V. MARKETING U.S. PRODUCTS AND SERVICES - Distribution and Sales Channels In order to sell successfully in Ecuador, it is necessary to have a local agent or representative. A local agent is legally required for sales to the government. Ecuadorian buyers prefer to purchase directly from the manufacturer. For sales of machinery and equipment, a key factor is the availability of parts and services from the local distributor or agent. Quito and Guayaquil are the major distribution centers for imported products. Cuenca and Ambato are the third and fourth largest centers, respectively. The majority of distributors cover the whole country and use their own sales forces. Many have branches and warehouses in the major cities. Options for distribution in Ecuador include: Distributors: These are commonly medium- to large-sized firms representing foreign companies and importing large quantities of products for wholesale distribution. Firms maintain large stocks and place orders for direct delivery to customers. Commission or Indent Agents: These are usually specialized firms or individuals who take orders in Ecuador for foreign goods by means of a well-trained and experienced sales force. The agents are paid a commission by the U.S. company filling these orders. Occasionally, agents may import goods with their own funds for resale. Direct Importers: Direct importers are generally large manufacturing companies and government agencies purchasing equipment or materials for their own use. Purchases are normally made directly from the manufacturer. Use of Agents/Distributors, Finding a Partner: U.S. exporters should be aware that under Ecuadorian law, Ecuadorian agents and representatives enjoy considerable legal protection, as described below, which can made it very costly to terminate such a relationship. Therefore, the U.S. Embassy normally recommend that U.S. companies appoint a non-exclusive representative who is not covered by this legislation. The details of the principal agent relationship follow: The principal-agent relationship is governed by Supreme Decree 1032-A, Official Register 245, of December 28, 1976, effective December 31, 1976. This law is entitled "Law on Protection for Representatives, Agents and Dealers or Foreign Corporations in Ecuador." Foreign noncorporate or private individual principals also are subject to the provisions of Decree 1032-A. Under this law, a principal may not unilaterally modify, terminate, or refuse to renew an agency or distributorship agreement, except for a judicially determined "just cause." A just cause under which a principal may validly terminate a representational agreement is limited to the following: 1. The agent's failure to discharge his/her legal or contractual obligations. 2. Any act or omission by the agent that substantially and adversely affects the principal's interest in the promotion, marketing, or distribution of his/her merchandise or services. 3. The agent's insolvency or bankruptcy. 4. Termination of the business. A principal may be held liable to compensate the agent if the contract is unjustly terminated. The amount of damages shall be assessed by a court in the jurisdiction of the agent's principal place of business according to the following factors: 1. Value of items purchased and expenses incurred by the agent in setting up and operating the business. 2. Value of the agent's unsalable inventories and stock. 3. Value of the business goodwill promoted by the agent, to be determined in consideration of the following: (a) duration of the relationship, (b) actual volume of sales by the agent vis-a-vis the principal's business, (c) amount of Ecuador's market share acquired by the agent's efforts, and (d) any other equitable factor available to determine the actual amount of damages suffered by the agent because the agreement was unjustly terminated. All controversies between a principal and his/her agent must be decided by the local Ecuadorian courts having jurisdiction over the agent. The Civil and Commercial Coded apply for matters not covered by Supreme Decree 1032-A. Finding a Partner: American firms have many options, including the use of the Commercial Section of the American Embassy through various of its services, local lawyers and consultants and banks. - Franchising Franchising is not widely used in Ecuador. A franchise is governed by the Ecuadoran Commercial Code, as it is deemed to be a private negotiation between two or more private entities acting for the same final end. The Commercial Code, Title VII of the Commission Contract, Articles 374 - 409 indicates, basically, that the commissioned merchant or agent is obligated directly and personally for his/her own franchise as if the business were entirely theirs. The principal and the agent are totally independent even with respect to legal action, save for the rights and obligations as indicated by their mutual commission contract and the Civil and Commercial Codes. Article 377 indicates that if the business has commenced under the name of the principal, the rights and obligations will be determined by the Civil Code. The commissioned agent can accept or refuse their duties, but if the agent refuses, that individual will remain obligated for any responsibility pertinent to the damages and prejudices based upon the Commercial Code, according to Articles 378 - 386. The commissioned agent is prohibited from representing a similar, opposing negotiation, without the express consent of the interested parties. Payment of commission and its corresponding privileges, transfer and/or assignment of same, is