Export Expansion Notes

Export Expansion

After identifying opportunities in foreign countries, the next step is determining the entry mode and global expansion strategy.
Marketing distinguishes between entry modes that ship products versus those that transfer know-how.
- Exporting: Product exchange for money.
- Licensing, franchising, strategic alliances, manufacturing investments: Sharing technology and know-how.
Exporting is straightforward and less risky, involving expansion with existing products, while know-how transfer involves trading company knowledge.
Firms often start with exporting due to its simplicity.
Exporting is like trade across regions, preferred when trade barriers and transportation costs are low.
Local marketing can be directed through independent middlemen or a foreign sales subsidiary (usually preferable).

Made in Brazil Example

Stanley Tools' Brazilian subsidiary initially faced negative perceptions about quality but overcame it.
Brazil now surpasses Latin American neighbors in ISO certifications, indicating high-quality standards.
Over 1,000 Brazilian companies have received ISO certification.
Grupo Siemens' Brazilian subsidiary quadrupled exports in four years, reaching $80 million.
Brazilian companies maintain competitive prices through productivity improvements.
- BASF da Amazonia S.A. saved itself from shutdown via productivity improvements, now exporting tapes to multiple regions.
Brazil's steel industry has doubled productivity to rival Japanese firms.
Despite financial turmoil in the late 1990s, Brazilian companies gained a strong global presence in the 2000s.
- Exports to the United States were $8.3 billion in the first seven months of 2001, compared to $7.5 billion in 2000. In 2006, it stood at $26.4 billion.
With a growing high-tech sector, Brazil faces issues typical of advanced economies.
- In 2001, a trade dispute with Canada arose over export subsidies for airplanes.
- Canadian firm Bombardier and Brazilian aircraft manufacturer Embraer were competitors.
- Governments commonly finance foreign buyers purchasing planes from their country's manufacturer.
- The Brazilian government offered interest-free loans to support Embraer, violating WTO rules, according to Bombardier.
- Bombardier matched Brazilian offers to win contracts in the United States.
Embraer has expanded its commercial sales and targeted the executive jet market, extending its product line and developing a trademark turned-up wingtips.
- Sales increased from US $2.7 billion in 2000 to$ 5.2 billion in 2007, despite a dip after September 2001.
President Luiz Inacio ("Lula") da Silva, a socialist elected in 2002, applied conservative economic policies for growth.
These policies stabilized Brazil's economy, with predictions of around 6% annual growth.

Introduction to Foreign Entry Strategies

Strategic questions arise on reaching foreign markets and global expansion.
- What should the entry mode be?
- How quickly should new country markets and products be added?
- What is the best expansion path, considering accumulated learning and experience?
- Are similar countries preferable, or should one venture into new territory?
- What advantages come with product and country diversification?
- How should new entries be chosen to maximize benefits?
Immediate global expansion isn't usually feasible due to financial, managerial, and resource constraints.
A sequential approach is often more prudent.
Companies should establish defensible market positions before expanding.
Foreign direct investment might be avoided early on due to risk exposure.
Learning from exporting and doing business abroad should be assimilated and diffused to company managers.
Chapter 5 introduces entry modes, relates entry decisions to entry barriers, and discusses exporting tasks, transportation documentation, export pricing, and payment alternatives.
The functions of independent middlemen and the need for a sales subsidiary are assessed.
Criteria for selecting agents and distributors are shown, and the need for legal advice is stressed.
The chapter ends with a discussion of how importers stimulate exports and become partners in the exporting process.
Know-how transfer modes are discussed further in Chapter 6.

Four Modes of Entry

Four principal modes of entry into a foreign market:
- Exporting
- Licensing
- Strategic alliance
- Wholly-owned manufacturing subsidiary

Exporting

Indirect exporting involves using home country agencies (trading companies, export management firms) to enter a foreign market.
- Piggybacking: Using already exported products' transportation and distribution facilities.
- Consortia: Smaller exporters banding together.
Direct exporting means the firm contacts buyers abroad (independent agents/distributors or the firm's own subsidiaries).
Direct sales include mail order and e-commerce.
E-commerce is useful for small businesses and initial entry.
Direct sales can involve products and services.
Online purchases can be shipped via express carriers like UPS, which handles customs clearance and delivery.
Cross-border catalog sales have expanded with telephones and credit cards.
Websites are similar to catalogs, with online ordering and payment.
E-commerce issues are further discussed in Chapter 17 on global promotion.

