::: Trade Talk :::
Trade Tips Part 2:
The Entry Strategies
Cos Mamhunze, an International Trade Specialist at saibl's Johannesburg office, continues his discussion on Trade Tips in the second part of this series of articles on international trade.
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In my first article on “Trade Tips - Entering New Frontiers”, I discussed the key steps you have to follow before entering the export market. One of the steps involves selecting an export market entry strategy. In one way or another, you will have to select an entry strategy. In this article, I will briefly discuss the four main export market entry strategies.
Once satisfied about your choice of target segments, you need to select an entry strategy. The selected strategy is mostly determined by your ability to accommodate risk, your financial resources, as well as the nature of the target market (including value chain dynamics).
The key export market entry strategies I will dwell on are a) Indirect exporting, b) Direct exporting, c) Joint venturing and d) Foreign direct investment. These entry strategies have differing levels of risk, legal obligation, advantages and disadvantages.
1. Indirect Exporting
As a tyro in exporting, this tends to be the best strategy to start with. Indirect exporting carries the least risk, least investment and minimum involvement. You have a distributor or trading house that buys from you and exports on their own account, and bears all responsibilities related to exporting, including marketing and promotion, movement of the cargo and credit risks. Indirect export entry is more pronounced in the arts and crafts sector, where the actual crafters leave the export activities to be handled by the more organized buyers and specialists who market the products overseas.
The main advantage of this entry strategy is that it is like a local sale. You are relieved of all export-related responsibilities and protected from exchange risks.
On the downside, indirect exporting allows the trading house to do all the export logistics, at the same time depriving you of the opportunity to grow much needed export skills. The trading house has the foreign contacts and a more intimate relationship with the target export market than you. You develop no knowledge of the foreign contacts.
2. Direct Exporting
Team Canada Inc describes this as involving "direct marketing and selling to the client". In this case you are directly involved in the export activities. Unlike indirect export, your local export team or branch in the foreign market or foreign-based agent/distributor handles the export activities. This entry strategy is more viable in more familiar markets, since less familiar markets present different sets of legal and regulatory milieu, new business practices and customs. More established companies with strong human and financial resources can attempt this option.
The advantages associated with the direct exporting strategy include the opportunity to be on the forefront in promoting your products, developing export expertise and developing direct relationships with the export market. Apparent disadvantages include a possible lack of familiarity with the foreign market. Even if you employ locals (natives of the foreign market) to handle your products, they may not have the same familiarity with your product or company's way of doing things. As the name implies, direct exporting is more involving and exposes you to more risk, such as credit risks and exchange risks.
3. Joint Venturing
Compared to the first two options, joint venturing is more involving and riskier. Joint venturing involves the following categories: licensing (more pronounced in manufacturing) and franchising (often applicable in service and retail set-ups), contract manufacturing (manufacturing) and management contracting (service). In all its different forms, the involvement of a local partner is implied. Both your company and the foreign company bring something to the table, you both or separately bring equity, resources, management expertise, contacts, insight and also share the profits and losses.
Under the licensing option, you as the licensor give consent to the licensee (in another country) to use your manufacturing process, trade mark, know-how or copyright in exchange for a royalty or fee. You and the licensee both benefit. The main advantage is that you enter the export market on low capital and risk levels. The licensee, on the other hand, does not reinvent the wheel since he is using known and approved know-how and markets a known product.
The main disadvantages under licensing are: a) You may not gain enough export experience since the licensee handles the marketing of your product, and b) The licensee may become your major competitor should you later decide to go it alone at the conclusion or termination of the license agreement. Those that entered license agreements with some suspect companies in the Far East have learnt hard lessons - the fake product often comes out ahead of the licensed product!
As alluded to earlier on, franchising is more pronounced in the service and retail sectors. You as the franchisor allow the foreign company (franchisee) the usage of your logo, packaging and trade mark in return for a fee. Travel and tour companies like Harvey World Travel and Uniglobe Travel use this strategy. Some franchise relationships are more intricate and in such cases you should have a more clear-cut business design under which the franchisee is to operate.
Because the franchisee is using a known and established business model, it benefits from reduced business risk. You, as the franchisor, retain control over the quality of the end product, e.g. the Nando's Head Office in South Africa retains control over the product quality of the Lusaka-based Nando's franchisee. Franchising makes it possible for you to rapidly expand your export market using the capital and fervor of owner-operators.
The main disadvantages relate to the ease with which some models are being copied. You can protect your name and business systems, but cannot prevent your franchise model from copycats. I have seen not far from a Chicken Inn restaurant, a competitor named Chicken King, employing the same model (not sure who copied who). Despite the desire by the franchisor to maintain the same standards and product offering, this may not be possible in other markets. A South African fast-food franchise that failed in Ghana because Ghanaians want their food spiced hot, whereas the South African entity is used to lightly spice its foods. Because it did not adapt, it failed. In such markets, you may consider making adaptations to your products, but this implies that standardization falls away.
