How to do business overseas effectively
Examining the key factors for success when moving operations overseas
As world trade moves into a general recession, paradoxically this may be the best time ever for entrepreneurs to look for new markets. Growing Business analyses the key factors for success when moving operations overseas
When Jamie Borwick started making electric vans in Coventry six years ago, he predicted selling 2,000 a year and was delighted when Tesco became his first customer. Now his company Modec produces 5,000 a year, but domestic sales have been disappointing.
“The growth of our business is almost all overseas,” he says. “Of the last 100 orders taken, only 16 are to be delivered in the UK, and in every case the decision to buy was taken abroad.”
The zero-emission commercial vehicles have been taken up in Europe by global operators like FedEx and UPS, who can’t get enough of them. That wasn’t the plan and took Modec by surprise, creating the enviable problem of supporting sales in key markets like Spain, Germany, France and the Netherlands.
“To expand abroad, we have to sell 10 or 15 in one country, so we are setting up dealerships in different markets,” explains Borwick. “We’ve just taken a substantial order from a distribution company in France and will be appointing a dealer now to service it.”
That a British vehicle manufacturer is successfully developing a new product and selling it abroad shows that, “companies with niche products and services can still find buoyant markets around the world,” as Sir Andrew Cahn, chief executive of UK Trade and Investment (UKTI) told Growing Business in an exclusive interview.
The export lifeline
There are two ways a business can react to recession: go into lockdown and wait for it to go away, or look for the opportunities that still exist and the advantages it throws up. Foreign exchange may be one of these, as British goods become cheaper as the pound’s value falls. “For many companies exports are going to be a lifeline,” says Cahn. “I am not saying exporting is easy or a silver bullet, but there are more opportunities around the world than there will be in the home market.”
So what questions should entrepreneurs ask themselves before they invest time, money and energy in overseas marketing? The key to success is doing your homework and preparing thoroughly. While the rewards may be tempting, exporting is riskier than selling into an established home market.
There are two reasons firms expand internationally, says the director of European management school ESCP-EAS, Davide Sola: either they are looking for cheap labour and natural resources, or searching out new markets. Either way, the objective will be to grow revenues, so they should ensure that going abroad is the best way to do that. “It’s costly to set up in a new market, so you need to ensure that you have exhausted possibilities at home, such as selling more to existing clients or cross selling.”
The next priority is to decide your market entry strategy, and it’s vital to consider all the available routes, including:
Greenfield investment – Opening a subsidiary by a direct investment of the firm, this normally entails 100% ownership with full control over its management.
Acquisition or merger – Purchasing a majority share of an existing company gives instant access to the resources you need, but carries a high risk of failure.
Strategic partnership – This is anything from an agency agreement to a joint venture, where both parties bring one or more business assets to the table that will help the other, such as production facilities, sales network or greater general knowledge of the local business environment.
The decision on how to enter the market usually depends on local market conditions, according to Sola. “First, what’s the market growth in that country? Is it stable or mature, high growth over 20% or less than 5%?” he says. “Then there’s the degree of consolidation. How many players cater for the top 80% of your market? Then consider your product fit and the level of adaptation it needs.”
Finally, Sola points to the political, legal and economic context of the target market. This refers to your ability to choose your options. In some countries, for example, there are restrictions on the maximum amount of shareholding by foreign-based investors.
Sources of help
Making these decisions on instinct is not an option. Exporting companies need all the help they can get. UKTI offers a number of key services, which can be tailored to meet the needs of your company – other resources include:
- Regional Chambers of Commerce
- Institute of Export
- HM Revenue & Customs
- British International Freight Association
- Dun & Bradstreet Country Risk Reports
- Enterprise Europe
- The UKIndia Business Council (UKIBC)
The Birmingham Chamber of Commerce, for example, offers export advice and support and help with documentation. “Our International Trade Promotion Centre provides a single point of contact to help companies find new markets or source new products on a regional, national and international level,” says the body’s head of international trade, Jonathan Webber. “On a practical level, we do a lot of work on simply helping our members to present well to customers, and at the end of the process, to get paid.”
For companies interested in India, the India Pakistan Trade Unit (IPTU) is a two-way, international trade portal designed to maximise trading opportunities between South Asian and West Midlands companies.
The Birmingham and Solihull International Trade team is linked to UKTI, giving access to a range of free or heavily subsidised services. Jonathan Watson, co-founder of Reactor Mobile, has been on a number of trade missions, visiting telecoms market events in Finland, Sweden and New Orleans in the US. “I found the support really good,” he says. “These events are very good for business, because they get people together, and you get credibility just by being on them. The preparation and research is invaluable too.”
Which export market?
The USA is Britain’s largest single export market, taking $57bn of UK goods in 2007. Although the US is at the centre of the downturn and showing signs of developing a ‘buy American’ culture, its neighbours should not be overlooked. Canada was less exposed, is booming on the back of oil, gas and construction, and is becoming a significant telecoms and IT market.
India and China are by far the most significant growth markets. In January, Gordon Brown made his first visit to China as prime minister, agreed an increase in trade and declared his intention to take trade relations “to a higher level”.
Russia and the Commonwealth of Independent States (currently Azerbaijan, Armenia, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Uzbekistan and Ukraine) are markets that hold huge potential for UK companies. Mobile technology company Synchronica has struck deals with the principal mobile telephony carriers in that region, while Reactor came to realise that the retail business in Russia shared characteristics and cross investment with the Middle East, where it was already active. “I now want to focus on these young markets in Eastern Europe,” says Watson.
Protect your IP
Intellectual property (IP) rights are territorial, which means they only give protection in the countries where they are granted or registered. Unprotected items can be used freely, including for import and export. Even a registered trademark is at risk unless it is protected in every market, according to Rob Hawley, partner at Mathys & Squire. “Companies that have practised good IP housekeeping at home ought to have fewer problems abroad, but some countries operate quirkily, so anyone entering a new market should take some advice before doing so,” he advises.
