V. MARKETING U.S. PRODUCTS AND SERVICES Distribution and Sales Channels Distribution is not limited by any existing laws or regulations. All channels are possible: manufacturer's representative or commission agent; wholesale importing distributor; importing retailer; or direct sale to end-user. Since the commercial code in Venezuela does not require that any Venezuelan business limit its activities to any specific method of operation, mixes of the above modes of operation are common. A sales agent thus might function as such for high-priced products, but could function also as wholesaler/importing distributor for large volume, lower- priced goods from the same manufacturer. Wholesalers often are retailers at the same time. No specific business license is required for a local company or individual to be a importer. Many retailers administer their own imports, sometimes placing orders through commission agents or purchasing directly from the foreign manufacturers, exporters or jobbers. "Exclusive" arrangements may not be truly exclusive, since parallel sources of supply are often used. Government agencies, however, usually require that a seller of specific types of equipment be the authorized seller for the foreign manufacturer. This is specifically true if after-sale support might be needed. If upon opening of offers for a tender it appears that several local companies offer the same product from the same manufacturer, the government might reject all such similar offers. Use of Agents/Distributors. Finding a Partner A commission sales agent, also called a manufacturer's representative, finds customers, passes the order to the foreign company and receives a commission for this. The level of commission will vary widely according to the price of the product, the volume of orders and the work or time the agent has to spend in obtaining such orders. It can vary between 5 percent and 30 percent. If there are many potential customers--end users, wholesalers or retailers--the use of an agent who has access to all of them is usually the most practical and efficient means of covering the market. Wholesalers or distributors often have no sales force, and instead rely on advertising and on walk- in customers or buyers. Venezuelan companies at any step in the distribution channel tend to place repeated small orders. Thus, foreign company requirements as to minimum orders, or even minimum annual sales, may meet with strong resistance from prospective representatives or agents. There are numerous ways to find a business partner. The various US&FCS services, such as the Agent/Distributor Service, Gold Key Service, Trade Missions, Catalog Shows and USDOC-Certified trade shows are the most commonly used. No service or list of potential leads can replace a visit to the country to study and interview prospects. Venezuela has the advantage that there are no laws which protect a local agent, requiring indemnization in case an agreement is cancelled. Whatever the agreement between local company and foreign principal stipulates is binding. Medium-term trial agreements are in new business relationships. Care has to be taken when considering placing a Venezuelan citizen on the company's payroll, since in that case he is entitled to all benefits of the very generous labor law, which could be expensive in case of separation. Commission agents are not considered employees. Franchising Franchising is allowed under the existing foreign investment laws. Franchise payments, royalties, patent or technical assistance agreements must be registered with the Superintendent of Foreign Investment (SIEX). Under an existing schedule, such payments may be taxable, depending on the case. Under Decree 2095, the regulations governing foreign investment in Venezuela, there are no restrictions on the remittance of such funds. However, due to recently implemented exchange controls, the rules governing the remittance of profits are unclear. Franchises will probably only be successful if they bring technology, services or systems which are not otherwise available in the country. Direct Marketing Marketing, through TV commercials, newspaper inserts, house visits or street vendors, is common in Venezuela. Mail orders are impossible due to the very poor reliability of the postal system. Placing orders by phone with delivery by messenger is becoming popular, and several such companies have been established placing their catalogs in newspapers as weekend issued inserts. As the telephone system continues to improve, direct marketing by phone will become more common. Almost all businesses now use fax in their day-to-day business. Joint Ventures / Licensing Under existing foreign investment laws, the formation of joint ventures by forming a new company with local capital or by buying into an existing local company, are common. No authorization is required, but a registration of the venture with SIEX is required. There are no restrictions against the remittance of dividends, their reinvestment or the repatriation of capital. The payment of license fees, royalties or trademark and patent fees is also allowed but also must be registered. Joint ventures, or even wholly-owned subsidiaries of foreign companies, are treated