A path to peace through inclusion
As the implementation of the peace accord begins, Colombia’s economy is facing the toughest conditions in many years. After a long period of strong growth, external factors including the apparent end of a long bull market in commodities and a sharp rise in the US dollar have helped slow the rate of GDP growth from an average of over 4% a year during 2001–15 (and record high of an annualised 8% in the first quarter of 2007) to 2% in 2016.
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The Hinrich Foundation Sustainable Trade Index 2018
Yet the enthusiasm in Asia for trade does not appear to have waned. This broad societal consensus behind international trade has enabled Asian countries to continue broadening and deepening existing trading relationships, for example, by quickly hammering out a deal for the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in early 2018 following the US’s withdrawal from its predecessor in 2017.
Asia, then, finds itself in the unique position of helping lead and sustain the global economy’s commitment to free and fair trade. It is in this context that the need for sustainability in trade is ever more crucial.
The Hinrich Foundation Sustainable Trade Index was created for the purpose of stimulating meaningful discussion of the full range of considerations that policymakers, business executives, and civil society leaders must take into account when managing and advancing international trade.
The index was commissioned by the Hinrich Foundation, a non-profit organisation focused on promoting sustainable trade. This, the second edition of the study, seeks to measure the capacity of 20 economies—19 in Asia along with the US—to participate in the international trading system in a manner that supports the long-term domestic and global goals of economic growth, environmental protection, and strengthened social capital. The index’s key findings include:
Countries in Asia, especially the richer ones, have broadly regressed in terms of trade sustainability. Hong Kong is developed Asia’s bright spot, recording a slight increase in its score and topping the 2018 index. Several middle-income countries perform admirably, led by Sri Lanka. For the economic pillar, countries generally performed well in terms of growing their labour forces as well as their per-head GDPs. For the social pillar, sharp drops for some countries in certain social pillar indicators contribute to an overall decline. For the environmental pillar, with deteriorating environmental sustainability in many rich countries, China, Laos and Pakistan are the only countries to record increases in scores. Sustainability is an ever more important determinant of FDI and vendor selection in choosing supply-chain partners. Companies are improving the sustainability of their supply chains by restructuring and broadening relationships with competitors and vendors.![](https://impact.econ-asia.com/perspectives/sites/default/files/styles/featured_thumbnail/public/TRACIT.png?itok=7haCbdkP)
The Global Illicit Trade Environment Index 2018
To measure how nations are addressing the issue of illicit trade, the Transnational Alliance to Combat Illicit Trade (TRACIT) has commissioned The Economist Intelligence Unit to produce the Global Illicit Trade Environment Index, which evaluates 84 economies around the world on their structural capability to protect against illicit trade. The global index expands upon an Asia-specific version originally created by The Economist Intelligence Unit in 2016 to score 17 economies in Asia.
View the Interactive Index >> Download workbook
![](https://impact.econ-asia.com/perspectives/sites/default/files/styles/featured_thumbnail/public/Agricultural%20trade%20between%20GCC%20and%20Latin%20America%20-%20Final_0.jpg?itok=4eAS8Zgb)
Breaking Barriers: Agricultural trade between GCC and Latin America
The GCC-LAC agricultural trading relationship has thus far been dominated by the GCC’s reliance on food imports, specifically meat, sugar, and cereals. Over the past two years, however, there has been a notable decline in the share of sugar imported from LAC, and 2017 saw the biggest importers in the GCC—Saudi Arabia and the UAE—impose a ban on Brazilian meat.
Market players on both sides of the aisle are keen to grow the relationship further, but there are hurdles to overcome. In this report, we explore in greater depth the challenges that agricultural exporters and importers in LAC and the GCC face. We consider both tariff and non-tariff barriers and assess key facets of the trading relationship including transport links, customs and certification, market information, and trade finance.
Key findings of the report:
GCC will need to continue to build partnerships to ensure a secure supply of food. Concerns over food security have meant that the GCC countries are exploring ways to produce more food locally. However, given the region’s climate and geology, food imports will remain an important component of the food supply. Strengthening partnerships with key partners such as those in LAC, from which it sourced 9% of its total agricultural imports in 2016, will be vital to food security in the region.
There is a wider range of products that the LAC countries can offer the GCC beyond meat, sugar and cereals. Providing more direct air links and driving efficiencies in shipping can reduce the time and cost of transporting food products. This will, in turn, create opportunities for LAC exporters to supply agricultural goods with a shorter shelf life or those that are currently too expensive to transport. Exporters cite examples such as berries and avocados.
The GCC can engage small and medium-sized producers that dominate the LAC agricultural sector by offering better trade financing options and connectivity. More direct air and sea links can reduce the cost of transporting food products, making it viable for smaller players to participate in agricultural trade. The existing trade financing options make it prohibitive for small and medium-sized players too. Exporters in LAC suggest that local governments and private companies in the GCC can offer distribution services with immediate payments to smaller suppliers at a discount.
Blockchain technology is poised to address key challenges market players face in agricultural trade. Through a combination of smart contracts and data captured through devices, blockchain technology can help to reduce paperwork, processing times and human error in import and export processes. It can improve transparency, as stakeholders can receive information on the state of goods and status of shipments in real time. Finally, it can help with food safety and quality management—monitoring humidity and temperature, for instance, along the supply chain can help to pinpoint batches that may be contaminated, minimising the need for a blanket ban on a product.
Drivers of prosperity in Africa
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![](https://impact.econ-asia.com/perspectives/sites/default/files/styles/featured_thumbnail/public/STIbg.png?itok=qRiNrkMU)
The Hinrich Foundation Sustainable Trade Index 2018
Yet the enthusiasm in Asia for trade does not appear to have waned. This broad societal consensus behind international trade has enabled Asian countries to continue broadening and deepening existing trading relationships, for example, by quickly hammering out a deal for the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in early 2018 following the US’s withdrawal from its predecessor in 2017.
Asia, then, finds itself in the unique position of helping lead and sustain the global economy’s commitment to free and fair trade. It is in this context that the need for sustainability in trade is ever more crucial.
The Hinrich Foundation Sustainable Trade Index was created for the purpose of stimulating meaningful discussion of the full range of considerations that policymakers, business executives, and civil society leaders must take into account when managing and advancing international trade.
The index was commissioned by the Hinrich Foundation, a non-profit organisation focused on promoting sustainable trade. This, the second edition of the study, seeks to measure the capacity of 20 economies—19 in Asia along with the US—to participate in the international trading system in a manner that supports the long-term domestic and global goals of economic growth, environmental protection, and strengthened social capital. The index’s key findings include:
Countries in Asia, especially the richer ones, have broadly regressed in terms of trade sustainability. Hong Kong is developed Asia’s bright spot, recording a slight increase in its score and topping the 2018 index. Several middle-income countries perform admirably, led by Sri Lanka. For the economic pillar, countries generally performed well in terms of growing their labour forces as well as their per-head GDPs. For the social pillar, sharp drops for some countries in certain social pillar indicators contribute to an overall decline. For the environmental pillar, with deteriorating environmental sustainability in many rich countries, China, Laos and Pakistan are the only countries to record increases in scores. Sustainability is an ever more important determinant of FDI and vendor selection in choosing supply-chain partners. Companies are improving the sustainability of their supply chains by restructuring and broadening relationships with competitors and vendors.![](https://impact.econ-asia.com/perspectives/sites/default/files/styles/featured_thumbnail/public/TRACIT.png?itok=7haCbdkP)
The Global Illicit Trade Environment Index 2018
To measure how nations are addressing the issue of illicit trade, the Transnational Alliance to Combat Illicit Trade (TRACIT) has commissioned The Economist Intelligence Unit to produce the Global Illicit Trade Environment Index, which evaluates 84 economies around the world on their structural capability to protect against illicit trade. The global index expands upon an Asia-specific version originally created by The Economist Intelligence Unit in 2016 to score 17 economies in Asia.
View the Interactive Index >> Download workbook
![](https://impact.econ-asia.com/perspectives/sites/default/files/styles/featured_thumbnail/public/Agricultural%20trade%20between%20GCC%20and%20Latin%20America%20-%20Final_0.jpg?itok=4eAS8Zgb)
Breaking Barriers: Agricultural trade between GCC and Latin America
The GCC-LAC agricultural trading relationship has thus far been dominated by the GCC’s reliance on food imports, specifically meat, sugar, and cereals. Over the past two years, however, there has been a notable decline in the share of sugar imported from LAC, and 2017 saw the biggest importers in the GCC—Saudi Arabia and the UAE—impose a ban on Brazilian meat.
Market players on both sides of the aisle are keen to grow the relationship further, but there are hurdles to overcome. In this report, we explore in greater depth the challenges that agricultural exporters and importers in LAC and the GCC face. We consider both tariff and non-tariff barriers and assess key facets of the trading relationship including transport links, customs and certification, market information, and trade finance.
Key findings of the report:
GCC will need to continue to build partnerships to ensure a secure supply of food. Concerns over food security have meant that the GCC countries are exploring ways to produce more food locally. However, given the region’s climate and geology, food imports will remain an important component of the food supply. Strengthening partnerships with key partners such as those in LAC, from which it sourced 9% of its total agricultural imports in 2016, will be vital to food security in the region.
There is a wider range of products that the LAC countries can offer the GCC beyond meat, sugar and cereals. Providing more direct air links and driving efficiencies in shipping can reduce the time and cost of transporting food products. This will, in turn, create opportunities for LAC exporters to supply agricultural goods with a shorter shelf life or those that are currently too expensive to transport. Exporters cite examples such as berries and avocados.
The GCC can engage small and medium-sized producers that dominate the LAC agricultural sector by offering better trade financing options and connectivity. More direct air and sea links can reduce the cost of transporting food products, making it viable for smaller players to participate in agricultural trade. The existing trade financing options make it prohibitive for small and medium-sized players too. Exporters in LAC suggest that local governments and private companies in the GCC can offer distribution services with immediate payments to smaller suppliers at a discount.
Blockchain technology is poised to address key challenges market players face in agricultural trade. Through a combination of smart contracts and data captured through devices, blockchain technology can help to reduce paperwork, processing times and human error in import and export processes. It can improve transparency, as stakeholders can receive information on the state of goods and status of shipments in real time. Finally, it can help with food safety and quality management—monitoring humidity and temperature, for instance, along the supply chain can help to pinpoint batches that may be contaminated, minimising the need for a blanket ban on a product.
A brave new world - Chinese
诸多迹象显示中国经济实力呈持续增长态势,其中一个现象就是寻求在海外收购资产的中国公司数量急剧增长。2009年,当发达经济体仍然在全球金融危机的泥沼中举步维艰时,中国公司进行跨国收购的数量却创下了新的历史记录,总数约298宗。许多中国投资都深受资金短缺的西方企业欢迎,因为如果没有中国的投资,它们将面临严峻的生存危机。然而,中国的大肆收购却引发了诸多忧虑,尤其当有中国国有企业参与海外竞购时,这种担忧便愈发强烈。与此前的西方同行一样,中国企业逐渐意识到要顺利完成并购绝非易事,进行跨过并购尤为如此。
在《勇闯新天地:纵观中国的海外并购》(A brave new world: The climate for Chinese M&A abroad)报告中,我们试图了解这些计划进行海外资产收购的中国企业的担忧与期望,并试图为这些企业提供一个视角,让它们能够了解潜在并购对象和国外监管机构所存在的关切。
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![](https://impact.econ-asia.com/perspectives/sites/default/files/styles/featured_thumbnail/public/STIbg.png?itok=qRiNrkMU)
The Hinrich Foundation Sustainable Trade Index 2018
Yet the enthusiasm in Asia for trade does not appear to have waned. This broad societal consensus behind international trade has enabled Asian countries to continue broadening and deepening existing trading relationships, for example, by quickly hammering out a deal for the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in early 2018 following the US’s withdrawal from its predecessor in 2017.
Asia, then, finds itself in the unique position of helping lead and sustain the global economy’s commitment to free and fair trade. It is in this context that the need for sustainability in trade is ever more crucial.
The Hinrich Foundation Sustainable Trade Index was created for the purpose of stimulating meaningful discussion of the full range of considerations that policymakers, business executives, and civil society leaders must take into account when managing and advancing international trade.
The index was commissioned by the Hinrich Foundation, a non-profit organisation focused on promoting sustainable trade. This, the second edition of the study, seeks to measure the capacity of 20 economies—19 in Asia along with the US—to participate in the international trading system in a manner that supports the long-term domestic and global goals of economic growth, environmental protection, and strengthened social capital. The index’s key findings include:
Countries in Asia, especially the richer ones, have broadly regressed in terms of trade sustainability. Hong Kong is developed Asia’s bright spot, recording a slight increase in its score and topping the 2018 index. Several middle-income countries perform admirably, led by Sri Lanka. For the economic pillar, countries generally performed well in terms of growing their labour forces as well as their per-head GDPs. For the social pillar, sharp drops for some countries in certain social pillar indicators contribute to an overall decline. For the environmental pillar, with deteriorating environmental sustainability in many rich countries, China, Laos and Pakistan are the only countries to record increases in scores. Sustainability is an ever more important determinant of FDI and vendor selection in choosing supply-chain partners. Companies are improving the sustainability of their supply chains by restructuring and broadening relationships with competitors and vendors.![](https://impact.econ-asia.com/perspectives/sites/default/files/styles/featured_thumbnail/public/TRACIT.png?itok=7haCbdkP)
The Global Illicit Trade Environment Index 2018
To measure how nations are addressing the issue of illicit trade, the Transnational Alliance to Combat Illicit Trade (TRACIT) has commissioned The Economist Intelligence Unit to produce the Global Illicit Trade Environment Index, which evaluates 84 economies around the world on their structural capability to protect against illicit trade. The global index expands upon an Asia-specific version originally created by The Economist Intelligence Unit in 2016 to score 17 economies in Asia.
View the Interactive Index >> Download workbook
![](https://impact.econ-asia.com/perspectives/sites/default/files/styles/featured_thumbnail/public/Agricultural%20trade%20between%20GCC%20and%20Latin%20America%20-%20Final_0.jpg?itok=4eAS8Zgb)
Breaking Barriers: Agricultural trade between GCC and Latin America
The GCC-LAC agricultural trading relationship has thus far been dominated by the GCC’s reliance on food imports, specifically meat, sugar, and cereals. Over the past two years, however, there has been a notable decline in the share of sugar imported from LAC, and 2017 saw the biggest importers in the GCC—Saudi Arabia and the UAE—impose a ban on Brazilian meat.
Market players on both sides of the aisle are keen to grow the relationship further, but there are hurdles to overcome. In this report, we explore in greater depth the challenges that agricultural exporters and importers in LAC and the GCC face. We consider both tariff and non-tariff barriers and assess key facets of the trading relationship including transport links, customs and certification, market information, and trade finance.
Key findings of the report:
GCC will need to continue to build partnerships to ensure a secure supply of food. Concerns over food security have meant that the GCC countries are exploring ways to produce more food locally. However, given the region’s climate and geology, food imports will remain an important component of the food supply. Strengthening partnerships with key partners such as those in LAC, from which it sourced 9% of its total agricultural imports in 2016, will be vital to food security in the region.
There is a wider range of products that the LAC countries can offer the GCC beyond meat, sugar and cereals. Providing more direct air links and driving efficiencies in shipping can reduce the time and cost of transporting food products. This will, in turn, create opportunities for LAC exporters to supply agricultural goods with a shorter shelf life or those that are currently too expensive to transport. Exporters cite examples such as berries and avocados.
The GCC can engage small and medium-sized producers that dominate the LAC agricultural sector by offering better trade financing options and connectivity. More direct air and sea links can reduce the cost of transporting food products, making it viable for smaller players to participate in agricultural trade. The existing trade financing options make it prohibitive for small and medium-sized players too. Exporters in LAC suggest that local governments and private companies in the GCC can offer distribution services with immediate payments to smaller suppliers at a discount.
Blockchain technology is poised to address key challenges market players face in agricultural trade. Through a combination of smart contracts and data captured through devices, blockchain technology can help to reduce paperwork, processing times and human error in import and export processes. It can improve transparency, as stakeholders can receive information on the state of goods and status of shipments in real time. Finally, it can help with food safety and quality management—monitoring humidity and temperature, for instance, along the supply chain can help to pinpoint batches that may be contaminated, minimising the need for a blanket ban on a product.
Talking US trade: The view from Hong Kong - Traditional Chinese
本文基於《貿易條款:了解美國的貿易動態》(Terms of trade: Understanding trade dynamics in the US)報告進行的調查撰寫。報告由美國運通(American Express)委託經濟學人智庫(The Economist Intelligence Unit/EIU)撰寫,此調查獲得香港50位高管的回應。本文從外國公司的 角度審查了與世界上最大的經濟體交易的主要層面。
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Terms of Trade: Understanding trade dynamics in the US
The findings are based on an executive survey of 531 companies that trade with the US, conducted by The EIU in March and April 2016, as well as desk research and interviews with experts.
Key findings:
- Companies are optimistic about future trade activity with the US. Two-thirds of respondents in our survey anticipate that their company’s trade with the US will increase over the next five years, with over 43% expecting an increase of 10% or more.
- Companies face a number of issues in trading with the US, but none of these are perceived to be insurmountable. Survey respondents cited exchange-rate volatility (41%), transport costs and delays (32%), trade-related infrastructure (32%) and making payments (32%) as their top challenges.
