Welcome to the Export Gateway! This website offers you a step-by-step process for exporting, with a collection of resources and information to help make your exporting experience as painless and profitable as possible. Making the decision to take your business global can be daunting but if you have the right tools, resources and support it can be an excellent way to expand your business and increase your sales.
Is Going Global Right for You & Your Business?
Before you commit the time, energy and finances to taking your business global there are many things to consider. Below are some frequently asked questions and answers that will encourage you to consider exporting as the ‘next step’ in your business.
Q: Will people in foreign markets need or want my product?
A: Approximately 95% of the world’s population lives outside of the United States and comprises two-thirds of the world’s purchasing power. The means there is a good chance that someone, somewhere outside the US will want to buy what you sell. With a little research you will be able to locate a market that needs your product or service and is willing to pay for it!
Q: What are the benefits of going global, other than increasing sales?
A: When you decide to take your company and your product/services into international markets your main goal is certainly to increase sales. However, you will also begin to develop global awareness of your brand, which will add value to your company. You will also reduce risk by selling to a more diverse group of customers. Both of these effects will enhance your chances for the long-term success of your business. There are also countless resources and increased channels of distribution once you enter foreign markets. If you are able to establish your channels of distribution in foreign markets that suit your products before your competitors do, you will have increased your company’s competitive advantage.
Q: There are so many challenges involved with engaging in international trade, why is it worth it for my small business?
A: It is true that taking the step to engage in international trade can be scary and filled with challenges but view these challenges as opportunities to grow your business and develop additional competitive advantage. Many companies in the US could be more successful and sustainable if they exported their products, but they are afraid of taking the risk or are not aware of the benefits of exporting. You are already a step or two ahead of these companies because you are here at The Export Gateway; learning more about international trade is the first step!
Q: What if I don’t speak the language native to the country to which I plan to export. Will I still be able to do business there?
A: English is the international language of business, but having foreign language skills is indisputably helpful. Don’t allow your company’s foreign language skills to determine where you export. Just because you have an employee who is fluent in German doesn’t mean that you should just focus on doing business in Germany. Conduct the proper market research to find out where your product will be most successful and allow that information to dictate your international plan.
Q: I am excited about the opportunities that international trade offers but how do I know that my firm is ready?
A: There are four primary conditions that should be present within your firm before you begin exporting. The first is having the support and commitment from your management team. Maybe this means that it is just you that needs to be ready to make the commitment or perhaps you have an executive board to convince, but it is crucial that all of your managers are ready. Second, everyone involved with exporting your product needs to have a comprehensive understanding of the product, how it is viewed in the domestic market, and what differentiates your product from your competition. Your firm’s international strategy will be based on your domestic strategy. The whole team will have to know every aspect of how your product competes in the marketplace, how it is viewed by the consumer and why your product is the best choice. If everyone involved isn’t able to answer those key questions then it may not be time to export. Thirdly, if you are interested in taking your business global then plan that into your budget. Just as with any new venture exporting requires at least some investment. So if your firm doesn’t have adequate funds then you might consider raising more capital before you start the process. You don’t want to start something you will not be able to finish because you have budgeted poorly. Exporting can increase your sales and eventually your profits so set targets for how much you plan to earn overseas, and view the cash out lay as an investment in your firm’s future. Finally, be sure that your firm is in a position to accommodate an increase in demand. Plan on having an increased inventory of products or ability to quickly produce more to avoid not being able to fill orders and causing stress for your sales team and/or your foreign distributors who have customers who want your product. Once you have all four of these conditions meet your firm is ready to go global and begin the exporting process.
The following section provides a step-by-step approach to preparing your business to export. Each step will have additional resources to offer so that you can easily access information to help build your international strategy.
Step 1 – Finding Your Product’s Code
Virtually all products have a 10 digit code similar to a NAICS or SIC number. The system used to classify products is The Harmonized Commodity Description and Coding System also referred to as the International System of Number. When importing into the United States, companies must classify their products within the Harmonized Tariff Schedule (HTS) and when exporting products the classification number is referred to as your, Schedule B number.
