Internationnal payment A case study of freight forwarding and logistics companies in Vietnam Luận văn thạc sĩ

MINISTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS HOCHIMINH CITY



HUYØNH NGOÏC MINH THÖ



INTE RNATIONAL PAYMENT:
A CASE STUDY OF FREIGHT FORWARDING
AND LOGISTICS COMPANIES
IN VIETNAM






MASTER’S THESIS IN BANKING




HOCHIMINH CITY, 2010


2
MINISTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS HOCHIMINH CITY

Huyứnh Ngoùc Minh Thử


INTERNATIONAL PAYMENT:
A case study of Freight Forwarding
and Logistics Companies
in Vietnam



MASTERS THESIS

In Banking

Ology code: 60.31.12

Supervisor
As. Pro. Dr. Leõ Thaứnh Laõn

Hochiminh City, 2010


3
Preface


Firstly, I would like to express my deepest appreciation to my Sponsor, Dr. Le
Thanh Lan, for his precious guidance, comments and suggestions.

This paper is one of the last compulsory elements of Banking program at the
University of Economics Hochiminh City. The objective of this subject is to find
out the new appropriate mode of international payment that is more suitable and
convenient to import and export enterprises in Vietnam, especially for small and
medium ones. This is accomplished via a survey and literature research. I hope it
can be applied to a practical situation.

I would like to assure that the research of “International Payment: A case study of
freight forwarding and logistics companies in Vietnam” was carried out by me
under instruction of As. Pro. Dr. Le Thanh Lan. All figures illustrated in this paper
are honest, accurate and quoted from a reliable source.


Ho Chi Minh City,
October 2010,
Huynh Ngoc Minh Thu







IM MI CA  TÀI



Lun vn vi đ tài: “International Payment: A case study of Forwarding
and Logistics Companies in Vietnam” ca tác gi Hunh Ngc Minh Th,

Ngi hng dn khoa hc: PGS. TS. Lê Thành Lân, gii thiu dch v
thanh tóan quc t theo phng thc C.A.D và C.O.D do các công ty giao
nhn ngoi thng đm nhim, dành cho các đn đt hàng l, s lng ít,
giá tr không cao, gn vi dch v giao hàng tn nhà thông dng ca các
doanh nghip này. Dch v này còn mi m  Vit Nam nhng li không xa
l  nc ngòai. Vic ng dng phong thc thanh toán mi này ti Vit
Nam s thun tin và an toàn hn, tit kim đc chi phí, thi gian, giúp
nâng cao hiu qu hot đng xut nhp khu cng nh giao nhn ngoi
thng, đng thi ni dài dch v thanh tóan quc t ra ngòai tr s ca
ngân hàng thng mi.


4
TABLE OF CONTENTS
Preface. 3
Table of contents. 4
List of firgure 8
List of tables 9
Abbreviation 10
1. Chapter 1: Introduction 11
1.1. Introduction 11
1.2. Research background 11
1.3. Problem statement 13
1.4. Research objective 13
1.5. Scope and methodology of the study 13
1.5.1. Scope of the study 13
1.5.2. Research method 14
1.6. Structure of the study 14
2. Chapter 2: Literature Review. 16
2.1. Introduction. 16

2.2. COD/CAD in international payment 16
2.2.1. Payment process 17
2.2.2. Condition for CAD/COD application 19
2.2.3. Advantages and disadvantages of CAD/COD
2.3. Forwarding and logistics companies. 21
2.3.1. Definition 21
2.3.2. Characteristics 22
2.3.3. Functions 24
2.4. Conclusion 27

3. Chapter 3: Methodology 28


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3.1. Introduction 28
3.2. Business research 28
3.3. Research design 29
3.4. Pilot test 30
3.5. Main survey 31
3.6. Conclusion 32
4. Chapter 4: Settling CAD/COD via forwarding and logistics companies 33
4.1. Introduction 33
4.2. Forwarding and logistics in international payment, in reality 33
4.3. Encroaching of forwarding and logistics companies in international
payment 35
4.4. Undertaking CAD via forwarding and logistics companies 36
4.4.1. Procedure for settling CAD via freight forwarders 36
4.4.1.1. Payment process 36
4.4.1.2. Document required 38
4.4.1.3. Conditions to apply 39