- The overall quality of trade-related infrastructure in the US is rated highly. Deeper investigation, however, points to shortcomings with ports and land borders, revealing that infrastructure development has not kept pace with the increase in trade activity and requires significant investment for expansion and automation.
- Delays at ports and land-border crossings arise primarily as a result of regulatory requirements. The top sources of regulatory challenges include customs duties and valuation (26% of respondents), licensing requirements (23%) and product-quality standards (20%).
- The post-9/11 security paradigm shift has increased the administrative requirements faced by foreign companies.
- Trade-related regulatory challenges impose significant additional costs on foreign companies. Over 40% of survey respondents indicate that trade-related regulatory challenges increase the cost of doing business by 10-30%, with an additional 15% reporting an increase of more than 30%.
- Payment-related challenges arise from a range of issues, particularly process inefficiencies (52%) and limited payment visibility (52%).
- Foreign companies look to key developments in policy and politics to understand the outlook for trading with the US, closely tracking the rhetoric on the campaign trail for the 2016 US presidential election.
- The negotiation of new trade deals, the Trans-Pacific Partnership (TPP) in particular, will bring new opportunities. Survey findings strongly corroborate this sentiment: 49% of respondents expect the TPP to improve opportunities for trade with the US market moderately, while an additional 29% believe it will improve opportunities substantially.
![](https://impact.econ-asia.com/perspectives/sites/default/files/styles/featured_thumbnail/public/STIbg.png?itok=qRiNrkMU)
The Hinrich Foundation Sustainable Trade Index 2018
Yet the enthusiasm in Asia for trade does not appear to have waned. This broad societal consensus behind international trade has enabled Asian countries to continue broadening and deepening existing trading relationships, for example, by quickly hammering out a deal for the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in early 2018 following the US’s withdrawal from its predecessor in 2017.
Asia, then, finds itself in the unique position of helping lead and sustain the global economy’s commitment to free and fair trade. It is in this context that the need for sustainability in trade is ever more crucial.
The Hinrich Foundation Sustainable Trade Index was created for the purpose of stimulating meaningful discussion of the full range of considerations that policymakers, business executives, and civil society leaders must take into account when managing and advancing international trade.
The index was commissioned by the Hinrich Foundation, a non-profit organisation focused on promoting sustainable trade. This, the second edition of the study, seeks to measure the capacity of 20 economies—19 in Asia along with the US—to participate in the international trading system in a manner that supports the long-term domestic and global goals of economic growth, environmental protection, and strengthened social capital. The index’s key findings include:
Countries in Asia, especially the richer ones, have broadly regressed in terms of trade sustainability. Hong Kong is developed Asia’s bright spot, recording a slight increase in its score and topping the 2018 index. Several middle-income countries perform admirably, led by Sri Lanka. For the economic pillar, countries generally performed well in terms of growing their labour forces as well as their per-head GDPs. For the social pillar, sharp drops for some countries in certain social pillar indicators contribute to an overall decline. For the environmental pillar, with deteriorating environmental sustainability in many rich countries, China, Laos and Pakistan are the only countries to record increases in scores. Sustainability is an ever more important determinant of FDI and vendor selection in choosing supply-chain partners. Companies are improving the sustainability of their supply chains by restructuring and broadening relationships with competitors and vendors.![](https://impact.econ-asia.com/perspectives/sites/default/files/styles/featured_thumbnail/public/TRACIT.png?itok=7haCbdkP)
The Global Illicit Trade Environment Index 2018
To measure how nations are addressing the issue of illicit trade, the Transnational Alliance to Combat Illicit Trade (TRACIT) has commissioned The Economist Intelligence Unit to produce the Global Illicit Trade Environment Index, which evaluates 84 economies around the world on their structural capability to protect against illicit trade. The global index expands upon an Asia-specific version originally created by The Economist Intelligence Unit in 2016 to score 17 economies in Asia.
View the Interactive Index >> Download workbook
SMEs and Global Growth
This EIU article series, sponsored by Mazars, explores the challenges facing mid-market firms when expanding internationally for the first time. They look at companies in a range of industries and home markets and show how these have responded to the challenges.
Read and download all five articles below.
More from this series
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SMEs and Global Growth: The High-Tech Advantage
To a greater extent every day, information technology is levelling the playing field for small and mid-sized enterprises
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SMEs and Global Growth: Meeting Logistics Challenges
A small or mid-sized enterprise (SME) establishing a presence in a new foreign market faces steep learning curves on
![](https://impact.econ-asia.com/perspectives/sites/default/files/styles/featured_thumbnail/public/Final%20Image%203%20%2B%20hero.jpg?itok=VDnUT7NU)
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SMEs and Global Growth: Navigating the Legal and Tax Maze
American statesman and inventor Benjamin Franklin once famously said that nothing is certain in life except death and
![](https://impact.econ-asia.com/perspectives/sites/default/files/styles/featured_thumbnail/public/Final%20Image%203%20%2B%20hero.jpg?itok=VDnUT7NU)
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SMEs and Global Growth: Sustaining Growth and Development
When a small or mid-sized enterprise (SME) ventures abroad for the first time, its first aim is typically to kick-start
![](https://impact.econ-asia.com/perspectives/sites/default/files/styles/featured_thumbnail/public/Final%20Image%203%20%2B%20hero.jpg?itok=VDnUT7NU)
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SMEs and Global Growth: Finding Local Partners
Hoping to profit from a wave of investment in China by large multinationals, small and mid-sizedenterprises (SMEs) based
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The Hinrich Foundation Sustainable Trade Index 2018
Yet the enthusiasm in Asia for trade does not appear to have waned. This broad societal consensus behind international trade has enabled Asian countries to continue broadening and deepening existing trading relationships, for example, by quickly hammering out a deal for the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in early 2018 following the US’s withdrawal from its predecessor in 2017.
Asia, then, finds itself in the unique position of helping lead and sustain the global economy’s commitment to free and fair trade. It is in this context that the need for sustainability in trade is ever more crucial.
The Hinrich Foundation Sustainable Trade Index was created for the purpose of stimulating meaningful discussion of the full range of considerations that policymakers, business executives, and civil society leaders must take into account when managing and advancing international trade.
The index was commissioned by the Hinrich Foundation, a non-profit organisation focused on promoting sustainable trade. This, the second edition of the study, seeks to measure the capacity of 20 economies—19 in Asia along with the US—to participate in the international trading system in a manner that supports the long-term domestic and global goals of economic growth, environmental protection, and strengthened social capital. The index’s key findings include:
Countries in Asia, especially the richer ones, have broadly regressed in terms of trade sustainability. Hong Kong is developed Asia’s bright spot, recording a slight increase in its score and topping the 2018 index. Several middle-income countries perform admirably, led by Sri Lanka. For the economic pillar, countries generally performed well in terms of growing their labour forces as well as their per-head GDPs. For the social pillar, sharp drops for some countries in certain social pillar indicators contribute to an overall decline. For the environmental pillar, with deteriorating environmental sustainability in many rich countries, China, Laos and Pakistan are the only countries to record increases in scores. Sustainability is an ever more important determinant of FDI and vendor selection in choosing supply-chain partners. Companies are improving the sustainability of their supply chains by restructuring and broadening relationships with competitors and vendors.![](https://impact.econ-asia.com/perspectives/sites/default/files/styles/featured_thumbnail/public/TRACIT.png?itok=7haCbdkP)
The Global Illicit Trade Environment Index 2018
To measure how nations are addressing the issue of illicit trade, the Transnational Alliance to Combat Illicit Trade (TRACIT) has commissioned The Economist Intelligence Unit to produce the Global Illicit Trade Environment Index, which evaluates 84 economies around the world on their structural capability to protect against illicit trade. The global index expands upon an Asia-specific version originally created by The Economist Intelligence Unit in 2016 to score 17 economies in Asia.
View the Interactive Index >> Download workbook
![](https://impact.econ-asia.com/perspectives/sites/default/files/styles/featured_thumbnail/public/Agricultural%20trade%20between%20GCC%20and%20Latin%20America%20-%20Final_0.jpg?itok=4eAS8Zgb)
Breaking Barriers: Agricultural trade between GCC and Latin America
The GCC-LAC agricultural trading relationship has thus far been dominated by the GCC’s reliance on food imports, specifically meat, sugar, and cereals. Over the past two years, however, there has been a notable decline in the share of sugar imported from LAC, and 2017 saw the biggest importers in the GCC—Saudi Arabia and the UAE—impose a ban on Brazilian meat.
Market players on both sides of the aisle are keen to grow the relationship further, but there are hurdles to overcome. In this report, we explore in greater depth the challenges that agricultural exporters and importers in LAC and the GCC face. We consider both tariff and non-tariff barriers and assess key facets of the trading relationship including transport links, customs and certification, market information, and trade finance.
Key findings of the report:
GCC will need to continue to build partnerships to ensure a secure supply of food. Concerns over food security have meant that the GCC countries are exploring ways to produce more food locally. However, given the region’s climate and geology, food imports will remain an important component of the food supply. Strengthening partnerships with key partners such as those in LAC, from which it sourced 9% of its total agricultural imports in 2016, will be vital to food security in the region.
There is a wider range of products that the LAC countries can offer the GCC beyond meat, sugar and cereals. Providing more direct air links and driving efficiencies in shipping can reduce the time and cost of transporting food products. This will, in turn, create opportunities for LAC exporters to supply agricultural goods with a shorter shelf life or those that are currently too expensive to transport. Exporters cite examples such as berries and avocados.
The GCC can engage small and medium-sized producers that dominate the LAC agricultural sector by offering better trade financing options and connectivity. More direct air and sea links can reduce the cost of transporting food products, making it viable for smaller players to participate in agricultural trade. The existing trade financing options make it prohibitive for small and medium-sized players too. Exporters in LAC suggest that local governments and private companies in the GCC can offer distribution services with immediate payments to smaller suppliers at a discount.
Blockchain technology is poised to address key challenges market players face in agricultural trade. Through a combination of smart contracts and data captured through devices, blockchain technology can help to reduce paperwork, processing times and human error in import and export processes. It can improve transparency, as stakeholders can receive information on the state of goods and status of shipments in real time. Finally, it can help with food safety and quality management—monitoring humidity and temperature, for instance, along the supply chain can help to pinpoint batches that may be contaminated, minimising the need for a blanket ban on a product.
SMEs and Global Growth: Meeting Logistics Challenges
A small or mid-sized enterprise (SME) establishing a presence in a new foreign market faces steep learning curves on several fronts. It must familiarise itself with the needs and preferences of a new market, ensure compliance with a new set of laws, find and train local staff, arrange financing, and sometimes learn a new language at the same time.
16513
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SMEs and Global Growth: Finding Local Partners
Hoping to profit from a wave of investment in China by large multinationals, small and mid-sizedenterprises (SMEs) based in Germany flocked to that country in the 1990s. China’s government welcomed them: like many other countries, China was intrigued by Germany’s Mittelstand firms— usually stable, technologically sophisticated, family owned firm —and wanted to learn from them. But despite the welcome—or perhaps because of that desire to learn from the newcomers— China often required the newcomers to establish formal joint ventures with Chinese partners. This requirement did not diminish the German SMEs’ interest; indeed, many Mittelstand firms saw the joint ventures as a way to get acclimated in China.
Today, though, the partnership requirements have eased for the approximately 5,200 German firms invested in China. As a result, most German firms have decided to go it alone in the Chinese market. Turck Technology, a family-owned German industrial automation company with annual sales of around €500m, is a case in point. It established a wholly owned subsidiary in China rather than partner with a Chinese firm. Its aim was to maintain control, ensure consistent quality, and protect its designs. The firm’s Chinese sales are about €40m a year, “the same level as our competitors,” says Christoph Kaiser, Turck’s managing director.
By now, only 12% of the German companies invested in China use formal joint ventures, says Alexandra Voss, executive director of the German Chamber of Commerce in north China. “Where the former joint venture requirements no longer exist, German companies tend to purchase the joint venture shares from their former partner rather than extending the agreement,” she says.
JOINT-VENTURE “LIGHT”
Between the two extremes—a formal joint venture and a go-it-alone subsidiary—there is a wide range of looser partnerships possible between SMEs in different countries. Among the most popular such tie-ups are those involving licensing and technical co-operation agreements. The challenge for SMEs in these arrangements—as in full-fledged joint venture deals—is to preserve their proprietary information while benefitting from enhanced access to the local market.
For example, James Cropper, a family-owned UK paper maker, expanded internationally in recent years, to the point where around half of its £88m revenue now comes from export markets. In China, it signed a technical co-operation agreement with a local firm to design fibres for high-end carbon bicycles. Despite cooperating on adapting products for the local market, the agreement sets strict guidelines to protect James Cropper’s know-how. “We wanted to keep control of intellectual property,” says its CEO Phil Wild.
Licencing agreements are another way to boost foreign sales without requiring a formal joint venture. Under such agreements, a local company buys the rights to market (and sometimes produce and develop) the exporting firm’s brand or products. The local partner does not have equity rights, making such agreements popular among small exporters with limited capital.
Australian pharmaceuticals firm Suda and its Chinese partner Eddingpharm provide an example of a licencing agreement. Suda, with revenues of just A$6.3m a year, would have struggled to afford to expand into China in its own name, or to invest in a joint venture. In late 2015, it signed a licensing agreement with Eddingpharm to produce and sell its drugs in China. Among the sweeteners for Suda: an upfront payment of US$300,000 and another US$200,000 when its product is registered in China. For small companies, licencing can offer an immediate cash injection, as well as a way to enter new markets.
A “lighter” variant of a licencing agreement is a simple sales-representative deal, in which a local firm contracts to market, sell and distribute the exporting firm’s products in the target market. David Butler, CEO of the South African Chamber of Commerce in London, says many of his country’s food exporters take this approach in the UK, benefiting from the market reach of UK retail chains and specialist distribution firms.
Such arrangements can help to avoid the biggest danger inherent in full-fledged joint ventures: their high failure rate. McKinsey, the management consultancy, estimates that up to 60% of international ventures fail.1 Among the major problems: partners may have incompatible objectives, for example with one wanting to maximise long-term market share and the other wishing to make a quick profit. The US advisory firm Water Street Partners finds that around twothirds of joint venture CEOs say the owners are misaligned on long-term strategy and on budget issues.2 A more limited technical co-operation agreement can sidestep such fundamental issues.
MATCH-MAKERS
What all these partnerships—the full-fledged joint venture agreements and the “lighter” variants— share in common is the marriage of an exporting firm’s product know-how and a local firm’s market expertise. Regardless of the form that a partnership takes, the fundamental questions apply: how to find the right local partner, and how to structure the agreement to avoid common pitfalls.
“That’s the million dollar question,” says Mr Harris, the US lawyer. “[The answer] is usually based on the [specific] business involved. If you are an educational software company, you think about partnering with the top one or two companies in China that distribute or sell educational software. If you make high-end [technical] widgets, you may partner with the one or two best high-end widget companies in China—whose widgets, though high-end for China, are not nearly as good as yours, and therefore they could use your help. You find these companies yourself, or you hire a consultant to help you find them.”
The routes to finding foreign partners vary. James Cropper found its Chinese partner via the contacts it had made in the country by selling there directly. It sought out Chinese partners with expertise and complementary skills for its high-end fibres division. It also looked for Chinese firms with industry contacts and specialist expertise to sell to high-end bicycle manufacturers.
Indeed, the search for such partners is often mutual, with Chinese firms eager for foreign partnerships. Eddingpharm, the pharma company licensing products from Suda, first entered the business via licensing deals with multinational pharma companies Novartis and Baxter in the early 2000s. In 2012, backed by international investors, Eddingpharm established a US subsidiary to seek out other product lines for distribution in China, as well as deals to develop and market such products. Among its wins: an agreement with Suda to develop and market an insomnia drug which the small Australian company would have struggled to sell in China on its own.
Companies that lack contacts in a target foreign market often turn to consultants for help. Firms such as Prospect Chinese Services, which is staffed by Chinese nationals and has offices across the UK and China, advise clients ranging from hotels and universities to car manufacturers wishing to enter the Chinese market. It claims to offer a ‘one stop shop’ for UK companies, comprising market research and market entry strategy services, support with first contacts, and advice on negotiations.
Other match-makers include government export promotion agencies, which compile large databases of foreign companies and can put exporters in touch with potential foreign partners. Erin Butler of the US Export Assistance Centre says that US SMEs supplying the oil industry approached her for contacts in growth markets such as North Africa. Like James Cropper, the US oil industry suppliers also used their domestic sales forces to make initial contacts with potential foreign partners. The search criteria for finding the right local partners tend to be similar, across a range of businesses: that is, local partners who supply expertise, skills and contacts that are complementary to those of the exporting SME.
ACQUISITIONS-PLUS
Exporters making a long-term commitment to a foreign market often acquire a local company to establish a stable presence in that market. One example is Palfinger, an Austrian SME and construction-machinery maker, which bought companies across the world to access their markets and to diversify away from over-reliance on building mobile cranes. Its foreign plants gave Palfinger a lower-cost, more flexible production base to supply new markets, which in turn helped it to withstand a series of economic storms.