The Harmonized System is organized by chapter, heading, subheading and commodity code, each number in the code correlates to the product’s chapter, heading and so on. There are 22 general commodity sections which are divided into 97 more specific chapters. Once you figure out what chapter your product belongs you will have to review the headings in that chapter and determine which heading best matches your product. The heading numbers combines the chapter number and the heading number, making the first 4 digits of your product’s 10 digit code. The subheadings are more specific about classifying the product. After you have determined what chapter, heading and subheading for your product you may have to be further classified based on what country you are exporting to. If the country you are sending your products doesn’t require an additional classification then the last 4 digits of your Schedule B number will be four zeros. This sounds like a tedious process, but it’s pretty easy to find your Schedule B number online and, once you do, there will minimal confusion about what your product is when it arrives overseas because the system is universal. Knowing your BTS and Schedule B codes will also help you find out who your competitors are, and how much of your product (and similar product) is bought and sold in different countries.
Schedule B number and coding system is available in a book published by the Department of Commerce. The system is also available online at http://www.census.gov/foreign-trade/schedules/b/. The Census Bureau manages the Schedule B number system, they offer additional resources and assistance to insure that your get the proper Schedule B number.
Once you have your Schedule B code it is time to determine where your product will be most successful. Finding the most profitable foreign market is a critical step in the exporting process.
Step 2 – Selecting Your Foreign Market
Now that you have your product classified it is time to research and select where to market your products. Selecting a foreign market has similar steps as selecting your domestic market. You need to consider who will buy your product, how large your target market is and the sustainability and profitability of that market. However when selecting foreign markets you also need to consider the country you are shipping to, the cultural differences, the infrastructure, the laws and regulations that surround exporting/importing ( we will discuss more of the legal challenges in Step 5). Consider the following questions when your begin researching what target market you wish to reach and where that market might be located:
- Who are your desired end user? How would they use your product?
- What adjustments might need to be made to your product because of cultural differences?
- Does your product require certain technology or supplemental products/services? Are these things available where you are looking to export?
- What is the infrastructure in the country you are looking to export to? Is there easy access to a port, major highways or railways to be able to transport your product?
- What is the status of your target market? Is it increasing, decreasing or stable?
- What is the competitive environment like?
A good starting point is to research your US competition and see where they are exporting. If your competition is having success in a particular foreign market then there is a good chance your product could also be successful. The risk involved with exporting to the same place as your competitors is that your product is new in that market. Because you aren’t the first one in the market you will have to highlight your company’s competitive advantage and why your product is the best choice for your target customers. You may find that your product has potential to be successful in multiple markets. That’s great but you will have to prioritize those markets. Consider how your company can control environmental variables, adapt your product for that market and maximize the opportunity with the resources you have available. The market that arrives at the top of that priority list will hopefully be the one with the most sales potential for your product.
In addition to discovering your foreign target market, the location of that market is crucial. Often times there are environmental, legal/regulatory and cultural challenges when conducting international trade. If this is your firm’s first stab at exporting than it may be best to export to a country with similarities to the United States. By researching a country’s relationship with the United States and some of its exporting/importing regulations you can reduce some of the risk by being educated on the country’s history with international trade and feelings toward US products. The following is some key data to find about the country you wish to export to: country’s economic status, the population size (is your present target market large enough to be profitable), inflation. The Central Intelligence Agency offers a World Factbook that includes information on the politic climate, natural resources, population, inflation, GDP, industries, legal system and available labor force for countries all over the world. This resource is a great place to find information about countries you are interested in exporting to. Additionally, US Department of Commerce has resources and data on many different countries, Click here for access to these resources.