governed by Articles 388 - 405. All claims of the commissioned agents are governed by Articles 406 - 40. - Direct Marketing Direct marketing is used on a limited basis, mainly on television where products are advertized for sale and telephone contact points are named in multiple countries in Latin America. A local company stocks products and fills orders, which are, often delivered to the home. - Joint Ventures/Licensing Two or more parties may enter into a contract to carry out a particular business activity, and no obligation exists to record this contract in the Mercantile Register. In accordance with the provisions of the Company Law, a joint venture may be considered as an association or a participation account (asociacion o cuenta en participacion). Under the applicable regulations of Company law, a business entity may give to others (associates) the right to participate in its business, but the rights are limited to obtaining information regarding the funds contributed and the profits obtained or losses incurred. Associates are not liable to third parties and, if the business enters brankruptcy, they are liable only for their share of the investment. All other matters are regulated by the terms of the contract of association. In Ecuador this type of joint venture occurs primarily when foreign corporations are contracted as associates to carry out specific projects with government entities. It is normal for foreign corporations entering into this type of agreement to set up branches. LICENSES: In Ecuador, licenses are governed by the beforementioned Commercial Code which corresponds to the Section on Franchising. - Steps to Establishing an Office The formation of procedure is usually entrusted to local lawyers and professional advisers. Costs vary depending on the size of the company's share capital. In general, setting up a branch is easier, although this should not be the overriding consideration in deciding which type of entity should be used. Foreigners may own 100% of an Ecuadorian enterprise, except in a few special cases. Accounting regulations are governed by the Superintendent of Companies which varies in some respects from generally accepted accounting principles. However, the "true and fair view" concept is applicable. Principal Forms The most common forms of business entities that foreign investors prefer when they start up a business in Ecuador are corporations and branches. Other forms are limited liability companies, partnerships and mixed economy company. Corporations, branches and limited liability companies are registered with and controlled by the Superintendent of Banks. Registration of corporations, branches limited liability companies is governed by the Companies' Law (Ley de Compa ias). All businesses must have a head office and legal representative domiciled in Ecuador. CORPORATIONS: Corporations are the most flexible form of entity, allowing a mixture of foreign and local capital. Private limited companies are useful as closed companies, but have disadvantages as regards the sale and transfer of capital and are not usually advantageous for the foreign investor. The corporation offers the same major advantages to investors as the corporate form does in other countries. Shareholders' liability is limited to the amount invested; shareholders are free to negotiate their stock without restrictions; corporations are represented by managers who may be discharged at any time; and continuity of the business as a going concern is assured regardless of death or changes in management or ownership. The formation of corporations and their operations are governed by the Companies' Law. Ecuador does not have different legal entities for private or governmental corporations, but the formation of mixed economy corporations with the government as a shareholder is allowed under the terms of the Companies' Law. - Formation of a Corporation Formation starts with a contract, which must contain: - Location and date of the contract - Statement of the shareholders' wish to form the company. - Name and activity to be performed. - Capital amount, both subscribed and paid-in, and the terms for the payment of capital subscribed, if payment is to be made in installments. - Number of shares, type and par value. - Subscribed and paid-in capital broken down by shareholder. - Any capital contributions in kind and their appraisals. - Management of the company, powers and limitations of the legal representative and duration in that position. - Procedures for assignment of legal representatives. - Procedures for assignment of the "comisario" (a legally- required auditor to report on accounting, management of the Company and legal compliance by the legal representatives) and attorneys and the terms of such positions. - Procedures for calling shareholders' meetings. - Rules for the distribution of profits. - Conditions for the dissolution of the company. The documents that must accompany the contract or deed of incorporation are the company's by-laws (or articles of association), appraisals of in-kind contributions, deposit slips of the cash contributions and other documents that prove the payment of certain taxes. Corporations must have at least one stockholder. Companies with governmental sector stockholders on non-profit organizations are allowed to have only two shareholders. Stockholders may be individuals, corporations or partnerships. Corporations's founders are not required to remain physically in Ecuador. A third person, usually an attorney, may perform the incorporation process on their behalf. The corporation's