A buying spree was not Palfinger’s sole expansion tool, however. It also established joint ventures with local companies in some major export markets, particularly in China and Russia, using the partners’ local market dominance to boost its own sales. In 2012 Palfinger established two joint ventures with SANY, China’s biggest manufacturer of construction equipment. One of the ventures was established to sell Palfinger products in China, and the other to distribute SANY products outside of the country. In 2013 the companies agreed to a share swap, with SANY taking a 10% stake in Palfinger in exchange for an equal stake for Palfinger in one of SANY’s operating units. For Palfinger, this helped to cement a deep presence in China, while for SANY the deal boosted its own globalisation efforts.
In 2014, Palfinger set up two more joint ventures, this time with Russia’s largest truck maker Kamaz. One builds chassis to hold Palfinger’s mobile cranes, and the other produces cylinders for construction machinery. Under the deal, Palfinger agreed to invest in modernising the production plant. In return, Palfinger gained entry to Russia’s specialist construction machinery market. “We couldn’t buy them [SANY and Kamaz],” spokesman Hannes Roither says drily when asked why the firm chose joint ventures.
Significantly, the local ventures provided a buffer when local markets weakened, due to their strong local customer base. “There have been serious market crashes in both countries” in recent years, Mr Roither says. “But we were able to protect our own sales by increasing market share when foreign competitors withdrew from the country.”
Similarly, the German luxury hotel group Steigenberger set up a joint venture with a local company to accelerate its expansion into India. Steigenberger owns 116 hotels in 12 countries, generating 2013 revenues of €500m. In 2016 it announced a joint venture with MBD, an Indian hotel group, with Steigenberger retaining a controlling stake. MBD will manage the joint venture including sales, while the German company will manage international marketing, training and brand development.
The companies have complementary skills, with Steigenberger a leader in five-star hotel management and MBD an established player within India. Also, and equally crucially, they share the same aim: the rapid roll out of luxury hotels in India. The joint venture plans to open 20 hotels over the next 15 years. Managing Director Sonica Malhotra Kandhari says it would take between three and five years for either partner acting alone to open a single hotel.
KEYS TO SUCCESS
Structuring any type of partnership agreement with a foreign partner can be tricky, says Dan Harris, a founder of the US law firm Harris Bricken, which specialises in joint ventures in China. He advises clients to keep a majority stake in a joint venture, and to protect their intellectual property zealously regardless of the nature of the co-operation. He offers the cautionary tale of a US firm whose Chinese partner began to manufacture the US partner’s products under the Chinese firm’s name. Some remedies are simple: “Many times we find that the [US] company had not registered a patent in China,” Mr. Harris says.
Beyond that, a key to success is to look carefully at the fundamentals: ensuring that the partners’ skills and expertise are complementary to those of the exporting SME; establishing that the aims of both partners are aligned; and making long-term commitments to the target markets. These elements—complementary skills, similar aims, and long-term commitments—are as close as an SME can come to finding a recipe for success in forming international partnerships.
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SMEs and Global Growth: Navigating the Legal and Tax Maze
American statesman and inventor Benjamin Franklin once famously said that nothing is certain in life except death and taxes. Nowadays, no one is more painfully aware of that—at least the part about taxes—than small and midsized enterprises (SMEs) entering foreign markets for the first time.
The complexity of foreign tax, regulatory and legal regimes is the most frequently cited reason why SMEs avoid foreign markets. The range of such barriers is wide, encompassing different tax treatment for similar products in different countries, varying product-composition and packaging rules, different standards for protecting intellectual property (IP), and complicated customs clearance procedures even within a free trade area. While the specific legal and tax barriers vary widely, they all represent essentially the same problem for SMEs: high compliance costs and the risk that, when implemented, regulations will be interpreted in unfavourable ways.
Such risks and costs are at the root of SMEs’ reluctance to export. According to the Confederation of British Industry (CBI), only one-fourth of European companies export. Dutch entrepreneurs’ association MKB-Nederland says that only 20% of Dutch companies export; according to a survey by logistics giant UPS, only 10% of French companies export.
Complex tax and legal issues also explain why SMEs that do export tend to do so only within a free trade area. A large-scale survey of SME owners and directors in seven European countries, carried out by UPS1 in 2015, found that, in four of the seven countries looked at, the complications of clearing customs or of complying with export regulations was among the top three reasons for not exporting outside of the European Union.
Overall, around 80% of EU-based SME exporters confine their exporting to the EU, according to Ben Digby, the CBI’s international director. Others venture farther afield, but to markets with which the EU has a free trade agreement, such as South Korea. An example is offered by UK pottery and tableware manufacturer Portmeirion: It says its export business to South Korea skyrocketed after the country signed a free trade agreement with the EU in 2010. By 2011, South Korea had surpassed the company’s home market in the UK, and became its second-biggest market after the US.
A LABYRINTH OF HEALTH RULES
Examples such as Portmeirion’s should not suggest that a free trade agreement sweeps away all legal and regulatory complications for exporters. Nothing could be further from the truth. Even within the EU single market, among countries with similar standards for products and services, legal and regulatory hurdles arise for exporters. An example is the maze of national rules that determine which pharmaceuticals qualify for medical prescriptions within the national health system.
Laboratoires Expanscience, a French pharmaceuticals SME specialising in skin cosmetics, faced such a problem in the UK. It entered the UK market a few years ago with, among other products, a range of skin creams under the Mustela brand; the creams are used for treating babies’ minor skin problems, among other uses. However, the firm’s UK sales are limited (currently below £1 million a year) because its products are not registered for prescription by the National Health Service (NHS). Registering with the NHS is an expensive and time consuming process: Raj Sandhan, the managing director of Expanscience’s UK distributor, Metro Health and Beauty, says that one of the French firm’s competitors had to wait five years to receive NHS approval. As a recent entrant to the market, Laboratoires Expanscience sells its products instead over-the-counter in independent pharmacies, which limits its sales volumes.
Family-owned with annual revenues of €272m, Laboratoires Expanscience is an active exporter, with subsidiaries in 14 of the 85 countries in which it sells. More than half its total revenue comes from foreign sales. Although it has not applied for NHS approval, its Mustela products are widely available on prescription in other countries. Its Bébé 123 Vitamin Barrier Cream has been classified a drug in the US, meaning that it can be sold on prescription, as well as through retail chains such as Walgreen’s. Obtaining such approvals can be a long process, the firm has found; but the resulting increase in sales that such approval brings makes that investment worthwhile.
INTRICACIES OF VAT
Registering for reimbursement of value-added taxes (VAT) also presents a hurdle for many exporters, even within the EU single market. National VAT rates for the same product vary considerably across the EU: the standard rate varies widely, from 19% in Germany to 21% in the Netherlands and 24% in Greece. Moreover, some states impose ‘additional’ taxes on imported products, leading to variations in tax treatment even within the EU. Belgium taxes imported bottled water and fruit juices, for example, whereas neighbouring France does not. All this causes headaches for importers, who must comply with a patchwork of European tax rules.
At company level, the VAT quilt in Europe causes other types of problems. To receive reimbursement for VAT paid, a company must register with national authorities. The threshold for VAT registration varies widely among EU member states, from €10,000 in Portugal to £83,000 in the UK. One SME dealing with the VAT registration rules is Emois Gourmands, a UK start-up selling French gourmet food in London. Emois Gourmands founder and CEO Cecile Faure says that her firm buys directly from producers in France, does not use middlemen and does not add a big mark-up, thus enabling it to sell products at lower prices than UK supermarkets charge.
But Ms Faure says her firm’s small size puts it at a disadvantage in the VAT department. Her firm is not large enough to qualify for VAT registration in the UK. To avoid paying VAT on imports without being able to offset the tax payment through sales, Ms Faure has to hire a freight forwarder to make the upfront payment. Details such as this can make even a deep free-trade area such as the EU less free than intended. “I applied for VAT registration several times but was repeatedly tuned down,” says Ms Faure. “It’s expensive for a small company.”
UNRAVELLING CUSTOMS CLASSIFICATIONS
A further complication for SMEs is finding a way through the thicket of regulations governing customs clearance and customs classification. An export product’s customs classification is more than just a number: it is a unique identifying code which determines the product’s tariff and VAT treatment, if applicable, and whether the product is permitted to be sold in the destination country in the first place. Some defence-related products, for example, are subject to both export- and import-restrictions. In theory, the World Trade Organisation’s standard product classifications take all the mystery out of identifying products. In practice, it is not so simple, since the WTO’s guidelines can be applied inconsistently across countries. This causes problems for all types of companies, but SMEs, with their relatively limited resources, can be hit particularly hard.
Varying classification of the same product can appear even within a single market such as the EU, according to Christine Debats, international development manager at Conex, a small French company that handles customs clearance for importers and exporters. Television set-top boxes are classified according to their main function, for example. If this is deemed to be recording broadcasts, then imported boxes are subject to a tariff of 13.9%. If the main function is considered to be internet access, then the duty is 0%. The ambiguity comes when the box does both things— leading to a WTO ruling that the EU’s customs treatment of set-top boxes was out of compliance with its rules. That ruling, in turn, forced the EU to issue a complex set of new rules for classifying settop boxes. This example shows how standardised customs classifications sometimes do not keep up with the rapid pace of product development, making it hard to predict the customs treatment of some goods.
But modernising customs classification and clearance can bring pitfalls of its own. In May 2016 the European Commission introduced the Union Customs Code as part of an effort to modernise customs. The initiative aims to enable traders to file all customs declarations remotely by 2020. This will require joining together all of the disparate IT systems used by EU countries—a hugely ambitious undertaking involving a host of detailed changes to the customs treatment of products. This is a huge challenge, considering that “customs classifications change constantly,” says Ms Debats.
PATENT ‘PROTECTION’: ENTER THE TROLLS
Other official attempts to promote efficiency and reduce the paperwork burdens of exporters and investors within the EU are causing a different set of problems. The EU’s planned Unified Patent Court, which is expected to start operating this year, will enable pan-European patent protection via a single filing, thereby cutting the cost of filing patents in multiple national jurisdictions. However, the unified system will also increase the risk of facing patent infringement challenges all across the EU rather than in individual countries.
That risk is increasingly a reality for exporters to and within the EU, as a result of the appearance in Europe of so-called “patent trolls”. These are firms that acquire patents to technologies that they have no intention of developing themselves, for the purpose of blocking others from using the technology. The patent trolls prevent the use of those technologies by threatening firms developing those technologies with patent infringement lawsuits.
The practice originated in the US, where patent trolling has become a big business. Specialist patent trolls are joined by multinationals that actively buy and police patents in their sectors. A surge in patent litigation has led the federal government, as well as some US states, to clamp down on the trolls. One result of the US clamp-down “is that the patent trolls have come over to Europe,” says Edward Borovikov, a lawyer in France with global law firm Dentons.
So far, many of the problems have centred on Germany, where the courts support patentholders’ rights vigorously (as they do in the Netherlands), Mr Borovikov says. However, the pan- European patent system increases trolls’ potential rewards if they win a case, since compensation will be calculated across the entire EU and not only in the affected country. “A case will cost at least €200,000-300,000, which SMEs simply can’t afford,” says Mr Borovikov. “Twenty years ago, intellectual property was not a huge concern in Europe. Now companies must check very carefully for possible patent infringements to avoid being sued by trolls.”
Patent trolls are a particular threat to SMEs. In the US, half of all patent troll lawsuits are against companies with revenues of US$10 million or less. The average cost of defending such lawsuits is US$3.2m—enough to put many SMEs out of business, according to Snapdragon, a consultancy offering intellectual property protections.
Similar cases are emerging against European SMEs. Toll Collect, a mid-sized German company with 600 employees, was targeted recently by such a case. It holds a government contract for a road-pricing system for trucks in Germany, with some terminals placed in neighbouring countries including the Netherlands. Toll Collect was sued by a German firm, Papst, which owns a European patent for road-pricing systems. The case was filed in the Netherlands among other places, and a Dutch court found in Papst’s favour.
Staying clear of patent trolls is not, of course, the only issue for exporters wishing to protect their markets. In many parts of the world, the issue is far simpler: enforcing the IP protections already on the books. In China, for example, “the problem is not necessarily with the legislation, but with the implementation” of IP rights, says Christoph Kaiser, managing director in China for Turck Technology, a family-owned German industrial automation company with annual sales of around €500m. Similarly, Dutch biotech firm Keygene has yet to set up a full subsidiary in China because of IP concerns. CEO Arhen van Tunen believes that IP rights for products such as his—innovative crop improvements—are weak in China. The company holds more than 500 patents, but these are only as good as local enforcement of property rights.
FINDING A WAY
Such concerns keep giant emerging markets such as China and India out of reach for many European SMEs. So, for instance, although most large Dutch companies such as Philips and ABN Amro are well established in both countries, few SMEs have followed their example. Fewer than 200 Dutch firms operate in India. A 2016 survey of Dutch companies active in China, carried out by the Dutch Ministry of Foreign Affairs,4 found only about 1,000 Dutch companies in the country, out of a total of 871,000 Dutch companies, most of them SMEs. “The barriers to doing business mentioned most often concern government relations and the Chinese regulatory environment,” the Ministry says. “Bureaucracy and the lack of transparency in legislation are the most common hurdles.”
Opaque rules and inconsistent application of regulations governing health products, among others, along with customs classification issues and variable VAT rules even within a single market create day-to-day problems for all exporters. These problems are felt most keenly by firms new to exporting and short on resources for figuring out the details of the regulatory, legal and tax systems in each of its export markets. Free trade agreements, along with various initiatives to reduce the paperwork burdens on exporters and cross-border investors, can help. But occasionally well-intended efforts, such as the pan-European patent filing system and the remote customs-clearance initiative, have unintended consequences that actually can increase the burden on exporters. It remains for policy makers to improve on these efforts, to avoid having newly internationalising SMEs turn back from their efforts to venture abroad.
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SMEs and Global Growth: The High-Tech Advantage
To a greater extent every day, information technology is levelling the playing field for small and mid-sized enterprises (SMEs). Export markets, in particular, are no longer the exclusive domain of large players with the resources to field global sales and production staffs. Today, even startups can use the Internet to sell abroad, and to commission foreign firms to produce their designs cheaply.
For some new firms, in fact, geographical boundaries hardly come into play at all: they market and sell to consumers worldwide directly, becoming global players almost from the start. A good example is Skype, an Internet phone service set up by two Scandinavian entrepreneurs in 2003. In short order, Skype grew from a start-up to a global player with US$2 billion in annual revenues.
Skype is a classic example of a ‘micro-multinational’, a phrase coined by Google chief economist Hal Varian to describe small firms that acquire a global presence by using technology. However, such instant international presence is more the exception than the rule. Most small companies have to build an international presence the slow way, by building up their brands and creating networks of international business partners. Information technology helps in this effort, but does not produce instantaneous results as it might with specialised communications services providers such as Skype.
Indeed, even technology companies typically need a certain scale and an established brand to expand beyond their home markets. A good example is IceMobile, a Dutch company that creates mobile apps and has launched a successful drive abroad. The firm did do so by first establishing its brand in the Netherlands, and then partnering with another Dutch firm with a complementary product—brand loyalty programmes—to expand abroad. Its experience illustrates that, for most mid-sized firms a certain initial size and heft in the home market is a prerequisite for export success.
Broadly speaking, technology has helped to foster three types of SME exporter. First, there are companies such as IceMobile with established brands at home, which can use technology to export their business models. Second, there are so-called ‘born global’ firms such as Skype, which sell products globally right from the start-up phase. And third, some mid-sized companies use technology to outsource and offshore a core activity.
VENTURING ABROAD
Although technology is fostering a new generation of smaller, export-focused companies, this development should be seen in perspective. Most SMEs remain focused on their home markets and have no plans to venture abroad anytime soon. This is particularly true of SMEs based in large markets such as the United States. US statistics show that 304,000 out of the country’s 5.8m companies—only 5.5% of the total—exported in 2014.1 Moreover, most of those exports went to neighbours Canada and Mexico. “The domestic market is big enough to grow sales in by itself, and small companies often lack the resources to export,” explains Erin Butler, a commercial officer of the US Commerce Department’s Export Assistance Centre in New Orleans.
Most European SMEs focus on their national markets, too, despite the advantages of the European single market. Only about one-fourth of continental European companies trade internationally, according to the Confederation of British Industry (CBI). In fact, the figure is driven upwards by Germany, where more than half (54%) of all manufacturing companies export, according to the Deutscher Industrie- und Handelskammertag (DIKW), an industry body. In the Netherlands, a big trading country, around 20% of firms export, often as suppliers to local multinationals, says the Dutch business federation MKB.
Similarly, France has comparatively few exporting companies, with foreign trade dominated by a relative handful of large firms. In a recent survey, United Parcel Service, the world’s largest package delivery company, found that only 10% of French companies export.2 French government figures show there are only 120,000 French exporting companies, a third of the number in Germany. In the UK, just 8% of companies export directly, and another 7% supply foreign markets indirectly as part of multinationals’ supply chains, the CBI says.
Yet there is evidence that the Internet is changing this picture, encouraging more SMEs to look abroad for growth. For example, Petit Bateau, a privately-owned French children’s clothing company with 2013 sales of €300m, now sells successfully to other European countries over a website launched in 2006. The web site built upon an international chain of shops started by Petit Bateau in 2001, which, in turn, built on a mail-order business the firm started in the late 1980s. The web site, in short, enhances the firm’s international offering, but is not the basis for it. The basis is a fashion business that was developed over decades in the home market, and then expanded through mail order and traditional bricks-and-mortar shops.