Step 3 – Direct or Indirect Exporting
The next step is to decide your firm’s foreign market entry strategy. There are two options - indirect exporting or direct exporting. There is no single ‘right’ way to go about exporting both methods have their advantages and disadvantages. It will be up to you and your management team to weigh those advantages and disadvantages against the resources your company has available to commit to exporting.
Indirect exporting is a great option for a company that wants to export but does not have international experience, foreign contacts or extensive resources to apply to exporting. When deciding to go with indirect market entry a company turns over control to a third party who will manage the storing, distributing, marketing and selling of your products in a foreign market. There are different types of third party agents to work with, including export management companies, export trading companies and export commission agents/brokers. These foreign trade partners take care of all the international sales and marketing responsibilities, which allows your management team to stay - focused on domestic sales growth. The other common methods of indirect market entry are “piggyback exporting” and using domestic distributors. Piggyback exporting is when you export your products in conjunction with a product your company does not manufacture but has appeal to a similar market segment. For example if you manufacture hair brushes and combs you may contact a hair products (shampoo, gel, hairspray) company who exports to the same market that you wish to export to. Your firm could negotiate a piggyback exporting partnership deal with the hair products company to export your brushes with their products. Domestic distributors are those clients who purchase your product in the US who turn around and sell your product to consumers in their own (non-US) markets. In this form of international sales, your company does not assume any of the risk or financial responsibility for final delivery of the product or ensuring that is getting to the right customer. Indirect market entry also allows for a quicker entry into foreign markets than direct exporting. Some of the main disadvantages of indirect marketing are the loss of control you have as the entrepreneur; you are allowing your Export Management Company or agent to be in total control of your international sales. Often times these people will not provide you with adequate feedback or be as concerned that they are offering your product in the most profitable market. Due to these factors your international sales may be lower than you had anticipated or hoped for.
Direct market entry or direct exporting offers its own set of advantages and disadvantages. By definition direct exporting is when a company deals directly with an agent, distributor or subsidiary in the desired foreign market. This buyer agent or distributor will assume ownership of your products and distribute them to retailers and dealers or directly to the end users. At this stage you must have a lot of trust in your foreign buyer to manage your products and to implement your international sales strategy but that is benefit of this method, you are still in control. The next steps in direct market entry require more capital investment to establish a warehouse or marketing subsidiary in your foreign market. These steps only help to increase the control your firm has in your international sales and offer the most relevant and accurate feedback. Direct exporting does require more financial investment and the amount of time it takes for your product to enter a foreign market will be longer than with indirect exporting.
The success of either strategy will be based on how well the strategy is executed. The decision also does not have to be 100% one way or the other. For example a company might decide to take the direct exporting approach in South America because of the available knowledge about the market and contacts there and go with indirect marketing in Asia where they may have little knowledge and no contacts. Using a mixture of the two methods in your international strategy is fine and can help diversify your international sales.
If you choose to go with an indirect export strategy then you will have to decide between using a Piggyback Partner and using an EMC (Export Management Company). The major difference between these two methods is the amount of contact you have with foreign distribution channels. When piggyback exporting your partner may not share the contacts used in foreign distribution so it will be more difficult to eventually export on your own because you will not have any contacts. When using an EMC you can communicate with your agent and other people involved in the foreign distribution channels. Your agent’s pre-established network of contacts can become your contacts if and when you decided to export independently. Another important thing to consider is how much you want to promote your brand in a foreign market. When piggyback exporting, your brand and product can be over shadowed by your partner’s product. EMC agents typically strive to highlight your product and create a positive reputation for your brand more than a piggyback partner will. This effort will only be a benefit if/when your firm decides to begin exporting without an EMC.
The process of finding the best EMC agent or broker is similar to that of hiring a new employee. Your firm must have a list of desired qualifications for your EMC but it also requires a judgment call based on the reputation of EMC and its agents as well as the interaction you have with the EMC before signing a contract. One of the best methods for finding an EMC is networking and trying to connect through existing contacts. There other four common sources for finding an EMC: international trade centers, the internet, industry associations and trade journals. All of these sources will provide a list of EMC agencies in the markets that you wish to export to.