You will usually need to apply for your IP rights abroad. However, some countries may allow you to extend your UK protection and accept it in that country after completing certain local formalities. Information can be obtained from the Intellectual Property Office (the old Patent Office). In addition, though, Hawley recommends engaging the services of a professional to thoroughly investigate your target market. “The cost is negligible compared to the risk of losing a patent or a trade name, or of going to court,” he says.
The most common mistake when companies are entering emerging markets is lack of preparation, according to Dave Heath, director of people capital and international business at recruitment process outsourcing specialist AMS.
A common mistake made by companies entering new markets is to view America, China or even Europe as a single entity when labour laws can differ regionally, as Heath points out.
“One company chose Hungary because it provided excellent language skills and a wage arbitrage opportunity, but it didn’t take the legal environment around employment into account,” he explains. “When they wanted to move people rapidly out of their business, they found the labour laws very restrictive.”
Planning how to sell your goods abroad is vital. Depending on the markets you are targeting and the goods you are selling, do you:
- Set up a separate company?
- Open a remote sales office?
- Use a local agent, distributor, or licensee to market and sell your products or services?
Careful research, together with participation in key trade exhibitions, should help you to decide the best option for you. Market reports may enable you to choose business partners in different parts of the world. They can help you to identify the best customers, the right way to approach those customers, the price of your products and services, and how to handle all the necessary paperwork. One effect of reduced consumer demand has been over capacity in international freight.
“It works both ways,” explains Jeroen Brenters, marketing director of shipping line APL. “China is beginning to require less of the waste fibre and scrap steel it imports from Europe and the USA to manufacture the goods it sells us.” APL cut its capacity in the Asia-Europe trade by close to 25% and its transatlantic trade by 20% last year, and the others followed suit. But these companies need to fill their ships, their trucks and their lorries, and the deals on offer make this a good time for manufacturers or contractors with goods or materials to move.
International trade activity involves red tape and the best place to go for help is, once again, your local Chamber of Commerce. Movement certificates, bills of lading, certificates of origin, letters of credit, ATA carnets and the like can be a legal minefield. Once you know what you need, freight forwarders can handle the import or export paperwork. You can identify a forwarder through the European Freight Forwarders Association EFFA or the British International Freight Association.
“There has never been a better time to export, and it has also never been more necessary.” That’s Sir Andrew Cahn’s personal message to readers of this report.
“There are markets around the world that are still buoyant (the Gulf would be a good example), and remember that governments around the world are pumping money into their economy as a fiscal stimulus, so in each case there is a real opportunity for businesses to get a slice of that funding,” he says.
“We are putting particular efforts into helping UK small and medium-sized enterprises enter the value chain in India and China, and I would focus on the opportunities there.”
China and India are already fertile markets for UK entrepreneurs, but many are apprehensive of entering into the unknown. Familiarising yourself with the economy before you invest can soften the culture shock of operating in new territories
“China and India are difficult markets,” warns UKTI chief executive Sir Andrew Cahn. “But the UK has many companies with niche products that are sought after in these markets.”
China is one of the world’s most rapidly growing economies. It already has almost 6,000 British-invested projects, and improving international relations, government reforms, increased foreign investment, diverse markets and strong gross domestic product growth rates (around 9% a year) make China an exciting opportunity for any business looking to expand internationally.
But market entry in China is a fairly ritualised and formal process, says Mike Norwood, managing director of Team Simoco, which sells its radio communications technology into more than a third of China’s provinces. The concept of Guanxi, or social capital, is central to Chinese society and also to the way people do business, he says, and establishing the networks you’ll need to succeed can be challenging.
India is more familiar, with its historic ties to Britain, its use of English to do business and its burgeoning middle class. But wage rates are inflating very quickly in Bangalore, and loyalty is not high among new employees there, warns Cahn. “They often accept one job, then get a better offer so don’t turn up!” he says. So an early task is to build your reputation among the workforce, as well as in your customer base.
Perhaps the best-known entrepreneur to have targeted India is Karan Bilimoria (right), who started producing beer there for import to the UK, moved production here, and is now again manufacturing in India for the home market. “There’s a consumer market of more than 300 million people in India today,” he says, “and the population is growing at a rate of 15 million people a year, equivalent to the population of the Netherlands, so the opportunity for British business in India is absolutely tremendous.”
Synchronica is targeting emerging economies for its mobile technology, with a different approach in each market. Its chief executive explains the strategy
Synchronica is an AIM-listed company headquartered in the UK with a sales focus completely geared to emerging economies and with its technical and service centre in Berlin. It provides BlackBerry-type email and internet capability on a regular mobile phone, and is targeting developing markets. Its main customers are mobile operators and IT infrastructure companies.
“You have to focus your marketing on your strengths,” says chief executive Carsten Brinkschulte.
“We approach each market differently. So we opened a subsidiary in Dubai to sell in the Middle East and Africa, we have a direct sales force in the USA, working from home and covering Latin America, and a similar system in Hong Kong to cover Asia. We try to keep the costs low and establishing an office is not always necessary.”
An office base concentrates the staff in one place, and Synchronica is active in too many emerging markets. “We will establish more offices like the one in Dubai, when strong business growth justifies that,” says Brinkschulte.
Another effective route into developing economies is through OEM partnerships with major players such as Sun Microsystems, Microsoft and Nokia. Synchronica’s partner in Latin America is Brightstar, the leading device distributor there. “This has just delivered our first deal in Latin America with Entel, which has 43% of the mobile market in Chile,” explains Brinkschulte. “Having strong global strategic partners emphatically eases the way into key markets.”