would undertake to buy the drafts for the second and third payments through its forfait subsidiary, thereby providing WFJ immediate funding, less the amount of the discounted interest to maturity of the drafts. The letter of credit was to include provision for on-board bills of lading, commercial invoices, and inspection certificates issued by an independent inspection agency to verify the quantity and quality of the jade before shipment. The letter of credit was to be issued subject to the International Chamber of Commerce (ICC) Uniform Customs and Practice for Documentary Credits, version 600. Wisconsin Fine Jewelry conveyed to its Vietnamese buyers the terms required and outlined the necessary letter of credit details and terms. Three weeks later, First Midwestern received the following from Bank of Saigon: An irrevocable guarantee issued in favour of Wisconsin Fine Jewelry, undertaking to guarantee payment of three drafts for USD 1 million each. The first was payable at sight and the remaining two were to be due for payment in two twelve-month intervals after the first draft was paid. The drafts were to be drawn on the issuing bank and would be accepted by them after the delivery of the full quantity of jade and against an inspection certificate indicating that the jade was of correct quality and density. The guarantee did not indicate which party was responsible for issuing the inspection certificate. The certificates and drafts were to be forwarded to the issuing bank by First Midwestern after all the jade had been shipped and it received an authenticated SWIFT message from the issuing bank that the full shipment had been successfully delivered to the buyers. The issuing bank did not request the advising bank to add its confirmation. The guarantee was not subject to any ICC or other universally recognized rules. Going Against Advice Against the advice of First Midwestern not to accept the guarantee and to request a documentary letter of credit along the lines it had recommended, WFJ was anxious to proceed with the transaction. The jade had been mined and had been ready for some time, and shipment had been arranged. When asked by WFJ if it would confirm the guarantee instrument if requested by the issuing bank, First Midwestem refused to confirm the instrument in its present form. It did, however, undertake to purchase and discount drafts if the shipment was completed successfully and the issuing bank accepted the drafts. The Outcome Wisconsin Fine Jewelry proceeded to ship the jade. After the arrival of the first shipment, the Vietnamese claimed that their analysis of the jade indicated not all of it was of the quality required. A heated debate and argument ensued between the buyer and the sellers, and Saigon threatened to not accept any of the shipment and to instruct its bank not to accept any of the drafts. Ultimately, the Americans arranged a subsequent small shipment of jade to satisfy the objections of the Vietnamese buyers. Despite these initial delays, accepted drafts were received by First Midwestern, and the first draft was paid immediately and reimbursement was successfully claimed from the issuing bank. The remaining two drafts for USD 1 million each were purchased at a discount and WFJ was paid the full value of both drafts less interest for the term of the drafts. The drafts were subsequently sold by First Midwestern to another bank. A year later, the price for jade gems and specialized jade jewelry had significantly dropped on the world market. Meanwhile, when First Midwestem claimed payment of the second draft on the due date, payment was refused by the issuing bank. Saigon had sought and received an injunction from the highest local court instructing the issuing bank not to pay. The reasons cited were that WFJ had failed to live up to its agreement to buy back the finished stones and jewelry for the price arranged in a prior agreement between the buyer and seller and that the buyer did not have the financial means to make payment for the current or future drafts. The principals at WFJ denied the existence of a side-agreement and thereafter refused to respond the calls from First Midwestern. This case study is loosely based on actual events that took place in the early 1990s. The names of the parties and the countries involved have been changed. The advisingegotiating bank in the actual case engaged legal counsel in the country of the buyers. Senior representatives of the bank visited the issuing bank and later took the matter to a higher court. That court ordered the lower court to lift the injunction and criticized it and the issuing bank for "doing a disservice to the country's international reputation." The second draft was paid, with interest, and the third draft was paid on time. The exporter did not get involved and did not provide any help in securing the payment of the drafts. The bank severed its relationship with the company