as Venezuelan companies and are not subject to special taxation or other regulations which would not also apply to Venezuelan firms. Such enterprises as security companies (watchmen services, armored cars, etc.), TV and radio broadcasting and the publication of Spanish language newspapers are restricted from foreign investment of more than 20% of the capital. Professional services (attorneys, medical services, CPAs, architects, etc.) are also restricted, since they fall under the Law of Professions. Foreign professionals wishing to work in Venezuela must revalidate their title at a Venezuelan university. This, however, does not eliminate consulting services under contract for a specific project. While the January 1994 banking law allows the establishment of foreign banks and branches in the country, insurance and brokerage companies are still excluded from foreign investment. Manufacturing under license by a foreign company is allowed, but also must be registered with SIEX. Again, remittance of license fees is allowed but may be taxable. Steps to Establish an Office A business must be registered with the Venezuelan "Commercial Registry" to be legally established. The simple opening of an office to coordinate activities, or to report on the local scene, is not considered foreign investment or a business activity as long as the office does not sell and is being financed from the home office. Any other activity would fall under the Commercial Code. Business enterprises can be registered as corporations, as limited liability companies, as partnerships or as proprietorships. It is advisable to have an attorney draft the registration documents. Registration itself is fast and inexpensive. After that, a municipal business license has to be obtained, which also requires the payment of a small quarterly tax. The final step would be to obtain from the Ministry of Finance the income tax registration number which must be shown on all bills. Office space is widely available. Furnished offices are rare. Lease contracts do not cover utilities. While the shortage of telephone lines is gradually being alleviated, there could still be a long wait depending on the area of town and the availability of lines from a given exchange. Some office buildings do lease office space with at least one phone line. Foreign companies are also allowed to buy real estate. Selling Factors / Techniques The most common mistake U.S. companies make in attempting to sell their products to agents or importers is their failure to provide sales literature in the Spanish language. While many businessmen speak English, their staff, sales personnel, and most of their customers will not. Consequently, failure to prepare materials in Spanish eliminates a key selling tool. In most cases, support has to be given to a new agent or distributor in the form of technical information on applications, potential users, maintenance requirements and similar details, especially if a product is new or entails new technologies. The average Venezuelan business does not have sales engineers or specialists, and some form of education is required. The same situation exists for maintenance or repair technicians, and the agent might request that his personnel be trained in the United States. Venezuelan end users of any type of machinery or equipment require that spare parts, repair service and after-sale support is available. Sales at the retail level are not much different from those in the United States. Price haggling in established stores is not common. Special offers are frequent but not seasonal "sales". There are numerous malls, but department stores are few. Advertising and Trade Promotion In the absence of many specialized publications, the daily newspapers are the most common form of advertising. This even includes machinery or industrial equipment. TV and radio commercials are used heavily to promote durable and non-durable consumer goods. Billboards are common. Distribution of leaflets, newspaper inserts, and in-store promotions are also used. There are numerous advertising companies, some being subsidiaries of well-known U.S. companies. There are many trade shows in expositions (see listing), some organized on behalf of trade or industrial associations by capable local show organizers. U.S. companies also have organized trade shows in Venezuela. Normally they are widely advertised and, even if very specialized, visited by the public in general. These are an excellent vehicle to promote a new product, or to find an agent or distributor. Off-the-floor sales are not common, however, although there are some shows which specialize in this, such as gift shows before Christmas, toy shows or furniture shows. Premiums are not widely used for trade promotion purposes, but are often available in companies for their customers or business friends and associates. Business gifts are common around Christmas for steady customers, and can be expensive. MAJOR DAILY NEWSPAPERS: El Universal Edificio El Universal Avda. Urdaneta Caracas, Venezuela Phone: (582)563-7511 Fax: (582)561-9639 El Nacional Puente Nuevo a Puerto Escondido Caracas, Venezuela Phone: (582)408-3111 Fax: (582)793-4083 El Diario de Caracas Avda. Principal de Boleita