If your firm chooses to go with piggyback exporting the challenge is not in finding a partner, but rather in qualifying them and hoping that they will be willing to work with your company. Some options for piggyback partners would include current customers, current suppliers or non-competing companies in your industry. To find these companies you would use many of the same sources as finding an EMC, such as networking, trade associations and trade shows.
If your firm decides to go with a direct market entry strategy then you will have to choose between a foreign sales agent and a distributor. It is crucial to understand the difference between the two. A foreign sales agent will represent your product in a foreign market, seek out potential customers, make sales calls and close the sale. After the sale is closed you as the manufacturer are responsible for billing the customer, shipping the product and paying your agent’s commission. Some of the disadvantages of using a foreign agent include issues with receiving timely payment, the amount of time and money it takes to ship your product because agents don’t hold inventory, and customs delays. A foreign distributor will purchase a large quantity of your product and be responsible for the warehousing and distribution of your product to the end user. A disadvantage of this method is that you may never know who the end user of your product is in a foreign market and will therefore be less able to tailor your product, packaging and distribution to their needs. However there are many benefits of using a distributor. For example, many distributors engage in marketing activities to increase the brand awareness for you company. Also, they have extensive knowledge about importing regulations as well as access to local distribution channels so the time between a customer order and its fulfillment is much shorter. Some distributors will also provide customer support services. Many times a high quality distributor will act as a foreign subsidiary of your company without your investment.
It is often suggested that to find a foreign sales agent or a distributor a company must travel to the potential market, conduct research and meet their foreign partners. This would certainly be a beneficial trip for your firm, as you get to have personal interaction with the people that will be representing your brand and see your market first hand. However, foreign trips can also be expensive and time consuming. There are ways to find a foreign agent or distributor without traveling to your foreign market. The following are the ten methods/resources for finding an agent or distributor without traveling.
- List of agents and distributors used by your competitors or other companies in your industry
- Networking within your industry and trade associations
- US Department of Commerce – International Partner Search ($300-$500 per search USDOC will provide as many 6 foreign partner options)
- State Foreign Offices and US Chamber of Commerce Contacts
- Catalog Shows
- Ask your potential customer base
- Advertising – Commercial News USA (international publication dedicated to connecting agents and distributors to US manufacturers)
- www.kompass.com – A free database of companies around the world
- Purchasing or Developing a Private Database – Often industry specific
- Researching the Internet
Step 4 – International Pricing Strategy
It is time for your firm to consider how you will develop your international pricing strategy. Developing an international pricing strategy has more steps and variables to consider than your domestic pricing strategy. In addition to considering your competition’s price, your target market/consumer’s ability to pay and profit goals, your firm will also have to build in foreign exchange rates, tariffs and duties, shipping and other logistics costs as well as foreign market conditions.
Foreign exchange rates changes almost daily and will impact your international pricing. Will you price your product in the currency of the country into which you are selling, or will you price it in US dollars? Most small to medium sized businesses price their products in US dollars because it is easier to understand and your foreign buyer assumes the exchange risk. All countries have import tariffs and duties, the purpose of which is to discriminate against foreign products and benefit their domestic products. There are many sources available to research tariffs and duties in different countries. The United States International Trade Commission offers a Tariff Database that contains tariff and duty information for many developed nations. The USDOC also offers information about tariffs and duties in multiple countries, many of these lists are broken down by product code. Individual products will have specific tariffs and duties applied to them.
Shipping and logistical costs are will also significantly increase the price of your. Your firm may also have to redesign or alter your packaging to comply with certain export or import requirements. Additionally having insurance on your products is mandatory when shipping and transporting your products into a foreign market.
