Foreign Market Entry
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.
Licensing and off-shore production are discussed in Chapter 7, "Strategic Alliances and Foreign Investment Opportunities."
EXPORTING
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. The
direct method requires your company to find a foreign buyer and
then make all arrangements for shipping your products overseas.
If this method seems beyond the scope of your business' in-house
capabilities at this time, do not abandon the idea of exporting.
Consider using an export intermediary:
American Cedar, Inc., a Hot Springs, Arkansas, producer of cedar products reports that 30 percent of its product sales now comes from exporting: "We displayed our products at a trade show, and an export management company found us. They helped alleviate the hassles of exporting directly. Our products are now being distributed throughout the European Community from a distribution point in France," says American Cedar President Julian McKinney.
INDIRECT EXPORTING
Many small businesses like American Cedar have been exporting indirectly by using an export intermediary. There are several kinds of export intermediaries you should consider.
Commissioned agents
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)
EMCs 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.
EMCs will often use the letterhead of your company,
negotiate export contracts and then provide after-sales support.
EMCs may assist in arranging export financing for the exporters
but they do not generally assure payment to the manufacturers.
Some of the specific functions an EMC will perform include:
EMCs 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)
ETCs 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
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.
The Export Trading Company Act of 1982
This legislation encourages the use and formation of
EMCs/ETCs by changing the antitrust and banking environments
under which these companies operate. The Act increases access to
export financing by permitting bank holding companies to invest
in ETCs and reduces restrictions on trade finance provided by
financial institutions. Under the Act, banks are allowed to make
equity investments in qualified ETCs.
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:
Some disadvantages of exporting through an intermediary include:
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.
Piggyback Exporting
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 Export Intermediaries
Small businesses often report that intermediaries find them
-- at trade fairs and through trade journals where their products
have been advertised -- so it can often pay to get the word out
that you are interested in exporting.
One way to begin your search for a U.S.-based export intermediary is in the Yellow Pages of your local phone directory. In just a few initial phone calls, you should be able to determine whether indirect exporting is an option you want to pursue further.
The National Association of Export Companies (NEXCO) and the National Federation of Export Associations (NFEA) are two associations that can assist in your efforts to find export intermediaries. The Directory of Leading Export Management Companies is another useful source (see Part II, The ExporterÕs Directory).
DOC's Office of Export Trading Company Affairs (OETCA) can also assist in providing information on how to locate ETCs and EMCs, as well as ETC cooperatives in the U.S. The office, under a joint public/private partnership, compiles the Export Yellow Pages, which provides the names and addresses of EMCs/ETCs, as well as other export service companies, such as banks and freight forwarders. Manufacturers, or producers, can also be listed in the guide free of charge; 50,000 copies are distributed worldwide annually. Contact your local U.S. Department of Commerce district office for information on being listed or for a free copy of the directory.
Locating the best export intermediary to represent you overseas is important. Do your homework before signing an agreement.
DIRECT EXPORTING
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.
California exporter Bayley Suit, Inc. reports that 80 percent of its sales come from exporting. The company president says that "40 percent of sales come from the Pacific Rim and 40 percent from the UK and Europe. In just a few years, exports have pushed our gross sales from $1 million to $4 million."
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. But, as the case of Ekegard, Inc. reveals, the extra efforts can pay off:
Using agents based in Pakistan and Thailand, Iowa-based Ekegard, Inc. states that 80 percent of its sales now come from exporting -- quite an achievement in just three years. According to Ekegard President Janne Ekstam, "Exporting helps to offset fluctuations in the United States economy."
Different Approaches to Direct Exporting
Sales Representatives/Agents
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.
Distributors
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. (See Chapter Four, The Export Transaction, for additional information on negotiating agent/distributor agreements.) Kansas-based Airparts Companies has been extremely successful using overseas distributors:
"We employ 1,200 distributors worldwide," says Marta E. Maxwell, president of Airparts Companies, Inc. of Wichita, Kansas. With over $13 million in sales and 38 employees, Maxwell attributes 70 percent of her sales to exporting.
Finding overseas buyers for your products need not be more difficult than locating a representative here in the United States. It may require, however, an investment of time and resources to travel to your target market to meet face-to-face with prospective partners. One way to identify those interested in your product is to tap the DOC's Agent/Distributor Service. This program provides a customized search to identify agents, distributors and representatives for United States products based on the foreign companies' examination of the United States product literature.
"The Commerce Department Agent/Distributor Search located a distributor for us in India, and we've had a good working relationship for three years," says Shirley Wright, a representative of the Wisconsin biotechnology firm Promega. Promega derives more than 30 percent of its sales from exporting.]
Other sources of leads to find foreign agents and distributors are trade associations, foreign chambers of commerce in the United States and American chambers of commerce located in foreign countries.
Many publications can be useful. The Standard Handbook of Industrial Distributors lists agents and distributors in more than 90 countries. The Manufacturers' Agents National Association also has a roster of agents in Europe (see Part II, The Exporter's Directory).
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.
Retail Sales
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-User
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.
