Original article appeared in Trade Ready 27/04/2016 By: Brent McNiven, CITP|FIBP
A firm’s success is directly related to their ability to operate effectively in their home environment, and that core skill combined with expert knowledge of their sector means that the product(s) they sell is often secondary to success.
Exporters without a foreign affiliate no longer have a home field advantage, and exchange their strong position to become a start-up often severely handicapped by the lack of expert local knowledge, networks, brand awareness, market intelligence and particularly of the culture(s) and language(s).
Proven, affordable methods used by successful exporters for decades easily overcome this handicap, but experience has shown that (too) many potential exporters still just want to sell surplus capacity, or temporarily offset declining domestic sales, and are not prepared to undertake the systematic and quantitative market analysis needed to develop appropriate strategies, or build in-house capacity to support international sales.
4 new global realities
1. Foreign affiliates replicate the home field advantage of being close to the customer, participating in integrated +/- JIT supply chain, gaining critical intelligence by being part of a cluster, and leveraging lower costs available in the offshore market.
2. Research indicates that only a small percentage of SME exporters would be competitive exporting goods from Canada, and even fewer will achieve significant growth. However, a much larger percentage would be competitive if they created foreign affiliates and GVCs.
3. Exports of goods to the USA are in long-term decline, and are projected to comprise less than 50% of Canada’s manufactured goods exports relatively soon. Many of the estimated 40,000 Canadian SMEs currently focused on exporting to the USA will need to pivot, and sell to emerging markets.
4. Customers expect that a vendor will become part of the local supply chain, provide a range of value added services, and will usually exclude those without bespoke foreign affiliates from bidding on procurement contracts. In many cases, firms without foreign affiliates will be systematically exuded from government procurement.
Growth: Get under the tree to catch the fruit
“Customers are hard to find” and “we don’t know where to start” are common complaints from prospective exporters. In our experience, if done right, business opportunities and customers are plentiful and relatively easy to find. And getting started is also straightforward.
Customers are plentiful: Manage your offshore markets the same way you do at home and it will quickly become obvious that finding customers is the same everywhere. Your personal and corporate networks and relationships are critical, and all are impossible to establish and maintain from a distance. A good example comes from an international business development initiative that leveraged professional networks and where over 50 opportunities in high demand sectors were generated, and confirmed, and meetings arranged in less than 8 hours of work. This result was not exceptional and equivalent outcomes have been generated in other instances.
Open a local office, staff it with the right people who can dedicate over 2000 hours per year in business development and replicating the ecosystem that you enjoy at home. If you have done your homework and your products are competitive, you should do well.
Opportunities: Unlimited if you are a local
Let’s just look at some “big picture” stats for Mexico. The opening of its petroleum production and distribution, and electrical generating and distribution sectors, will require that two national support and service industries be created almost from scratch, and will need to be built in years, not decades. Petroleum investment will be rapid, and planned production will ramp up to exceed Alberta (4.5Mb/d), along with the related services, specialized manufacturing and fabrication, infrastructure installation, upgrading, engineering, controls, and miscellaneous service (assuming, of course, that Mexico’s development proceeds as planned).
Over US$25 billion in automotive investment was announced and is under construction, in an industry that already employs >700,000 workers.
Their ICT sector is growing at about 14% per year (about the same rate as Canada’s is shrinking), and is now a world leader in video game and software development, employing >650,000 workers.
You can’t get there from here:
Empirical evidence perhaps, but with billions of dollars in investment in the near term, explosive growth, and huge quantities of qualified and affordable technical talent in Mexico alone, the problem is not that there are a lack of opportunities. The problem is that exporters are not positioning themselves properly to access them as most demands tight supply chain integration and only limited access is possible without having a local subsidiary.
Start with a comprehensive, cost effective market analysis to give management the information needed to make strategic decisions. Follow it up with a business case, develop a business plan, and then decide where to launch.
The leadership challenges in becoming local
Launching a new enterprise in a foreign country used to be difficult, slow, and expensive. Now, it is often possible to start a new sales and/or professional services office, staff it, and be operational in as little as 10 weeks. We have seen many examples where costs were up to 80% less than maintaining a full time international sales rep. Manufacturing and larger firms do take longer to set up.
The greatest difficulty we encounter is that international expansion requires transformational change that will impact every aspect of an SME, and perhaps the most difficult is accepting the home office will invariably shed functions and possibly staff. This makes people uncomfortable and challenges strongly held personal and professional beliefs. A simple benchmark is that if the management team are comfortable with developing export markets, that usually result in creating offshore divisions, they are hiding from reality.
The world of trade has matured, and countries that were decades behind have become sophisticated competitors. In this new global reality, the proven road to growth is to develop global value chains, establish autonomous foreign affiliates, and become an integrated part of the local markets. In other words, manage the export market the same way as you do at home, not differently.
With this in mind, I suggest that establishing a foreign affiliate should become the default strategic starting point when considering new export markets.