Chapter 4 - 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:

• conducting market research to determine the bestforeign markets for your products;
• attending trade shows and promoting your productsoverseas;
• assessing proper distribution channels;
• locating foreign representatives and/or distributors;
• arranging export financing;
• handling export logistics, such as preparing invoices,arranging insurance, customs documentation, etc.; and
• advising on the legal aspects of exporting and othercompliance matters dealing with domestic and foreign trade regulations.

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:

• Your product gains exposure in international markets --with little or no commitment of staff and resources from your company.
• The EMC/ETC's years of experience and well-establishednetwork of contacts may help you to gain faster access to international markets than you could through establishing a relationship with a foreign-based partner.
• Using an intermediary lowers or eliminates your exportstart-up costs, and, therefore, the risks associated with exporting. You can negotiate your contract with an EMC so that you pay nothing until the first order is received.
• Your intermediary will guide you through the exportprocess step-by-step. Over time, you will develop your own export skills.

Some disadvantages of exporting through an intermediary include:

• You lose some control over the way in which yourproduct is marketed and serviced. Your company's image and name are at stake. You will want to incorporate any concerns you may have into your contract, and you will want to monitor closely the activities and progress of your intermediary.
• You may lose part of your export-sales profit margin bydiscounting your price to an intermediary. However, you may find that the economies of scale realized through increased production offset this loss.
• Using an intermediary can result in a higher pricebeing passed on to the overseas buyer or end-user. This may or may not affect your competitive position in the market. The issue of pricing should be addressed at the outset.

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:

• What is the company's history and what are the qualifications and backgrounds of the principal officers?
• Does the company have adequate trained personnel, facilities, resources to devote to your business?
• What is their current sales volume?
• What is the size of their inventory?
• How will they market your product (retail, wholesale or direct)?
• Which territories or areas of the country do they cover?
• Do they have other U.S. or foreign clients? Are any of these clients your competitors? It is important to obtain references from several current clients.
• What types of customers do they serve?
• Do you publish a catalogue?
• What is their sales force?

When you have this background information and are comfortable about proceeding, then obtain a credit report about their financial position. DOC's World Trade Data Reports (WTDRs), available from your local District ITA Office, are compiled by US&FCS officers. A WTDR can usually provide an in-depth profile of the prospective company you are investigating.

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 5, "The Export Transaction."

Next: Chapter 5 - The Export Transaction