Entering a Foreign Market
Foreign Market Entry Plan
Before entering the international arena it is important to make a profile of your potential market. The following is a list of questions to take into consideration:
- What are the major distribution channels for this product in each geographical market? Are there distributors who can market the product/service locally, or will the company need to sell directly to the end user? If after-sales service is required, can local distributors handle this responsibility?
- What is the nature of the competition in each market? What market share have indigenous firms attained? Are other firms exporting to that market or setting up local operations? From what countries? How are other firms positioning their products? What is the pricing structure in each market? Is the product subject to any government-mandated price controls? Does the government provide subsidies or other forms of support to domestic competitors?
- What is the market outlook for the product/service in each country? Has the growth rate been consistent or subject to wide variations? How does the growth rate for imported product compare to the overall growth rate in the domestic market?
- What specific regulations will the product/service be subject to in a given country? How will they impact the design requirements for the product? For services, what professional licensing requirements or regulatory oversight will the company be subject to?
- Are incentives offered by the US Government or other government/multilateral agencies to promote the export of the product/service?
Which Method of Exporting is Best For You:
Having determined the best international markets for your products, you now need to evaluate the most profitable way to get your products to potential customers in these markets. There are several methods of foreign market entry including exporting, licensing, joint venture and off-shore production. The method you choose will depend on a variety of factors including the nature of your particular product or service and the conditions for market penetration which exist in the foreign target market.
Exporting can be accomplished by selling your product or service directly to a foreign firm, or indirectly, through the use of an export intermediary, such as a commissioned agent, an export management or trading company. International joint ventures can be a very effective means of market entry. Joint ventures overseas are often accomplished by licensing or off-shore production. Licensing involves a contractual agreement whereby you assign the rights to distribute or manufacture your product or service to a foreign company. Off-shore production requires either setting up your own facility or sub-contracting the manufacturing of your product to an assembly operator. Of the various methods of foreign market entry, exporting is most commonly used by small businesses. Start-up costs and risks are limited, and profits can be realized early on. There are two basic ways to export: direct or indirect.
While indirect exporting offers many advantages, direct exporting also has its rewards: although initial outlays and the associated risks are greater, so too can be the profits. Direct exporting signals a commitment on the part of company management to fully engage in international trade. It may require that you dedicate a staff person or even several personnel to support your export efforts, and company management may have to travel abroad frequently.
Selling directly to an international buyer means that you will have to handle the logistics of moving the goods overseas.
Different Approaches to Direct Exporting:
Like manufacturers' representatives in the United States, foreign-based representatives or "agents" work on a commission basis to locate buyers for your product. Your representative most likely will handle several complementary, but non-competing product lines. An agent is, generally, a representative with authority to make commitments on behalf of your firm. Be careful, therefore, about using the terms interchangeably. Your agreement should specify whether the agent/rep. has legal authority to obligate the firm.
Foreign distributors, in comparison, purchase merchandise from the U.S. company and re-sell it at a profit. They maintain an inventory of your product, which allows the buyer to receive the goods quickly. Distributors often provide after-sales service to the buyer.
Your agreement with any overseas business partner — whether a representative, agent or distributor — should address whether the arrangement is exclusive or non-exclusive, the territory to be covered, the length of the association, and other issues.
Foreign Government Buying Agents:
Foreign government agencies or quasi-governmental agencies are often responsible for procurement. In some instances, countries require an in-country agent to access these procurement opportunities. This can often represent significant export potential for U.S. companies, particularly in markets where U.S. technology and know-how are valued. Foreign country commercial attaches in the United States can provide you with the appropriate in-country procurement office.
If you produce consumer goods, you may be able to sell directly to a foreign retailer. You can either hire a sales representative to travel to your target market with your product literature and samples and call on retailers, or you can introduce your products to retailers through direct-mail campaigns. The direct-marketing approach will save commission fees and travel expenses. You may want to combine trips to your target markets with exploratory visits to retailers. Such face-to-face meetings will reinforce your direct marketing.
Direct Sales to End-Users:
Your product line will determine whether direct sales to the end-user are a viable option for your company. A manufacturer of medical equipment, for example, may be able to sell directly to hospitals. Other major end-users include foreign governments, schools, businesses and individual consumers.
Many small businesses have been exporting indirectly by using an export intermediary. There are several kinds of export intermediaries you should consider.
Commissioned agents act as "brokers," linking your product or service with a specific foreign buyer. Generally, the agent or broker will not fulfill the orders, but rather will pass them to you for your acceptance. However, they may assist, in some cases, with export logistics such as packing, shipping and export documentation.
Export Management Companies (EMCs):
EMC's act as your "off-site" export department, representing your product — along with the products of other companies — to prospective overseas purchasers. The management company looks for business on behalf of your company and takes care of all aspects of the export transaction. Hiring an EMC is often a viable option for smaller companies that lack the time and expertise to break into international markets on their own. Some of the specific functions an EMC will perform include:
- Conducting market research to determine the best foreign markets for your products;
- Attending trade shows and promoting your products overseas;
- Assessing proper distribution channels;
- Locating foreign representatives and/or distributors;
- Arranging export financing;
- Handling export logistics, such as preparing invoices, arranging insurance, customs documentation, etc.; and
- Advising on the legal aspects of exporting and other compliance matters dealing with domestic and foreign trade regulations.
