Alarmingly only 7% of all Australian businesses earned overseas income in 2011-2 down from 9% in 2006-7 (ABS, 2013). Of that group just under 1% account for over 70% of international trade value. In Australia’s case that group is dominated by the big miners in particular (Austrade, 2014). There are barriers to taking the first steps towards international business and the top two cited is local culture and regulations.
As a result it is hardly surprising that most Australian businesses will expand to neighbouring markets with common language or cultural heritage like New Zealand, Singapore, the UK or the USA before considering more culturally divergent markets like Indonesia, Japan or China for example. As a business owner considers firstly, ‘Where to go?’ and then ‘How to enter?’ they will often opt to get involved in international business by one of the lowest risk and reward options of exporting their goods or services or importing overseas goods and services.
Taking a consumer packaged goods or manufactured goods perspective there are several ways for businesses to begin exporting their goods to overseas markets which we will detail below:
1. Export Merchant at Home or Australian Based Consolidator.
Here a home base company or merchant will buy the goods on behalf of overseas customers and make payment in local currency and arrange all shipping, documentation and clearance of goods via sea or air freight to the foreign destination. This was more common in the past and still exists with regard to smaller enterprises or smaller markets where consolidation of goods at port of despatch helps to reduce freight costs and makes business dealing simple for the goods manufacturer.
2. Export Agent at home.
Here an agency or agent is used in the home country or place of production to seek out and negotiate pricing and contract with overseas customers on behalf of the manufacturer. The agency is rewarded most often with a commission on the sale but the contract is between the goods manufacturer and overseas customer. This arrangement is commonly used where the manufacturer has low export knowledge and awareness or contracts and relies on the agent to negotiate a fair and reasonable price for the exporter. As technology evolves and the world shrinks virtually with the internet we are also seeing the emergence of export agencies or facilitators at home like AusPost who will partner locally based small and medium size enterprises to facilitate listing their goods for sale on large eTail/Commerce websites especially in China like Tmall inside Australian Pavilion shops and pages with their connections to both China Post and Alibaba (owners of TMall) facilitating end to end delivery of goods. Likewise, VECCI can facilitate the development of an individual customised microsite that will sit in the Australian Pavilion on yiguo.com a large Shanghai based B2B and B2C eCommerce website to assist your company in showcasing its products. These facilitators and eCommerce providers will assist with goods clearance and import, website/shop set up and provides an avenue for small and medium size business in particular to test their products and get direct consumer feedback in foreign countries.
3. Agency in foreign country.
The agent identifies a buyer and negotiates with both parties (exporter) and buyer (the importer) on prices and delivery details. It is then the exporter’s responsibility to ship the goods to the importer and receive payment and pay an agreed rate of commission to the overseas agent. Overseas agents are invaluable where cultural and linguistic barriers might otherwise prove unsurmountable and give confidence to the importer who is dealing with someone on their own home soil. This type of arrangement tends to be more common in cultural diverse or distinct markets e.g. Korea where an Australian company maybe uncomfortable with the language and cultural and business challenges and seek an agents support to begin the trade and relationship building. For the exporter it is important to know their agent is working for them and not competitors in the same category of business and for the agent it is important as s/he builds up the exporters business and contacts s/he is not cut out as the middle (wo)man who enabled the trade to be established.
4. Direct export to an importer/wholesaler/distributor/retailer.
Direct export requires a deeper knowledge of the foreign marketplace and would normally follow a trade discovery market visit or existing agency relationship. It also tends to appear where parties on both sides are of sufficient scale to support international business dealings and is common in medium to large size consumer goods companies for example. Increasingly today we are also seeing direct export from consumer goods manufacturers to retailers as both sides look to maximise their share of the value chain.
5. Overseas Branch Office
The most significant investment for export/import is establishing and overseas branch office that maybe focus on the market it is based or a regional holding company or base from which to expand into neighbouring territories. Normally employed only after significant trade has been established and sales have plateaued or by large companies with significant resources required to invest in local business licence to operate, rental of offices, hiring staff and establishing banking and legal facilities. Some countries are easier to establish branch offices than others and even actively encourage it as part of their economic growth plans. The World Bank issues annual rankings on countries ‘ease of doing’ business and Singapore tops the list followed by Hong Kong, New Zealand and the US. Australia ranks 11 after UK and Norway on that list while some markets near us like Indonesia rank 120 or the Philippines 108 indicating the importance of upfront thinking and work on ‘where to situate’ your overseas branch office.
As you can see from the relatively fastest, lowest risk and lowest reward ex/import market entry model you can see there are at least 5 possible entry models to begin international trade. The appropriate model for your business will of course depend on a number of factors including your size, turnover, international business experience, products or services and overall objective for going international. We highly recommend you contact us or other professional international business consultancies and government bodies with experience in the area like Austrade and your local State Government services and Chambers of Commerce to do the ‘upfront thinking’ before you jump into international business. Unpicking unsatisfactory trade relationships is time consuming and costly to your business and reputation.
Please feel free to add your own comments and experience on export/import international business entry models below and reach out to us for a follow-up face to face discussion at no obligation on your objectives for international business expansion.
Bibliography & References:
Australian Bureau of Statistics (2013), ‘Selected Characteristics of Australian Business’, cat. no. 8167.
Austrade (2014) http://www.austrade.gov.au/about-austrade/news/latest-from-austrade/2014/australias-international-business-survey-2014 retrieved on 10 Oct 2014
Bruno Mascitellia & John Tinney (2012) The Global Business Environment: An Australian Perspective McGraw Hill.
The World Bank Group (2014) Doing Business Internationally http://www.doingbusiness.org/rankings retrieved on 2 Oct. 14.