Import and Export in Ecuador
Import duty & taxes when importing into Ecuador
Import duty and taxes are due when importing goods into Ecuador whether by a private individual or a commercial entity. The valuation method is CIF (Cost, Insurance and Freight), which means that the import duty and taxes payable are calculated on the complete shipping value, which includes the cost of the imported goods, the cost of freight, and the cost of insurance. In addition to duty, imports are also subject to Sales Tax, FodInfa, and Consumption Tax on certain products.
VAT is levied on imports at a standard rate of 12%, calculated on the sum of the CIF value and applicable duty.
Imports with a FOB value (product value) up to US$400 and actual weight up to 4 kg are exempt of duty and VAT. However, FodInfa still applies.
Other taxes and custom fees
- FodInfa (Children’s Development Fund) is applicable on all imports at 0.5% calculated on the CIF value.
- ICE (Consumption Tax) is applicable on certain non-essential goods at rates between 0% and 300% calculated on the sum of the CIF value and applicable duty.
Local Customs office and contacts
More information on import declaration procedures and import restrictions can be found at Aduana del Ecuador.
Reference for the above article – Importing into Ecuador
Exporting Giftware from Ecuador
When you visit Ecuador, one of the very noticeable attractions you will see is the huge variety of high quality local artisan crafts at very reasonable prices. If you buy in larger volumes, you can expect very good quantity discounts. The family owned artisan producers appreciate being able to make products in large production runs. Many of these products are ideal to sell into the giftware market around the world.
The main hub of the artisan products are on display at the Otavalo markets, especially on Saturdays. It is one of the most famous markets in all of South America. Otavalo is about a two hour bus trip north of Quito.
See HERE for a great selection of photos from Otavalo.
You will also find that many other towns in Ecuador display their artisan products. Most towns specialize. For example, Cotacachi is called the “leather town”. San Antonio de Ibarra is famous for its wood carvings. Chordeleg specializes in jewelry. Peguche is a weaving town. The list goes on. You will find these hubs all over Ecuador.
This article is focused at starting a serious business of exporting products from Ecuador and not "suitcase exporting". The following tips are given, based on experience in a similar business in Australia, and our initial experience in Ecuador before the economic crisis hit and the Australian dollar crashed against the US dollar in late 2008 (see below to read a bit about our background in this area).
If you want to investigate the feasibility of exporting artisan products from Ecuador, the following are some suggestions:
- Buy a set of electronic scales (0-5kg). These are to carry with you (a backpack is a good idea). Also carry a notebook and a calculator or enter your research direct into a laptop or net book computer.
- Get a copy of EMS and other shipping costs. There is an EMS branch in the post office that is adjacent to the Otavalo central square where the markets are held. EMS is a good direct door-to-door air service for packages up to 30 kg in weight. They have an on-line tracking facility. Our orders sent to Europe and Canada by EMS took only seven days. A shipment to the USA took longer due to a holdup in customs. EMS packs the orders for you. The staff do an excellent job.
For larger orders, there is a shipping company that operates near the Otavalo markets too. Get shipping quotes from them. They also pack the orders very professionally.
- Identify products for sale. We initially chose lightweight scarves. We considered them to be low risk items to start with and the shipping cost by air to Australia was acceptable.
We also tried some other heavier products (e.g. blankets) but the shipping cost per item killed their viability. They became too expensive at retail values and did not have the same sell-through as the cheaper scarves. They would possibly be OK if consolidated into a larger sea freight order.
With volume orders (more than 2,000 scarves) we were offered a very good discount. For the lightweight scarves, the landed unit cost in Australia by air was less than $3.00. Competitive products from Asia were retailing in Australia for over $25.00, so we knew that we had a good enough margin to wholesale the products to giftware stores and also afford to pay normal agent commissions. The stores normally require a margin of 100%.
So when calculating, you need to work backwards from the competitive retail price (which includes taxes). With the EMS shipping, it would be possible to ship smaller orders direct to retail stores in the US. The landed cost would be higher than larger orders, but you would not need to sell to a distributor at a lower price. You would still need to establish an agency network. In Australia the commission rates to agents were from 15% to 20% of the wholesale price.
A random sample of other great products is shown HERE. But we think it is best to establish a very small range to start with, otherwise your inventory investment could get too high and limit your marketing and growth. It is best to add new products after doing some test marketing. Once your business gets started with a small product range, you can add small samples to test market in each reorder shipment.
- Weight 10 random items and then divide by 10 to arrive at an average weight per item. From this you can later calculate your shipping cost per item - by EMS or sea freight. Just add your purchase price to arrive at a landed cost.
