Exporting: How Do I Go About Exporting?
And how can your small business minimise the risks of going global?
Companies always face a degree of risk when they decide to start exporting; and smaller businesses, without considerable in-house resources, may feel particularly exposed. But the rewards for those who compete successfully are considerable. This guide starts by considering the benefits of international trading, then takes you through the stages of assessing your own company’s export suitability, identifying and selecting potential markets and describing the first few practical steps you will need to take. It also points you towards the many sources of advice available to British exporters.
An increasing number of companies are driven to consider exporting because of increasing globalisation or the new trading opportunities that the Internet has provided. In truth, there are many and varied reasons for a company to start exporting. Benefits include:
- Increasing your revenue and profitability by expanding your business – often the most obvious reason to export your goods and services.
- Protection from local market fluctuations. A downturn in one country’s or even continent’s economy is not usually replicated worldwide. The wider the base that you take business from, the better.
- Stabilising your annual workflow. Many businesses experience seasonality if they concentrate on only one market, but this effect can be lessened by broadening your horizons, e.g. selling your summer-friendly products in hotter climates throughout the winter period.
- Finding a market for your product. A failed product in the UK may be a great success elsewhere.
It is frequently argued that selling overseas is less profitable than selling to the home market. Although it may be true that your profit per unit or service sold may decrease with your expansion, it is also true that many businesses are considerably more profitable overall because they have expanded beyond the UK.
Is my business right to export?
Your considerations here can be split into two categories. The first are specific to your own company and its current circumstances; the second examines the international position of your industry.
The first thing your company needs is an effective export strategy that complements your overall business plan.
Commitment to exporting must be evident throughout your company – your vision should have a truly international perspective.
Ask yourself the following questions about your business:
- Are your UK sales increasing and profitable? Most companies that move to successful exporting are already a success at home.
- Do you have the financial reserves for export market development?
- Are you receiving a lot of overseas enquiries about your product? This can certainly suggest a demand.
- Do you have the production capacity/human resource to meet an increase in demand?
- Does your product fulfil the necessary overseas regulations and standards? If not, your capital outlay will have to be reviewed.
- Are any UK companies already exporting your product?
Ask yourself the following questions about your industry:
- Are any of your current UK competitors exporting?
- Do any of your trade association reports recommend exporting?
- Are similar products to yours being imported from overseas for sale in the UK?
Only you can make the final decision about your suitability or readiness for exporting but lots of help and advice is available to help you reach that decision. For example, on the UK Trade & Investment’s (UKTI) website you can find a self-diagnostic exercise to help you to identify your suitability.
Selecting the right market
The whole world is a potential market or series of markets, of course, so the skill lies in analysing which opportunities offer the best chance of success, bearing in mind your company’s capabilities and resources. Market research is the key to identifying prime foreign markets for your services.
The key differences between markets can be summarised under the following headings. There are some questions included to help you start to think through the issues:
- How is the population made up? Is it growing or declining?
- What is the state of economic development?
- Are there incentives for foreign investment or import restrictions?
- What is the balance between public planning and free enterprise?
Political and social factors
- What is the political system of that country? Is it stable?
- Are there any other strong influences (e.g. military, religious)?
- What is the Government’s attitude to free trade?
- What are its monetary/credit policies?
- What is the administrative set-up (e.g. efficient or bureaucratic)?
- What is the trade union situation?
- Is bribery or corruption commonplace?
- What are the general cultural influences (e.g. tribal, religious)?
- How is the population’s personal expenditure divided – how much goes towards food, housing, leisure etc?
- Are there any current trends in spending patterns – such as a change in how money on leisure activities is spent?
- What is the trading pattern?
- What are the distribution methods?
- How are either of these changing?
- What legislation exists to affect your manufacture or trading (e.g. on trading methods, company structure or performance)?
- Are there any restrictions on advertising and promotions?
(The Useful contacts section at the end of this guide will show you how to source this key information.)
Many successful exporters identify and target a small number of key markets. Start by looking for close markets with low entry barriers. Market visits enable you to experience and adapt to the local cultural environment and help you understand how to conduct business in an area. Trade exhibitions can bring you into contact with potential representatives and discuss a market’s merits with other exporters.
How do I get into the market?