Licensing

Licensing involves offering a foreign company the rights to use proprietary technology and know-how in return for fees and royalties.
- Franchising is a well-known licensing mode with global hotel and fast-food chains.
- The firm provides technical expertise, franchise management, and advertising support.
Other licensing options differ mainly in the type of know-how transmitted.
- Turnkey contracts: Construction of whole plants and training of personnel.
- Contract manufacturing: Hiring a firm to produce a prespecified product.

Strategic Alliances (SAs)

Strategic alliances are collaborations between companies, sometimes competitors, to exchange or share value activities, such as joint R&D, shared manufacturing, and distribution alliances.
Joint ventures are a type of strategic alliance involving capital investments and a new corporate unit with a foreign partner.
Joint ventures are especially common where governments mandate local participation or market access is difficult.
Non-equity-based strategic alliances have become common.
International strategic alliances involve cooperation between companies across borders, encompassing any part of the value chain.
Distribution alliances contractually agree to jointly use an existing distribution network.
- Example: Lufthansa and United Airlines pooling route information and passengers.

Wholly Owned Manufacturing Subsidiary

When production occurs in the host country through a wholly-owned manufacturing subsidiary, the company invests capital in plant and machinery.
This constitutes traditional Foreign Direct Investment (FDI).
A wholly-owned subsidiary can involve investment in a new plant or acquisition of an existing one.
Manufacturing operations support marketing activities.
A local plant can provide a stable product flow, and it's easier to adapt products to local preferences.
FDI usually leads to exporting; parts and components are often shipped from the home country.
Intra-organizational transfers differ from market exchanges, but companies set transfer prices at market levels and allow subsidiaries to buy from local suppliers if favorable.
Supplier plants engage in "internal" marketing, satisfying internal customers in subsidiaries abroad.
A sales subsidiary manages distribution and marketing, importing products from the home country or another foreign plant.
Establishing a sales subsidiary requires less capital investment.
Operating costs can be high, but investment risk is low.
Establishing a sales subsidiary involves taking control of marketing, thus is strategically important.
Control of the sales effort should be in the hands of the company itself for marketing effectiveness.

The Impact of Entry Barriers

Before examining entry options, import or entry barriers must be considered.
Market entry barriers directly influence the chosen entry mode.
Entry barriers increase the cost of entry and constrain options.

Entry Barriers Defined

Entry barriers come from industrial organization economics, representing obstacles to entering a product market.
Entry barriers exist at home and abroad (e.g., limited shelf space or lengthy customs procedures).
In global marketing, classify entry barriers by origin.
Transportation costs may necessitate investment in manufacturing close to the market.
Tariff barriers are obvious obstacles.
Nontariff barriers: Slow customs procedures, special product tests, bureaucratic import license processes.
Government regulations create market barriers, sometimes creating local monopolies.
Regulations protect domestic businesses against foreign competitors.
Access to tech, processes, suppliers, and distribution channels can be restricted by regulation, territorial restrictions, collusion, or close ties.
These barriers constitute artificial value chain imperfections.
"Natural" entry barriers arise from competitive actions, such as brand loyalty, product differentiation, and promotional spending.

The Cost of Barriers

Inefficiency created by barriers translates into higher consumer prices.
Barriers create additional costs for foreign entrants.
Some firm or individual can profit from a monopolistic position, acting as a gatekeeper.
The cost of doing business is very high in some countries because of such barriers.

The Importer’s View

Entry barriers can give importers a protected market position, especially with exclusive distribution contracts.
Exclusive rights combined with restricted entry can lead to high prices.
As countries lower trade barriers, exclusivity means less due to unauthorized gray trade distributors.
Import barriers aren't simply a boon for authorized importers.
High barriers may lead companies to invest in local production.
Extra costs may not always be passed on to consumers.
High taxes on vehicles in Europe serve as a nontariff trade barrier.
Importers may need to cultivate personal contacts in customs administration, impacting their bottom line.
Many importers would prefer to compete without government help.