EMC's usually operate on a commission basis, although some work on a retainer basis and some take title to the goods they sell, making a profit on the markup. It is becoming increasingly common for EMCs to take title to goods.
Export Trading Companies (ETCs):
ETC's perform many of the functions of EMCs. However, they tend to be demand-driven and transaction-oriented, acting as an agent between the buyer and seller. Most trading companies source U.S. products for their overseas buyers. If you offer a product that is competitive and popular with the ETC buyers, you are likely to get repeat business. Most ETCs will take title to your goods for export and will pay your company directly. This arrangement practically eliminates the risks associated with exporting for the manufacturer.
ETC cooperatives are United States government-sanctioned co-ops of companies with similar products who seek to export and gain greater foreign market share. Many agricultural concerns have benefited from ETC cooperative exporting, and many associations have sponsored ETC cooperatives for their member companies. The National Machine Tool Builders' Association, the Outdoor Power Equipment Institute and the National Association of Energy Service Companies are a few examples of associations with ETC co-ops. Check with your particular trade association for further information.
Foreign Trading Companies:
Some of the world's largest trading companies are located outside the United States. They can often be a source of export opportunity. U.S. & Foreign Commercial Service (US&FCS) representatives in embassies around the world can tell you more about trading companies located in a given foreign market.
Exporting through an Intermediary — Factors to Consider:
Working with an EMC/ETC makes sense for many small businesses. The right relationship, if structured properly, can bring enormous benefits to the manufacturer, but no business relationship is without its potential drawbacks. The manufacturer should carefully weigh the pros and cons before entering into a contract with an EMC/ETC. Some advantages include:
- Your product gains exposure in international markets—with little or no commitment of staff and resources from your company.
- The EMC/ETC's years of experience and well-established network of contacts may help you to gain faster access to international markets than you could through establishing a relationship with a foreign-based partner.
- Using an intermediary lowers or eliminates your export start-up costs, and, therefore, the risks associated with exporting. You can negotiate your contract with an EMC so that you pay nothing until the first order is received.
- Your intermediary will guide you through the export process step-by-step. Over time, you will develop your own export skills.
Disadvantages of exporting through an intermediary:
- You lose some control over the way in which your product is marketed and serviced. Your company's image and name are at stake. You will want to incorporate any concerns you may have intoyour contract, and you will want to monitor closely the activities and progress of your intermediary.
- You may lose part of your export-sales profit margin by discounting your price to an intermediary. However, you may find that the economies of scale realized through increased production offset this loss.
- Using an intermediary can result in a higher price being passed on to the overseas buyer or end-user. This may or may not affect your competitive position in the market. The issue of pricing should be addressed at the outset.
Export Merchants/Export Agents:
Export merchants and agents will purchase and then re-package products for export, assuming all risks and selling to their own customers. This export intermediary option should be considered carefully, as your company could run the risk of losing control over your product's pricing and marketing in overseas markets.
Allowing another company, which already has an export distribution system in place, to sell your company's product in addition to its own is called "piggyback" exporting. Piggyback exporting has several advantages. This arrangement can help you gain immediate foreign market access. Also, all the requisite logistics associated with selling abroad are borne by the exporting company. Oklahoma-based DP Manufacturing's winches were attached to another product and sold abroad by another company. DP Manufacturing now handles its own exports and reports that 15 percent of its sales comes from international markets.
How to find buyers:
- Advertise in Trade Journals
- Participate in Catalog and Video/Catalog Exhibitions:
- Pursue Trade Leads
- Exhibit at Trade Shows
- Participate in Trade Missions
- Contact Multilateral Development Banks
Qualifying Potential Buyers Or Representatives:
Once you locate a potential foreign buyer or representative, the next step is to qualify them by reputation and financial position. First, obtain as much information as possible from the company itself. Here are a few sample questions you will want to ask:
- What is the company's history and what are the qualifications and backgrounds of the principal officers?
- Does the company have adequate trained personnel, facilities, resources to devote to your business?
- What is their current sales volume?
- What is the size of their inventory?
- How will they market your product (retail, wholesale or direct)?
- Which territories or areas of the country do they cover?
- Do they have other U.S. or foreign clients? Are any of these clients your competitors? It is important to obtain references from several current clients.
- What types of customers do they serve?
- Do you publish a catalogue?
- What is their sales force?
When you have this background information and are comfortable about proceeding, then obtain a credit report about their financial position. DOC's World Trade Data Reports (WTDRs), available from your local District ITA Office, are compiled by US&FCS officers. A WTDR can usually provide an in-depth profile of the prospective company you are investigating.
There are also several commercial services for qualifying potential partners, such as Dun & Bradstreet's Business Identification Service and Graydon reports. U.S. banks and their correspondent banks or branches overseas, and foreign banks located in the United States can provide specific financial information.
In this chapter we have discussed methods of market entry, how to find potential foreign buyers and representatives and how to qualify whom you will be doing business with overseas. Advance market research and preparation is the best way for a small business to define a potential export market.
The next question that needs to be explored involves how to accomplish the business of exporting — that is, how the deal should be structured.
International Trade Administration
The International Trade Administration (ITA) strengthens the competitiveness of U.S. industry, promotes trade and investment, and ensures fair trade through the rigorous enforcement of our trade laws and agreements. ITA works to improve the global business environment and helps U.S. organizations compete at home and abroad. ITA supports President Obama's recovery agenda and the National Export Initiative to sustain economic growth and support American jobs.