Question

Baby Apparel and Dubai Fashions – Letter of Credit as an Export Payment

Baby Apparel: Baby Apparel was incorporated in December 1981. From a 1,500-square-meter factory in Manila employing 35 people with U.S. $181,398 in export sales, the company has grown to two factories employing over 1,400 workers with sales of U.S. $8,230,199.

Baby Apparel, a leading children’s wear exporter, specializes in handsmocked children’s wear. Handsmocking is a skill that was taught to Filipinos by Spanish nuns during the Spanish regime in the Philippines. To this day, it is said that the Filipinos do better handsmocking than Spanish. Buyers the world over look to the Philippines for handsmocked dresses because of the quality of the work. Thailand, Malaysia and Indonesia produce handsmocked children’s dresses, but buyers are said to prefer the quality of Philippine handsmocking.

Baby Apparel’s exports to the U.S. and U.K. account for 90 percent of its production. Its biggest buyer is Norman Marcus, Ltd., a U.K.-based manufacturer and importer. Baby Apparel also sells to JC Penney Company, one of the world’s biggest retailers.

Dubai Fashions:

Mr. Abdul Alih, managing director of Dubai Fashions, visited Manila to look for a supplier of children’s wear with smocking. Dubai Fashions is a garment importer based in the United Arab Emirates; it has shops in Dubai, Sharjah and Alain. Before going to the Philippines, Dubai Fashions had sourced its children’s wear from Spain and the United Kingdom. Having heard that the handsmocked children’s wear in Spain and U.K. were imported from the Philippines, Dubai Fashions decided to cut the distribution channel by importing directly from the Phillippines. Mr. Alih obtained a list of recommended children’s wear exporters from the Philippine Commercial Office in Dubai. On top of this list was Baby Apparel.

The Transaction:

Although Dubai Fashions liked Baby Apparel’s handsmocked dresses instantly, product revisions had to be made to suit the Arab market. Unlike the children’s summer dresses sold to JC Penney which has no sleeves and no lining, children’s dresses to be sold to Dubai Fashions had to have sleeves and linings. Further, utmost care had to be taken to ensure that designs did not include stars and crosses. A sales contract amounting to U.S. $22,710 covering 2,700 pieces, to be delivered to Dubai, was signed by Mr. Alih and Baby Apparel. Bank of Oman, the issuing bank, sent an irrevocable Letter of Credit (LC) at sight to the Philippine National Bank, the negotiating bank. The following were some of the LC’s terms:

1. Shipment.

1.1 Port of discharge: Manila

1.2 Port of destination: Dubai 2

1.3 Partial shipment: Allowed

1.4 Transshipment: Allowed

1.5 Shipment expiry date: 28 November 2011 1.6 Shipping documents should be presented to the issuing bank within 10 days of issuance but within the validity of the credit.

2. Special Instructions.

2.1 Invoice should show the manufacturer’s name.

2.2 Bill of Lading should show Bank of Oman as notify party.

2.3 A certificate from the owner/master or agent of the vessel or from the manufacturer/exporter is to be presented stating “To Whom It May Concern” and “We certify that the vessel is allowed by Arab Authorities to call at Arab ports and is not scheduled to call at any Israeli port during its trip to Arab countries.” This certificate is not applicable if shipment was effected on United Arab Shipping Co. (UASC) vessel.

2.4 An inspection certificate is to be issued and signed by the authorized buying agent.

After the receipt of the LC, Baby Apparel produced the reference samples, which were airshipped to Dubai Fashions. Dubai approved the reference sample without any revision. Thus, Baby Apparel began production as soon as the reference samples were approved.

Ocean shipment from Manila to Dubai takes about 30 days on a regular vessel. Since the goods were shipped based on an Irrevocable Letter of Credit at sight, Baby Apparel only had to send the complete set of documents as specified in the LC to the Bank of Oman to be paid.

Questions:

1. Are there any political influences found in the above case?
2. Why is it important to follow the terms of the LC?

Answer 1

ANS 1. YES, THERE ARE POLITICAL INFLUENCES IN THE ABOVE CASE STUDIES AS THERE ARE RULES OF IMPORT-EXPORT WHICH ARE SET BY THE GOVERNMENT OF THE RESPECTIVE COUNTRIES WHICH HAD TO BE FOLLOWED BY THE FIRMS. THE RULES, POLICIES WERE SETUP BY GOVERNMENT, THEREFORE POLITICAL INFLUENCE WAS THERE.

ANS 2. LETTER OF CREDIT ARE AN IMPORTANT ELEMENT IN INTERNATIONAL TRANSACTION. IT ENSURES THAT THE PAYMENT WILL BE RECEIVED. USING LC ENABLES THE SELLERS TO REDUCE THE RISK IF THE GOODS ARE DELIVERED AND PAYMENT IS NOT RECEIVED BECAUSE THE RISK OF BUYER IS REPLACED BY THE BANKS. IT ENSURES THAT IF THE BUYER IS NOT ABLE TO MAKE MONEY IT WILL BE PAID BY BANK. ALSO, IT ACTS AS A PROOF THAT ALL THE CONDITIONS FOR DOING AN INTERNATIONAL TRADE HAVE BEEN MET SUCCESSFULLY.