Under contract manufacturing, you enter into an arrangement with a company in the target foreign market to manufacture your products that are then sold in that foreign market. This strategy allows you entry into markets that are difficult to penetrate because of various barriers such as high import tariffs or imposed quotas. The advantage you enjoy is the low level of investment you have to put into the arrangement, since you are riding on the presence of an established manufacturer. The other advantage is that the products can be easily modified to meet the conditions and specific requirements of the target market.
The main disadvantage though is that you will be creating competition for yourself, should you decide to directly export the products from South Africa, rather than by means of contract manufacturing.
Unlike contract manufacturing, management contracting means you are transferring management expertise to a foreign company that makes available the needed capital for the venture. Such arrangements are more pronounced in service industries, especially in the hotel and airline business.
There are general advantages and disadvantages to be found in the four forms of joint-venturing listed above. The common advantages include: a) You can avoid tariff barriers and satisfy local content requirements; b) You are able to acquire competencies or skills not available in-house; and c) Risks are spread with other partners involved. The main disadvantages include: a) As partners from different environments, there tend to be divergent views on expectations; b) You lack full control of management; and c) At the end of the relationship you may fail to recover all capital you invested.
What we have found, especially when it comes to government opportunities in Africa, is that there is a trend towards preferential procurement. Most governments and large corporations are increasingly giving preference to locals. In such cases, you are encouraged to form strategic alliances with local businesses in a foreign country. There are good examples of South African companies that have tendered jointly with foreign partners, and have been successful.
Due diligence becomes more critical under joint venturing arrangements, since you need to team up with competent foreign partners. In countries where saibl has an active presence, our trade representatives can provide some basic information about target partners. The South African embassy or consulate, banks and industry associations can also provide some information on the prospective partners. I urge you to make use of such institutions.
4. Foreign Direct Investment
This strategy carries the most involvement, risk and investment and is an option for resource-rich and more established companies. After establishing the existence of a sustainable market, gauged from orders received, you can decide to invest part or all of your manufacturing activities. In this case you partially or wholly acquire a foreign company or establish your own business in the export market.
Representative or Branch Office: Under this simple form of foreign direct investment the exporter establishes a local presence through a representative or branch office, rents office space and hires staff. Advantages include: a) Greater control of marketing and distribution; b) Direct contact with customers; c)
Improved credibility with customers in the market place; and d) Access to local venture capital.The disadvantages include the fact that the costs and risks of establishing a foreign office are higher than using an agent and/or distributor; and that you do not have a local partner with contacts and expertise as in the case of a joint venture.
Merger/acquisition: A merger occurs when you merge with a domestic company in the target market and create a new entity. Under an acquisition, you take over a domestic company in the target market. The domestic company may still trade under its own company name with ownership and direction controlled by you.
Advantages: a) Decreased time to access and penetrate target market as the existing company already has a product line and a distribution network; b) Prevents an increase in the number of competitors in the market; c) Entry barriers can be overcome, including restrictions on skills, technology, materials supply and patents.
Disadvantages: a) Increased risk because the merger/acquisition can involve large financial commitment, b) You may face political and market resistance and risks; c) Poor or slow post-merger integration - it takes time; d) There tends to be overly optimistic appraisal of synergies and overestimation of market potential; e) Incompatible corporate cultures.
Greenfield Site: Austrade (the Australian Trade office) lists what it calls “Greenfield site” investments, whereby you enter the foreign market by establishing a new operation in the market, as exhibited by Australian companies such as the Village Roadshow cinemas, Westfield shopping malls and Berri processing plants.
Advantages include a) Reduction or elimination of price escalation caused by transport costs, customs and duties; b) Guaranteed availability of goods to resellers and elimination of delays; and c) Adaptation of products for local (foreign) requirements.
The major disadvantage is that this is a slower mode of entry. You will need to get the nod from foreign governments and pressure groups. This involves committing a lot of money and thereby exposes you to a number of risks, such as political risks which may prohibit or limit repatriation of profits.
Subsequent articles will address the following areas: International trade risks, International trade law, trade finance and payments, export marketing and logistics, cargo movement, international financial management, etc.
Cos Mamhunze is an International Trade Specialist based at the saibl head office in Johannesburg. He is a student of international trade at the International Trade Institute of Southern Africa (ITRISA) - whose outline of steps in this article are included with their permission - and a member of IATTO (International Association of Trade Training Organizations). For more information, contact Cos at tel: +27 11 602 1273 or email: email@example.com
Continue to Part 3: Entering New Frontiers - The Key Steps >>>