- Posted by Brent McNiven
- On January 18, 2017
What if Everything You Tried Didn’t Get You Past Go?
A chance meeting with a group of potential exporters, led to a spirited discussion on how to best enter export markets. It quickly became apparent that management were flying blind, were planning for markets that no longer existed, and seemed to forget that if you want to catch the fruit, you must first get under the tree.
Drilling down determined the fundamental problem: management were not willing, or able, to apply the same strategies and operating methods that had made them successful at home, to export markets.
Begging the questions:
So what has changed and why are so few of Canada’s SME exporting?
Why do they try to manage offshore markets differently than home markets?
Where are the best opportunities for growth – i.e. where is the tree ?
Canada’s Exportation Evolution
Canada’s exporters underwent two powerful shocks, plus a pronounced transition from goods to services, that combined to radically change how Canadian SME export value added products.
The Haves and Have Nots:
Enabled by Globalization, Canadian exporters had separated into two distinct camps by 1995; those with Global Value Chains (GVC) that saw massive offshoring to Foreign Affiliates and focused on services and knowledge intensive manufacturing, and those without GVC who were limited to exporting goods from Canada. Exports sales by Foreign Affiliates now account for over 50% of Canada’s value added exports, and are growing at than twice as fast as export sales from Canada.
Money Talks – Trade Walks:
The second shock occurred 2000-2009 when the high dollar forced an estimated 20,000 manufacturing firms to shut down, with a loss of about 500,000 jobs. Local actors in the former export markets quickly dominated their sectors, and became sophisticated competitors. Manufacturing clusters employing millions of workers in automotive and aerospace manufacturing, ICT, agriculture and chemical industries sprung up, forming tightly integrated supply chains that insist on local supply and service, effectively excluding foreign based exporters.
Leaving On A Jet Plane? Not Without A Work Visa:
In 1995 goods still dominated Canada’s (and World) trade, but by 2008 services accounted for about 50% of Canada’s exports. Unfortunately, exporting services means either moving people who have the IP in their heads, or by establishing autonomous Foreign Affiliates and transferring IP. Since 2004, exporting technical and professional services from Canada has faced increasing difficulty in obtaining the necessary visas (often nearly impossible) and from competition from rapidly advancing local competitors who are invariably cheaper, and often are offshore divisions of Canadian firms.
From Widgets to Services:
Manufacturing has also moved away from transactional finished goods, to value added (knowledge intensive) products, that include offering services and maintaining a relationship with the customer for maintenance, upgrades etc. Those firms that established GVC have prospered, and a primary reason is that they have developed solid local customer relationships, whereas Canada based exporters have seen a general decline.
Exactly Where is The New Frontier?
Canada holds no compelling advantage in any value-added sector, however many Canadian products and specialized technical and professional services are competitive and in demand. Exporters have been successful, but most had to leave Canada and set up Foreign Affiliates to do so.
Canada is a world leader in Integrative Trade, with well over $800 Billion in Canadian Direct Investment Abroad (CDIA), and we would argue that Canada’s most successful exports are corporate divisions or even entire companies, and not the products they produce.
This offshoring strategy has paid off, as since 2004, Foreign Affiliate sales in Services have grown by about 86%, adding over 200,000 new jobs offshore.
Over 2,500 examples of Canadian Foreign Affiliates in Mexico alone clearly demonstrate that exporting goods from Canada is not a path to growth. In fact, exporting goods from Canada declined by 7% over the same period as manufacturing growth from Canadian Foreign Affiliates grew by 20%, and these trends expected to accelerate.
Market intelligence is critical, however on its own is dangerous without the cross cultural context that drives each market. Realistically, the only way to get unfiltered market intelligence in context is to have a credible local presence in each export market, capable of establishing and maintaining relationships, and obtaining and responding to change in real time.
How Can an SME Ensure a Successful Launch?
Critical Success Factor.
A firm’s success is directly dependent on their ability to operate in their home environment, combined with expert knowledge of their sector: the product itself is secondary. When a firm exports without a Foreign Affiliate it no longer enjoys home field advantage: it is a start-up severely handicapped by the lack of expert local knowledge, networks, brand awareness, market intelligence and particularly of the culture(s) and language(s).
Plot Your Course: Get a Good Map
Proven, affordable methods exist to 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. Further, we find that few will undertake the systematic and quantitative market analysis needed to develop appropriate strategies.
Four New Global Realities
Foreign Affiliates replicates 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, plus leveraging overall lower costs available in the offshore market.