Similarly, the director of a successful UK fashion brand, which now earns around half of its £380m annual revenue in foreign markets, expects explosive growth from Internet sales—but sees this growth as building on the firm’s existing brand strength. “The Internet technology became available for us to increase our presence abroad around six years ago,” says an executive of
the firm, who requested anonymity. The web site automatically detects where a user is based, enabling options such as home delivery or “click and collect” at a local store.
As with Petit Bateau, these marketing channels complement, rather than replace, an established foreign presence. The UK firm opened its first foreign store in the US in the late 1990s, and then steadily built up a network of shops worldwide, as well as supply arrangements with foreign department stores. As these examples show, the companies that benefit most from leveraging their established brands via the Internet are often those occupying a specialised market niche, such as a fashion brand or a unique technology.
‘BORN—OR RE-BORN—GLOBAL’
Many ‘born global’ companies, in contrast, sell a high-technology product internationally right from the start. As noted above, Skype and social media platforms such as Facebook fit this description. Another example is Bausey Medical Solutions, a US firm marketing a medical diagnostic app. The firm says it has attracted interest from Europe as well as the US. In Germany, start-ups such as SoundCloud, a global online audio distribution platform, and the photo-editing and photo-sharing app EyeEm, have quickly built a global presence.
In some cases, the growth afforded by Internet marketing is so rapid that a company is, in effect, ‘re-born global’. IceMobile, for example, built an established national presence by providing mobile apps for Dutch companies such as ABN Amro bank and the Albert Heyn grocery store chain. It then proceeded to build an international presence. In 2012 it merged with another Dutch company, BrandLoyalty, which produces loyalty programmes for retailers. Most of its revenues now come from foreign markets, as the combined company uses IceMobile technology to offer shoppers mobile access to their accounts. Clients include companies such as Lowes Foods (US), Dutch-owned SPAR China, and Danish retailer Coop, says its chief executive Jeroen Pietryga. “The possibilities are increasing fast,” he adds, pointing to the possible use of customer data to design and implement loyalty schemes.
Similarly, Globalstar, a listed US communications company, grew quickly in international markets after making major technology investments. “It cost us US$1bn to launch our satellite network,” says Jay Monroe, Globalstar’s chairman, with industry backers including Deutsche Aerospace and Vodaphone funding the launch of a system that supports satellite phone and data transmission. That investment enabled the company to occupy a niche selling global positioning and tracking devices, including satellite phones for individuals visiting remote regions.
Mr Monroe talks of bringing the retail price down to US$100 (less than half of the launch price at the start of next year). “The potential market could be 500,000 units a year in time,” he claims, with interest from the major car makers (looking for reliable connectivity for their vehicles) as well as retailers. That would be a large increase for a company with 2015 revenues of US$90.5m. The potential is being factored into its share price: the company is valued at more than US$1bn. Like IceMobile’s, Globalstar’s experience shows that technology companies can tap into global markets to win rapid growth, but must have an initial scale and established technology to do so.
OUTSOURCING AND OFFSHORING A CORE ACTIVITY
Mid-sized companies can also expand abroad in a third way: outsourcing a core activity, such as manufacturing, to a foreign partner, using information technology to ensure close adherence to product specifications and guidelines. Mid-sized manufacturers based in Germany in particular have led the movement to move manufacturing to lower-wage partners in Asia and Eastern Europe. In many cases, such moves are in response to technology-driven offshoring of production by the SMEs’ key multinational customers.
This pattern is well established, and predates the Internet revolution. Many German mid-sized firms set up production in Asia as they followed their multinational customers there; leading automakers, for example, have been manufacturing in China since the 1980s. The German Chamber of Commerce says that more than 5,000 German firms now operate in China and that, with local production so well established, attention has shifted to exploiting the huge Chinese market. By now, 93% of German firms say that they are in China for its sales potential, while just 43% are there because of lower production costs.
The shift wrought by information technology is not that it allows firms to outsource or offshore core activities, but that it makes it much cheaper and easier for smaller companies to follow the lead of bigger companies in doing so. A good example is Bowers & Wilkins, a UK company that produces loudspeakers and other audio equipment. Three quarters of its £125 million annual revenue comes from a plant it opened in China to cut costs. That plant allowed it to market speakers priced at just a few hundred pounds, compared to the £35,000 price of some of its UKmanufactured systems (or up to £1 million for a bespoke stadium system).
Beyond facilitating offshoring, the Internet combined with technologies such as 3D printing and automated manufacturing are changing the nature of manufacturing itself. A case in point is Local Motors, a US company that uses open-source online vehicle designs and then manufactures the vehicles through a global network of small plants, sometimes through 3D printing. The firm employs just 15 full-time staff, relying on an online network of 12,000 freelance designers. To date, it has produced about 50 off-road vehicles, and plans to produce another 1,500. Its combination of open-source design and distributed manufacturing allows this mid-sized firm to compete with automotive giants burdened with large fixed costs.
A LOOK AHEAD: CONSTRUCTIVE DISRUPTION
Examples such as Local Motors show how new technologies that benefit SMEs also disrupt established business models across a range of industries. In manufacturing, a shift to flexible manpower and online intellectual property is calling into question the old fixed-plant business model, which requires mass manufacturing to benefit from economies of scale.
Moreover, highly automated production—for example, the use of robots—will eventually erode the cost advantage of basing production in low-wage countries, as labour becomes less important to costs, says Erik Brynjolfsson, a professor of management at the MIT Sloan School of Management and director of the MIT Initiative on the Digital Economy. This will allow mid-sized firms to shift production away from low-wage countries and into target markets abroad, or indeed back to their home markets to facilitate close monitoring of quality and product design.
Rossignol, the French ski equipment maker with 2015 sales of €243m, provides an example of ‘backshoring’—moving previously offshored production back to the home market—as the cost advantage of offshoring was eroded. The company said in 2010 that was moving production back to France that it had off-shored to Taiwan three years earlier. Its aim, it said, was to produce better researched products and react more quickly to changes in the ski equipment market. Modern manufacturing technology has helped to protect the company’s price-competitiveness despite its return to a higher-wage manufacturing base.
Non-manufacturing industries also provide examples of business-model disruption driven by new technologies, which in turn opens new opportunities for SMEs to challenge established giants. In financial services, small players are building new markets in developing countries by offering basic, mobile-based banking services to previously under-served populations. An example is bKash, a mobile banking platform in Bangladesh. It launched in 2011 and had 11m accounts two years later. In retailing, small web-based shopping platforms such as Konga and Jumia in Nigeria are challenging the predominance of companies like US-based amazon.com, and have seen rapid growth in their customer bases as well. Jumia was launched by a German e-commerce investor, Rocket Internet, in 2012. It is losing money, but its sales have surged to US$150m a year.
Across manufacturing and service industries, then, technology is not just enabling leaps in efficiency. It is changing the very way that some sectors operate. For mid-sized firms, this opens the door to explosive growth, if they are able to spot and exploit new market niches, and use new technologies to leverage their success.
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SMEs and Global Growth: Sustaining Growth and Development
When a small or mid-sized enterprise (SME) ventures abroad for the first time, its first aim is typically to kick-start sales and build a local market. That, however, only establishes a foothold. To continue growth and development in a new market, SMEs require a broader strategy aimed at developing and maintaining a strong local presence.
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SMEs and Global Growth: Finding Local Partners
Hoping to profit from a wave of investment in China by large multinationals, small and mid-sizedenterprises (SMEs) based in Germany flocked to that country in the 1990s. China’s government welcomed them: like many other countries, China was intrigued by Germany’s Mittelstand firms— usually stable, technologically sophisticated, family owned firm —and wanted to learn from them. But despite the welcome—or perhaps because of that desire to learn from the newcomers— China often required the newcomers to establish formal joint ventures with Chinese partners. This requirement did not diminish the German SMEs’ interest; indeed, many Mittelstand firms saw the joint ventures as a way to get acclimated in China.
Today, though, the partnership requirements have eased for the approximately 5,200 German firms invested in China. As a result, most German firms have decided to go it alone in the Chinese market. Turck Technology, a family-owned German industrial automation company with annual sales of around €500m, is a case in point. It established a wholly owned subsidiary in China rather than partner with a Chinese firm. Its aim was to maintain control, ensure consistent quality, and protect its designs. The firm’s Chinese sales are about €40m a year, “the same level as our competitors,” says Christoph Kaiser, Turck’s managing director.
By now, only 12% of the German companies invested in China use formal joint ventures, says Alexandra Voss, executive director of the German Chamber of Commerce in north China. “Where the former joint venture requirements no longer exist, German companies tend to purchase the joint venture shares from their former partner rather than extending the agreement,” she says.
JOINT-VENTURE “LIGHT”
Between the two extremes—a formal joint venture and a go-it-alone subsidiary—there is a wide range of looser partnerships possible between SMEs in different countries. Among the most popular such tie-ups are those involving licensing and technical co-operation agreements. The challenge for SMEs in these arrangements—as in full-fledged joint venture deals—is to preserve their proprietary information while benefitting from enhanced access to the local market.
For example, James Cropper, a family-owned UK paper maker, expanded internationally in recent years, to the point where around half of its £88m revenue now comes from export markets. In China, it signed a technical co-operation agreement with a local firm to design fibres for high-end carbon bicycles. Despite cooperating on adapting products for the local market, the agreement sets strict guidelines to protect James Cropper’s know-how. “We wanted to keep control of intellectual property,” says its CEO Phil Wild.
Licencing agreements are another way to boost foreign sales without requiring a formal joint venture. Under such agreements, a local company buys the rights to market (and sometimes produce and develop) the exporting firm’s brand or products. The local partner does not have equity rights, making such agreements popular among small exporters with limited capital.
Australian pharmaceuticals firm Suda and its Chinese partner Eddingpharm provide an example of a licencing agreement. Suda, with revenues of just A$6.3m a year, would have struggled to afford to expand into China in its own name, or to invest in a joint venture. In late 2015, it signed a licensing agreement with Eddingpharm to produce and sell its drugs in China. Among the sweeteners for Suda: an upfront payment of US$300,000 and another US$200,000 when its product is registered in China. For small companies, licencing can offer an immediate cash injection, as well as a way to enter new markets.
A “lighter” variant of a licencing agreement is a simple sales-representative deal, in which a local firm contracts to market, sell and distribute the exporting firm’s products in the target market. David Butler, CEO of the South African Chamber of Commerce in London, says many of his country’s food exporters take this approach in the UK, benefiting from the market reach of UK retail chains and specialist distribution firms.
Such arrangements can help to avoid the biggest danger inherent in full-fledged joint ventures: their high failure rate. McKinsey, the management consultancy, estimates that up to 60% of international ventures fail.1 Among the major problems: partners may have incompatible objectives, for example with one wanting to maximise long-term market share and the other wishing to make a quick profit. The US advisory firm Water Street Partners finds that around twothirds of joint venture CEOs say the owners are misaligned on long-term strategy and on budget issues.2 A more limited technical co-operation agreement can sidestep such fundamental issues.
MATCH-MAKERS
What all these partnerships—the full-fledged joint venture agreements and the “lighter” variants— share in common is the marriage of an exporting firm’s product know-how and a local firm’s market expertise. Regardless of the form that a partnership takes, the fundamental questions apply: how to find the right local partner, and how to structure the agreement to avoid common pitfalls.
“That’s the million dollar question,” says Mr Harris, the US lawyer. “[The answer] is usually based on the [specific] business involved. If you are an educational software company, you think about partnering with the top one or two companies in China that distribute or sell educational software. If you make high-end [technical] widgets, you may partner with the one or two best high-end widget companies in China—whose widgets, though high-end for China, are not nearly as good as yours, and therefore they could use your help. You find these companies yourself, or you hire a consultant to help you find them.”
The routes to finding foreign partners vary. James Cropper found its Chinese partner via the contacts it had made in the country by selling there directly. It sought out Chinese partners with expertise and complementary skills for its high-end fibres division. It also looked for Chinese firms with industry contacts and specialist expertise to sell to high-end bicycle manufacturers.
Indeed, the search for such partners is often mutual, with Chinese firms eager for foreign partnerships. Eddingpharm, the pharma company licensing products from Suda, first entered the business via licensing deals with multinational pharma companies Novartis and Baxter in the early 2000s. In 2012, backed by international investors, Eddingpharm established a US subsidiary to seek out other product lines for distribution in China, as well as deals to develop and market such products. Among its wins: an agreement with Suda to develop and market an insomnia drug which the small Australian company would have struggled to sell in China on its own.
Companies that lack contacts in a target foreign market often turn to consultants for help. Firms such as Prospect Chinese Services, which is staffed by Chinese nationals and has offices across the UK and China, advise clients ranging from hotels and universities to car manufacturers wishing to enter the Chinese market. It claims to offer a ‘one stop shop’ for UK companies, comprising market research and market entry strategy services, support with first contacts, and advice on negotiations.
Other match-makers include government export promotion agencies, which compile large databases of foreign companies and can put exporters in touch with potential foreign partners. Erin Butler of the US Export Assistance Centre says that US SMEs supplying the oil industry approached her for contacts in growth markets such as North Africa. Like James Cropper, the US oil industry suppliers also used their domestic sales forces to make initial contacts with potential foreign partners. The search criteria for finding the right local partners tend to be similar, across a range of businesses: that is, local partners who supply expertise, skills and contacts that are complementary to those of the exporting SME.
ACQUISITIONS-PLUS
Exporters making a long-term commitment to a foreign market often acquire a local company to establish a stable presence in that market. One example is Palfinger, an Austrian SME and construction-machinery maker, which bought companies across the world to access their markets and to diversify away from over-reliance on building mobile cranes. Its foreign plants gave Palfinger a lower-cost, more flexible production base to supply new markets, which in turn helped it to withstand a series of economic storms.
A buying spree was not Palfinger’s sole expansion tool, however. It also established joint ventures with local companies in some major export markets, particularly in China and Russia, using the partners’ local market dominance to boost its own sales. In 2012 Palfinger established two joint ventures with SANY, China’s biggest manufacturer of construction equipment. One of the ventures was established to sell Palfinger products in China, and the other to distribute SANY products outside of the country. In 2013 the companies agreed to a share swap, with SANY taking a 10% stake in Palfinger in exchange for an equal stake for Palfinger in one of SANY’s operating units. For Palfinger, this helped to cement a deep presence in China, while for SANY the deal boosted its own globalisation efforts.
In 2014, Palfinger set up two more joint ventures, this time with Russia’s largest truck maker Kamaz. One builds chassis to hold Palfinger’s mobile cranes, and the other produces cylinders for construction machinery. Under the deal, Palfinger agreed to invest in modernising the production plant. In return, Palfinger gained entry to Russia’s specialist construction machinery market. “We couldn’t buy them [SANY and Kamaz],” spokesman Hannes Roither says drily when asked why the firm chose joint ventures.
Significantly, the local ventures provided a buffer when local markets weakened, due to their strong local customer base. “There have been serious market crashes in both countries” in recent years, Mr Roither says. “But we were able to protect our own sales by increasing market share when foreign competitors withdrew from the country.”
Similarly, the German luxury hotel group Steigenberger set up a joint venture with a local company to accelerate its expansion into India. Steigenberger owns 116 hotels in 12 countries, generating 2013 revenues of €500m. In 2016 it announced a joint venture with MBD, an Indian hotel group, with Steigenberger retaining a controlling stake. MBD will manage the joint venture including sales, while the German company will manage international marketing, training and brand development.
The companies have complementary skills, with Steigenberger a leader in five-star hotel management and MBD an established player within India. Also, and equally crucially, they share the same aim: the rapid roll out of luxury hotels in India. The joint venture plans to open 20 hotels over the next 15 years. Managing Director Sonica Malhotra Kandhari says it would take between three and five years for either partner acting alone to open a single hotel.
KEYS TO SUCCESS
Structuring any type of partnership agreement with a foreign partner can be tricky, says Dan Harris, a founder of the US law firm Harris Bricken, which specialises in joint ventures in China. He advises clients to keep a majority stake in a joint venture, and to protect their intellectual property zealously regardless of the nature of the co-operation. He offers the cautionary tale of a US firm whose Chinese partner began to manufacture the US partner’s products under the Chinese firm’s name. Some remedies are simple: “Many times we find that the [US] company had not registered a patent in China,” Mr. Harris says.
Beyond that, a key to success is to look carefully at the fundamentals: ensuring that the partners’ skills and expertise are complementary to those of the exporting SME; establishing that the aims of both partners are aligned; and making long-term commitments to the target markets. These elements—complementary skills, similar aims, and long-term commitments—are as close as an SME can come to finding a recipe for success in forming international partnerships.
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SMEs and Global Growth: Meeting Logistics Challenges
A small or mid-sized enterprise (SME) establishing a presence in a new foreign market faces steep learning curves on several fronts. It must familiarise itself with the needs and preferences of a new market, ensure compliance with a new set of laws, find and train local staff, arrange financing, and sometimes learn a new language at the same time.
In the excitement of establishing a foothold in unfamiliar terrain, small firms can overlook a less glamorous aspect of the process, but one that is crucial to success: ensuring that components, raw materials and finished products reach their destinations on time, in good condition and at competitive prices. That task—establishing supply chains and distribution channels—falls to logistics managers; the quality of their performance can make the difference between a successful international expansion and an expensive disappointment.