4.4.2. Advantages of undertaking CAD via forwarding and logistics
companies. 39
4.4.2.1. Advantages to the Importer 39
4.4.2.2. Advantages to the Exporter 40
4.4.3. Significances of applying CAD via forwarding and logistics
companies 40
4.4.3.1. Time savings 41
4.4.3.2. The cargo situation has been well checked and monitored 41
4.4.3.3. Eliminating fraudulent shipping documents 42
4.4.3.4. More choice for import export customers 42
4.4.3.5. Avoiding risk in payment 43
4.4.4. Role of commercial banks in CAD/COD once being settled via
freight forwarders 43


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4.4.4.1. Currency exchange 44
4.4.4.2. Overseas money transfers 44
4.5. Customer’s behaviors towards settling payment via freight forwarders 44
4.5.1. What do local Import Export companies say? 45
4.5.1.1. Difficulties in settling payment via the banks and forwwarder’s
workarounds 49
4.5.1.2. How much convenient do they feel? 50
4.5.1.3. Opinions about time saving 50
4.5.1.4. Ideas regarding collection fees 51
4.5.1.5. Point of views in terms of maximum of goods 50
4.5.2. What do local International Forwarding and Logistics companies say?51
4.5.2.1. Background for local forwarding and logistics staffs in
international payment 51
4.5.2.2. Experiences of local staffs in international payment. 51

4.5.2.3. Interest and willingness to participate in international payment.52
4.6. Petition to the authorities 52

4.6.1. Solution for forwarding and logistics companies 52
4.6.1.1. Training and employing 52
4.6.1.2. Expanding network 54
4.6.1.3. Upgrading the IT system. 55
4.6.1.4. Advising customer to diversify foreign currencies in settling
payment to reduce the dollarization effect. 56
4.6.2. Petition to the government. 58
4.6.2.1. Allow this new method of payments 58
4.6.2.2. Public companies main achievements and their problems in an
open system. 58
4.6.3. Petition to the Customs Division 59
4.6.3.1. Publishing enterprises black list. 59
4.6.3.2. Being accustomed to new methods of payment 60


7
4.6.4. Petition to the State Bank of Vietnam 59
4.6.5. Petition to the Commercial Banks 60
4.6.6. Market sharing with Post Offices and express services 61
4.6.6.1. Nature of goods 61
4.6.6.2. Size of goods 62
4.6.6.3. Value of goods 62
4.7. Conclusion 62

5. Chapter 5: Conclusion and imlication 63
5.1. Introduction 63
5.2. Conclusion of the study 63

5.3. Implication of the study 64
5.4. Limitation and recommendations for further research 65
Appendix 67
Reference 90












8
LIST OF FIGURE

Figure 2.1. CAD/COD payment process. 17
Figure 4.1: Payment process of undertaking CAD via forwarding and logistics
companies 36

9
LIST OF TABLES

Table 4.1: Respondents’ profiles in partern. 45
Table 4.2. Respondents’ profiles in pfrequency of using CAD/COD 45
Table 4.3. KMO and Bartlett’s test 46
Table 4.4. Cronbach Alpha Test 47
Table 4.5. Coefficients 48

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ABBREVIATION

CAD : Cash against Document
CIF : Cost, Insurance and Freight
COD : Cash on Delivery
D/A : Documents against Acceptance
D/P : Documents against Payment
D/OT : Delivery of documents on other terms and conditions
FOB : Free On Board
GDP : Gross Domestic Product
L/C : Letter of Credit
LCL : Less-Than-Container Load
SMEs : Small and medium enterprises
T/T : Telegraphic transfer
UNCTAD : United Nations Conference on Trade and Development
WTO : World Trade Organization