Norte Caracas, Venezuela Phone: (582)576-8211 Fax: (582)34-1927 Econom a Hoy Edificio Di Mase Alcabala a Urapal Caracas, Venezuela Phone: (582)576-8211 Fax: (582)572-5470 Reporte Edificio El Telar Avda. Urdaneta Caracas, Venezuela Phone: (582)481-7441 Fax: (582)482-5275 The Daily Journal (only English language newspaper published in Venezuela) Avda. Fuerzas Armadas Crucecita a San Ram n Caracas, Venezuela Phone: (582)562-1122 Fax: (582)562-1322 While many more newspapers are published both in Caracas and in all major towns in Venezuela, those listed above have country- wide distribution. MAJOR MAGAZINES: Automotriz (Automotive trade) Avda. Los Mangos No. 86, La Florida Caracas, Venezuela Phone: (582)74-3957 Fax: (582)74-4168 Business Venezuela (published by the Venezuelan-American Chamber of Commerce) Edificio Credival 2da. Avda. Campo Alegre Caracas, Venezuela Phone: (582)263-0833 Fax: (582)263-1829 Computer News Edificio Tajamar Piso 4, Parque Central Caracas, Venezuela Phone: (582)574-3313 Fax: (582)576-8858 Dinero (Finance, Business) Edificio ACO Avda. Principal Las Mercedes Caracas, Venezuela Phone: (582)993-5633 Fax: (582)993-0644 El Mundo de la Seguridad (safety and security market) Edificio Cipriano Morales Avda. Urdaneta Caracas, Venezuela Phone: (582)83-7310 Fax: (582)862-4448 N mero (Business) Edificio Agfa 3ra. Transversal Los Ruices Caracas, Venezuela Phone: (582)238-3393 Fax: (582)203-9104 Pricing Products In an effort to control inflation, the government has placed price controls on an increasing number of products, particularly foods, pharmaceuticals and services. Outside of these, pricing is pretty much left to market and competitive forces. Generally, pricing is what the market will bear, and mark-ups of 100 percent or more are not uncommon. Price fixing among manufacturers or dealers is prohibited by law. The cost of doing business in Venezuela is high, partly because of the very steep labor fringe benefits, and in the cases where English language ability or technical know-how is needed, salaries are high because of the shortage of such personnel. Basically, prices are calculated on the basis of: cost of product in Venezuela port (CIF), plus import duties, plus value added tax, plus local transportation, plus warehousing costs, plus promotion, advertising or marketing cost, plus sales commissions, plus mark-up for profit, plus possible additional taxes. It has been said that a product costing $100 CIF cannot be sold for less than $300 to the end user, but this will depend on the product. In the past few years, discount stores have appeared for the first time in Venezuela. Sales Service / Customer Support It is not normally possible to sell equipment, whether industrial or durable consumer, without offering sales support, spare parts or service. This is the first question a potential customer will ask. It is therefore extremely important that prospective agents or distributors are able to provide this support or are able to contract for it. Maintaining an adequate stock of spare parts, while costly, is considered essential. Selling to the Government The purchase of goods and services by government agencies is ruled by a complex system of laws, decrees and regulations. The basic law of procurement (Ley de Licitaciones) of July 20, 1990 establishes the framework. Venezuelan government officials are not permitted to conduct official business in any language except Spanish. If you correspond in English, it is highly unlikely that you will receive a reply. There is no specific Venezuelan agency in charge of government procurement or which provides guidance to foreign bidders/sellers. There is a considerable amount of cooperation and assistance generally provided by the purchasing agency, especially to foreign companies with no previous experience in Venezuela. Anyone wanting to sell to a Venezuelan governmental agency must be registered in the National Register of Contractors, which is maintained by the Central Office of Statistics and Informatics. This National Register can open sub-registers, normally found in all ministries and governmental agencies which regularly purchase goods or services. Although it is acceptable practice to pay commissions, these cannot be included as part of the final sales price to the government (since they are considered a part of the seller's cost of doing business and, therefore, should not be charged to the buyer). Government comptrollers frequently check the quoted price against the published export price list to make sure that commissions are not added. Exporters are advised to proceed with caution if they are requested to make changes in a contract after it has been signed. If such a request is made, make sure that both the agency's request, and the change in contract language or terms, are in writing. There have been occasions where changes were requested by a governmental agency and, in order to maintain harmonious relations and to avoid red-tape, the exporter did not insist that these be documented in writing. Later, it was difficult to collect payment, as the excuse was that the terms of the contract were not followed. In the event of a dispute, it is most difficult to win a legal settlement against the