Tariff and Nontariff Barriers

Firms can lobby governments for tariff and nontariff barrier reduction.
Analyze the tariff base carefully to determine how the tariff rate is calculated.
Tariffs are often higher for complete assemblies and lower for parts and components.
Companies may ship products in parts to enter as unfinished goods with lower tariff rates.
Lower or waive tariffs when products have a certain level of "local content" or involve production for re-export.
Entrants may help establish parts suppliers in the country to obtain lower tariff rates, leading to foreign investment.
Trade barriers lead entrants to reexamine their value chain integration.
Trade barriers may mean some activities in the chain need to be broken out, internalizing only activities that can't be done better elsewhere.
Volkswagen contracted with Nissan to distribute Volkswagens in Japan due to the difficulty of establishing its own dealer network.
Multinational production is an efficient response when trade is prohibited by tariffs.
Establishing manufacturing in a member country within a regional trade group allows exporting to the market country at lower tariff rates.

Government Regulations

When it comes to government regulations of business, foreign firms adapt to them.
Home government assistance may be available.
The U.S. government's Structural Impediments Initiative with Japan and the EU's homogenization of regulations are examples of changing government rules.
Foreign entrants need to study regulations affecting their industry.
Government offices and local chambers of commerce can help.
Hire specialists to decipher foreign regulations.
Government regulations may be so severe that a native partner is needed.
Native partners can negotiate with government authorities and local regulators.
Toys “R” Us selected the general manager of McDonald’s Japan as its representative to get building codes and retail regulations changed.

Distribution Access

It can be difficult to get distribution channel members to carry a firm’s product.
Retailers may have limited shelf space or carry competing brands.
Wholesalers may not depend on overseas supplies.
New brands may pay a "slotting" fee to gain trade interest.
Difficulty gaining distribution access means firms might compete with a handicap.
Close distribution or supply ties can be a burden if channel members or suppliers are inefficient.
Lack of access to distribution channels may lead firms to consider strategic alliances or sell unbranded products in an OEM arrangement.
Establishing a new channel is an alternative.
Honda motorcycles helped train and finance new dealerships in the United States.
Firms may have trouble hiring capable local talent.
Working for a foreign firm may be seen as desirable in developing countries, facilitating entry.

Natural Barriers

Competition among differentiated brands creates natural barriers.
Strong brand names can charge a premium price.
Market success and customer allegiance are factors behind natural barriers.
High customer satisfaction, brand loyalty ,or country-of-origin biases make it difficult to break into a market.
High advertising expenditures and price promotion require entrants to offer something special and match promotional spending.
Natural barriers depend on subjective consumer perceptions.
Marketing efforts must effectively convey superiority.

Advanced versus Developing Nations

In developing countries, important barriers are tariffs and government interventions.
Investing in product assembly to get under tariff barriers can allow firms to gain a strong position at a relatively low cost.
Pepsi gained entrance to the Soviet Union and dominated the Russian market until the fall of the Berlin Wall.
In advanced countries, natural barriers are high.
Entry may be easier, but establishing a strong position is difficult.
Advanced countries are a learning ground for marketing strategy and tactics.
Developing countries produce subsidiary managers savvy about negotiations with foreign governments.

Exit Barriers

Firms face exit barriers after entry.
Nonrecoverable investments have been made, people hired, and contracts signed.
Potential loss of goodwill accompanies withdrawal from an important market.
Peugeot lost brand equity exiting the U.S. market.
When future exit is likely, less visible and committed entry modes should be chosen.
Companies are less willing to forgo leveraging a global brand name.
In global marketing, companies need sufficient resources and capability to sustain their products and brands.

Effect on Entry Mode

Barriers to entering a foreign market make entry mode decisions complex.
Companies can expand into some markets only by unbundling know-how.
Companies may sell components to avoid giving up know-how when government regulations or lack of market knowledge force joint ventures.
High local-content requirements may lead companies to contract manufacture simpler product versions locally.
Complex distribution or customer requirements may prompt distribution alliances with competitors.
The global expansion path is more complex than a question of where final products will be sold.
Many companies develop expertise in a particular entry mode.
Some multinationals prefer wholly-owned subsidiaries run by expatriates.
Small technology-based entrepreneurs often expand through licensing or joint ventures.
Each mode of foreign entry involves different managerial skills.
Growth of cross-border strategic alliances has led to skilled international contract lawyers and managers.
Start-up costs for learning to manage entry modes are considerable.
Companies leverage their skills by staying with the same approach.
Value chains may be broken up to get under country barriers, but expansion path follows the same mode of entry.
Xerox and 3M prefer joint ventures; IBM and Ford like wholly-owned subsidiaries; The Body Shop and McDonald's prefer franchising.
Staying with the “tried-and-true” maximizes success.
Other modes are usually forced by government regulation or market access barriers.

