Megahertz Communications is a U.
K based company that specializes in the building of broadcasting systems. Created in 1982, Megahertz designs, manufactures, and installs TV and radio broadcasting systems. They also build broadcasting and news-gathering vehicles with satellite links. Megahertz builds everything in-house, from satellite trucks to custom desks and cabinets used in newsrooms.
Megahertz International was set up by Ashley Coles in 1998 as an international subsidiary of Megahertz Communications.The goal of Megahertz International is to sell products to the Middle East, Africa, and Eastern Europe. The Middle East, Africa, and Eastern Europe were growing markets that were not being serviced by any companies in the broadcasting industry. Megahertz International’s plan was to provide turnkey solutions to these emerging foreign markets.
Megahertz International offers custom-designing, manufacturing, installation, and testing of broadcasting systems. To market towards new clients, Megahertz hired salespeople with significant experience in these regions and opened a foreign sales office in Italy.They also displayed their products at a number of exhibitions that focused on the target markets, sent mailing and email campaigns, and set up a Web page. Megahertz International expanded quickly.
By 2000, they had sold products to Namibia, Oman, Romania, Russia, Nigeria, Poland, South Africa, Iceland, and Ethiopia. There were seventy-five employees working on the international business and generating ten million pounds a year. They even earned the Small Business Export Award from the British government in January of 2000.Although they had great success in growing their company, they had problems securing financing for their international business with developing countries.
In the end, AZCAR of Canada purchased Megahertz International to gain access to the expanding European market. Megahertz benefited from the additional working capital that enabled it to take full advantage of export opportunities. Report The Megahertz case study relates to chapter 13 because the chapter discusses the mechanics involved in exporting, not just the benefits and affects of exporting.Megahertz had to do research to find the target markets, tailor its marketing campaigns; tailor its products, and secure financing for a somewhat risky business.
Chapter 13 explains what companies must do in the way of research, hiring specialized employees, and securing financing for international ventures. Megahertz had to hire salespeople with experience in the foreign regions and people to work in a foreign sales office. They also had to research which countries to enter, and if there were any other companies servicing that area. Their biggest problem was securing financing even with letters of credit and export insurance documentation.
Megahertz even tried to use lending companies that specialized in financing international trade, but they charged excessive interest rates. If Megahertz had used an export management company, they may have been able to avoid the problems with financing, because the EMC could secure financing easier, due to its preexisting relations with banks. Megahertz was able to avoid many of the common pitfalls associated with international exporting because they identified the need for broadcasting systems in developing markets and they tailored their products to their customer’s needs.Megahertz is a good example of how smaller companies can greatly benefit by exporting their good and the challenges even prepared businesses face.
Problem Analysis For Megahertz to expand its business, in 1998 Megahertz International was developed to sell products to the Middle East, Africa, and Eastern Europe. Megahertz’s approach to get business from these broadcasting systems illiterate countries was to offer them custom designs, manufacture, installation, and testing. The response from these countries was positive, and Megahertz began business with several different countries in each region.Soon after business was conducted, however, Megahertz ran into some trouble.
Since most of these countries were under-developed, they were unable to provide the money as fast as Megahertz would have liked. This brought on major financing problems for Megahertz. Megahertz’s bank account was constantly changing; sometimes there was next to nothing in the bank and sometimes there was plenty of money. What Megahertz needed was additional working capital to finance the purchase of material to produce their systems.
Since some of Megahertz’s customers were unreliable for payments to be paid on time and the constant fluctuation of currency, banks turned them down because of the amount of risk. Megahertz then turned to lending companies that specialize in financing international trade. However, because of the extremely high interest rates, their profit margins became too diminished. Alternatives Although Megahertz had great success and was awarded the Small Business Export Award the company still had major financial problems.
The company’s week to week financial situation was constantly up and down. One week there could be nothing in the bank and the next there could be ₤300,000. There were many problems that affected this erratic situation. The main problem that Megahertz had in expanding international operations to growing markets was getting money to finance an order.