Logistics pitfalls abound even in an SME’s home market, and can be compounded when using an overseas manufacturer. One typical example, involving underestimating shipping costs, is related by Entrepreneur magazine1, a North American publication focused on small business. A small California supplier of wedding-cake toppers, Younique Boutique, received an order to ship wedding toppers to a television production set. When the order ballooned unexpectedly to 280 toppers and the television production set was belatedly revealed to be in Hawaii, the SME’s founder and CEO scrambled to fill the order using a manufacturer in China. Under time pressure, and without accurate information on the shipment method to be used by the Chinese plant or the added price of a rush order, the owner guessed that the added shipping cost would be $5 per item—an underestimation that ultimately cost the firm $800.
HIRING DELIVERY EXPERTS
Mistakes made under time pressure are hard to avoid, but the main lesson here for SMEs is clear: Regardless of where they operate, attention to the nuts-and-bolts of logistics is an important aspect of successful entry into a new market.
To avoid costly logistical problems, many newly internationalising SMEs outsource the logistics function, both for inbound components and returns, and for outbound finished products. They look for experienced logistics services providers, using either partners they already employ elsewhere, or local firms, or a combination of the two. This enables them to concentrate on their core business and leaves the details of deliveries to firms with distribution expertise in the new market.
Consider UK-based Childrensalon, which sells high-end children’s clothing via its website and through a shop in Tunbridge Wells, UK. It increased its sales tenfold over the past five years (to £63 million in 2016) by selling internationally via its web site. This expansion required a heavy investment in logistics, including building up the firm’s packaging staff and warehousing capacity, as well as updating its IT systems. For deliveries, however, Childrensalon relies on five international freight firms including UPS and DHL. “We found that some companies were more efficient than others for deliveries in certain parts of the world,” says human resources director Denise Hamilton, adding that selecting providers for each new market was a process of “trial and error”. These outside providers manage the paperwork, such as customs clearance, as well as the actual deliveries.
Childrensalon is hardly alone in outsourcing freight services in new markets. Toby Gooley, editor of the US-based Supply Chain Quarterly, says that most companies, large and small, outsource distribution to avoid devoting time and resources to a non-core activity. While freight services provided by a third party come at a cost, outsourcing this function means an SME saves on dedicated staff to deliver goods and to ensure legal compliance with import and export regulations, as well as saving the direct costs of buying and maintaining delivery vehicles.
For a largely web-based company such as Childrensalon, outsourcing freight operations has allowed it to sell, and source, worldwide: it now offers more than 270 different brands and sells to more than 120 countries, fuelling rapid sales growth in recent years. Given that complexity, outsourcing freight operations was a must—even if that meant paying the costs of both initial deliveries to customers and return deliveries when customers do not want an item they ordered. The cost of return deliveries, in particular, cuts into the margins of an online retailer, but is an unavoidable cost since customers cannot physically see or try the goods they order online.
So, for example, Childrensalon pays freight services providers such as UPS or Fedex £9.95 per delivery to an address in the United States, and a similar amount if the customer decides to return the item. The firm pays freight providers £3.95 for delivery to a UK address. Ms Hamilton says that the higher US delivery charges are passed on to US customers (who must also pay return postage costs themselves), who pay them because the charges are relative low compared to the high cost of the high-end products involved. While this works for Childrensalon, high delivery costs in export markets could hurt companies in more competitive industry segments by pricing their products out of reach.
In general, experts say distribution and logistics services can add 10%-15% to the cost of goods.2 One concern highlighted by Childrensalon is that SMEs often fail to shop around extensively among alternative freight suppliers, even though the cost of freight services can dent competitiveness. Jim Edmondson, CEO of the UK aerospace company Gilo Industries, a privatelyheld group with 2016 revenues of £3.2 million, is one example among many. His company is about to expand from a specialised to a wider consumer market, but so far is relying on a single supplier, UPS.
Gilo makes a very lightweight engine which can be carried in a backpack to create a powered paraglider (avoiding many of the stringent regulations for conventional aircraft), among other applications. With sales of a few hundred units a year of products costing thousands of pounds apiece, logistics has not been a great concern. Gilo has hired UPS to deliver worldwide, and will pass delivery costs on to customers. This is a practical solution for the firm at a busy time. But with sales expected to increase to the thousands of units when the new product is launched, logistics costs may become more of a factor in the firm’s profitability.
KEEPING CORE LOGISTICS IN-HOUSE
While some firms outsource product deliveries, they also keep some mission-critical functions in-house. As noted above, for example, Childrensalon invested in a made-to-order IT system to manage dispatching of products from a warehouse in its home town. Due to the surge in sales and international deliveries that followed its online expansion, the firm recently added two warehouses on the same industrial estate. It also increased its packing and fulfilment staff to 90 people, nearly one-third of its total staff. Centralised distribution makes sense for a company selling to so many different markets: the cost of setting up warehouses abroad would have been prohibitive. More importantly, the in-house central warehousing function allows Childrensalon to retain direct control over a critical service—dispatching products as specified in customers’ orders—and to provide direct customer support when needed.
The use of Childrensalon employees to answer customer queries and provide comprehensive product information before purchase has paid off by keeping return rates very low, the firm says. According to Ms Hamilton, only around 10% of orders are returned. This compares to an estimated returns rate of 25% for women’s fashion items in the UK, according to an executive of retailer John Lewis.3 Cutting the rate of returns translates into an improved bottom line. The consultancy Clear Returns says that returned orders cost UK retailers £60 billion a year, a third of which is generated by online retailers.
Managing returns is particularly important for companies trading internationally, where the cost of deliveries from and to the home base are typically higher than for domestic deliveries. Raj Sandhan, managing director of UK distributor Metro Health and Beauty, experienced the difference first-hand when it sourced cosmetics in the US. He says that freight charges of 8-10% on US imports, on top of import tariffs, cut deeply into profit margins. “Together, freight and tariff charges can easily wipe out half of an exporter’s margins,” Sandhan says. Metro turned instead to cosmetics manufacturers in France to reduce both tariff and transport costs, and deals with suppliers there directly.
The heavy capital cost of setting up foreign logistics centres (such as warehouses) mean that companies expanding into new foreign markets generally outsource this function at first. They are more likely to invest in such centres when they are well established in the foreign market and therefore can predict demand, says Christopher Van Riet, managing director of Russian logistics provider Radius Group. Metro’s Sandhan agrees, saying that firms tend to use external distributors for the first two to three years in a foreign market.
Van Riet cites the example of John Deere, a large American agricultural machinery maker that started local assembly of its products to facilitate sales to Russian dealerships. Initially, it leased a turn-key assembly plant built by Radius, which bolted together a small number of components imported from the US. Over several years, John Deere built up its own manufacturing operation to take on more complex work; it also started to use more Russian suppliers of components. Although it needed to assemble locally to avoid Russian import tariffs, John Deere built up its manufacturing and logistics operations gradually, to avoid heavy upfront investment in an unproven market.
This approach is different from that of retailers, who—due to the fast-moving nature of their business—are more likely than heavy-goods manufacturers to see warehousing as mission-critical. “Retail stores can open and shut,” says Van Riet. “The key for supermarket chains is [control over] warehousing and distribution, so that they can maintain and deliver goods to stores reliably.”
For example, Auchan, the French supermarket chain, said in October 2016 that it will spend over US$100 million on a big logistics and distribution centre near Moscow. It used Radius to develop the project but has kept direct control over the facility. Initially, it will service Auchan’s existing 50 stores in the region. But with capacity to load and unload more than 200 trucks simultaneously,
the warehouse is expected to help with future expansion of the retailer’s store network in Russia. Like Childrensalon, Auchan regards control of warehousing and stock as too crucial to outsource.
Similarly, Ted Baker, a UK fashion brand with 2016 turnover of £456 million, plans to consolidate warehousing and distribution after a period of rapid international expansion. Previously, the firm used three separate distribution centres, which it combined into a single large warehousing and fulfilment centre in Derby, UK in May 2016. Centralising distribution into a single, highly automated, location open around the clock will save money, as well as giving it extra capacity to serve a growing international market, the firm says. On the other hand, in contrast to Auchan, which will manage its warehousing function with its own personnel, Ted Baker outsourced management of its new logistics centre to a logistics supplier. The provider not only bore the upfront cost of setting up the consolidated warehouse, but also provided the IT systems to manage inventories and deliveries.
Given the diversity of SME approaches to balancing in-house control and outsourcing of logistics functions, warehousing and logistics providers are offering increasingly sophisticated menus allowing SMEs to pick and choose the services they want. Some services involve only freightforwarding— organising shipments from the producer to the final customer or distributor. Others are broader, and might encompass, for example, managing online sales, arranging transport including documentation, and delivering goods to customers. The Royal Mail, the UK’s privatised postal services provider, has agreed on such a comprehensive system for Alibaba, the Chinese e-commerce web site. Under this arrangement, the Royal Mail will establish a sales web site for British firms selling via Alibaba, and will deliver the goods to UK customers.
Choosing a supplier requires research into each supplier’s specific expertise. Ms Gooley of Supply Chain Quarterly says that certain logistics providers specialise in particular industries, others have a certain geographic focus, and still others perform the whole gamut of logistics functions worldwide.
MIXING AND MATCHING
It remains for SMEs to decide on the best balance between controlling their own logistics and outsourcing some of those functions. Some creative mixing and matching of logistics functions— some in-house and some outsourced—may be required. Matt McInerney, vice president of global forwarding sales at the US third-party logistics provider C.H. Robinson, gives the example of an upmarket US kitchen equipment maker that wanted to expand into the UK. C.H. Robinson set up this company’s warehousing operations in the UK, sparing the client a heavy upfront expenditure. However, the kitchen equipment maker kept many operational functions in-house, for example running its own fleet of 18 trucks to deliver products to a network of more than 100 dealers.
The same principle—choosing what functions to outsource, and avoiding over-reliance on an external supplier—applies as well to outsourced manufacturing and product-assembly services. Supply chains begin with suppliers—of finished products or components or various functions such as freight services—and therein lies a risk for SMEs entering a foreign market. The risk is that an SME will over-rely on a crucial supplier that later fails, causing knock-on problems for the SME.
UK toy-maker Hornby, which had 2016 revenues of £56m and is best known for its model railways, found this out the hard way. The firm had largely relied since the 1990s on a single Chinese supplier of manufacturing services, Sanda Kan. After a series of ownership changes from 2000, the Chinese firm encountered financial difficulties and was bought by Kader Holdings (owner of one of Hornby’s main competitors, Bachmann) in 2009. From 2012, Hornby found that supplies of its products became erratic, with many containers arriving without needed products, as the supplier could not fulfil orders. That hit Hornby’s sales and its bottom line. Hornby paid £500,000 to sever its contract with the Chinese company. To avoid a repeat of the problem, and to diversify its supply chain and reduce risk, it replaced Sanda Kan with ten different Asian suppliers.
CONCLUSION: THE TECHNOLOGY ADVANTAGE
The cost of logistics—sometimes overlooked amidst the challenges of entering a new foreign market—can prove dangerous to an SME’s profit margin. Some SME’s take this risk in stride, choosing to work for thin margins as part of the cost of establishing their brands abroad. The lucky few with a unique market niche, such as Gilo Industries or Childrensalon, can keep margins healthy by passing freight costs on to customers. But whether margins are thin or not, SMEs must find the right balance between hiring outside experts to provide supply management and logistics services and performing these functions themselves in an unfamiliar new market.
The bigger picture related to the cost of logistics is that the logistics function itself is undergoing a profound change, as sellers of a wide range of goods shift from distribution through physical stores and warehouses to global sourcing and fulfilment of orders via e-commerce web sites. Added to this transformation are potentially revolutionary changes in the nature of transport, such as the use of delivery drones or self-driving delivery vehicles. These innovations all rely heavily on information technology; it follows that SMEs with sophisticated IT systems will have an edge in securing the best and most cost-effective logistics support.
As a first step, advances in communication technology can help SMEs both in researching potential logistics suppliers and managing providers once they are chosen. Information technology can also simplify logistics functions, and can aid SMEs in taking advantage of technological advances in distribution and delivery. Childrensalon’s web site, for example, streamlines the sales and fulfilment process, in part by detecting where a customer’s computer is located and automatically translating product data and pricing into the local language and currency.
But automation only goes so far; sometimes firms have to intervene manually to fill logistical gaps. “One of our staff once flew over to the US to deliver a very expensive dress on time,” when delivery otherwise would have been delayed by a holiday, recalls Childrensalon’s Denise Hamilton. That is a shoe-leather approach to logistics: doing whatever is necessary, including wearing out one’s shoes, to ensure that products reach their destination on time. It is the sort of thing that modern logistics, backed by sophisticated communication technology, is designed to avoid. “Many SMEs see distribution and logistics purely as a cost,” says Ms Gooley. “In fact it is an investment.”
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SMEs and Global Growth: The High-Tech Advantage
To a greater extent every day, information technology is levelling the playing field for small and mid-sized enterprises (SMEs). Export markets, in particular, are no longer the exclusive domain of large players with the resources to field global sales and production staffs. Today, even startups can use the Internet to sell abroad, and to commission foreign firms to produce their designs cheaply.
For some new firms, in fact, geographical boundaries hardly come into play at all: they market and sell to consumers worldwide directly, becoming global players almost from the start. A good example is Skype, an Internet phone service set up by two Scandinavian entrepreneurs in 2003. In short order, Skype grew from a start-up to a global player with US$2 billion in annual revenues.
Skype is a classic example of a ‘micro-multinational’, a phrase coined by Google chief economist Hal Varian to describe small firms that acquire a global presence by using technology. However, such instant international presence is more the exception than the rule. Most small companies have to build an international presence the slow way, by building up their brands and creating networks of international business partners. Information technology helps in this effort, but does not produce instantaneous results as it might with specialised communications services providers such as Skype.
Indeed, even technology companies typically need a certain scale and an established brand to expand beyond their home markets. A good example is IceMobile, a Dutch company that creates mobile apps and has launched a successful drive abroad. The firm did do so by first establishing its brand in the Netherlands, and then partnering with another Dutch firm with a complementary product—brand loyalty programmes—to expand abroad. Its experience illustrates that, for most mid-sized firms a certain initial size and heft in the home market is a prerequisite for export success.
Broadly speaking, technology has helped to foster three types of SME exporter. First, there are companies such as IceMobile with established brands at home, which can use technology to export their business models. Second, there are so-called ‘born global’ firms such as Skype, which sell products globally right from the start-up phase. And third, some mid-sized companies use technology to outsource and offshore a core activity.
VENTURING ABROAD
Although technology is fostering a new generation of smaller, export-focused companies, this development should be seen in perspective. Most SMEs remain focused on their home markets and have no plans to venture abroad anytime soon. This is particularly true of SMEs based in large markets such as the United States. US statistics show that 304,000 out of the country’s 5.8m companies—only 5.5% of the total—exported in 2014.1 Moreover, most of those exports went to neighbours Canada and Mexico. “The domestic market is big enough to grow sales in by itself, and small companies often lack the resources to export,” explains Erin Butler, a commercial officer of the US Commerce Department’s Export Assistance Centre in New Orleans.
Most European SMEs focus on their national markets, too, despite the advantages of the European single market. Only about one-fourth of continental European companies trade internationally, according to the Confederation of British Industry (CBI). In fact, the figure is driven upwards by Germany, where more than half (54%) of all manufacturing companies export, according to the Deutscher Industrie- und Handelskammertag (DIKW), an industry body. In the Netherlands, a big trading country, around 20% of firms export, often as suppliers to local multinationals, says the Dutch business federation MKB.
Similarly, France has comparatively few exporting companies, with foreign trade dominated by a relative handful of large firms. In a recent survey, United Parcel Service, the world’s largest package delivery company, found that only 10% of French companies export.2 French government figures show there are only 120,000 French exporting companies, a third of the number in Germany. In the UK, just 8% of companies export directly, and another 7% supply foreign markets indirectly as part of multinationals’ supply chains, the CBI says.
Yet there is evidence that the Internet is changing this picture, encouraging more SMEs to look abroad for growth. For example, Petit Bateau, a privately-owned French children’s clothing company with 2013 sales of €300m, now sells successfully to other European countries over a website launched in 2006. The web site built upon an international chain of shops started by Petit Bateau in 2001, which, in turn, built on a mail-order business the firm started in the late 1980s. The web site, in short, enhances the firm’s international offering, but is not the basis for it. The basis is a fashion business that was developed over decades in the home market, and then expanded through mail order and traditional bricks-and-mortar shops.
Similarly, the director of a successful UK fashion brand, which now earns around half of its £380m annual revenue in foreign markets, expects explosive growth from Internet sales—but sees this growth as building on the firm’s existing brand strength. “The Internet technology became available for us to increase our presence abroad around six years ago,” says an executive of
the firm, who requested anonymity. The web site automatically detects where a user is based, enabling options such as home delivery or “click and collect” at a local store.
As with Petit Bateau, these marketing channels complement, rather than replace, an established foreign presence. The UK firm opened its first foreign store in the US in the late 1990s, and then steadily built up a network of shops worldwide, as well as supply arrangements with foreign department stores. As these examples show, the companies that benefit most from leveraging their established brands via the Internet are often those occupying a specialised market niche, such as a fashion brand or a unique technology.
‘BORN—OR RE-BORN—GLOBAL’
Many ‘born global’ companies, in contrast, sell a high-technology product internationally right from the start. As noted above, Skype and social media platforms such as Facebook fit this description. Another example is Bausey Medical Solutions, a US firm marketing a medical diagnostic app. The firm says it has attracted interest from Europe as well as the US. In Germany, start-ups such as SoundCloud, a global online audio distribution platform, and the photo-editing and photo-sharing app EyeEm, have quickly built a global presence.