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 could be competitive if they created Foreign Affiliates and GVC.
Exports of goods to the USA is in long term decline, and is projected to be less that 50% of Canada’s manufactured goods exports relatively soon. Many of the estimated 40,000 SME exporters currently focused on the USA will need to pivot, and sell to emerging markets.
Customers expect that a supplier will become part of the supply chain, provide a range of value added services, and will usually exclude those without bespoke Foreign Affiliates from bidding on procurement contracts, or becoming part of integrated supply chains.
Domestic Competitors: How Fast Can They Grow to Dominate Their Markets?
Expat Boom to Domestic Dominance:
When new markets, or market sectors open to development, it creates a “boom” period of expansion that is often dominated by foreign firms, at least until the domestic competitors can ramp up their capacity. In some countries, such as Nigeria or Angola that have limited domestic capacity, foreign companies generally continue to dominate, whereas in Mexico, Colombia, Peru, and Chile, domestic firms soon develop capacity and push foreign firms out. Note that a local division of a foreign firm (FDI) is considered to be domestic.
Looking at mining, Venezuela opened in 1992, expats rushed in but by 1995 all the expats were gone, Chile opened around 1990, and thousands of expats flooded in to provide services, but by 1997 were gone. Peru opened in 1995 and by 1998 the mining and petroleum related expats were gone. Colombia’s petroleum industry had been largely ignored by outside firms, and did not so much open as was developed organically by the influx of highly skilled senior Venezuelan engineers pushed out by the Chavez Regime.
Domestic Competitors: Developing Fast:
Mexico is continuing the trend towards increasingly rapid dominance by national firms, particularly in services and high end, sophisticated engineering functions, many of which are being delivered by Venezuela, Colombian and Mexican engineers who have spent over 10 years in Canada and the USA, and are now moving to Mexico. These engineers are starting new firms, but also forming new divisions of existing, very well funded and connected, and can count on almost infinite resources to help them compete.
The future of the Latin American market is clearly that highly experienced and competent Latino engineers are more than capable of dominating the entire sector, however for the next 1-2 years a window of opportunity exists whereby Canadian services and engineering firms can establish local divisions and – if managed correctly – can be come strong competitors. History has clearly demonstrated that only those firms that have established credible local presence by dedicating the necessary resources and become serious local players will compete, and those firms attempting to compete from “outside” will find themselves pushed out the market.
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 straight forward.
Customers Are Plentiful:
Manage your offshore markets the same as 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 was that during a business development initiative that leveraged personal networks found to already exist in a Latin American office, over 50 opportunities in high demand sectors were generated and confirmed in less than 8 hours of research, or another instance where sales were increased by over 500% in less than 120 days for an all-in cost of under $2000. These results are typical and readily achievable but as always, appropriate preparation and planning are key, and can only be accessed by firms with a strong local presence.
Bottom line is open a local office, staff it with the “right” people, invest in creating an autonomous operating ecosystem, and you should do well.
Opportunities: Unlimited if a Local
You Can’t Get There From Here:
Empirical evidence perhaps, but with 10’s of 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 – it is that exporters are not positioning themselves properly to access them. This market cannot be accessed from Canada.
Start with a comprehensive, cost effective Market Analysis to give management the information needed to make strategic decisions, follow it up with a Business Plan, and then decide where to launch. Keep in mind that TCS has up to $99,999 in matching grants for business development, and BDC can offer expansion loans up to $150,000.
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, and we have seen many examples where costs were up to 80% less than maintaining a full time international sales rep. Manufacturing and larger firms 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 staff. This makes people uncomfortable and challenges strongly held personal and professional beliefs. A simple benchmark is that if executive / management are comfortable with opening offshore divisions, they are hiding from reality.
The world of trade has matured, and countries that were once decades behind in their ability to develop local capacity, have become sophisticated and aggressive 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 as at home: not different.
With this in mind, we suggest that establishing a Foreign Affiliate become the default strategic starting point when considering export markets.
Chasing the Chain: Canada’s Pursuit of Global Value Chains
D. Koldyk, L. Quinn, T. Evans, 2015. http://irpp.org/research-studies/aots6-koldyk-et-al/
Statscan: Decade of Change in Canadian Manufacturing Exports 2002-2012,
Canadian Manufacturers and Exporters: www.cme-mec.ca various pages
ProMexico www.promexico.gob.mx various pages
Conference Board of Canada www.conferenceboard.ca/ various pages