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1. Chapter I:
INTRODUCTION
1.1. Introduction.
This chapter portrays general introduction for the current study with which
research problem, research objectives and research questions are provided as the
rationale for this study. An introdcution to the methodology to be used and the
scope of the study is also addressed in this chapter. At the end of the chapter, the
structure of this study is provided. The ouline of this chapter are as follows:


1.2. Research background
Foreign trade activities have become increasingly important in the economic
development of the country, especially in current time, when Vietnam became a
member of WTO and we are now still in the process of industrialization and
modernization. As a key element which cannot be lacking in foreign trade activities,

international payment more and more increases its important role and position in
the economy. It is considered as an indispensable tool, and essential link in
economic relations, and trade between countries around the world. International
1.1
Introduction

1.3
P
roblems
Statement

1.2
Research background

1.4
Research objective


1.5
Scope and m
ethodology
of the
study
1.6
Structu
re of the study



12

payment forms an important part in promoting domestic financial markets
integrating into the world.

International payment arises from import and export activities and then it turns
back to support and creates good conditions for foreign trade development. It is an
essential basis to the formation and development of international financial relations,
circulation of goods and services, as well as money rotation. It helps to promote
and lubricate import and export activities, foreign investment, services, strengthens
drawing overseas remittances and other financial resources.

However, international payment is very sophisticated because the participating
subjects differ in geography as well as in culture, economics and politics. Therefore,
the participants are always interested in finding out the most effective payment
method which brings least risks for both importer and exporter. In Vietnam, T/T,
Collection, L/C are the most common methods selected in international payments,
subject to the demand and agreement from the participants.

In order to expand overseas market, enterprises should base on a reliable payment
system. One of safe and effective channel of payment so far is settling via
commercial banks, and especially the vital role of Vietnamese overseas commercial
counselors in providing valuable information for local banks and businesses.
However, there is still another intermediary who can approach and control
merchandise, monitor clearly and thoroughly cargo situation as well as routine and
transit time in specific. They are forwarding companies and logistics companies.
While carrying out their business, they can know exactly the delivery date, the cargo
and they even can act as a reliable representative on behalf of the importer or
exporter in specific cases. With remarkable advantages, forwarding and logistics
companies can participate and perform very well the role of a key chain in
international payments. Settling via international freight forwarding and logistic

13
companies is a remarkable payment method which is safer, quicker, cheaper, and
especially suitable for small lots, samples, or shipment of particular goods.

1.3. Problems Statement.
Telegraphic Transfer (T/T), Collection (D/A, D/P, D/OT…), Letter of Credit
(L/C) are main methods of payment generally applied in Vietnam so far. Each of
them has its own advantages and disadvantages so the report will try to find out a
new method which can harmonize and meet the needs of low value merchandises.
It’s settling CAD/COD via forwarding and logistics companies.

1.4. Research objective.
The report is supposed to analyze the current situation of international payment in
Vietnam then to find out the new appropriate mode of international payment that is
more suitable and convenient to local import and export enterprises, especially for
small and medium entities. This new method will save time and costs, also being
safe for small and regular inbound and outbound merchandises, especially for small
air cargo, scare and perishable goods, samples…

By getting feedback from customers who daily deal with overseas payments, the
report will summarize particularities, limitations and conditions of this new method:
i.e. CAD/COD via international freight forwarding and logistics companies.

1.5. Scope and methodology of the study.
1.5.1. Scope of the study
The research will approach the case study of forwarding and logistics companies in
Vietnam. All data will be got and collected from bank’s website, annual report,
published studies from different local and foreign universities and articles from
books and journals…. Besides, an online survey to key staff of import export

companies, email interview to the person in charges of overseas forwarders as well


14
as direct interview with managers of local forwarders in Vietnam has been
conducted in order to collect primary data.

1.5.2. Research method
An online survey was posted at the link below:
/>VDJseEJOUVE6MA , it dispensed to 120 key staff of import export companies
and there are a total of 82 executives, approximate by 68.33% of the participation,
response to this survey.