In some cases, the growth afforded by Internet marketing is so rapid that a company is, in effect, ‘re-born global’. IceMobile, for example, built an established national presence by providing mobile apps for Dutch companies such as ABN Amro bank and the Albert Heyn grocery store chain. It then proceeded to build an international presence. In 2012 it merged with another Dutch company, BrandLoyalty, which produces loyalty programmes for retailers. Most of its revenues now come from foreign markets, as the combined company uses IceMobile technology to offer shoppers mobile access to their accounts. Clients include companies such as Lowes Foods (US), Dutch-owned SPAR China, and Danish retailer Coop, says its chief executive Jeroen Pietryga. “The possibilities are increasing fast,” he adds, pointing to the possible use of customer data to design and implement loyalty schemes.
Similarly, Globalstar, a listed US communications company, grew quickly in international markets after making major technology investments. “It cost us US$1bn to launch our satellite network,” says Jay Monroe, Globalstar’s chairman, with industry backers including Deutsche Aerospace and Vodaphone funding the launch of a system that supports satellite phone and data transmission. That investment enabled the company to occupy a niche selling global positioning and tracking devices, including satellite phones for individuals visiting remote regions.
Mr Monroe talks of bringing the retail price down to US$100 (less than half of the launch price at the start of next year). “The potential market could be 500,000 units a year in time,” he claims, with interest from the major car makers (looking for reliable connectivity for their vehicles) as well as retailers. That would be a large increase for a company with 2015 revenues of US$90.5m. The potential is being factored into its share price: the company is valued at more than US$1bn. Like IceMobile’s, Globalstar’s experience shows that technology companies can tap into global markets to win rapid growth, but must have an initial scale and established technology to do so.
OUTSOURCING AND OFFSHORING A CORE ACTIVITY
Mid-sized companies can also expand abroad in a third way: outsourcing a core activity, such as manufacturing, to a foreign partner, using information technology to ensure close adherence to product specifications and guidelines. Mid-sized manufacturers based in Germany in particular have led the movement to move manufacturing to lower-wage partners in Asia and Eastern Europe. In many cases, such moves are in response to technology-driven offshoring of production by the SMEs’ key multinational customers.
This pattern is well established, and predates the Internet revolution. Many German mid-sized firms set up production in Asia as they followed their multinational customers there; leading automakers, for example, have been manufacturing in China since the 1980s. The German Chamber of Commerce says that more than 5,000 German firms now operate in China and that, with local production so well established, attention has shifted to exploiting the huge Chinese market. By now, 93% of German firms say that they are in China for its sales potential, while just 43% are there because of lower production costs.
The shift wrought by information technology is not that it allows firms to outsource or offshore core activities, but that it makes it much cheaper and easier for smaller companies to follow the lead of bigger companies in doing so. A good example is Bowers & Wilkins, a UK company that produces loudspeakers and other audio equipment. Three quarters of its £125 million annual revenue comes from a plant it opened in China to cut costs. That plant allowed it to market speakers priced at just a few hundred pounds, compared to the £35,000 price of some of its UKmanufactured systems (or up to £1 million for a bespoke stadium system).
Beyond facilitating offshoring, the Internet combined with technologies such as 3D printing and automated manufacturing are changing the nature of manufacturing itself. A case in point is Local Motors, a US company that uses open-source online vehicle designs and then manufactures the vehicles through a global network of small plants, sometimes through 3D printing. The firm employs just 15 full-time staff, relying on an online network of 12,000 freelance designers. To date, it has produced about 50 off-road vehicles, and plans to produce another 1,500. Its combination of open-source design and distributed manufacturing allows this mid-sized firm to compete with automotive giants burdened with large fixed costs.
A LOOK AHEAD: CONSTRUCTIVE DISRUPTION
Examples such as Local Motors show how new technologies that benefit SMEs also disrupt established business models across a range of industries. In manufacturing, a shift to flexible manpower and online intellectual property is calling into question the old fixed-plant business model, which requires mass manufacturing to benefit from economies of scale.
Moreover, highly automated production—for example, the use of robots—will eventually erode the cost advantage of basing production in low-wage countries, as labour becomes less important to costs, says Erik Brynjolfsson, a professor of management at the MIT Sloan School of Management and director of the MIT Initiative on the Digital Economy. This will allow mid-sized firms to shift production away from low-wage countries and into target markets abroad, or indeed back to their home markets to facilitate close monitoring of quality and product design.
Rossignol, the French ski equipment maker with 2015 sales of €243m, provides an example of ‘backshoring’—moving previously offshored production back to the home market—as the cost advantage of offshoring was eroded. The company said in 2010 that was moving production back to France that it had off-shored to Taiwan three years earlier. Its aim, it said, was to produce better researched products and react more quickly to changes in the ski equipment market. Modern manufacturing technology has helped to protect the company’s price-competitiveness despite its return to a higher-wage manufacturing base.
Non-manufacturing industries also provide examples of business-model disruption driven by new technologies, which in turn opens new opportunities for SMEs to challenge established giants. In financial services, small players are building new markets in developing countries by offering basic, mobile-based banking services to previously under-served populations. An example is bKash, a mobile banking platform in Bangladesh. It launched in 2011 and had 11m accounts two years later. In retailing, small web-based shopping platforms such as Konga and Jumia in Nigeria are challenging the predominance of companies like US-based amazon.com, and have seen rapid growth in their customer bases as well. Jumia was launched by a German e-commerce investor, Rocket Internet, in 2012. It is losing money, but its sales have surged to US$150m a year.
Across manufacturing and service industries, then, technology is not just enabling leaps in efficiency. It is changing the very way that some sectors operate. For mid-sized firms, this opens the door to explosive growth, if they are able to spot and exploit new market niches, and use new technologies to leverage their success.
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SMEs and Global Growth: Navigating the Legal and Tax Maze
American statesman and inventor Benjamin Franklin once famously said that nothing is certain in life except death and taxes. Nowadays, no one is more painfully aware of that—at least the part about taxes—than small and midsized enterprises (SMEs) entering foreign markets for the first time.
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SMEs and Global Growth: Finding Local Partners
Hoping to profit from a wave of investment in China by large multinationals, small and mid-sizedenterprises (SMEs) based in Germany flocked to that country in the 1990s. China’s government welcomed them: like many other countries, China was intrigued by Germany’s Mittelstand firms— usually stable, technologically sophisticated, family owned firm —and wanted to learn from them. But despite the welcome—or perhaps because of that desire to learn from the newcomers— China often required the newcomers to establish formal joint ventures with Chinese partners. This requirement did not diminish the German SMEs’ interest; indeed, many Mittelstand firms saw the joint ventures as a way to get acclimated in China.
Today, though, the partnership requirements have eased for the approximately 5,200 German firms invested in China. As a result, most German firms have decided to go it alone in the Chinese market. Turck Technology, a family-owned German industrial automation company with annual sales of around €500m, is a case in point. It established a wholly owned subsidiary in China rather than partner with a Chinese firm. Its aim was to maintain control, ensure consistent quality, and protect its designs. The firm’s Chinese sales are about €40m a year, “the same level as our competitors,” says Christoph Kaiser, Turck’s managing director.
By now, only 12% of the German companies invested in China use formal joint ventures, says Alexandra Voss, executive director of the German Chamber of Commerce in north China. “Where the former joint venture requirements no longer exist, German companies tend to purchase the joint venture shares from their former partner rather than extending the agreement,” she says.
JOINT-VENTURE “LIGHT”
Between the two extremes—a formal joint venture and a go-it-alone subsidiary—there is a wide range of looser partnerships possible between SMEs in different countries. Among the most popular such tie-ups are those involving licensing and technical co-operation agreements. The challenge for SMEs in these arrangements—as in full-fledged joint venture deals—is to preserve their proprietary information while benefitting from enhanced access to the local market.
For example, James Cropper, a family-owned UK paper maker, expanded internationally in recent years, to the point where around half of its £88m revenue now comes from export markets. In China, it signed a technical co-operation agreement with a local firm to design fibres for high-end carbon bicycles. Despite cooperating on adapting products for the local market, the agreement sets strict guidelines to protect James Cropper’s know-how. “We wanted to keep control of intellectual property,” says its CEO Phil Wild.
Licencing agreements are another way to boost foreign sales without requiring a formal joint venture. Under such agreements, a local company buys the rights to market (and sometimes produce and develop) the exporting firm’s brand or products. The local partner does not have equity rights, making such agreements popular among small exporters with limited capital.
Australian pharmaceuticals firm Suda and its Chinese partner Eddingpharm provide an example of a licencing agreement. Suda, with revenues of just A$6.3m a year, would have struggled to afford to expand into China in its own name, or to invest in a joint venture. In late 2015, it signed a licensing agreement with Eddingpharm to produce and sell its drugs in China. Among the sweeteners for Suda: an upfront payment of US$300,000 and another US$200,000 when its product is registered in China. For small companies, licencing can offer an immediate cash injection, as well as a way to enter new markets.
A “lighter” variant of a licencing agreement is a simple sales-representative deal, in which a local firm contracts to market, sell and distribute the exporting firm’s products in the target market. David Butler, CEO of the South African Chamber of Commerce in London, says many of his country’s food exporters take this approach in the UK, benefiting from the market reach of UK retail chains and specialist distribution firms.
Such arrangements can help to avoid the biggest danger inherent in full-fledged joint ventures: their high failure rate. McKinsey, the management consultancy, estimates that up to 60% of international ventures fail.1 Among the major problems: partners may have incompatible objectives, for example with one wanting to maximise long-term market share and the other wishing to make a quick profit. The US advisory firm Water Street Partners finds that around twothirds of joint venture CEOs say the owners are misaligned on long-term strategy and on budget issues.2 A more limited technical co-operation agreement can sidestep such fundamental issues.
MATCH-MAKERS
What all these partnerships—the full-fledged joint venture agreements and the “lighter” variants— share in common is the marriage of an exporting firm’s product know-how and a local firm’s market expertise. Regardless of the form that a partnership takes, the fundamental questions apply: how to find the right local partner, and how to structure the agreement to avoid common pitfalls.
“That’s the million dollar question,” says Mr Harris, the US lawyer. “[The answer] is usually based on the [specific] business involved. If you are an educational software company, you think about partnering with the top one or two companies in China that distribute or sell educational software. If you make high-end [technical] widgets, you may partner with the one or two best high-end widget companies in China—whose widgets, though high-end for China, are not nearly as good as yours, and therefore they could use your help. You find these companies yourself, or you hire a consultant to help you find them.”
The routes to finding foreign partners vary. James Cropper found its Chinese partner via the contacts it had made in the country by selling there directly. It sought out Chinese partners with expertise and complementary skills for its high-end fibres division. It also looked for Chinese firms with industry contacts and specialist expertise to sell to high-end bicycle manufacturers.
Indeed, the search for such partners is often mutual, with Chinese firms eager for foreign partnerships. Eddingpharm, the pharma company licensing products from Suda, first entered the business via licensing deals with multinational pharma companies Novartis and Baxter in the early 2000s. In 2012, backed by international investors, Eddingpharm established a US subsidiary to seek out other product lines for distribution in China, as well as deals to develop and market such products. Among its wins: an agreement with Suda to develop and market an insomnia drug which the small Australian company would have struggled to sell in China on its own.
Companies that lack contacts in a target foreign market often turn to consultants for help. Firms such as Prospect Chinese Services, which is staffed by Chinese nationals and has offices across the UK and China, advise clients ranging from hotels and universities to car manufacturers wishing to enter the Chinese market. It claims to offer a ‘one stop shop’ for UK companies, comprising market research and market entry strategy services, support with first contacts, and advice on negotiations.
Other match-makers include government export promotion agencies, which compile large databases of foreign companies and can put exporters in touch with potential foreign partners. Erin Butler of the US Export Assistance Centre says that US SMEs supplying the oil industry approached her for contacts in growth markets such as North Africa. Like James Cropper, the US oil industry suppliers also used their domestic sales forces to make initial contacts with potential foreign partners. The search criteria for finding the right local partners tend to be similar, across a range of businesses: that is, local partners who supply expertise, skills and contacts that are complementary to those of the exporting SME.
ACQUISITIONS-PLUS
Exporters making a long-term commitment to a foreign market often acquire a local company to establish a stable presence in that market. One example is Palfinger, an Austrian SME and construction-machinery maker, which bought companies across the world to access their markets and to diversify away from over-reliance on building mobile cranes. Its foreign plants gave Palfinger a lower-cost, more flexible production base to supply new markets, which in turn helped it to withstand a series of economic storms.
A buying spree was not Palfinger’s sole expansion tool, however. It also established joint ventures with local companies in some major export markets, particularly in China and Russia, using the partners’ local market dominance to boost its own sales. In 2012 Palfinger established two joint ventures with SANY, China’s biggest manufacturer of construction equipment. One of the ventures was established to sell Palfinger products in China, and the other to distribute SANY products outside of the country. In 2013 the companies agreed to a share swap, with SANY taking a 10% stake in Palfinger in exchange for an equal stake for Palfinger in one of SANY’s operating units. For Palfinger, this helped to cement a deep presence in China, while for SANY the deal boosted its own globalisation efforts.
In 2014, Palfinger set up two more joint ventures, this time with Russia’s largest truck maker Kamaz. One builds chassis to hold Palfinger’s mobile cranes, and the other produces cylinders for construction machinery. Under the deal, Palfinger agreed to invest in modernising the production plant. In return, Palfinger gained entry to Russia’s specialist construction machinery market. “We couldn’t buy them [SANY and Kamaz],” spokesman Hannes Roither says drily when asked why the firm chose joint ventures.
Significantly, the local ventures provided a buffer when local markets weakened, due to their strong local customer base. “There have been serious market crashes in both countries” in recent years, Mr Roither says. “But we were able to protect our own sales by increasing market share when foreign competitors withdrew from the country.”
Similarly, the German luxury hotel group Steigenberger set up a joint venture with a local company to accelerate its expansion into India. Steigenberger owns 116 hotels in 12 countries, generating 2013 revenues of €500m. In 2016 it announced a joint venture with MBD, an Indian hotel group, with Steigenberger retaining a controlling stake. MBD will manage the joint venture including sales, while the German company will manage international marketing, training and brand development.
The companies have complementary skills, with Steigenberger a leader in five-star hotel management and MBD an established player within India. Also, and equally crucially, they share the same aim: the rapid roll out of luxury hotels in India. The joint venture plans to open 20 hotels over the next 15 years. Managing Director Sonica Malhotra Kandhari says it would take between three and five years for either partner acting alone to open a single hotel.
KEYS TO SUCCESS
Structuring any type of partnership agreement with a foreign partner can be tricky, says Dan Harris, a founder of the US law firm Harris Bricken, which specialises in joint ventures in China. He advises clients to keep a majority stake in a joint venture, and to protect their intellectual property zealously regardless of the nature of the co-operation. He offers the cautionary tale of a US firm whose Chinese partner began to manufacture the US partner’s products under the Chinese firm’s name. Some remedies are simple: “Many times we find that the [US] company had not registered a patent in China,” Mr. Harris says.
Beyond that, a key to success is to look carefully at the fundamentals: ensuring that the partners’ skills and expertise are complementary to those of the exporting SME; establishing that the aims of both partners are aligned; and making long-term commitments to the target markets. These elements—complementary skills, similar aims, and long-term commitments—are as close as an SME can come to finding a recipe for success in forming international partnerships.
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SMEs and Global Growth: Sustaining Growth and Development
When a small or mid-sized enterprise (SME) ventures abroad for the first time, its first aim is typically to kick-start sales and build a local market. That, however, only establishes a foothold. To continue growth and development in a new market, SMEs require a broader strategy aimed at developing and maintaining a strong local presence.
This growth strategy has many facets, depending on the nature of the SMEs business, its strengths in its home market, and the nature of its targeted foreign markets. For example, for many SMEs, sustaining growth abroad involves modifying products and even changing entire business models to suit local tastes and conditions. For others, sustaining growth entails partnering with multinationals or with other established players to provide initial entrée –and then ongoing access—to foreign markets.
For yet other SMEs, sustaining growth in foreign markets requires building on a unique proprietary technology and using existing distribution channels to extend the firm’s market reach. Paradoxically, other firms may find they can best sustain their international growth by pulling back from an overly ambitious expansion, thereby keeping the international business manageable.
ADAPTING TO LOCAL TASTES: THE GRAZE EXAMPLE
An example of successful adaptation of both products and business model to sustain growth in a foreign market is offered by Graze, a mid-sized UK snacks maker that made a successful entry into the US market in 2013. Several years before it took that step, the company, which is majorityowned by US private equity giant Carlyle Group, took several measures in its home market that later served it well in the much larger US market.
First, Graze switched from a subscription-only sales approach—in which customers signed up to receive snack packages periodically through the mail—to a multi-channel distribution system including subscriptions, sales of individual items over the company’s website, and sales of individual items through supermarkets such as Sainsbury’s and other retail outlets such as Boots. “Our customers are telling us it would be more convenient if the product were to be available in a number of different ways,” Chief executive Anthony Fletcher said at the time, a year before the firm introduced multiple sales channels in the US market as well.