Twenty percent of work time was spent on pre-shipment financing or chasing money. The company needed additional working capital to finance the purchase of component parts that go into the systems it builds for customers.This was a problem because banks were very cautions when they heard that customers were from Africa and Eastern Europe. The banks were worried that Megahertz would not get paid on time, or at all.
They also had concerns that currency fluctuations would reduce the value of payments to Megahertz. Although Megahertz had a letter of credit and export insurance documents, the banks still worried that lending the money to them was too risky, and they declined the company’s request. In order to finance operations, Megahertz turned to lending companies that specialized in financing international trade.These companies charged high interest rates greater than what a bank would charge.
Growth was too slow and these high interest rates had a major financial impact on the setback of the company. As a result, the company was sold to AZCAR of Canada; this gave the company additional working capital and full advantage of export opportunities. One alternative to Megahertz International’s financial problems would be if the company hired an Export Management Company (EMC). EMC’s are export specialists that act as the export marketing department or international department for their client firms.
These companies start exporting operations for a firm with an understanding that the firm will take over operations after they are well established. Megahertz should have hired an EMC that specialized in selling products to countries such as Africa, the Middle East, and Eastern Europe. They should be skilled in the communications industry specializing in the design, manufacture, and installation of TV and radio broadcast systems. The advantage to hiring an EMC is that they are experienced specialists that can help the beginner exporter in identifying good opportunities and avoid common drawbacks.
Another alternative that Megahertz should have used for financing would be to use a bill of exchange also known as a draft. A draft is an order written by an exporter instructing an importer or importers’ agent to pay a specified amount of money at a specified time. If Megahertz had ordered a draft, the countries importers would have had to pay what they owed by a certain period of time. This would have helped saved quality time spent on chasing payments.
If Megahertz would have issued a Sight draft the payment would be payable upon presentation to the drawee.This would decrease delay in payment. Countertrade is an alternative to structuring international exports when conventional means of payment are difficult, costly or nonexistent. If megahertz chose to use the countertrade market it would solve the issue of currency fluctuation because the company would trade goods and services for other goods and services not money.
This depletes the issue of nonconvertability that an exporter may not be paid in his or her home currency. Recommendations:Taking into consideration all of the alternatives presented in the case study, I would above all recommended Megahertz try utilizing the countertrade market to solve their financial problems. The only reason this company could not reach its goals was because they could not obtain the pre-shipment financing that it needed to finance the purchase of component parts for the systems. The banks, even with the export credit insurance, would not fund Megahertz, considering them to be too great a risk, worrying that Megahertz would not get paid, and also that currency fluctuations would reduce the value of payments.
I believe countertrade would almost guarantee a solution to the company’s problems because it does not involve the approval of banks to sell their products internationally. Countertrade is primarily used when a firm exports to a country whose currency is not freely convertible and may lack the foreign exchange reserves required to purchase the imports. And this happens to be the situation of Megahertz International. Countertrade would be specifically useful when trading with countries such as Africa and Eastern Europe.
Of the countertrade agreement options available, switch trading would be most beneficial.Switch trading occurs when a specialized third party is utilized to buy the counter purchase credits provided as payment for the Megahertz systems and selling them to another firm that could better use them. By using this type of countertrade, Megahertz would not be obligated to buy from the country they are exporting to, unlike other countertrade options such as a barter, counter purchase, or offset, which would all require Megahertz to acquire products from the importing countries as payment for the Megahertz systems.Also, buybacks could be a very beneficial alternative solution to Megahertz’s financial problems.
A buyback occurs when a firm builds a plant in a country and agrees to take a certain percentage of the plant’s output as partial payment of the contract. Basically, if Megahertz would build their manufacturing plants in countries such as Africa and Eastern Europe, those countries would accept part of the plant’s output of broadcasting systems as partial payment to the contract.If this type of countertrade occurs, Megahertz would have to find a significantly less amount of financing, which could come from investors or even entering into the stock market. If the countertrade market is not an option, the next best choice would be to hire an export management company.
Using an EMC would still solve Megahertz’s financial problems, but most likely not as quickly. The reason for this is because EMC’s would take some of the profits away from the company to pay for the services provided.