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Feb 1990

Exporting opportunities for small and mid-sized companies. (Accounting for International Operations)

by Neubelt, Paul E.

    Abstract- Small and medium-sized businesses in the manufacturing and services sectors can exploit exporting opportunities by focusing on niches overlooked or ignored by large companies. Companies can adopt one of three export strategies: indirect exporting, using domestic intermediaries such as an export management or trading company; direct exporting, in which the company handles all its own financing, licensing, marketing, and shipping; or joint ventures, a licensing agreement between the company and a foreign company in which costs, rights, and profits are shared. To be successful, companies must adapt products to foreign tastes, thoroughly understand the legal aspects of the business ventures, and secure expert advice.

Exporting opportunity is knocking on the doors of America's small and mid-sized companies. However, many owners have vet to capitalize on this significant chance for growth, due to misconceptions about what it takes to successfully market abroad.

Are false impressions about foreign trade keeping your clients from exporting too? Don't be misled by the three biggest myths: 1) only multinational corporations have the necessary capital and global reach to run a profitable export business; 2) only manufacturers have something to export; and 3) overseas demand for U.S. exports is currently being met. There will be room for all players who know the rules. The Benefits of Being Smaller

When it comes to exporting, small and mid-sized firms have the capacity to act quickly and gain a competitive edge. They also can focus on areas that larger companies often overlook or do not wish to compete in, such as specialized machinery, computer software, and one-of-a-kind consumer goods in addition, top management of smaller companies are often more willing to commit long-term to a specific market, while their multinational counterparts may need rapid investment returns and higher initial profit margins to justify continued operations in selected foreign markets.

Finally, owners of small and medium-sized businesses with plans to export should not be intimidated by financing. The capital required to get started can be much less than imagined. Sources of financing include commercial banks, the Small Business Administration, and state and local export financing programs. Yet, a recent studs, sponsored by a group of mid-sized, internationally-oriented companies found that money isn't the key to exporting success-it's the time and commitment of management, exactly the qualities that characterize entrepreneurial ventures.

Room for Growth

According to a survey commissioned by my firm, four out of ten owners of mid-sized businesses state that they are currently exporting, while an additional 20% of the respondents sax. they would like to start exporting soon. Experts believe many more could be exporting profitably.

What's more, manufacturing companies are not the only businesses that stand to benefit from exporting. Companies in the services industries make up the fastest growing sector of the global economy. Services currently constitute a quarter of world trade, and the U.S. is the largest supplier. Many service industries, such as private global communications networks, have been thriving in the international marketplace since the 1970s.

Is Exporting Worth It?

Here are some of the reasons why exporting may be right for your clients:

Increased profits. Selling goods overseas can be an effective waN,, for businesses with under $40 million in revenues to leverage earnings. The value of the dollar measured against most major currencies gives U.S. firms an opportunity to price their products competitively and reap substantial profits from overseas sales.

Increased plant efficiency. Although the cost of raw materials increases with additional production, fixed costs remain constant. With greater output, these fixed costs are distributed over a larger proportion of goods, thereby decreasing the individual cost per unit. Increased plant efficiency improves price competitiveness overseas and at home.

Tax incentives. Tax breaks are an added bonus for selling goods and services abroad. A small or mid-sized company meeting certain requirements can establish itself as either a Domestic International Sales Corporation (DISC) or a Foreign Sales Corporation (FSC). As a DISC, the company's taxes are deferred; as a FSC, a portion of export profits will be exempt from taxation.

Competitive opportunity. Only 5% of the world's population lives in the U.S. American companies, with their domestic market chipped away by foreign manufacturers, should look to exporting as a way to take the offensive and expand their market base. This strategy could prove more critical after 1992 when the countries of Western Europe consolidate their economic markets and loosen their internal and commercial trade barriers with each other. At that time, U.S. firms can expect increased competition from European firms that are freer to market goods and services closer to home.

Increased product life. The opportunity to extend product life is another incentive. Goods nearing the end of their life cycles in the U.S. may, be relatively new in a foreign country. The strategy of extending the useful lives of products by cultivating new markets has long been a major factor contributing to the success of multinational firms.

Exposure to different business methods. First-hand observance by American executives of different marketing strategies, manufacturing techniques, and employee communication styles can improve their business approach in both foreign and domestic arenas.

What It takes to Go Global

To prosper overseas, your clients will need patience, commitment and capital. The amount of start-up money will depend on their strategy. Oftentimes, exporting does not require a significant share of the company's working capital. However, sufficient funding will be necessary to sustain the venture in the early stages.

If you believe one or more of your clients could benefit from a start- up exporting program, here are some guidelines designed to maximize their potential for success.

Where to Begin

First, they must decide which of the following exporting strategies to use: indirect exporting, direct exporting or a joint venture with a foreign company.

