In its latest study titled ‘Why go International?’ UHY audit firm educates on the benefits, risks and challenges of setting up a company overseas…
AS COMPANIES, both large and small, search for new international markets in today’s global economy, they appreciate the differences between trading in their home market, with its known parameters, and marketing products overseas.
Competing overseas usually involves greater risk and requires a detailed understanding of uncertainties – such as currency prices, payments, regulations, cultural matters, market structures and protocols. It also requires business partnerships to provide local expertise and support.
“Expanding your business abroad is a big step,” says UHY chairman Ladislav Hornan.
“Whether exporting for the first time, or entering a new international market, selling goods or services abroad is an excellent way of gaining exposure to longer-term growth and high-impact profits. As governments make efforts to facilitate cross-border trading and it therefore becomes easier to do business internationally, an increasing number of dynamic companies are looking to transfer their expertise overseas,” he added.
A successful presence in overseas markets will help businesses achieve:
• Increased growth beyond what is possible domestically – leading to economies of scale, such as larger production runs that reduce costs
• A competitive edge – exposure to intensive competition, new products and ideas, more efficient technologies and better working practices increase the company’s ability to compete
• Greater sales volume – translating into higher earnings, especially where margins in some markets exceed those in the domestic market, thereby increasing resilience of revenues and profits
• The ability to spread risks – while product sales in the home market may be in decline, those in overseas markets may be booming
• Higher profile and brand awareness – leading to increased reputation with existing customers and improved staff morale
• Spreading the exchange rate risk – for example, if a business does most of its trade in US dollars, it may want to start trading with Japan to spread the exchange rate risk between the dollar and the yen
• Increased commercial lifespan of products and services – and therefore increased returns on investment in research and development.
Key performance factors
The size of your business is not a key factor; nor, often, is the product sector. What is important is that the product meets local need, overseas teams are trained, long-term partner relationships are established and new markets are established to compensate for less buoyant ones.
Economic research by business advisory services, such as chambers of trade, consistently shows that companies which export to any country, in any financial climate, perform better than those which do not.
“There’s rarely such a thing as a global market. International trade involves recognising that people all over the world have different needs,” says UHY Marketing and Business Development Manager Dominique Maeremans.
“Many products will only suit specific countries because of different values, customs, languages, technical standards and currencies. There is rarely such a thing as a global market, but rather a number of different overseas markets. In order to pinpoint markets where a business is most likely to be successful in selling its products, a lot of groundwork has to be done and advice sought. It is also just as important to identify unsuitable markets,” she added.
Step 1- Getting Started
When considering to open a new office overseas, you need to ask yourself these important questions;
1. Have you reviewed your international potential? Take time to consider the realities of setting up a subsidiary, or licensing an agent, abroad and be aware of the implications for all aspects of your business. Consider the support you will need.
2. Have you developed an action plan? Going international is a process, which needs to be planned. Clear and focused objectives are needed. International businesses need to be realistic as to what can be achieved within a given timescale.
3. Have you researched and prepared to visit the market? Researching markets is essential to help reduce risk and improve the chance of success. Research is usually a combination of desk and field research. Each business and each market is unique. Taking part in overseas events, trade fairs or missions is an effective way to do field research to test markets, attract customers, appoint agents or distributors and make sales.
4. Have you explored routes to market entry? Choosing a sales presence in an overseas market can be complex. There are a number of options, including having a subsidiary, branch, joint venture and recruiting an agent or distributor. The suitability of each will depend on your company and your products and services.
6. Have you identified cultural and linguistic challenges? Your relationships with people from other cultures, who have different languages from your own, can be enhanced when you are aware of cultural differences such as communication styles, religious beliefs, power structures, and attitudes toward time and work.
8. Have you protected your intellectual property? Protecting your intellectual property can be the difference between commercial success and failure. It is important to know at an early stage regulations and legal requirements which must be complied with and trading terms which might apply.