Don’t forget to ask your suppliers to quote on several different potential order quantities (e.g. 2,000, 5,000, 10,000, and 20,000). This will give you an idea of what your future potential is. We had to quote on 20,000 scarves, so anything is possible. You can afford to cut your margins to distributors if you get orders like that. For large orders, you calculate profit per day rather than profit per item.
The quickest way to establish a customer base is to exhibit at trade/gift fairs. You can also usually find agents and distributors at these shows.
Selling at large retail craft shows also helps. These give you an opportunity to sell at retail prices for higher prices and generate extra cash, and to also to test price sensitivities.
Just Google “Gift Fairs 2011” to see which fairs you want to try and get into. John has exhibited in all the capital cities in Australia and many overseas. These include Atlanta, San Francisco, Vancouver, Singapore, Kuala Lumpur, Hong Kong, and London. In the US, the larger fairs like New York and Chicago are more difficult to get space. That difficulty also applies in Birmingham (UK) and Frankfurt (Germany).
The current global economic crisis might make it easier. Once you get your leg in the door, it is much easier in future years.
You will require some up-front investment to pay for the space, sample products and their display, and travel, accommodation and meals. It’s best to have at least two people man a trade fair booth, so that at least one person is manning the stand at all times. You don’t want to miss any potential customers, agents or distributors. This strategy allows time for bathroom and meal breaks, and also time to research competitive products and prices, and to identify gaps in the market.
A marketing alternative is to randomly call some gift shops and ask the owner/manager who they recommend as an agent. With the internet and Skype you can easily find retailers all over the world who can be targeted. You will then probably have an opportunity to send details about your products. They might want to take an initial sample order.
If you become successful at trade fair and/or direct sales to retailers, quality of customer service needs to be thought of.
How soon can you deliver after you receive an order? The quicker you can get your products in the customer’s hands, the quicker the re-order will be. And in the giftware industry, it is characterized by many small business owners. If they don’t spend their money on your products, they will spend it with someone else who is better at service.
Be prepared to have your dispatch operations send orders while you are at the trade fair. That means faxing/emailing copies of the orders back to your home office from the show.
If you don’t already have an accounting software program, buy one and learn how to use it. We recommend that you buy one that has an inventory function module. You may expand your business and need to carry some stock and it is also worth tracking where samples get sent to. Good programs also automatically calculate your profit margin per item sold. With various reports you can then analyze where to concentrate your efforts (profit per customer, per state, per agent, etc).
You can see a good review of programs for the US on http://accounting-software-review.toptenreviews.com/.
QuickBooks Pro is a very popular and modestly priced program that we have used in Australia. It is also one of the most popular programs in the US. You can easily expand it to a multi-user system – with more than one party on a network accessing it at the same time. John has used this software for over 20 years and at one stage was even a trainer of the program for small business owners. His accountant directed many of her clients to him. That was in the early days after the Australian Government introduced a Goods and Services Tax (GST) which made all small businesses upgrade their accounting systems.
A single user system of QuickBooks Pro will cost you around US $200 – not a big expense to start a potential million dollar business. The program has many other useful features such as the ability to track who the sales agent is for each sale (helpful for calculating commissions). It also integrates with word processing so that standard letters can be sent to customers.
Applicable Background and Experience (optional reading!!)
We provide background information to demonstrate that the subject matter is well within our range of expertise.
After we viewed the various artisan products at Otavalo and around Cuenca, we believed that we could be successful at starting a business similar to what John had done before in Australia.
In my 20’s I had also been a partner with my mother in a successful bridal gown manufacturing and retail business. Our retail store was in the centre of Perth and was called “Australian Bride”. Our manufacturing side of the business sold gowns to various retail outlets throughout Australia.
I was raised in a family where creative clothing designs were made. My mother was the founder of the manufacturing business and soon became known for her exquisite “haute couture” (the creation of exclusive custom-fitted clothing) garments throughout the bridal retail stores in Australia. I had been working as a legal secretary for a number of years before partnering with my mother. My major role was sales and customer service but I also accompanied my mother to see agents when she was buying imported fabrics and laces from Belgium and France. Unfortunately this experience did not include a buying trip to Europe.