The Exporting Option

The exporting option is often the most attractive for newcomers.
Exporting can lead to a full-fledged market entry.
Foreign markets are given attention once unsolicited orders start flowing in.

Indirect Exporting

The simplest way to manage export business is to employ outside specialists.
Hire a trading company as the "export department."
An export management company (EMC) performs all foreign trade transactions.
EMCs are independent agents in overseas markets.
This type of "indirect" exporting avoids overhead costs but skills are accumulated outside the firm.
Domestic firms want limited commitment, keeping the option of taking responsibility for exporting later.
EMCs can have precarious lives if the producer decides to internalize the exporting function.

Direct Exporting

Direct exporting offers producers control of operations.
Direct exporting allows more influence on the marketing effort in the foreign market.
Without involvement in day-to-day operations, firms won't generate in-house knowledge.
Firms need their own staff for strategic involvement in foreign markets.
The principal choice is between establishing a sales subsidiary or employing independent middlemen.
Trade credit is key in level of price quoted.
Optimal balance depends on the desired control, available resources, anticipated volume of operations, and availability of distributors.
Investing in a sales subsidiary requires more resources but provides central control.

The Exporting Tasks

Many functions must be managed in direct exporting.
Functions can be handled by independent specialists.
Associated with these tasks are many documents.

Product Shipment & Transportation Documentation

The shipment of the product to the border is handled by an independent freight forwarder with a shipping agency.
Freight forwarders specialize in products or countries, picking up products and loading them onto a carrier.
Federal Express and DHL serve as freight forwarders for express mail, and they usually own their own transportation fleets.

Clearing through Customs

Unloaded at the border, the product goes to a customs-free depot before processing.
This depot can be a large free-trade zone.
Free-trade zones allow workers to add value to the product.
Customs officials process goods for entry once a claimant appears.
Buyers or agents present shipping documents to access goods after paying duty.
Tariff rates are decided by customs officials.
Customs officials can be tempted by bribes.

Warehousing

After entering the country, goods often require storage.
Destination ports have rental facilities.
Storage prices can be high.
Companies save money by quickly getting goods through customs and warehousing them at less expensive locations.

Export Pricing

Price Quotes

Export pricing quotes are more complex than domestic quotes.
Pricing terms of shipment are standardized by the International Chamber of Commerce as Incoterms.
CIF (cost-insurance-freight) is more competitive than FOB (free on board).
Quoting CIF leaves buyers responsible for checking tariff charges and duties, but arranging payment by COD can be common for high value low weight items, with transport via air freight.

Trade Credit

A high price can be counterbalanced by advantageous trade credit terms.
Periodical payments are often more important than total price.
Credit is important for large items like turbines and aircraft.
Strong support from a dominant international bank and government financial leverage increases the seller competitiveness.
Airbus sales are accompanied by loans from participating governments.
Boeing lobbies for the Export-Import Bank to offer competitive credit terms.

Price Escalation

Prices abroad can be expected to be higher than at home.
Transportation costs, tariffs, special taxes, and exchange rate fluctuations contribute to price escalation.
Price escalation increases prices and makes it difficult to anticipate the final price.
Companies attempt to redesign products to fit into lower tariff categories, sometimes shifting final assembly abroad.
Creating a "knockdown" (KD) assembly stage can lower tariffs.
Lowering prices can absorb trade barrier costs.
Foreign direct investment to assemble or manufacture in the market country avoids escalation problems.
Exporters learn to live with escalated costs by shipping semi-finished goods and avoiding outrageous customs duties.

Dumping

Cost-based pricing is easiest to defend against dumping charges.
Dumping is selling goods in some markets below cost.
Reverse dumping is selling products at home at prices below cost.
Dumping is often illegal and can be taken to court.
Countervailing duty is an assessment levied on the foreign producer.
Dumping cases are notorious for their protracted duration.
The manner in which relevant costs are used to define dumping varies between countries.
China ranks first in the world for antidumping suits.
The lack of a true market economy makes it difficult to determine potential dumping practices.

