Is it better to be a merchant exporter than a manufacturer/producer exporter?

It has always been on-going speculation whether it is the manufacturer exporters that hold an advantageous edge over the merchant exporters or is it the other way around. Manufacturer exporters have always been looked upon as the more lucrative option. But recently merchant exporters have almost become parallel to them.

Merchant exporters act as an advantageous recourse because of their high level of competitiveness to propel higher unit realization. It is also their adeptness at upgrading the production quality offered by the manufacturers.

The increasing difficulties in generating foreign exchange earnings have begun to demand compliant export schemes to encourage exports. It is perhaps another reason, which has enforced the governments to increase the involvement of both manufacturer and merchant exporters equally.

The merchant exporters in India contribute almost a third of export revenues, they have been bereft of many incentives received by the manufacturer exporters until now, not being given equal footage. But the concern over the slow growth of exports, even though having crossed the USD 300 billion mark in the year 2017-2018, has induced the government to seriously look upon the merchant exporters as the best boosters in bringing in more export opportunities into the country and has spurred on the extended incentives being especially designed for the merchant exporters including reduction in the cost of credit.

Who are manufacturer exporters?

An entrepreneur who produces finished goods with an intention to sell them to the global markets under his brand is a manufacturer exporter. The manufacturer exporter procures raw materials from the market and processes them to produce finished goods.

Who are merchant exporters?

A merchant exporter, on the other hand, is a person that procures finished goods from a manufacturer and furthers them to the global markets under his label or name. He does not own a factory to produce goods but trades in them.

What is the fundamental difference between the two?
An indisputable advantage that manufacturer exporters experience over merchant exporters is that they do not require the services of any intermediaries for exporting, inadvertently keeping their prices at bay. Since they manufacture the products, they can easily incorporate any changes defined by the importer.

Merchant exporters, on the other hand, do not own a processing facility of their own and have to depend on the manufacturers to purchase goods from. They can procure goods from several manufacturers, and export them at their own risk thus entering into two agreements, i.e., one with the manufacturer to procure goods and the other with an importer to sell goods.

Is merchant exporting more advantageous?

Though manufacturer exporters and merchant exporters receive equal export benefits from the government yet, they differ from each other in terms of how they conduct their business. There are several areas where merchant exporting seems to have the edge over manufacturer exporting. Though there is a multitude of limiting factors involved in it too, on the other hand.

Cons of being a merchant exporter

Cost competitiveness

Manufacturer exporters produce the goods hence they serve importers with a better deal in terms of price. When they quote their prices, it is with an added profit margin. It may have variations depending on the buyers, the volume to supply and the consistency of the order from the same buyer. They need not add any middlemen expenses as they can directly deal with the importer.

The merchant exporters are specialist traders and though they have an infrastructure to serve importers with the best quality products and flexible deals they fail to present as low prices as the manufacturer exporters.

The reason for this being that a merchant exporter is another buyer for the manufacturer exporter. When goods by a merchant exporter are purchased, they already have an added profit margin. The merchant exporter further adds his profit ratio too. Thus, when the merchant exporter quotes the prices to the importers, they are higher than the prices offered by the manufacturer exporter.

Dependence on suppliers for goods 

Manufacturer exporters have a production and processing infrastructure to manufacture the goods; hence they do not have to depend on the suppliers for the products to enter into any export-import agreement.

Merchant exporters, on the other end, are traders and they cannot move ahead with an export order without complete cooperation of the manufacturer. They need to complete a number of extra formalities, which involves two-way paperwork.

Reliability

Merchant exporters rely on the manufacturer in terms of timely delivery as well as meeting the quality parameters meticulously. Though the network of merchant exporters is well structured and they meet all international norms astutely, the reliability on a merchant exporter is indirectly dependent on the quality of the products, which he has to procure from the producers. Any discrepancy in the quality directly affects the credibility of the merchant exporter.

Pros of being a merchant exporter

Lower manufacturing risk

Manufacturing goods require a well-laid infrastructural facility in the form of a processing unit, which in turn involves massive finances. Merchant exporters are traders who involve their finances to further the already produced goods to the overseas market. Thus, they do not have to face overwhelming manufacturing risks. They have the freedom to select the finished products they require and sell it at a profit.

Easily available finance

Merchant exporters are just like other ordinary exporters. With a well-documented export order in their hands, they can access easy finance. It could be either through government or private financial institution or banks. They provide pre-shipment finance to the manufacturers to instigate them to produce products without fear of loss or obsolete stock. The cost of credit presently is low to facilitate the merchant exporters to bring in more export revenues.

Easy diversification

Merchant exporters are just like any other exporters in a country and enjoy all benefits that manufacturer exporters do. They are experts in their strategies and have a strong network through which they adeptly deal with overseas buyers and multiple products.

Flexibility

Merchant exporters buy products from several buyers according to the market pulse. Later they repackage it to sell it under their own brand and name. Thus, they have a wider range of products catering to different qualities than a manufacturer exporter.
Their operational field is more flexible than a manufacturer exporter. Having many products of different quality and price range, they can easily promote goods that fetch better returns in the foreign market and pull away products that are not bringing in profits for them.

Benefits under GST

The merchant exporter prior to the imposition of GST received a special tax benefit. They could procure goods without any duty payment. But with effect from 23.10.17, there have been four IGST tax slabs in function, i.e. 5%, 12%, 18%, and 28%. Precious metals fall under a special category of 3% for inter-state supply.

The merchant exporters are eligible for special concessions on GST. It is under the deemed condition that they export the goods within ninety days of procuring them with effect from the date of the tax invoice of purchase. They have to submit a well-endorsed export order to avail the incentives offered by the government.

Financial benefits

Merchant exporters have to pay GST to procure goods from the manufacturer. When they export the goods to another country, they become legible to ITC allowance, i.e., input tax credit. If the merchant exporters further the goods under bond or LUT [letter of undertaking] they become legible to receive a refund on ITC only under the condition that they have received a remittance of rupees one crore or 10% of export turnover, whichever is higher, in the previous financial year. When merchant exporters export goods after paying IGST, they can claim their refund of IGST.

An EndNote

Manufacturer exporters and merchant exporters, both, are essential to steer exports turnover in a country. They are almost synonymous with each other in terms of benefits and incentives received from the Ministry of Commerce. Though, they do differ in their area of operation with merchant exporters being contributory in bringing more exports to the country by boosting the small manufacturers or MSME.