government. GOVERNMENT TENDERS Tenders may be opened: a) Only to domestic companies b) To domestic and foreign companies c) Exclusively to foreign companies In the case of foreign public tenders, conditions sometimes stipulate that the foreign company must form a consortium with a domestic firm. Registration exemptions: If tenders are opened at an international level with only foreign companies expected to participate, these are exempt from prior registration but must register once pre-selected (short-listed). Companies that expect to sell goods or services costing less than 100,000 bolivars (US$590.)are exempt from having to register. TYPES OF TENDERS Purchases of up to 100,000 bolivars (US$590.)are not subject to tenders. All others fall under one of these three classifications: a) General tender b) Selective tender c) Direct purchase A) GENERAL TENDERS (Licitacion General) are for: - Purchase of goods or the contracting of services valued at over 10 million Bs (US$59,000.). - For construction projects of over 30 million Bs. (US$177,000). B) SELECTIVE TENDERS (Licitacion Selectiva) are used: - For services or goods valued between one and ten million Bs (US$59,000.). - For construction projects valued between ten and thirty million Bs (US$59,000. to $177,000.). - When there are less than ten qualified suppliers listed in the National Register of Contractors. - If the goods are only available outside of the country. - For goods and services related to state security. For all selective tenders, at least five suppliers must be invited to bid and a minimum of three offers has to be received, or the process will be declared null and void. C) DIRECT PURCHASE (Adjudicacion directa) is used: - For purchases of less than 1 million Bs (US$5,900.). - For construction projects of less than 10 million Bs (US$59,000.). - If needed for the completion of a project in process - For purchasing artistic or scientific works - When there is only one supplier - In emergencies - When determined that no other purchase methods are possible. THE BIDDING PROCESS Bid proposals usually must be separated into two parts: Sobre I and Sobre II. The first part consists of legal documentation on the supplier, description of experience, list of prior clients, etc. The second part provides information on the actual technical offer and price. The bids are usually reviewed by a commission established by the buyer and in the presence of a representative of the national Comptroller. The review of the technical part may necessitate outside opinions, such as from the College of Engineers, The National Council of Science and Technology, or a Congressional Committee established for this purpose. In all cases, the National Comptroller has the final word and may stop a bidding process at any time if he feels that procedures have been flawed. The tender publication usually contains a time schedule for pre- selection, submission of the final offer, and the date of the final selection. When several organizations are involved in the final selection, the deadline frequently slips and bidders are asked to provide a date up to which they will hold their prices. If that date passes, price increases may be accepted. If a U.S. company feels that the bidding process of a foreign tender in which it is participating is flawed or unfair, we suggest it contact the American Embassy's Commercial Section for assistance. Protecting Your Product from Intellectual Property Right Infringement Since Venezuela does not automatically recognize foreign patents, trademarks or logos, it is necessary to register this property with the Director General of Industrial Property Registry of the Ministry of Development. It is advisable not to have the agent or distributor do this in their name because the agent or distributor then becomes the registered owner. Registration should be done through a local attorney experienced in these matters. Care should be taken to use the registered trademark. Venezuelan regulations, which are based on Andean Pact Decision 344, allow for cancellation of the registration of the trademark is not used in at least one of the Andean Pact countries for three consecutive years. The Andean Pact is comprised of Venezuela, Colombia, Ecuador, Bolivia and Peru. Need for a Local Attorney Contracting a reputable local law firm is advisable for any U.S. company wishing to establish itself in Venezuela, from joint ventures, register a trademark, or enter into any type of business relationship. The provide essential start-up information on labor laws, tax regulations, purchase of real estate and drafting by-laws of a new local subsidiary. Venezuelan laws are complicated, even more so since many activities are regulated, not only by laws but also by presidential decrees or specific regulations. The bureaucracy and paperwork is often complicated and requires an expert. A number of large law firms have attorneys who have also studied in the United States and are familiar with matching an American company's requirements to the local law. A list of Venezuelan law firms which specialize in various aspects of commercial and investment law can be requested from the U.S. Embassy in Caracas (See Appendix C for contact information).