It is critical to calculate exactly how much your product will cost your foreign buyer after all of the shipping, tariff, duties and other unseen costs of shipping internationally. After these calculations your firm will have to consider if your product can still be competitive in that market. The first step in is to determine the foreign market landed cost. Landed cost includes all of costs associated with the product leaving your warehouse and arriving at your foreign market. From the landed cost you will have to consider the distributors and the retailers mark-up on your product. Typically, a distributor will apply a 30% mark up to the retailer and the retailer will apply a 40% mark up. These mark-ups can quickly raise the price of your product beyond your target consumer’s reach. The final addition to the price of your product will be any local taxes. After your firm has completed these calculations, compare your products price with your competitors in that market.
If you find that your product’s price is too high to remain competitive there are a few ways to approach lowering or adjusting your pricing strategy - it just depends on if you want to focus on solving long-term pricing problems or short term. Some solutions to short term pricing problems include focusing on your product’s differentiation, lowering your base price, chose foreign distributors and retailers that are willing to apply a lower mark up percentage or offer discounts and promotions. To combat some long-term pricing problems, your firm might consider partial manufacturing instead of exporting a finished good; having your product assembled in your foreign market, have your product manufactured internationally or licensing your technology so your firm’s goods can be manufactured elsewhere with your technology.
Now that your firm has researched the price of your product in an international market it is time to determine your profit expectations. Which will require deciding between variable costing or full absorption costing. Variable costing only applies to the direct costs of manufacturing and selling the product at a price which cover only those direct costs. This method will reduce your product’s price therefore making it more competitive. Full absorption costing applies all costs associated with the production of the product as well as factory overhead and sales, marketing and corporate overhead. This method will increase your product’s price but it will also help ensure long-term success for your company because your customer is paying for costs that are not directly related to the product.
An important thing to remember if you are going to be exporting your product to multiple foreign markets is that, ideally, you want to have a constant price for your product. This kind of consistency is easier for your company to keep track of and better for your product’s success in the foreign markets. For example if your product is priced lower in France than it is in Germany there is nothing to stop your buyer or your end users to go to France to purchase your product at the reduced cost or an enterprising business in France from re-exporting your product into Germany and this competing with you to sell your own product. The last major consideration when developing your international pricing strategy is to decide what costs you will assume as the manufacturer and what costs your foreign buyer will assume. A big part of this decision is based on your firm’s ability to manage international shipping and logistics. If you are not in a position to assume these responsibilities than it is common to ask the buyers to take on that cost and responsibility on your buyer if they have more experience with importing into their country and finding the best distribution channels. In the end, this lowers your costs and reduces the risk your firm takes on. The other option is to establish a worldwide logistics and freighting contract with a US-based shipping company, which generally lowers the landed cost in each country as well as reducing the work for your buyer... which in turn makes your product more attractive.
Step 5 – Legal Considerations
One of the biggest challenges when expanding internationally is to understand and comply with US and international laws. This task can appear overwhelming so we strongly suggest that you do not attempt to conduct international business without the support and guidance of a qualified lawyer. There are four main legal challenges to consider when preparing to export/import: the different types of legal systems, US laws and regulations regarding exporting/importing, foreign laws and contract laws.
It is crucial that your firm understand what type of legal system the country you are exporting to utilizes. There are three types of legal structures: common, civil and theocratic. The United States and the United Kingdom, as well as most of the UK’s former colonies and territories operate under the common law system. The common law system bases its laws and rulings on tradition and past precedents, and laws are often revised when new officials are elected into office. So if you are exporting to a common law country, be aware that some regulations and laws may have been recently changed or updated. The civil law system does not require the courts to interpret the laws to the same degree as a common law system. Laws and regulations are changed or revised much less frequently. Countries that utilize the civil law structure include many European countries as well as Russia and Japan. Countries with a theocratic legal structure which are few have laws based on the religious guidelines and values of that country’s dominant religion. If you have an understanding of the legal system of the country to which you will be exporting you will better understand how it will affect your contracts and business in that country.