There are four main ways that you can sell your products overseas:
1. From your home base
This usually occurs in the following situations:
- Where each customer’s requirements are different and a high degree of custom-building is needed.
- Where only a small number of orders, usually at a high value, are expected.
- Where customers are very thinly spread throughout many different countries.
2. Using overseas agents/distributors
Using a retail/distribution specialist in your selected area/s has a number of obvious advantages, not least that they shoulder a good deal of the overseas legwork. The key to making such partnerships a success lies in the pre-agreed contracts you draw up, clearly defining the division of key responsibilities and the channels of communication between you. Many companies have found that the success of a distributor can be directly attributed to their commitment to the product. You need to be aware of the other commitments of your agent or distributor and spend a good deal of time ensuring they understand and appreciate the benefits of your product/service.
3. Having an overseas sales base
This requires a significant commitment to one country or area. It often happens when sales are very high for a specific reason in that country or area.
4. Licensing Agreements
This is where a local business produces and sells your product and is used when this appears to be the only way of ensuring profitable returns from an area. Many developing countries insist on the highest possible level of local manufacture as this represents the best long-term commitment to the region.
What is critical?
Research and planning
Both have already been mentioned in this guide but the advance planning and research required prior to implementing your exporting strategy cannot be too heavily stressed.
Research doesn’t have to be expensive, nor does it all need to be originated by you. There is a great deal of publicly available data which you can access yourself. For example, governments and international trade bodies publish reports that could answer some of your questions. A few words of warning though – check the date of the report, find out how many people were interviewed for any research (and who they were) and, finally, try to establish why the research was conducted in the first place. This may be free information, but to be of any real use to you, it needs to be relevant, recent, accurate and objective.
If you do find that you need to conduct some research of your own, be very clear about what you want to achieve.
The costs will mount up if you try to achieve too much.
Among other things, your research musTelephone:
- assess the current potential for the sale of your products/services in export markets,
- let you identify and target a small number of key markets,
- assess the level of competition in the export markets,
- determine the need to modify your products/services for export,
- inform you of your barriers to entry in your selected markets (e.g. import restrictions, national standards)
Successful planning ensures that adequate resources are available over time to develop your export market/s.
Your business plan is critical for gaining any additional funding required for export-led growth.
Your export plan should be continuously reviewed and updated as you must always be ready to respond to, and exploit, new opportunities.
Minimising the risks
- Your product must comply with all the relevant regulations and standards set by the countries you are exporting to. You may choose to introduce changes yourself, eg introducing cheaper materials for a different marketplace. Any modifications will affect your budget.
- A move to exporting often leads to changes in manufacture and supply. You need to be vigilant about maintaining standards if you transfer any manufacturing overseas or grant an overseas licence that includes production. You should always ensure that your designer’s specifications are strictly adhered to.
One very obvious implication for your product arises if you are exporting to countries with different languages. Your packaging, product literature, advertising and point-of-sale material will all need a re-design. You may also need to review all of your marketing communications materials for other English-speaking countries because of cultural differences. An example of this is if your advertising relies on irony – the American market may have a different sense of humour and so not respond very positively.
A key risk for exporters is that your customers will fail to make prompt (or any) payment. It is vital you protect yourself against this. Measures include:
- Insuring against non-payment of export invoices with a specialist provider or arranging for your bank to take over the risk (e.g. discount your export sales ledger).
- If you have the slightest concern over your potential customers’ ability to pay, try to negotiate payment up front; or, if it is a big project you are working on, at least ask for stage payments. If you know your buyer well, you could arrange an open account whereby you invoice and they pay you within a stipulated timeframe. You could also consider a collect-on-delivery arrangement with your customers, which gives you more security until you are able to establish a relationship. Alternatively, ask for a Letter of Credit from the customer’s bank – which effectively means their bank guarantees the payment. Beware, however; that over 50 percent of letters of credit are turned down when first presented to a UK bank, usually because of documentation failures. If you require further reassurance on a customer’s financial security, The British Chambers Of Commerce can help trace companies in the UK and worldwide. For a small fee, it can also conduct press searches on companies or personalities, and can provide credit ratings or in-depth financial accounts for a UK or international company.
- Ask your suppliers for extended terms while you are trying to develop demand from overseas and establish a trading pattern.