Step 2: Identify your market niche
According to Dominique Maeremans an important factor to consider when identifying your market niche is the speed at which the market is growing.
“It is usually easier to take a share of an expanding market than to fight for a share of a market that is already mature or declining. The quality of competition in some markets may make entering these markets difficult,” says Dominique.
“The nature and type of market a company is considering entering is also particularly important. For example, some businesses might find a small market to be a useful way of slowly expanding into international markets, while for others, only a large market could provide them with the potential to realise their ambitions.”
“Focusing on countries with fewer competitors might be more beneficial. The degree of similarity to the company’s home territory, or other markets in which a business operates, can also be valuable, as it can be hard for companies to break into markets lacking common ground,” she added.
Step 3: Risks and Challenges
Don’t ‘jump’ when you see opportunities, the UHY study warns.
Small to medium-size (SME) businesses dominate the international business arena by contributing 97% to the number of exports, according to the US Department of Commerce. These businesses are able to take advantage of significant growth opportunities, but not without overcoming challenges and risks.
Too often, says the US department, business owners ‘jump’ when they see opportunities abroad, without first taking the time to research the market and train their employees for the challenges they may face.
Have you thought about the risks and challenges?
The SME management may not have experience of international businesses. Experience is critical for businesses to move into the international market with the fewest surprises, mistakes and expenses. The existing management team should have the right expertise or be trained beforehand. Another option is to hire internal or external experts to guide decision-making.
No local contacts
Connections in the new international market are a valuable asset when pushing products out faster and obtaining a quicker return on investment.
Laws and regulations
Each country has its own set of laws and regulations for importing goods, taxes, and even selling online. Some products are banned in some countries and, even though you may not be aware of these restrictions, your company may end up in legal difficulty if your company ships those products. Obtain legal advice from an experienced business lawyer for the new market and research which laws and regulations will affect your business. Finding information online does not replace legal advice from a specialist.
Some countries do not have adequate infrastructure for transporting goods. Find out which obstacles exist and what should be done to overcome them or what adjustments should be made.
Cultural, language barriers
Researching the local culture and speaking the same language is not enough to communicate efficiently. When two people are speaking the same sentence, the underlying meaning may not be the same. Find out how the locals conduct business and how their culture affects their decision-making and communication.
Corruption among officials
Corruption is more prevalent than most small business owners are prepared for. Research the new market country and find out how business is truly conducted.
After entering into the new market, the business may have to adapt further to the local market. Small businesses that are not flexible or refuse to make alternations will lose out on customers and revenue.
Tariffs and quotas awareness
Countries add taxes or restrictions to particular products coming into their country to give their own businesses a higher advantage. Unsuspecting small business owners unaware of these tariffs and quotas can end up at a loss.
Pricing not optimised for the country
Small business owners who price products the same abroad as in their home territory are either overcharging or undercharging customers. In countries with a lower GDP, consumers have less money to spend on purchases so lower price points should be set to attract more buyers – after also taking into account higher or lower costs of production.
No after-sales services
Customer support should be available in the language of each country and be conveniently accessible. Customers should not have to pay long distance call charges to get help. Small business owners may choose to outsource customer support to a customer call centre within the new market country (or a country with the same language), provide a local phone number (or toll-free number), email support (but make sure the internet is widely available in the new market country), and live chat through its company website.
Wrong payment methods
SME owners must address payment methods before accepting or placing international orders. Countries may have different payment methods that are locally popular, but may not be commonly used internationally. Always select the safest option for you. The currency exchange rate is also important: be aware of currency exchange rates at the time of buying or selling products. Drastic changes on exchange rates may scupper your business.
Step 5: Support your staff abroad
Take care of your employees and their families – Companies that go international often choose to dispatch a team of managers they know and trust to the overseas market.
Part of the incentive offered to such employees can be a support package in the new jurisdiction – not only providing support on business issues, but taking care of personal finance needs for themselves and their families.