The US has several laws and regulations that may restrict your ability to expand internationally or restrict your company’s actions in a foreign market. The US has embargoes and trade sanctions that prohibit the interaction and trade of specific products with specific nations. Be sure to review the current embargoes and trade sanctions before you export because you could be in serious trouble with the US government if you attempt to export your product to a country under embargo. If your product incorporates high technology or could be used as a weapon or in the creation of a weapon, it is likely that you will have to apply for a export license and even then you may not be able to export your product due to US export controls. The US government wants to protect itself and its intelligence and so it restricts what can and cannot be exported. The most important US law that will impact your firm when expanding internationally is the Department of Justice’s Foreign Corrupt Practices Act (FCPA) which was passed in 1977. This law prohibits any US company, business person or individual from bribing or making corrupt payments to obtain or maintain business. Bribes are common practice in many countries to more efficiently conduct business but if you are a US company you and your intermediaries may not make any bribes to anyone in a foreign market in order to enhance your business. However, the one loop hole of this law is that is allows ‘grease payments’. A grease payment is defined as a certain type of payment to a foreign official or business person in order to expedite a decision, shipment or other transaction, that is not considered a bribe. It is beneficial that your company may be allowed to make grease payments but it is always best to seek legal counsel to be sure that you are acting in compliance with the FCPA. Since the passing of the FCPA, 34 other countries have signed an agreement that prohibits bribes to foreign public officials. In addition to abiding by the FCPA and embargoes, US companies that chose to expand internationally must abide by all US antitrust laws and any foreign antitrust laws. Antitrust laws are designed to maintain an economy based on competition, so these laws forbid actions such as price fixing.
Another concern for US companies operating in foreign markets is learning and complying with foreign laws. A main point of focus is how your company will continue to protect your IP once you enter foreign markets. IP protection rights that your company enjoys in the US only apply within the 50 states and territories, many foreign countries do not have the same if any IP protection laws. It is possible to apply and receive patent and trademark protection in a foreign market.
The final legal consideration for your firm when expanding internationally is foreign contract laws. It is critical that you seek proper legal advice when negotiating and writing your foreign contracts. Your firm should have a contact in just about every situation where there is someone representing your company/product/brand (which do you like best or include all 3) in a foreign market, there are too many uncontrollable variables that could harm your business if there isn’t a contract in place. The following are some guidelines of what to consider and include when drawing up your foreign contracts.
- Define the relationship between your firm and the other party involved/foreign representative
- Exclusive vs. Nonexclusive Relationship. If you choose to have an exclusive contract than include performance expectations
- Terms of the Agreement. The most common terms for international contracts is 1 year and then review the contract and relationship however research what is the norm in your industry.
- Protecting your IP. Emphasis the importance of protecting your firms IP and technical information
- Duties of the Distributor and the Duties of Manufacturer or Service Provider. Outline the responsibilities and expectations of all involved parties to eliminate the confusion over who is responsible for what.
- Termination. Include a clause about grounds for termination of the contract
- Governing Law. It is crucial that your contracts states which laws will be applied in case of a dispute, it is standard for a US company to use US laws.
We hope that The Export Gateway has provided you and your firm with information to help with your international expansion planning. Credit must be given to James Foley, author of The Global Entrepreneur. His book was the source of much of the information provided here. If you would be interested in purchasing this book Click Here! It is a great resource to have when planning your international strategy. Another great resource for additional information to help with your planning is the National Association of Small Business International Trade Educators. This organization over sees the Certified Global Business Professional designation program that is offered through the Swain Center. This professional development program offers training to business people in the areas of global management, marketing, supply chain and trade financing. It would be a beneficial program for you and your employees involved in your international expansion.
For more information on how the Swain Center for Business and Economic Services can help your company go global, please contact Joe Dougherty, Director of the Global Business Initiative, at firstname.lastname@example.org.