HOW TO FIND BUYERS
Advertise in Trade Journals
Many small businesses report that foreign buyers often find
them. An ad placed in a trade journal or a listing in the DOC's
Commercial News USA can often yield innumerable inquiries from
abroad. Commercial News USA is a catalog-magazine featuring U.S.
products and distributed to 125,000 business readers in over 140
countries around the world and to over 650,000 Economic Bulletin
Board users in 18 countries. Fees vary with the size of the
listing. Many U.S. companies have had enormous success in
locating buyers through this vehicle:
"When overseas buyers contacted us we were thrilled," says Maryland's Marine Enterprises Vice President Brenda Dandy, discussing the results of a listing her company bought in Commercial News USA. Exports now represent 20 percent of Marine Enterprises' sales.
Participate in Catalog and Video/Catalog Exhibitions
Catalog and Video/Catalog exhibitions are another low-cost
means of advertising your product abroad. Your products are
introduced to potential partners at major international trade
shows -- and you never have to leave the United States. For a
small fee, the US&FCS officers in embassies show your catalogs or
videos to interested agents, distributors and other potential
buyers.
A number of private sector publications also offer U.S. companies the opportunity to display their products in catalogs sent abroad. A few include Johnston International's Export Magazine, The Journal of Commerce and the Thomas Publishing Company's American Literature Review.
Pursue Trade Leads
Rather than wait for potential foreign customers to contact
you, another option is to search out foreign companies looking
for the particular product you produce. Trade leads from
international companies seeking to buy or represent U.S. products
are gathered by US&FCS officers worldwide and are distributed
through the DOC's Economic Bulletin Board. There is a nominal
annual fee and a connect-time charge. The leads also are
published daily in The Journal of Commerce under the heading,
"Trade Opportunities Program" and in other commercial news
outlets.
Another source of trade leads is the World Trade Centers (WTC) Network, where you can advertise your product or service on an electronic bulletin board transmitted globally.
If your product is agricultural, the U.S. Department of Agriculture (USDA) Foreign Agricultural Service (FAS) disseminates trade leads collected by their 80 overseas offices. These leads may be accessed through the AgExport FAX polling system, the AgExport Trade Leads Bulletin, The Journal of Commerce or on several electronic bulletin boards.
Exhibit at Trade Shows
Trade shows also are another means of locating foreign
buyers. DOC's Foreign Buyer Program certifies a certain number
of U.S. trade shows each year. Foreign buyers are actively
recruited by DOC commercial officers, and special services --
such as meeting areas and translators -- are provided to
encourage and facilitate private business discussions.
International trade shows are another excellent way to market your product abroad. Many U.S. small businesses find that going to a foreign trade show once just is not enough:
"You have to hang in there," said Allen-Edmonds Shoe Corporation President John Stollenwerk. "In the beginning, in many countries where we displayed our products at foreign trade shows, we saw no results. But gradually people began to take our product, American made shoes, seriously. We market our shoes as `the world's finest.' That's one way American companies can compete." Twelve percent of Wisconsin-based Allen-Edmonds sales are derived from exporting.
Through a certification program DOC also supports about 80 international fairs and exhibitions held in markets worldwide. U.S. exhibitors receive pre- and post-event assistance. The USDA FAS sponsors about 15 major shows overseas each year.
Participate in Trade Missions
Participating in overseas trade missions is yet another way
to meet foreign buyers. Public/private trade missions are often
organized cooperatively by federal and state international trade
agencies and trade associations. Arrangements are handled for
you so that the process of meeting prospective partners or buyers
is simplified.
Matchmaker Trade Delegations are DOC-sponsored trade missions to select foreign markets. Your company is matched carefully with potential agents and distributors interested in your product. Tennessee-based Shaffield Industries, a futon manufacturer, reaped excellent returns as a result of a 1991 Matchmaker trade mission to Asia:
"I was especially surprised at the high-level of appointments scheduled for us during the Matchmaker trade mission. Each was a true prospect," stated David Goff, comptroller for Shaffield Industries. As a result of the mission, his company negotiated the sale of three containers of his product to South Korea and two containers to Taipei.
Being properly prepared for the kinds of inquiries you might encounter on overseas trade missions is important. The SBA offers pre-mission training sessions through its district offices and the SCORE program. Contact your local SBA office for a schedule of upcoming "How to Participate Profitably in Trade Missions" seminars.
Contact Multilateral Development Banks
In developing countries, large infrastructure projects are
often funded by multilateral development banks such as the World
Bank, the African, Asian, Inter-American Development Banks and
the European Bank for Reconstruction and Development.Multilateral
development bank (MDB) projects often represent extensive
opportunities for U.S. small businesses to compete for project
work. DOC estimates that MDB projects could amount to at least
$15 billion dollars in export contracts for United States
businesses.
One U.S. small business that successfully entered the international marketplace by bidding on a World Bank project is DSI of Poestenkill, New York:
"As a result of World Bank loans to the People's Republic of China, DSI received over $1 million dollars in contracts for laboratory equipment," reports DSI President Dave Ferguson. Exports now account for 60-70 percent of DSI's business.
Development bank projects can be an excellent way to start exporting. Many U.S. small business exporters have benefited from large MDB projects through subcontracting awards from larger corporations.
A list of MDBs is included in Part II, The Exporter's Directory. From their Washington, D.C. headquarters, many MDBs hold monthly seminars to acquaint businesses with the MDB procurement process. Additionally, the DOC's Office of Major Projects can be of assistance in identifying contracting and subcontracting opportunities.
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:
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, the topic of Chapter 4, "The Export Transaction."
*Last Modified 7-5-01