Second, Graze built an efficient warehousing and distribution system in the UK, thereby acquiring expertise which later helped it to bypass distribution bottlenecks in the US postal system. And third, Graze developed expertise in gathering and analysing customer feedback to tailor products to local tastes. The firm employs a team of ten data scientists at its UK headquarters to analyse thousands of customer ratings, and responds with changed product offerings within a few months. In the US market, this meant dropping British staples such as mango chutney—a food item that befuddled many Americans—and introducing such US standbys as cinnamon buns and peanut cookies.
The distribution and product development expertise developed in the UK worked to Graze’s advantage in the US, the world’s largest snack-foods market. Within a year of entering the US market, the company’s US sales reached an annualised US$35m a year. In 2016 Graze started selling through 3,500 US stores, including Boots’ sister company Walgreens. Overall, the firm grew quickly since its founding in 2007, reaching a turnover of £70 million in the year to February 2016.
Along the way, the firm’s “unique selling proposition” has evolved along with its product line and business model. Originally focusing on snack boxes containing health-oriented basics such as nuts, grains and berries, Graze has since introduced healthy variants on fat- and sugar-intensive snacks. For example, the firm’s American cinnamon buns are not the familiar dough-based, fatand sugar-intensive US staple, but rather are cinnamon fig rolls which, the company says, are healthier and lower in calories. Similarly, Graze’s package of “sweet and salty cookies” sold in America actually consists largely of nuts and is marketed as protein-rich and low in calories.
In adapting itself to the US market, Graze essentially exported business-model modifications— such as continuous product development and multiple-channel selling—that it first introduced in its home market. In this, it is typical of SMEs going abroad: Try an approach at home, develop expertise, and then use it in foreign markets. Yet Graze’s example also shows the importance of building a new brand identity in a foreign market that suits the specific tastes of that market.
USING A LOCAL TOUCH: THE TED BAKER EXAMPLE
Ted Baker, a British luxury clothing brand listed on the London Stock Exchange, offers another example of developing techniques in the home market and then exporting them, while also ensuring a local identity within each foreign market. Ted Baker’s global presence relies on investing in the design of its distinctive and sometimes quirky clothing—as well as paying close attention to smooth-running warehousing and distribution. Much of this foundation work, on both product design and logistics, takes place in the UK. But the work is done with a view to serving a global market.
So, for example, in October 2016 Ted Baker opened a giant warehouse in Derby, UK, run by US multinational XPO Logistics, to operate a Europe-wide delivery system. Efficient distribution forms the basis for a network of own-brand stores and other outlets that has spread beyond the UK to Europe, North America and Asia. In less than three decades after its founding in 1988 as a single store in Glasgow selling men’s shirts, Ted Baker has acquired a global presence. It now has a total of 470 stores, concessions and outlets worldwide, led by the UK (186), North America (106) and continental Europe (97), with smaller presences in Australasia, the Middle East and Africa.
Significantly, all of the Ted Baker stand-alone stores outside the UK are designed to match the local style and culture, rather than following a single global template. The new store in Amsterdam, for example, uses parquet flooring and interior design celebrating Dutch artists including 20th century painter Theo van Doesburg. In contrast, its most recent store in New York City features walls with a rough concrete finish and brushed brass strips lining the walls to recall grids such as the New York street system. Scale-model buildings attached to the walls add a three-dimensional element to the notional cityscape. The overall marketing message in the design touches: Ted Baker, while a global brand, aims to establish a local identity and appeal to local tastes.
In addition to offering a local touch within its global network, Ted Baker provides customers a multiplicity of purchase channels: through Ted Baker-branded stores, concessions within department stores, and online. This variety of sales channels has allowed the firm to weather retail downturns. Any problems at stand-alone stores, for example, can be compensated for by booming online sales, and by concessions and licensing agreements with outside retailers and distributors.
The firm’s global-local strategy, and its focus on central product design and seamless delivery, appear to be working. The company increased sales by 18% to £456 million in the year to January 30, 2016, and then by another 14% year-on-year in the following six months, despite a generally flat retail market.
PARTNERING WITH ESTABLISHED PLAYERS: THE APMT EXAMPLE
Not all firms start an international expansion from a basis of heavy investment in product design and logistics expertise in the home market, which they then use to enter export markets. Some take a more direct route, partnering with multinational companies or with other local players who already have the foreign-market expertise and the distribution networks in place, and use these to gain a toe-hold in new markets.
An example is given by Advanced Polymer Monitoring Technologies (APMT), a small company in New Orleans, which grew out of academic research at Tulane University in 2011. It holds several patents for real-time monitoring equipment that, claims CEO Alex Reed, can reduce chemicals plants’ production costs significantly. With revenues of about US$1 million, APMT is clearly a startup, but one with high growth potential among plastics and pharmaceuticals manufacturers, among others.
To capitalise on that potential, and develop international markets quickly, APMT sought joint ventures with companies that can take its products to foreign manufacturers. In October 2016 it reached an agreement with Austin Chemical Company, a services and products supplier to the life sciences and specialty fine chemicals industries. This agreement should “expand the reach of our offerings to an international network of manufacturers and researchers,” according to Reed. For APMT the challenge is to get its technology adopted by a global industry. “Any of the production plants could use it,” says Reed, adding that real-time monitoring of production allows factories to cut waste and increase efficiency.
In addition to the monitoring technology, APMT has developed a light-scattering tool that helps drug makers test the stability of drug formulas. It shines a ray of light onto the drug being produced, which causes the light to scatter, or deflect. If the drug formula is incorrect then this will be detected through variations in the light scattering, allowing the formula and the manufacturing process to be corrected quickly.
Since APMT feels it has a hot technology in its hands, its aim is to keep its focus on that technology and rely on others for the sales function. Its market-entry strategy, therefore, is to benefit from the local-market knowledge and the marketing and distribution expertise of larger players, rather than developing these skills itself. This approach can allow it to start from a very small base and build up export sales quickly and sustainably.
BUILDING ON A PROPRIETARY TECHNOLOGY: THE GLOBALSTAR EXAMPLE
Some companies sustain their international growth by trying to extend their product range, building upon a unique technology and/or on existing foreign sales and distribution networks. A case in point is Globalstar, a long-established firm with a strong global sales network, which nonetheless needs to find a way to unlock mass sales. Globalstar is a US satellite communications firm set up in 1991 with $1.8bn in funding from industry giants including Alcatel and Hyundai. Now private equity controlled, it supplies navigation and communications equipment to those out of range of conventional mobile phone signals. “Much of the world’s land mass lacks mobile phone connectivity,” says its chairman Jay Monroe. “Even driving across the US there would be large areas lacking coverage.”
Yet with annual sales of around $90m, the firm lacks the product line and brand recognition to reach consumers beyond its small niche. The company has a global sales network in place, since it sells to individuals and firms venturing into remote areas, and many of these are in developing countries, for example in Africa, where mobile phone coverage can be patchy. But the market for its products is limited if the firm remains focused on specialist equipment such as satellite phones.
To address that problem, Globalstar plans to introduce a device that connects conventional mobile phones to its communication satellites when they lose coverage. Partly, it will sell these through its existing international network of dealers and suppliers. The firm is also talking with car manufacturers, who may add the device to improve the connectivity of vehicles.
Whereas Ted Baker has established a brand to market globally, and APMT sought help from multinationals to market an existing and promising technology, Globalstar is approaching export marketing from the opposite direction: seeking to develop technologies which it can market through an established sales network. In doing so, Globalstar hopes to build not only on its existing sales network but also on its core advantage: a satellite system that would be hard to replicate.1
MODERATION IN ALL THINGS, INCLUDING GROWTH: THE WIGGLE EXAMPLE
Either way—whether seeking products for an existing sales network, or seeking a sales network for existing products—amassing a portfolio of export markets can be a tricky business for an SME. As the local-touch strategy implies, every export market is different, with its own culture and history, consumer preferences, and legal requirements. Some SMEs find that building a sustainable international presence means picking and choosing among individualised foreign markets, to avoid becoming overwhelmed by having to meet so many different local market requirements.
A case in point is Butler’s Cycles, a UK-based bicycle store that expanded abroad and found itself a victim of too much success. Two decades ago, the Portsmouth-based shop launched a company specialising in mail-order sales of bicycle parts and accessories. It relied on the thennascent Internet first to build a UK customer base, and then to sell products abroad, eventually changing the name of the firm to Wiggle. Today, half the company’s £179m annual sales come from export markets. With bulk buying keeping prices low, and with efficient delivery, Wiggle was able to compete successfully against local firms even in countries as far away as Australia.
With backing from private-equity owners, Wiggle quickly reached customers in 120 countries. But to make the business more manageable, and to protect profitability, the firm recently cut the number of export markets back to 70. In particular, it chose to focus on fast-growing and profitable markets in the UK and continental Europe. Other markets, for example in Asia, were less lucrative, particularly as exchange-rate differences hurt sales and margins.
Like Graze, Wiggle shows how a successful company can use the Internet to gain entry into export markets globally. But sustaining that success sometimes requires taking a step back and assessing whether all expansions are necessarily good expansions. That calculation is not inconsistent with a key success factor for SMEs entering export markets—namely, the importance of establishing a deep presence in each market. Spreading a small company’s limited resources too thinly around the globe can mean devoting too little attention to acquiring a firm foothold in the markets that matter most to the firm’s growth.
Developing a recognisable local brand, tailoring products to local tastes and ensuring efficient delivery all require a certain focus. If an SME wants sustainable international growth, it may find that, in amassing a portfolio of export markets, sometimes less is indeed more.
The same principle applies to amassing a portfolio of foreign subsidiaries. Each subsidiary represents a range of costs, from start-up to maintenance to ongoing compliance expenses. Velocity Global, a consultancy, estimates the global average cost of establishing a foreign subsidiary at US$15,000-20,000, and the average maintenance costs at US$40,000 per employee per year. To this it adds indeterminate ongoing costs of staying current on changing local tax laws, payroll withholding requirements, employment law, and new banking regulations, among others.
CONCLUSION
There is, of course, no “recipe” for success in sustaining international growth by SMEs. But the experience of some successful SMEs points to guidelines to consider.
The examples of Graze and Ted Baker show the importance of adapting products—and when necessary, entire business models—to suit local tastes and conditions. APMT’s example showcases the advantage of partnering with established players to ensure both initial and ongoing access to local markets. Globalstar’s example indicates the value of leveraging a unique technology and existing foreign sales and distribution channels to extend market reach.
Wiggle, the UK bicycle parts and accessories exporter, offers a cautionary tale concerning expansion that is too fast and too extensive. In its case, sustaining international growth required, first and foremost, focusing on a portfolio of foreign markets that it could manage effectively.
All these examples show the diversity of strategies needed to sustain international growth. While the examples are diverse, they share an important success factor in common: All show the importance of firms committing themselves to their chosen foreign markets. More than anything else, that commitment is a prerequisite for sustained growth in those markets.
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SMEs and Global Growth: The High-Tech Advantage
To a greater extent every day, information technology is levelling the playing field for small and mid-sized enterprises (SMEs). Export markets, in particular, are no longer the exclusive domain of large players with the resources to field global sales and production staffs. Today, even startups can use the Internet to sell abroad, and to commission foreign firms to produce their designs cheaply.
For some new firms, in fact, geographical boundaries hardly come into play at all: they market and sell to consumers worldwide directly, becoming global players almost from the start. A good example is Skype, an Internet phone service set up by two Scandinavian entrepreneurs in 2003. In short order, Skype grew from a start-up to a global player with US$2 billion in annual revenues.
Skype is a classic example of a ‘micro-multinational’, a phrase coined by Google chief economist Hal Varian to describe small firms that acquire a global presence by using technology. However, such instant international presence is more the exception than the rule. Most small companies have to build an international presence the slow way, by building up their brands and creating networks of international business partners. Information technology helps in this effort, but does not produce instantaneous results as it might with specialised communications services providers such as Skype.
Indeed, even technology companies typically need a certain scale and an established brand to expand beyond their home markets. A good example is IceMobile, a Dutch company that creates mobile apps and has launched a successful drive abroad. The firm did do so by first establishing its brand in the Netherlands, and then partnering with another Dutch firm with a complementary product—brand loyalty programmes—to expand abroad. Its experience illustrates that, for most mid-sized firms a certain initial size and heft in the home market is a prerequisite for export success.
Broadly speaking, technology has helped to foster three types of SME exporter. First, there are companies such as IceMobile with established brands at home, which can use technology to export their business models. Second, there are so-called ‘born global’ firms such as Skype, which sell products globally right from the start-up phase. And third, some mid-sized companies use technology to outsource and offshore a core activity.
VENTURING ABROAD
Although technology is fostering a new generation of smaller, export-focused companies, this development should be seen in perspective. Most SMEs remain focused on their home markets and have no plans to venture abroad anytime soon. This is particularly true of SMEs based in large markets such as the United States. US statistics show that 304,000 out of the country’s 5.8m companies—only 5.5% of the total—exported in 2014.1 Moreover, most of those exports went to neighbours Canada and Mexico. “The domestic market is big enough to grow sales in by itself, and small companies often lack the resources to export,” explains Erin Butler, a commercial officer of the US Commerce Department’s Export Assistance Centre in New Orleans.
Most European SMEs focus on their national markets, too, despite the advantages of the European single market. Only about one-fourth of continental European companies trade internationally, according to the Confederation of British Industry (CBI). In fact, the figure is driven upwards by Germany, where more than half (54%) of all manufacturing companies export, according to the Deutscher Industrie- und Handelskammertag (DIKW), an industry body. In the Netherlands, a big trading country, around 20% of firms export, often as suppliers to local multinationals, says the Dutch business federation MKB.
Similarly, France has comparatively few exporting companies, with foreign trade dominated by a relative handful of large firms. In a recent survey, United Parcel Service, the world’s largest package delivery company, found that only 10% of French companies export.2 French government figures show there are only 120,000 French exporting companies, a third of the number in Germany. In the UK, just 8% of companies export directly, and another 7% supply foreign markets indirectly as part of multinationals’ supply chains, the CBI says.
Yet there is evidence that the Internet is changing this picture, encouraging more SMEs to look abroad for growth. For example, Petit Bateau, a privately-owned French children’s clothing company with 2013 sales of €300m, now sells successfully to other European countries over a website launched in 2006. The web site built upon an international chain of shops started by Petit Bateau in 2001, which, in turn, built on a mail-order business the firm started in the late 1980s. The web site, in short, enhances the firm’s international offering, but is not the basis for it. The basis is a fashion business that was developed over decades in the home market, and then expanded through mail order and traditional bricks-and-mortar shops.
Similarly, the director of a successful UK fashion brand, which now earns around half of its £380m annual revenue in foreign markets, expects explosive growth from Internet sales—but sees this growth as building on the firm’s existing brand strength. “The Internet technology became available for us to increase our presence abroad around six years ago,” says an executive of
the firm, who requested anonymity. The web site automatically detects where a user is based, enabling options such as home delivery or “click and collect” at a local store.
As with Petit Bateau, these marketing channels complement, rather than replace, an established foreign presence. The UK firm opened its first foreign store in the US in the late 1990s, and then steadily built up a network of shops worldwide, as well as supply arrangements with foreign department stores. As these examples show, the companies that benefit most from leveraging their established brands via the Internet are often those occupying a specialised market niche, such as a fashion brand or a unique technology.
‘BORN—OR RE-BORN—GLOBAL’
Many ‘born global’ companies, in contrast, sell a high-technology product internationally right from the start. As noted above, Skype and social media platforms such as Facebook fit this description. Another example is Bausey Medical Solutions, a US firm marketing a medical diagnostic app. The firm says it has attracted interest from Europe as well as the US. In Germany, start-ups such as SoundCloud, a global online audio distribution platform, and the photo-editing and photo-sharing app EyeEm, have quickly built a global presence.
In some cases, the growth afforded by Internet marketing is so rapid that a company is, in effect, ‘re-born global’. IceMobile, for example, built an established national presence by providing mobile apps for Dutch companies such as ABN Amro bank and the Albert Heyn grocery store chain. It then proceeded to build an international presence. In 2012 it merged with another Dutch company, BrandLoyalty, which produces loyalty programmes for retailers. Most of its revenues now come from foreign markets, as the combined company uses IceMobile technology to offer shoppers mobile access to their accounts. Clients include companies such as Lowes Foods (US), Dutch-owned SPAR China, and Danish retailer Coop, says its chief executive Jeroen Pietryga. “The possibilities are increasing fast,” he adds, pointing to the possible use of customer data to design and implement loyalty schemes.
Similarly, Globalstar, a listed US communications company, grew quickly in international markets after making major technology investments. “It cost us US$1bn to launch our satellite network,” says Jay Monroe, Globalstar’s chairman, with industry backers including Deutsche Aerospace and Vodaphone funding the launch of a system that supports satellite phone and data transmission. That investment enabled the company to occupy a niche selling global positioning and tracking devices, including satellite phones for individuals visiting remote regions.
Mr Monroe talks of bringing the retail price down to US$100 (less than half of the launch price at the start of next year). “The potential market could be 500,000 units a year in time,” he claims, with interest from the major car makers (looking for reliable connectivity for their vehicles) as well as retailers. That would be a large increase for a company with 2015 revenues of US$90.5m. The potential is being factored into its share price: the company is valued at more than US$1bn. Like IceMobile’s, Globalstar’s experience shows that technology companies can tap into global markets to win rapid growth, but must have an initial scale and established technology to do so.