My parents emigrated to Australia from Holland before I was born. Before they were married, apparently my mother was always spending time behind a sewing machine. When I was young, my older sister and I were often dressed in well made “haute couture” outfits courtesy of my mother. Without her expertise in the design and making of the gowns, the bridal business would not have happened. I then probably would not have had such an interest in fashion and accessories – the sort of Ecuadorian products I later became interested in. I was very proud to always present my mother’s garments to new brides-to-be in our retail store, or to buyers from around Australia. Mum was (and still is at 83) a “perfectionist”. She still has a sewing room. I guess it is her way of meditating.
On the 29th of July, 1981 Diana Spencer married Prince Charles. We had been asked to make a replica of her gown for a store window in Perth. I believe it was around 10 hours later that my mother’s version of the gown was in a store window - less the 25ft train. At this time we had a small factory and a staff of five. Everyone pitched in and helped. We were even on the evening news.
So between John and me and our respective business experiences, we thought that we had good chance to successfully start a giftware exporting business from Ecuador.
The other comforting realization when we were at the Cotacachi import/export course was that the teachers had not really ever had much experience in the giftware or import/export industries. They were really only teaching “suitcase exporting” – where you carry your products home with you after a visit to Ecuador and sell them at retail prices to friends and at retail craft shows. That approach might have been fine as a hobby, or as an excuse to help pay for travel expenses, but it did not interest us. John wanted to replicate the higher volume business and marketing model that he had pioneered in Australia in the early 90’s.
When we first visited Ecuador we did the import/export course because of our particular interest and past experience.
John previously co-founded a cottage industry giftware manufacturing business in Australia in the early 90's. We thought that we might be able to start a business of exporting from Ecuador to other countries and not have any manufacturing headaches. We could concentrate on marketing, and enjoying some more travel. At the same time we would be helping the local artisans expand their businesses.
John’s previous co-owned giftware business was recognized nationally as a very successful small business startup. In 1994 it was one of 30 Australian companies to be awarded an Australian DesignMark Award for its primary product. In the same year it was awarded an Australian Best Practice grant of $113,000 - again one of only 30 Australian companies to receive such an award. This national recognition was after an initial start only two years earlier with virtually zero capital.
In 1995 John’s business received further major recognition. The Australian government had launched a new industries assistance program called AusIndustry. It currently provides about AU $2 Billion in various assistance programs.
“AusIndustry provides a range of incentives that actually assist businesses to grow. The focus of our staff is really about understanding business, understanding business needs and understanding how the range of incentives across Government can actually support those businesses.” http://www.ausindustry.gov.au/AboutAusIndustry/Pages/AboutAusIndustry.aspx
This program was launched in 1995 via satellite hookup at all major centers around Australia. John’s business was one of only four Australian companies chosen to feature on a video presentation for this launch. The media package and signage at each center only featured John and his partner.
The main reason for the national prominence of John’s business was because of its spectacular growth, and because it started exporting in the first year of scaled-up operations. It was thought by the Australian government to be a model for other small businesses to emulate. Most countries like to stimulate exports to earn foreign reserves. Within two years of start-up, the business was distributing to over 1,500 retailers in Australia (which included customers like The Body Shop, Amway and major retail chains). It was also exporting to 10 countries.
The other amazing thing is that the major product wholesaled for only $6.00, even with Australian labor costs. It was a low cost item that was all handmade. It was an essential oil product that was an alternative to chemical moth balls, but finished with attractive dried flower decorations to differentiate the different perfumes (Lemon Scented Eucalyptus, Rose & Lavender, Lavender & Clove, etc).
The manufacturing and packaging of the essential oil products were mostly done by subcontractors who were motivated pensioners. The government also thought that this method of business and giving seniors an opportunity to earn money was good. The subcontractors did the work in their own homes – usually while watching a favorite TV program or socializing with friends.
John’s partner, an elementary school teacher, had invented this product many years before but had only sold small numbers. It was a hobby activity. The products were sold at local small craft fairs.
John improved the manufacturing efficiency so that production and marketing could be scaled up.
The largest customer order in 1993 was for 10,600 items to an Indonesian distributor. The marketing model was to exhibit at craft and gift fairs in Australia and overseas.
In this trade fair display shown above, all the display units were made out of cheap wood so that they concertinaed inside the crates that were also used to ship the display products and sundry setup tools and accessories. Even the outer crate itself was used on the display – as the serving counter. The products were then shipped to customers directly after the fair, before sending the empty crates back home.
The business is still operating in Australia; nearly 20 year years later and John’s family own 50%. He sold out after inventing a new product in a different industry in the late 1990’s (composting technology). The manufacturing method for the cottage industry business is still the same that John instituted. Many of the original customers still buy the product, more than 15 years later. The trade fair method of marketing is still used.