name must contain reference to the kind of entity, such as "compa ia anonima" or "C.A." or "S.A.". The company's name must not be similar to that of an existing company. To guaranty proprietorship of the name, it should be registered with the Commerce Division of the Ministry of Industries, Commerce, Integration and Fisheries - MICIP. The companies operations are regulated by the by-laws and the Companies' Law, but may be revised by the company at any time. The estimated total formation costs depend on the type and the complexity of the business being formed, but may range from USD 1,000 to USD 5,000. The establishment of a company takes approximately two months. Capital of a Corporation The capital must be included in the by-laws and its amount results from multiplying the shares by their par value. Capital may consist of: - Authorized capital, that is, as stated in the by-laws. - Subscribed capital which the stockholders are required to pay in. - Paid-in capital. The minimum capital requirement for corporations is S/.5,000.000 sucres and must be denominated in sucres. Unpaid subscribed capital may be paid within two years from the date of incorporation. Contributions may also be made in goods, as long as they relate to the company's operations. Such goods must be valued by expert appraisers and the appraisal will be part of the deed of incorporation. Companies must file an annual return with the Superintendent of Companies containing the financial statements and other relevant information, as well as the reports of the legal representative, of the corporate comptroller and of the external auditors. Companies controlled by the Superintendent of Banks are obligated to publish their June and December financial statements in a local newspaper. BRANCHES: To establish a branch of a foreign company in Ecuador the following is required: - Proof that the company has been legally established in its country of origin. - Proof that according to the laws of its country of origin, the company can establish branches and has the ability to negotiate abroad. - Permanent legal representative in Ecuador. - Assigned capital of no less than S/50,000,000 sucres. The pertinent documentation should be presented to the Superintendency of Companies, along with a certification issued by the Ecuadorian Consul nearest to the foreign company's head office that certifies the establishment and legality of the company in its country of origin and that it is authorized to do business abroad. Also a certified bank deposit must be presented of the capital paid in which the company representative has authority. If the legal representative is a foreign citizen, he should obtain a resident visa. To establish a branch in Ecuador, the procedures applying to corporations must also be followed. LIMITED LIABILITY COMPANIES: This type of corporate form closely resembles a limited partnership, and is suitable for that type of operation. Its characteristics are as follows: - It must have 3 or more members, not exceeding 15 members. - The members have limited liability for the corporate obligations up to the amount of their individual contribution. - Foreign corporations are excluded from membership. - The capital cannot be less than S/.2,000.000. At least 50% of the capital must be paid in at the time of formation and the remainder within one year. - A legal reserve must be set by transfer of 5% of annual profits until the reserve equals 20% of capital. PARTNERSHIPS: Partnerships may be organized in two different forms: as a company with a collective name in which all of the partners are jointly and separately liable for all actions taken by any partner in the firm's name, and a silent partnership, which has general partners and limited partners. Among other legal differences between these partnership forms, limited partners are liable, silent partners are not part of the firm's name and they do not participate in management. To form a partnership, the bylaws should state the: - Name, nationality and domicile of the partners. - Number of payments made and future payments. - Form of payments made and future payments. - Time period for which the company will function. - Way in which the administration will be organized and fiscal control established, if any. A draft copy of the bylaws must be presented before a civil judge who orders the extract published in a newspaper of the company's country of origin. Later the judge will order the registration of the bylaws in the Mercantile Registry and in the Property Registry if there are property taxes. MIXED ECONOMY COMPANY: Another form or type of company is a Mixed Economy company in which both private and public capital are used. The public sector funds may come from the state, municipal, provincial governments and judicial representatives of both the public or semipublic sectors. The laws imposed on corporations are generally applied to this type of company. When the public sector investment exceeds 50% of capital in the company, one of the directors of this sector acts as President. The private shareholders may acquire a public sector investment and the company would continue to function as a corporation. - Selling Factors/Techniques The Ecuadorian market is relatively small and U.S. exporters should take this into consideration when considering setting sales targets for distributors and agents. Most U.S. products do not require any changes to be readily acceptable here. Price competitiveness is a very important sales factor in Ecuador. U.S. firms selling high tech products must provide training and maintenance