Due to geographical distance, we have conducted an e-mail interview to overseas
international forwarding and logistics companies located in 15 main import export
markets of Vietnam over the world such as in United States of America, France,
Switzerland, Belgium, Australia, Korea, Hong Kong, China, Taiwan, Japan,
Thailand, Indonesia, Malaysia, Pakistan, United Arab Emirates and luckily get 100%
response from them. 73.33% of participations accept this method of payment and
willing to cooperate with Vietnamese correspondents, then settling payment
without problem.

1.6. Structure of the study.
The study consists of 6 main section:



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This is a new method which has not been applied in Vietnam so far. Hence, there is
still deficiency of experience on its implementation. Consequently, there will be
unavoidable shortcomings in this report. The valuable appraisement, contributions,
judgment and suggestion from the Board of Examiners will be highly expected and
grateful appreciated.













1
Introduction

3
Methodology

2
Literature Review

5
Conclusions and Implications

4
Settling CAD/COD via
Forwarding and logistics companies
in
Vietnam



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2. Chapter 2: LITERATURE REVIEW
2.1. Introduction
The previous chapter introduces an overview of the study background, the rationale
of the study, the research objective and the research question. This chapter searches
and reviews relevant theories in the literature. The aim of this review is to develop
CAD/COD via the commercial banks to CAD/COD via freight forwarding and
logistics companies.



2.2. CAD/COD in international payment

Whether it is a trade debt settlement, a unilateral funds transfer, a capital
investment, or so on the reasons for such payments between countries, the
methods of implementing and accounting for them are matters of concern to
economists and national governments. International debts are settled either from
accumulated balances of foreign currency, claims on foreign currency, by loans
from creditor lent to debtor, by drawing on the International Monetary Funds, or
by utilizing the national gold reserves. How a country balances its international
accounts is one of the most important decisions for its balance of payments

2.1
Introduction

2.3
Forwarding and logistics companies

2.2
COD/CAD in international payment

2.4
Conclusion



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Cash against documents is a type of transaction in which the importer, basing on
the sales contract, requests the exporter’s bank open a trust account in order to
settle payment to the exporter upon receiving all necessary documents as
negotiated.

Settling COD/CAD via post office has been implemented by Saigon Post before
1975. It also carried out by forwarders around the world, mostly in EU, USA, and
some developing country nearby Vietnam, such as Thailand, Indonesia, Singapore,
Hong Kong, Taiwan…

Many UEH Master Thesis major on international payment, especially focus on L/C
method, such as Du Minh Sen, Perfecting operation skills in L/C method at Incombank,
1998; Nguyen Thi Ngoc Mai, Developing L/C method at Vietin Bank, Long An Branch,
2008; Hoang Thi Hai Yen, Developing L/C method in settling payment for import cargo at
Vietin Bank, Hochiminh Branch, 2010, but there no topic major on CAD/COD was

found in library database.

This method of payment has been compilated on lectures in international payment
of authors specialized in this field such as Dr. Tran Hoang Ngan, International
Payment, Publisher of Statistic, 2001 (page 244-245), MSc. Ho Thanh Tung, Lectures
of International Payment, TDT University, 2009, with payment process are as follows:

2.2.1. Payment process.









T/T (5)

EXPORTER

IMPORTER
(6)
(2) (1)
(3) CARGO

(4)

THE BANK
DOCUMENT

SALES CONTRACT



18




Firgure 2.1. CAD/COD payment process
(1) Basing on the sales contract with an international customer, the importer
requests the exporter’s bank open a trust account for 100% value of goods
contracted. This amount will be settled in favor of the exporter according to a
memorandum between both sides.
(2) The bank notifies to the exporter.
(3) The exporter ships all merchandises to the importer as per the terms and
conditions negotiated in the sales contract.
(4) The exporter submits all necessary documents as required.
(5) The bank carefully check all document against the memorandum, if they meet all
requirements, the bank will disburse to the exporter from the importer’s trust
account.
(6) The bank then releases all documents pertaining to the transaction to the buyer
and closes the trust account.
Many banks charge fees for cashing against documentary transactions. In some
instances, the seller bears all bank charges. However, it is more common for buyers
to cover these charges at the end of each transaction. Typically, the seller adds bank
charges to the invoice value, as all bank charges are deducted from the trustee
account upon payment.
2.2.2. Condition for CAD/COD application.