- Familiarise yourself with settlement terms as they vary greatly from country to country (e.g. 30-60 days in Germany and Norway, 90-120 days in Greece and Turkey, and 120-150 days in Uzbekistan).
- Take advice about what the norm is in the markets you move into and protect yourself as much as possible in any pre-agreed partnership contracts. In general terms, Western Europe operates on an open account basis, whereas Eastern Europe tends to use letters of credit.
- The Export Credit Guarantee Scheme (ECGS) is operated by the Government in countries that the private sector is unwilling to touch.
Above all, if you are in any doubt, you should seek professional advice to help you manage your credit. The British Chambers of Commerce can point you in the right direction.
Exchange rate risk
Exporting obviously makes you prey to exchange rate fluctuations.
There are a number of ways you can protect against currency fluctuations, including:
- If you match your income received in a particular currency by your expenditure in that currency, you can offset any adverse financial implications.
- Another rising trend of UK exporters is to borrow money in the currency of the country to which you are exporting – this is particularly effective in the Eurozone (the 12 countries participating in the euro) with its low interest rates.
The British Chambers of Commerce can advise you on getting help to manage your exporting finances.
Sustained export success is dependent on mastering international trade procedures. Investment in training and computer software may both be needed to aid your management of trading (and payment) processes. What you are exporting and where it is going obviously determine the kind of procedures you need to employ, but key procedures usually include:
Chambers of Commerce offer advice and training courses on paperwork for the movement of goods. Certificates of origin are often required to meet customs and quota requirements in the importing state, and the Chambers of Commerce are the designated authorities for the issue of EU certificates of origin. The service is available to all businesses in the UK at a reasonable cost, although Chamber members receive beneficial rates.
The movement of your goods will play a key role in facilitating your global commerce. To ensure the mode of transport and packing is best suited to your product, first-time exporters can discuss their plans with their local Chambers to check that they haven’t missed anything.
You can get help with the packing and shipping of your goods from a forwarding agent. Finally, your goods should be insured. Although there is no legal obligation to do so, it is generally advisable. Marine insurance is a general term used to describe cover against damage and loss for goods while in transit. Policies will also cover road, rail and air freight.
Governments control the export of goods and technology primarily to control the transfer of arms. This includes many items designed for civil use but termed ‘dual-use’ because they could be used for military purposes. These items include:
- machine tools,
- electronic equipment,
- telecommunication equipment,
- related components and spare parts.
The licenses are controlled and issued by the Export Control Organisation (ECO) of the DTI. It is vital that if you are in any doubt of your need for a licence that you seek legal advice, irrespective of the destination of your goods.
For some companies, international expansion that is reliant on third parties could compromise the overall strategy of a successful business.
FatFace is a leisurewear company founded in 1993 by Tim Slade and Julian Leaver. It is known to be a dedicated and growing clientele of sports enthusiasts in the UK where, in 2000, it achieved sales of £8.5m.
FatFace has started to expand both in the UK and overseas. The company has already opened three stores in France, but global expansion presents a particular challenge. Seeking distributors to wholesale the product, the most conventional route to global growth isn’t an option for FatFace. The company cannot compromise its core values because its reputation is based on the quality of its product and the retail experience. The brand has a cult status in the UK.
Julian Leaver comments,
‘We could easily be in every ski shop, surf shop and department store inside a year. Within two years, we would have trashed the brand.’
So FatFace are resourcing their expansion plans in-house by setting up their own international stores. This is a very capital-intensive rollout strategy, which means they have to be very sure of a market before they can make a move. Market research has become the foundation of its global expansion plans.
UK Trade & Investment (UKTI)
The Government network dedicated to building British business success overseas. Its website www.ukti.gov.uk has lots of invaluable information for exporters and gives details of tailored market information reports that can be compiled by embassy commercial staff on a particular market.
Telephone: 020 7215 8000
Chambers of Commerce
Accredited, independent local chambers funded by subscriptions.
Telephone: 020 7654 5800
British International Freight Association
For help with packing and transport procedures.
Telephone: 020 8844 2266
Institute of Export
Charitable organisation whose main aim is to raise professional standards in international trade through professional education and training.
Telephone: 01733 404400
This business advice article published in association with Lloyds TSB.
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