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It’s a Small World After All

“It’s a Small World After All”

Getting started: a primer on international trade.

When you boil it down, international trade is merely another form of market expansion. Yet selling products and services abroad gets dicey because you’re playing under a new set of rules. (See “When in Rome” in the July [2001] issue.)Choosing a path

There are numerous ways to compete in the international arena with varying degrees of risk and reward:

Direct exporting: Finding buyers and arranging to deliver products or services on your own.

Pros: Higher profits, more control, more feedback.

Cons: Requires more capital and management time.

Indirect exporting: Engaging an intermediary, such as an export-management company (EMC) or export-trading company (ETC), which acts as your “export department” and assists with all aspects of the transaction.

Pros: Because EMCs and ETCs usually have years of experience in a particular market or industry, you gain faster exposure with fewer resources from your company.

Cons: Loss of control over marketing and service, which ultimately can hurt your company’s name and image. Profits are usually lower because of price discounts to the intermediary.

Licensing: Allowing another company to use your intellectual property (product, trademark, process) for compensation — either a lump sum or ongoing royalties.

Pros: Like indirect exporting, licensing also allows you to test international trade without investing major capital or management time. Because the licensee is a local company, licensing can help sidestep a “closed-market” mentality in another country.

Cons: Marketing control shifts to the licensee, so you don’t learn as much about your customers. You could also be creating overseas competitors in your licensees.

Franchising: Licensing your business practice. This gets tricky because franchising requires standardization, yet you must still adapt to local markets.

Pros: Similar to licensing, foreign governments are often more receptive to franchising; they don’t see franchisees as a threat to their local economy.

Cons: Less control, difficult to terminate and less protection. Local competitors may duplicate your practices — without punishment from their government.

Piggyback exporting: Another company with compatible products and an export distribution system already in place sells your product overseas.

Pros: Quick access to foreign markets with relatively no costs. It offers the company that’s taking you to market more diversity and clout.

Cons: Less control, less learning and lower profits.

Direct exporting is considered the broadest avenue to international trade. Though riskier, it offers higher profits and the greatest opportunity to learn and react to that knowledge. Yet your specific strategy will vary depending on your business objective. Sometimes licensing or piggybacking may be the only way you can enter a country, especially if the government is trying to protect local industry.

First things first

Market research can make or break you. Fortunately, the Web has made it easier for small companies to access information.

Two places to start: the Department of Commerce’s (DOC) International Trade Administration and the Small Business Administration’s Office of International Trade. Many Small Business Development Centers offer export counseling; some even specialize in overseas trade, such as theInternational Trade Center SBDC in Dallas.

At some point you have to travel overseas. Case in point: One U.S. recording company thought it had an untapped market in the Middle East after seeing statistics on sales of tape recorders. The company invested significant capital to export its tapes, only to discover later that consumers weren’t buying pre-recorded music; they bought blank cassettes to tape music from the radio.

Go into as many segments of the sales channel as possible: Talk to wholesalers and distributors, and visit stores if your product is sold at retail. Attend trade shows — not necessarily as an exhibitor, but to see what’s going on. Find out who your competitors are and how they are positioned in that market.

Working with reps

If you export directly, you need overseas representation — someone to scout buyers and make sure they’re credit worthy. There are typically two options:

  • Distributors — who take title to your goods and resell them for a profit. Because they maintain inventory of your products, buyers can get goods quickly.
  • Sales reps or agents — similar to a U.S. manufacturer’s rep, this external salesperson handles noncompeting lines and receives a commission.

Entrepreneurs often prefer distributors because they carry fewer lines and typically concentrate on a particular industry. Ownership, however, is another factor.

“In my opinion, agents aren’t as motivated to sell because they don’t take title to your goods,” observes Bill Neal, co-founder and vice president of international sales at Poly-Flex Inc., a Grand Prairie, Texas-based manufacturer of liners for environmental control and water-conservation facilities. Founded in the mid-’80s, Poly-Flex began exporting in 1988; today international customers generate more than 20% of the company’s annual sales, which total about $25 million. “Agents act more in their customers’ best interests, whereas distributors act more like partners,” says Neal.