Local Distribution

Finding a Distributor

The most common approach is to use existing distribution channels.
Independent distributors handle storage and transportation to wholesalers and retailers.
Distributors take ownership of goods and handle importing and customs processes.
Distributors are generally appointed for the whole country with an exclusive territory.
Firms should find the best distributor available.
Distributor performance can vary greatly.
The best distributors may only be interested in well-known global brands.
Governmental agencies can assist in finding potential distributors.
Trade fairs and international conventions are a common venue.

Screening Distributors

Select candidates must be screened on key performance criteria.
Late entrants to the country market may have trouble finding a good distributor.

Personal Visits

Visit the country to talk to equipment users and identify distributors.
Look for the distributor who has a champion for the new product line.

Negotiating a Contract

The contract has to be very specific on manufacturer and distributor obligations, contract length, and conditions for renegotiation.
Local regulations and the letter of law must be followed.
Contract formulation hinges directly on the size and strength of the two parties.
The spirit of the contract should be reflected in the subsequent actions of both parties.
The relationship should be a win-win proposition.

Payment

Local Currency

Getting paid can be a headache if the country imposes convertibility restrictions.
Access to hard currencies can be difficult.
Former communist countries may have trouble paying for imports in hard currency.

Creditworthiness

Check creditworthiness through banking connections.
Exporters avoid relying on credit, not shipping goods until payment is guaranteed.

Letter of Credit

Payment in advance is done via a letter of credit.
Buyers approach a local bank to open a credit line.
The local bank contacts its corresponding bank in the seller's country.
The latter bank informs the seller that a letter of credit has been issued.
The seller ships the goods and presents the bill of lading to the bank.
The bank contacts the overseas bank and pays the seller.
The buyer claims the goods at customs against the bill of lading.

Converting Funds

Letters of credit involve intermediaries and administrative work, making fees high.
Importing companies negotiate standing letters of credit to reduce costs.
Buyers try to induce sellers to accept payment within 30 or 90 days of delivery.
Conversion to home currency and payment is likely to become less of a problem as international financial markets integrate.
Internationally accepted credit cards have reduced payment risks.

Repatriation/Hedging

Financial intermediaries develop swaps for repatriating funds from a weak currency country.
Various ways of hedging against shifts in exchange rates exist.
Firms use futures options to purchase funds in a currency they know will have to be used in the future.
Marketers should stay close to financial managers in the company.
Standard sales techniques might have to be forgone in favor of prudent pricing schemes.

Legal Issues

Export License

Many products require an export license to be shipped out of the country.
National security concerns were used to block many exports during the Cold War.
Import licenses are needed for many foreign products in the importing country.

Transferring Title

Title of ownership follows the bill of lading.
Business risk shifts with the title.
Distributors borrowing money to pay for goods are exposed to risk when the bill of lading is accepted by the seller’s bank.

Insurance

Insurance questions arise if damage occurs during transit.
Sellers should quote a price CIF (cost insurance-freight).
Quoting FOB (free on board) saddles the buyer with arranging shipment and insurance.

Hiring an Agent

Sellers must pay attention to legal matters in the market country.
Agents are legal representatives of the firm (the principal) in the local market.
Agents usually work for a retainer fee and hourly compensation.
Agents can be remunerated via a commission percentage of revenue.
Agents work for more than one principal but not competing firms.

After-Sales Support

Service, Parts Supply, Training

Firms need to establish after-sales service, stock spare parts and supplies, and train local staff.
Distributors manage these tasks, aided by the agent.
Sales Subsidiary
The need to control the local marketing effort becomes important as firm's sales grow larger

Local Marketing

A sales subsidiary will run a local marketing effort by:
- Conducting market research
- Dealing with local advertising agencies
- Monitoring distributors' performance
- Providing information on competitors, market demand, and growth
- Managing the local marketing mix sometimes against top management's recommendations

Importers As Trade Partners

While we've looked at the exporter as the initiator, importers can also initiate trade.
- Example: Nike locating sneaker production in Asia
- Where new markets are made, local entrepreneurs see the potential to attract foreign brands.