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 This method of payment should be applied in case both importer and exporter
totally trust each other.
 Merchandises should be so precious and scarce.
 The transaction should be performed rapidly in a short period of time.
 It requires the importer’s representative in exporter’s country to attest cargo
delivery.

2.2.3. Advantages and disadvantages of CAD/COD.
Further to Mr. R N.Bose, Institute of Banking studies, Calcutta, West Bengaal,
India, CAD/COD is safer than T/T, D/A, faster and more saving cost than L/C
as well.
 Disadvantages to the Exporter:
o There is no guarantee that the Importer will take delivery of the
consignment. No agreement or contract can force an Importer to accept
the consignment.

o If Importer wishes to play truant and delays taking delivery, it may lead to
demurrages and other incidental costs, compromising Exporter’s
bargaining power.

o Legal remedy for breach of contract applies a long and costly process.

o In case of failure of the Importer, the Exporter would either have to pay
the cost of carriage for bringing back the goods, or find out an alternate
Importer at the same or a new destination – leading to additional costs.
o The trust account can be cancelled by the importer at any time. Otherwise,
it needs a multilateral agreement between importer – exporter and the bank

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for each transaction that is very convenient since it is not subject to any
international customs or practices.

o Since the Importer also doesn't trust any prepaid payment without binding
contract and consignment, both parties do not trust each other. Even a
contract signed by both parties will be too expensive when something goes
wrong, i.e. the Importer suddenly refuses to accept the goods or take the
goods but doesn't pay at all. Debt collector agency will add more cost. A
returned shipping costs even more. All the risks will be borne by the
Exporter's. This gone worst in foreign trade which is subject to variety of
laws or jurisdiction. Each side is not empowered to court the other, except
when you are a big trusted company or you are very rich. This terms a bit
one sided. The consignee doesn't take the risk as much as the consignor.

o Exporter should arrange booking via reputation carriers or forwarders who
have well handled and monitored on cargo tracking and tracing. In case of
coming up against difficulties, the exporters should urgently get in touch
with Vietnamese Commercial Affairs for essential instructions and advices.

 Advantages to the Exporter
o Simple payment procedure
o The exporter can immediately receive the full value of goods as soon as
merchandises have been delivered in good situation.
o Simple set of documents is required for settling payment.

 Disadvantages to the Importer:

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o Unless he has paid for the goods, he is unable to take possession and satisfy
himself as to the correctness in terms of quality and quantity.
o Once payment has been made, he cannot reclaim the funds. Refund only is
possible upon the consent of the Exporter.
o Since merchandises and shipping papers are sent separately, there will be a
delay for the Importer to receive the shipment from customs. Shipping
documents go out by courier on the working day following the cargo
departure and take 2-3 business days to reach the bank.
o The importer must have their own representatives or branches in the
exporter’s country in order to verify the goods prior to shipment.
o There will be no interest arisen for the bank deposit in case the exporter does
not deliver cargo on time as agreed.

2.3. Forwarding and logistics companies.
Logistics activities in commerce were firstly applied and developed after the ending
of World War II. In Vietnamese history, the first two successful applications of
logistics in military operations were the distinguished King Nguyen Hue in the
operation towards the North at high speed, successfully destroyed the Qing army in
1789 and the second was the victorious campaign of Dien Bien Phu led by General
Vo Nguyen Giap in 1954.

Through the flow of history, logistics and research had been applied to business. In
business, the term "logistics" is usually known as a supply chain or a physical
distribution management in the enterprise.