Be careful before you enter into any agreement, for contracts can be difficult to break in other countries without significant compensation. In the Middle East and South America, you must give three- to six-months notice before you cut a representative loose.

Financial standing is an important issue to address up front. Make sure they have the wherewithal to represent your company.

Other considerations: What other lines are they selling? Do they have the time and muscle to represent you? What kind of influence do they have in the market? (Agents and distributors also act as facilitators and can help with various cultural and government issues.)

A good starting point for finding prospective partners is to use the DOC’s international partner search and “gold key” service (www.usatrade.gov). Other sources include foreign chambers of commerce in the United States and U.S. chambers of commerce overseas.

A couple of caveats: Don’t pick an agent or distributor just because they speak English. That could be the worst choice for your product. Also, don’t grant exclusive distribution rights until the intermediary has proven itself — and then only for a specific period of time with an option to renew.

“Establish a joint-marketing plan with your distributors,” advises Neal. “Determine not only sales quotas, but policies so they know how to handle product complaints.

“It’s also important to talk on a regular basis,” Neal adds. “You can do a lot with e-mail, but I try to talk over the phone with our distributors at least once a month. E-mail tells you some facts, but it doesn’t give you a sense of their feelings — I want to hear the tone of their voice.”

Other international pointers

Freight forwarders are another major player in the export game and act as your agent in shipping cargo to an overseas destination. Familiar with import-export regulations in the United States and other countries, they can advise you on everything from mode of transportation to what to include in letters of credit. Freight forwarders tend to specialize, so make sure you pick one with experience in your industry.

Documentation. The paper chase can be daunting, but it’s become a lot easier in recent years, especially with standardization strides in the United States and Europe.

Take care with your shipper’s export declaration; it contains much of the information used for other documents. Get the correct Harmonized System code number — not only for the United States but also your destination country. The Harmonized System provides a universal classification system for tracking goods, but other countries interpret codes in different ways: in the United States, an Ace bandage is classified as elastic, but Mexico classifies it as an orthopedic device. Using the wrong number could affect your tariffs.

Financing. Find a bank that is knowledgeable in international trade — not all are.

One of the most secure forms of payment is a letter of credit. Next to payment up front, it offers the least amount of risk for exporters. But be careful what terms you include. Payment depends on compliance of all documents; the fewer terms specified, the better for the exporter. Even if nothing goes wrong with the shipment, if there are any inconsistencies in documents, you won’t be paid until your buyer waives those discrepancies.

It’s easier to require payment in U.S. dollars so you don’t have to deal with foreign exchange rates. Yet customers will probably want to pay in their own currency, and competition may force you to comply. One way to protect yourself against changes in exchange rates is through forward contracts, which allow you to lock in a price.

Legal issues. Get legal counsel up front. Touchy areas include:

  • Kickbacks. Bribes and kickbacks may be common practice in other countries, but U.S. companies can’t engage in any activities prohibited under the Foreign Corrupt Practices Act. If caught, you may incur serious penalties.
  • Intellectual property. In the United States, you have a year to file a patent from the time you invent something. However, in other countries, you have to file right away. Ditto for trademarks; just because you’re protected in the United States doesn’t mean you’re covered in another country. What’s more, other governments are not as vigilant about enforcing IP laws, which means you must find ways to protect yourself against counterfeiters.
  • Internet. If you’re engaged in e-commerce, be aware that privacy laws are much stricter abroad than in the United States.

An encouraging word

International trade is complicated, but not impossible. Americans are used to risk and reward being closely linked — the greater the risk, the greater the reward. With international trade, it’s important to remember that those variables are initially inversed. Your risk goes up, and there might not be any reward. But once you get over the rough patches, the potential for growth is far greater than in domestic markets.

Writer: TJ Becker