Indirect exporting. A firm using indirect exporting employs a domestic intermediary, such as an export management or trading company, to solicit business, arrange financing and ship goods. The advantage of this method is that it can save a considerable amount of time for top management. The disadvantage? Top management will not receive first-hand exporting experience that may be extremely valuable in developing long- term business plans.

Direct exporting. With direct exporting, a company handles all of its own market research, financing, export licensing, sales promotion and shipping. It does, however, hire an agent or a distributor to sell directly to consumers overseas. (A sales agent acts as a foreign manufacturing representative, while a distributor serves as an overseas retailer.) The plus side of direct exporting is that the company is highly involved in exercising control over various phases of the operations. The downside is that the intermediaries typically will have other principals, and will not solely promote your client's product or service.

Joint venture. With the joint venture option, a licensing agreement is drawn up between the U.S. exporting firm and the foreign company. Both share costs, responsibilities, rights and profits from sales of the product or service. Although your client will give up some control in the arrangement, it is likely to penetrate the foreign market more quickly and benefit from the expertise and reputation of the firm based abroad.

Adapting to Foreign Tastes

Once the market strategy is determined, the U.S. company owner must decide whether its product or service needs to be refined further to make it more appealing or to meet the specific needs of the foreign consumer. This could mean anything from changing the voltage of the product to translating the wording on the packaging. if the necessary adaptations are not made, the most sought after of commodities in the U.S. can fall flat on its face overseas. Consider the Legalities

Exporters must keep in mind the legal aspects of their ventures. Basic law of agency in European and Asian countries differs substantially from that of the U.S. Your agreement should consider currency fluctuations, among other items.

Since translations can alter interpretations of contracts, an official language should be agreed upon in the event that contractual terms become subject to litigation in either country.

Secure Expert Advisors

Legal considerations alone demonstrate how important it is to secure a team of advisors. other qualified professionals, including lawyers and financing agents can offer the company critical assistance with such unfamiliar concepts as trade restrictions and distribution requirements. The company will also need assistance in developing and implementing business plans that target its new exporting markets.

Management Must Become Involved

In addition to your help, and that of other experts, the personal involvement on the part of top management is key to a firm's overseas success. it is best for owners and other executives to begin their market research by visiting the foreign trade center. In many ways this can tell them more about a market than any amount of background data or secondhand advice. Management should establish a mechanism to continually monitor their new market(s). This will keep them abreast of subtleties in the overseas market and make sure their intermediary, is not lax in promoting the company's product or service.

Exporting Over the Long Haul

Due to the dollar's value overseas, small and mid-sized U.S. companies can price their products or services lower to gain foreign market share. Having a sound business plan, however, can help a firm survive and thrive in the future-changes in value of the dollar, both upward and downward, will continue in the future.

U.S. companies have a reputation for pouring goods into the international market (to dump excess domestic production) and then pulling out again when sales pick up at home. On this point American manufacturers can take lessons from their European counterparts who, rather than focus on domestic trading centers, think in global terms and do not quit foreign markets when currency values shift. This world view approach has enabled European firms to extend their trade pool far beyond the borders of their individual countries.

Adopting this international philosophy doesn't mean that mid-sized firms that export must lose out as the dollar appreciates. Rather, they can hedge their investments over long periods by adjusting with currency shifts. Multinationals typically do just that by moving production to foreign countries when the domestic currency grows too strong, thereby capitalizing on lower manufacturing costs abroad. instead of shipping finished goods, these companies ship parts and components to be assembled overseas.

However, achieving long-term exporting success goes beyond competitive pricing. Experts are now stressing what many have yet to realize; America's ability to deflate the trade deficit will hinge not only on product price, but also on product quality. Each wields its own power in overseas markets to attract and maintain demand. in fact, without high standards for exported goods, American firms will not be able to capitalize on favorable currency valuation differences. Top quality is a must for exporters. Well-made products can capture foreign market niches, generate brand loyalty, and ultimately weather harsher economic climates.

Exporting and the U.S. Economy

The beauty of exporting is that U.S. firms working individually to benefit themselves, ultimately benefit the American economy as a whole. Selling U.S. products overseas stimulates domestic markets as manufacturers employ greater numbers of workers and amounts of raw materials in production at home. in addition, domestic goods sold to foreigners generate the cash inflows from abroad that are so crucial to reducing our trade deficit.

It is precisely in these capacities that small and mid-sized firms hold the greatest promise for the U.S. economy. Giant multinationals typically import as much as they export. But middle market firms can plaNT a disproportionately significant role in narrowing the trade gap in future years.

The bottom line is that small and mid-sized firms have the capacity to be the new global pioneers-exploring and mapping new and untapped international territories for profit and gain.

Paul E. Neubelt.

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