2.3.1. Definition.

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There are many different concepts of logistics in the world based on industry and
research purposes of logistics services. Some key concepts are as follows:

1. According to the United Nations (Training Course on International Multimodal
Transport and Logistics Management, Foreign Trade University, October 2002):
logistics activities are the management of materials transfer through stock,
producing and delivery products to consumers as per their demand.

2. According to Logistics Management Committee of the United States 1988,
logistics is the process of planning, selecting the optimal method to manage, control
raw materials, semi-finished and finished products with fastest transportation and
most saving cost of storage, as well as transferring corresponding information from
pre-production until the goods reach the final consumer to meet their requirements.

3. The Vietnamese Commercial Law in 2005 (Article 233) stipulates: Logistics is a
trading service, in which, traders implement one or more stages, including picking
up the goods, transporting, storaging, demurring, declaring customs and other
procedures, consulting, packing, coding, delivering or other services related to
merchandises as agreed with the customer in order to get remuneration.

2.3.2. Characteristics
Experts’ studying on logistics services has summarized several basic characteristics
of this service as follows:

 Logistics is a combination of enterprise activities under 3 main aspects, which
are existing logistics, operating logistics and system logistics.

o Existing logistics relates to basic needs of our life. Existing logistics, as the
name, derives from the instinct of human survival and in order to meet the

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needs of people: what, how much, when and where we need. Existing
logistics is the nature and the foundation of logistics activities in general;

o Operating logistics is the development of existing logistics and associates
with the whole enterprise production system. Operating logistics relates to
the transportation and storage of inputs raw materials , going into, passing
and going out of the enterprise before penetrating into the distribution
channels then reaching to final consumers;

o System logistics help to maintain the operation of the system. The elements
of systems logistics are machinery, equipment, human resources, technology,
infrastructure, workshops, warehouse Existing logistics, operating logistics
and system logistics have very close relationship, and they all create the basis
of a complete logistics system.

 Logistics supports business activities: It assists all the activities of the enterprise,
even if the products have been out of production lines of business and reach
final consumers. A company can combine some factors of logistics together or
with all factors depending on the logistics requirements of their business.
Logistics also supports business activities through management in transportation
and storage of raw materials going to enterprises and semi-finished products
moving around in the business scale.

 Logistics is a high and complete development of transportation as well as
forwarding services. These services are parts closely connected to logistics.
Along with its development, logistics have diversified the key concepts of
traditional forwarding and transportation. Forwarding and logistics companies

not only act on behalf of customers to control separate steps such as arranging
booking, preparing and packing goods, recycling, and performing customs


24
clearance but also provide a Door-to-door service. Not only they play the role
of an agent, but a trustee is also becoming a main subject in forwarding and
logistics activities, taking full responsibility in the field of laws and practices
accordingly. Today, in order to well and smoothly perform their operation,
forwarding and logistics companies must control a comprehensive management
system from the transportation, supplying of raw materials for production,
maintaining storage of merchandises in inventory, distributing it to the right
place, at the right time, using electronic information for monitoring and
inspection, Therefore, the transportation agency will become a logistics
delivery agency.

 Logistics is a perfect development of Multimodal Transportation: Previously,
goods have been sent overseas under LCL via different modes. Thus, there is
high probability of risks and losses and the consignor should sign many
contracts with different transporters in which their responsibility is only limited
on the section or services they undertake. Up to 1960-1970s, the container
revolution in transportation guaranteed cargo safety and reliability in
transportation. It is the premise and basis for the coming and development of
multimodal transportation. Then, shipper only signs a contract with the MTO
(Multimodal Transport Operator). MTO is responsible for implementing the
whole routine from place of receipt to destination via a sole transport document
only though he is not the actual transporter. As a result, MTO is a logistics
services provider.

2.3.3. Functions.

 Logistics services improve the effectiveness of management, reduce production
costs, and enhance the competitiveness of enterprises.