Getting started in exporting can be confusing – There are many options, and each country has its own idiosyncrasies – Murray Rees and Tony Lobo take us through the dynamics of export distribution channels.
Export is the most common approach to going international. It mainly applies to physical goods, although more services are being exported, too. If you actively seek orders on the internet then an export order can happen. There are indirect and direct exporting methods to get your products onto the global radar.
Indirect export is where intermediaries approach you, order goods, and trans-ship to foreign destinations. You have little control regarding your marketing and where your product ends up. Typical players in indirect export include buying agents, brokers, merchants, and trading companies.
Export buying agents have a relationship with the buyer not the seller (you) while export brokers and trading companies often aim to put deals together between parties. These third parties are usually paid by both buyers and sellers, and payment may be exchanged by a countertrade (barter or similar). Trading companies will often operate transport, physical distribution, marketing, and financing.
Export merchants buy the product and resell it; the exporter has no control once the sale has been made. These distribution channels could represent your competitors if they service whole categories such as food and hardware.
Another technique is using a ‘piggyback’ arrangement, where a manufacturer uses its existing distribution network to carry your products. This is useful for seasonal products–however, it is wise to remember that it is not the manufacturer’s main game.
Direct exporting is where you undertake the role of exporter yourself and set up overseas contacts usually in the form of agents or distributors. With agents or distributors you can use their existing relationships and this is good for accessing difficult markets where local knowledge is required. Agents may sell to distributors/wholesalers or to end-users directly, but they might only cover limited markets. Normally these contractual relationships are short-term and a long-term strategy involving wholesalers/retailers needs to be developed.
In different countries the service attitudes of retailers and wholesalers varies. For example, in Egypt the main purpose of their simple trading system is to handle the physical distribution of goods, whereas in China wholesalers are primarily storage centres. Every country has a distinct pattern relative to the breadth of line carried by wholesalers and retailers.
The retailing structure also varies in different countries with the relative importance of retail outlets dependent on the category in countries like Japan, the US, and Germany. In Italy and Morocco retailing is composed mainly of specialty stores that carry narrow lines, whereas in Finland the majority of retailers carry general merchandise. The size of the retail outlets also varies between countries, such as Japan’s giant department stores as compared with the one- or two-person stalls in Nigeria.
Cooperative export or an export management house is where exporters join with others to combine export activities. The export management house acts as an export department, which is useful for inexperienced exporters or those with limited or complementary product lines. However, beware of involvement by competitive, incompatible or inappropriate products.
Having your own sales office offshore is attractive to some small businesses, allowing more control over client contact than some of the previous options. A sales office often initially performs the agency function and could grow into a clone of your Australian operation. The downside is that it can be very expensive building and maintaining relationships offshore and this often requires more management time than other options.
Remember that the number of intermediaries (length of the channel) you use to reach the end customers adds to the cost to the end customer and this has to be balanced with the cost of maintaining direct contact from Australia.
A physical distribution system includes the location of manufacturing plants, warehousing, transportation mode, inventory control, packaging and ordering systems. All these activities are interdependent and a decision involving one activity generally affects the cost and efficiency of one or all others. The transportation mode, such as sea, air, rail or road must be carefully selected in terms of the total impact on final cost.
Foreign freight forwarders are generally used as shipment coordinators either at the export port or the destination port. Full-service foreign freight forwarders provide information and advice on routing and scheduling, tariffs and rates, licensing arrangements, labelling, legal requirements and government restrictions. Shippers are generally satisfied with the services provided by freight forwarders and also by the nominal fees charged by them.
If the costs of physically exporting your product overseas make it less competitive, there are some other options worth considering.
Intellectual property exports include licensing and franchising and are good for quick access to markets. However, they need to rely heavily on intellectual property (IP) laws to ensure that your owner’s rights are protected (not all countries are signatories to IP laws and those that are sometimes have difficulties policing them).
Licensing is useful for a technology or a well-known brand where other firms use your IP and pay royalties often in your currency. This avoids currency exchange risk issues too. The offshore marketing is left to the licensee, and so the selection of licensee is very important.
Franchising is a good way to get offshore if you have a sound business concept that works well in your home market. Finding markets with similar needs to those in Australia is the key, and the selection of a master franchisee is very important. A good example is Jim’s Mowing, now operating in several countries.
Both licensing and franchising require foreign investors who are available to take up the concept. Rather than export you could arrange for contract manufacture of your product overseas. This method can be used to access markets with tariff barriers or simply to take advantage of lower manufacturing costs. In some countries, such as China, there are tax concessions if part of the manufacture is exported to other countries too.
Turnkey projects are usually project-based and are short-term. These can be major construction or consulting projects. One of the critical issues here is that the expectations of both parties are clearly understood. If there is an issue here, legal proceedings may occur and the jurisdiction as mentioned in the governing contract will determine where the dispute will be heard. This is not often in Australia, unless written into the contract.
A strategic alliance is often used where market information is an issue. This is where complementary strengths/compatibility are important to success, and where say a supplier and customer contractually pool, exchange or integrate resources. An example might be a cannery integrating its operations with a fishing company.
A joint venture is often used where access to markets is restricted, such as for difficult distribution or where a foreign government requires local input. This might require technology transfer, and so IP again becomes an issue. Picking partners is very important to success and it is not a decision to be taken lightly or quickly.
In many countries you can invest in your own operations either by acquisition or by developing a ‘Greenfield’ site (the form of market entry through establishing a new operation in the market). As with any purchase the old legal maxim of ‘let the buyer beware’ applies as it would in Australia.
And so, there are many choices for export distribution channels, and decisions made for your efficiency/expediency will not necessarily equate to export effec
tiveness in offshore markets.
* Murray Rees and Tony Lobo are from Swinburne University of Technology’s Faculty of Business and Enterprise.