support to their distributors and agents. Local distributors expect their foreign suppliers to underwrite sales promotion, support and training. Sales materials should be in Spanish. - Advertising and Trade Promotion Advertising The advertising market and the media in Ecuador are centered in Quito, Guayaquil and Cuenca. The principal means of advertising in Ecuador is through newspapers, of which there are 5 with nationwide circulation. Major newspapers with their national circulation figures are as follows: Quito - El Comercio, 70,000 and weekends 130,000 Ultimas Noticias, 35,000 HOY, 15,000 and weekends 20,000 La Hora, 25,000 Guayaquil - El Universo, 140,000 and weekends 220,000 Expreso, 20,000 and weekends 25,000 El Telegrafo, 35,000 and weekends 45,000 Extra, 150,000 and weekends 135,000 La Razon 15,000 Cuenca - El Mercurio, 12,000 All of these include large amounts of advertising and economic and commercial news. However, El Comercio and El Universo are favored by the business community. Television is the second most important advertising media. There are 5 Ecuadorian TV networks, 2 cable TV networks showing programs from the U.S. and Europe and a number of local stations in the larger cities. There are an estimated 1 million sets and 6.4 million viewers. A third advertising medium is radio. There are around 375 radio stations, including medium wave, short wave and FM, broadcasting to approximately 8 million daily listeners. There are an estimated 6.5 million radio sets in Ecuador. Movie theaters are also an important means of advertising, especially for consumer goods. Most show 15 minutes of advertisements before each feature. Trade Promotion There are two trade exposition centers in Quito and one in Guayaquil. In Quito the Centro de Exposiciones Quito holds around 15 shows each year. Shows include: Compu 93 (computers), Expomadera (wood products), Expotex (textile products), Feria de las Orquideas, (orchids) and the Feria de la Construccion, (construction). Shows are oriented towards selling to the local market. For additional information contact: Centro de Exposiciones Quito Avs. Amazonas s/n y Atahualpa Quito, Ecuador Tel: 593-2-454-428/453-129 Fax: 593-2-449-846 Contact: Hector Estrella, Manager The second in Quito, FEREXPO, has a large new exhibition building in the north side of the city and has been operating since February 1993. Recent shows include Expo Colombia 93, Expo Integracion Andina 93, Clase 93, Navidad 93, Expo Colombia 94, 1er Salon del Comercio Andino. For additional information contact: FEREXPO INTERNACIONAL Av. Occidental y Carlos V Quito, Ecuador Tel: 593-2-590-102 Fax: 593-2-590-100 Contact: Washington Aguayo, Executive President The US&FCS has offices in Quito and Guayaquil and carries out a full range or trade promotion services for U.S. exporters. Please contact: Ralph Griffin, Commercial Officer, U.S. Embassy Quito, Tel: 593-2--562-890, Fax: 593-2-504-550 and Hector Gomez, Commercial Officer, U.S. Consulate General, Guayaquil, Ecuador, Tel: 593-4-323-570, Fax: 593-4-324-558 for details. In addition, the International Fair of Ecuador is organized by Ferias S.A. every two years in Guayaquil. For further information please contact: Ferias S.A. P.O. Box 4184 Guayaquil, Ecuador Tel: 593-4-290-116 Fax: 593-4-290-080 - Pricing Product No imported products have price controls. In general, wholesalers sell to retailers at 15-20 percent above their price. Retailers mark-up that price at 20-30 percent to the end user. - Sales Service/Customer Support Very few products are sold in Ecuador with warranties. However, it is extremely important that U.S. companies exporting products to Ecuador that require maintenance and spare parts ensure that their Ecuadorian distributor provides both. - Selling to the Government Government procurement of goods, equipment, and services is regulated by the Public Contracting Law 95 issued in August 1990. However the military is not required to use this law for its purchases. Foreign bidders in both cases must be legally represented in Ecuador and associated with an Ecuadorian company in order to bid. Procurement by public invitation involves various steps. The government agency usually inserts announcements in newspapers and trade journals inviting potential suppliers to request specific information regarding the types of equipment desired. Documents containing detailed information must be purchased by the interested party. The cost of these documents varies with the size of the project involved. Guarantees required on invitations for bids and calls for tenders are specified in the Public Contracting Law. The bids shall be filed in Spanish, using the format specified by the inviting agency, and they must be delivered to the contracting agency in person. - Protecting your Product from IPR Infringement U.S. firms should hire an intellectual property lawyer to register their trademarkets, patenets, and copyrights under Ecuadorian provisions. A list of lawyers is available from the U.S. Embassy, Commercial Section. An intellectual property agreement between the United States and Ecuador has been signed, but not ratified by the Ecuadorian Government. Currently, the Andean Pact standards regarding protection of intellectual property apply. Enforcement of intellectual property rights has been weak. See Chapter VII. for further details. - Need for a Local Attorney A local attorney or a professional adviser is imperative when setting up a business in Ecuador or in collection matters and trade complaints. USFCS Ecuador has lists of lawyers for Quito and Guayaquil.