OUTSOURCING AND OFFSHORING A CORE ACTIVITY
Mid-sized companies can also expand abroad in a third way: outsourcing a core activity, such as manufacturing, to a foreign partner, using information technology to ensure close adherence to product specifications and guidelines. Mid-sized manufacturers based in Germany in particular have led the movement to move manufacturing to lower-wage partners in Asia and Eastern Europe. In many cases, such moves are in response to technology-driven offshoring of production by the SMEs’ key multinational customers.
This pattern is well established, and predates the Internet revolution. Many German mid-sized firms set up production in Asia as they followed their multinational customers there; leading automakers, for example, have been manufacturing in China since the 1980s. The German Chamber of Commerce says that more than 5,000 German firms now operate in China and that, with local production so well established, attention has shifted to exploiting the huge Chinese market. By now, 93% of German firms say that they are in China for its sales potential, while just 43% are there because of lower production costs.
The shift wrought by information technology is not that it allows firms to outsource or offshore core activities, but that it makes it much cheaper and easier for smaller companies to follow the lead of bigger companies in doing so. A good example is Bowers & Wilkins, a UK company that produces loudspeakers and other audio equipment. Three quarters of its £125 million annual revenue comes from a plant it opened in China to cut costs. That plant allowed it to market speakers priced at just a few hundred pounds, compared to the £35,000 price of some of its UKmanufactured systems (or up to £1 million for a bespoke stadium system).
Beyond facilitating offshoring, the Internet combined with technologies such as 3D printing and automated manufacturing are changing the nature of manufacturing itself. A case in point is Local Motors, a US company that uses open-source online vehicle designs and then manufactures the vehicles through a global network of small plants, sometimes through 3D printing. The firm employs just 15 full-time staff, relying on an online network of 12,000 freelance designers. To date, it has produced about 50 off-road vehicles, and plans to produce another 1,500. Its combination of open-source design and distributed manufacturing allows this mid-sized firm to compete with automotive giants burdened with large fixed costs.
A LOOK AHEAD: CONSTRUCTIVE DISRUPTION
Examples such as Local Motors show how new technologies that benefit SMEs also disrupt established business models across a range of industries. In manufacturing, a shift to flexible manpower and online intellectual property is calling into question the old fixed-plant business model, which requires mass manufacturing to benefit from economies of scale.
Moreover, highly automated production—for example, the use of robots—will eventually erode the cost advantage of basing production in low-wage countries, as labour becomes less important to costs, says Erik Brynjolfsson, a professor of management at the MIT Sloan School of Management and director of the MIT Initiative on the Digital Economy. This will allow mid-sized firms to shift production away from low-wage countries and into target markets abroad, or indeed back to their home markets to facilitate close monitoring of quality and product design.
Rossignol, the French ski equipment maker with 2015 sales of €243m, provides an example of ‘backshoring’—moving previously offshored production back to the home market—as the cost advantage of offshoring was eroded. The company said in 2010 that was moving production back to France that it had off-shored to Taiwan three years earlier. Its aim, it said, was to produce better researched products and react more quickly to changes in the ski equipment market. Modern manufacturing technology has helped to protect the company’s price-competitiveness despite its return to a higher-wage manufacturing base.
Non-manufacturing industries also provide examples of business-model disruption driven by new technologies, which in turn opens new opportunities for SMEs to challenge established giants. In financial services, small players are building new markets in developing countries by offering basic, mobile-based banking services to previously under-served populations. An example is bKash, a mobile banking platform in Bangladesh. It launched in 2011 and had 11m accounts two years later. In retailing, small web-based shopping platforms such as Konga and Jumia in Nigeria are challenging the predominance of companies like US-based amazon.com, and have seen rapid growth in their customer bases as well. Jumia was launched by a German e-commerce investor, Rocket Internet, in 2012. It is losing money, but its sales have surged to US$150m a year.
Across manufacturing and service industries, then, technology is not just enabling leaps in efficiency. It is changing the very way that some sectors operate. For mid-sized firms, this opens the door to explosive growth, if they are able to spot and exploit new market niches, and use new technologies to leverage their success.
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SMEs and Global Growth: Finding Local Partners
Hoping to profit from a wave of investment in China by large multinationals, small and mid-sizedenterprises (SMEs) based in Germany flocked to that country in the 1990s. China’s government welcomed them: like many other countries, China was intrigued by Germany’s Mittelstand firms— usually stable, technologically sophisticated, family owned firm —and wanted to learn from them. But despite the welcome—or perhaps because of that desire to learn from the newcomers— China often required the newcomers to establish formal joint ventures with Chinese partners.
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SMEs and Global Growth: Navigating the Legal and Tax Maze
American statesman and inventor Benjamin Franklin once famously said that nothing is certain in life except death and taxes. Nowadays, no one is more painfully aware of that—at least the part about taxes—than small and midsized enterprises (SMEs) entering foreign markets for the first time.
The complexity of foreign tax, regulatory and legal regimes is the most frequently cited reason why SMEs avoid foreign markets. The range of such barriers is wide, encompassing different tax treatment for similar products in different countries, varying product-composition and packaging rules, different standards for protecting intellectual property (IP), and complicated customs clearance procedures even within a free trade area. While the specific legal and tax barriers vary widely, they all represent essentially the same problem for SMEs: high compliance costs and the risk that, when implemented, regulations will be interpreted in unfavourable ways.
Such risks and costs are at the root of SMEs’ reluctance to export. According to the Confederation of British Industry (CBI), only one-fourth of European companies export. Dutch entrepreneurs’ association MKB-Nederland says that only 20% of Dutch companies export; according to a survey by logistics giant UPS, only 10% of French companies export.
Complex tax and legal issues also explain why SMEs that do export tend to do so only within a free trade area. A large-scale survey of SME owners and directors in seven European countries, carried out by UPS1 in 2015, found that, in four of the seven countries looked at, the complications of clearing customs or of complying with export regulations was among the top three reasons for not exporting outside of the European Union.
Overall, around 80% of EU-based SME exporters confine their exporting to the EU, according to Ben Digby, the CBI’s international director. Others venture farther afield, but to markets with which the EU has a free trade agreement, such as South Korea. An example is offered by UK pottery and tableware manufacturer Portmeirion: It says its export business to South Korea skyrocketed after the country signed a free trade agreement with the EU in 2010. By 2011, South Korea had surpassed the company’s home market in the UK, and became its second-biggest market after the US.
A LABYRINTH OF HEALTH RULES
Examples such as Portmeirion’s should not suggest that a free trade agreement sweeps away all legal and regulatory complications for exporters. Nothing could be further from the truth. Even within the EU single market, among countries with similar standards for products and services, legal and regulatory hurdles arise for exporters. An example is the maze of national rules that determine which pharmaceuticals qualify for medical prescriptions within the national health system.
Laboratoires Expanscience, a French pharmaceuticals SME specialising in skin cosmetics, faced such a problem in the UK. It entered the UK market a few years ago with, among other products, a range of skin creams under the Mustela brand; the creams are used for treating babies’ minor skin problems, among other uses. However, the firm’s UK sales are limited (currently below £1 million a year) because its products are not registered for prescription by the National Health Service (NHS). Registering with the NHS is an expensive and time consuming process: Raj Sandhan, the managing director of Expanscience’s UK distributor, Metro Health and Beauty, says that one of the French firm’s competitors had to wait five years to receive NHS approval. As a recent entrant to the market, Laboratoires Expanscience sells its products instead over-the-counter in independent pharmacies, which limits its sales volumes.
Family-owned with annual revenues of €272m, Laboratoires Expanscience is an active exporter, with subsidiaries in 14 of the 85 countries in which it sells. More than half its total revenue comes from foreign sales. Although it has not applied for NHS approval, its Mustela products are widely available on prescription in other countries. Its Bébé 123 Vitamin Barrier Cream has been classified a drug in the US, meaning that it can be sold on prescription, as well as through retail chains such as Walgreen’s. Obtaining such approvals can be a long process, the firm has found; but the resulting increase in sales that such approval brings makes that investment worthwhile.
INTRICACIES OF VAT
Registering for reimbursement of value-added taxes (VAT) also presents a hurdle for many exporters, even within the EU single market. National VAT rates for the same product vary considerably across the EU: the standard rate varies widely, from 19% in Germany to 21% in the Netherlands and 24% in Greece. Moreover, some states impose ‘additional’ taxes on imported products, leading to variations in tax treatment even within the EU. Belgium taxes imported bottled water and fruit juices, for example, whereas neighbouring France does not. All this causes headaches for importers, who must comply with a patchwork of European tax rules.
At company level, the VAT quilt in Europe causes other types of problems. To receive reimbursement for VAT paid, a company must register with national authorities. The threshold for VAT registration varies widely among EU member states, from €10,000 in Portugal to £83,000 in the UK. One SME dealing with the VAT registration rules is Emois Gourmands, a UK start-up selling French gourmet food in London. Emois Gourmands founder and CEO Cecile Faure says that her firm buys directly from producers in France, does not use middlemen and does not add a big mark-up, thus enabling it to sell products at lower prices than UK supermarkets charge.
But Ms Faure says her firm’s small size puts it at a disadvantage in the VAT department. Her firm is not large enough to qualify for VAT registration in the UK. To avoid paying VAT on imports without being able to offset the tax payment through sales, Ms Faure has to hire a freight forwarder to make the upfront payment. Details such as this can make even a deep free-trade area such as the EU less free than intended. “I applied for VAT registration several times but was repeatedly tuned down,” says Ms Faure. “It’s expensive for a small company.”
UNRAVELLING CUSTOMS CLASSIFICATIONS
A further complication for SMEs is finding a way through the thicket of regulations governing customs clearance and customs classification. An export product’s customs classification is more than just a number: it is a unique identifying code which determines the product’s tariff and VAT treatment, if applicable, and whether the product is permitted to be sold in the destination country in the first place. Some defence-related products, for example, are subject to both export- and import-restrictions. In theory, the World Trade Organisation’s standard product classifications take all the mystery out of identifying products. In practice, it is not so simple, since the WTO’s guidelines can be applied inconsistently across countries. This causes problems for all types of companies, but SMEs, with their relatively limited resources, can be hit particularly hard.
Varying classification of the same product can appear even within a single market such as the EU, according to Christine Debats, international development manager at Conex, a small French company that handles customs clearance for importers and exporters. Television set-top boxes are classified according to their main function, for example. If this is deemed to be recording broadcasts, then imported boxes are subject to a tariff of 13.9%. If the main function is considered to be internet access, then the duty is 0%. The ambiguity comes when the box does both things— leading to a WTO ruling that the EU’s customs treatment of set-top boxes was out of compliance with its rules. That ruling, in turn, forced the EU to issue a complex set of new rules for classifying settop boxes. This example shows how standardised customs classifications sometimes do not keep up with the rapid pace of product development, making it hard to predict the customs treatment of some goods.
But modernising customs classification and clearance can bring pitfalls of its own. In May 2016 the European Commission introduced the Union Customs Code as part of an effort to modernise customs. The initiative aims to enable traders to file all customs declarations remotely by 2020. This will require joining together all of the disparate IT systems used by EU countries—a hugely ambitious undertaking involving a host of detailed changes to the customs treatment of products. This is a huge challenge, considering that “customs classifications change constantly,” says Ms Debats.
PATENT ‘PROTECTION’: ENTER THE TROLLS
Other official attempts to promote efficiency and reduce the paperwork burdens of exporters and investors within the EU are causing a different set of problems. The EU’s planned Unified Patent Court, which is expected to start operating this year, will enable pan-European patent protection via a single filing, thereby cutting the cost of filing patents in multiple national jurisdictions. However, the unified system will also increase the risk of facing patent infringement challenges all across the EU rather than in individual countries.
That risk is increasingly a reality for exporters to and within the EU, as a result of the appearance in Europe of so-called “patent trolls”. These are firms that acquire patents to technologies that they have no intention of developing themselves, for the purpose of blocking others from using the technology. The patent trolls prevent the use of those technologies by threatening firms developing those technologies with patent infringement lawsuits.
The practice originated in the US, where patent trolling has become a big business. Specialist patent trolls are joined by multinationals that actively buy and police patents in their sectors. A surge in patent litigation has led the federal government, as well as some US states, to clamp down on the trolls. One result of the US clamp-down “is that the patent trolls have come over to Europe,” says Edward Borovikov, a lawyer in France with global law firm Dentons.
So far, many of the problems have centred on Germany, where the courts support patentholders’ rights vigorously (as they do in the Netherlands), Mr Borovikov says. However, the pan- European patent system increases trolls’ potential rewards if they win a case, since compensation will be calculated across the entire EU and not only in the affected country. “A case will cost at least €200,000-300,000, which SMEs simply can’t afford,” says Mr Borovikov. “Twenty years ago, intellectual property was not a huge concern in Europe. Now companies must check very carefully for possible patent infringements to avoid being sued by trolls.”
Patent trolls are a particular threat to SMEs. In the US, half of all patent troll lawsuits are against companies with revenues of US$10 million or less. The average cost of defending such lawsuits is US$3.2m—enough to put many SMEs out of business, according to Snapdragon, a consultancy offering intellectual property protections.
Similar cases are emerging against European SMEs. Toll Collect, a mid-sized German company with 600 employees, was targeted recently by such a case. It holds a government contract for a road-pricing system for trucks in Germany, with some terminals placed in neighbouring countries including the Netherlands. Toll Collect was sued by a German firm, Papst, which owns a European patent for road-pricing systems. The case was filed in the Netherlands among other places, and a Dutch court found in Papst’s favour.
Staying clear of patent trolls is not, of course, the only issue for exporters wishing to protect their markets. In many parts of the world, the issue is far simpler: enforcing the IP protections already on the books. In China, for example, “the problem is not necessarily with the legislation, but with the implementation” of IP rights, says Christoph Kaiser, managing director in China for Turck Technology, a family-owned German industrial automation company with annual sales of around €500m. Similarly, Dutch biotech firm Keygene has yet to set up a full subsidiary in China because of IP concerns. CEO Arhen van Tunen believes that IP rights for products such as his—innovative crop improvements—are weak in China. The company holds more than 500 patents, but these are only as good as local enforcement of property rights.
FINDING A WAY
Such concerns keep giant emerging markets such as China and India out of reach for many European SMEs. So, for instance, although most large Dutch companies such as Philips and ABN Amro are well established in both countries, few SMEs have followed their example. Fewer than 200 Dutch firms operate in India. A 2016 survey of Dutch companies active in China, carried out by the Dutch Ministry of Foreign Affairs,4 found only about 1,000 Dutch companies in the country, out of a total of 871,000 Dutch companies, most of them SMEs. “The barriers to doing business mentioned most often concern government relations and the Chinese regulatory environment,” the Ministry says. “Bureaucracy and the lack of transparency in legislation are the most common hurdles.”
Opaque rules and inconsistent application of regulations governing health products, among others, along with customs classification issues and variable VAT rules even within a single market create day-to-day problems for all exporters. These problems are felt most keenly by firms new to exporting and short on resources for figuring out the details of the regulatory, legal and tax systems in each of its export markets. Free trade agreements, along with various initiatives to reduce the paperwork burdens on exporters and cross-border investors, can help. But occasionally well-intended efforts, such as the pan-European patent filing system and the remote customs-clearance initiative, have unintended consequences that actually can increase the burden on exporters. It remains for policy makers to improve on these efforts, to avoid having newly internationalising SMEs turn back from their efforts to venture abroad.
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SMEs and Global Growth: Sustaining Growth and Development
When a small or mid-sized enterprise (SME) ventures abroad for the first time, its first aim is typically to kick-start sales and build a local market. That, however, only establishes a foothold. To continue growth and development in a new market, SMEs require a broader strategy aimed at developing and maintaining a strong local presence.
This growth strategy has many facets, depending on the nature of the SMEs business, its strengths in its home market, and the nature of its targeted foreign markets. For example, for many SMEs, sustaining growth abroad involves modifying products and even changing entire business models to suit local tastes and conditions. For others, sustaining growth entails partnering with multinationals or with other established players to provide initial entrée –and then ongoing access—to foreign markets.
For yet other SMEs, sustaining growth in foreign markets requires building on a unique proprietary technology and using existing distribution channels to extend the firm’s market reach. Paradoxically, other firms may find they can best sustain their international growth by pulling back from an overly ambitious expansion, thereby keeping the international business manageable.
ADAPTING TO LOCAL TASTES: THE GRAZE EXAMPLE
An example of successful adaptation of both products and business model to sustain growth in a foreign market is offered by Graze, a mid-sized UK snacks maker that made a successful entry into the US market in 2013. Several years before it took that step, the company, which is majorityowned by US private equity giant Carlyle Group, took several measures in its home market that later served it well in the much larger US market.
First, Graze switched from a subscription-only sales approach—in which customers signed up to receive snack packages periodically through the mail—to a multi-channel distribution system including subscriptions, sales of individual items over the company’s website, and sales of individual items through supermarkets such as Sainsbury’s and other retail outlets such as Boots. “Our customers are telling us it would be more convenient if the product were to be available in a number of different ways,” Chief executive Anthony Fletcher said at the time, a year before the firm introduced multiple sales channels in the US market as well.
Second, Graze built an efficient warehousing and distribution system in the UK, thereby acquiring expertise which later helped it to bypass distribution bottlenecks in the US postal system. And third, Graze developed expertise in gathering and analysing customer feedback to tailor products to local tastes. The firm employs a team of ten data scientists at its UK headquarters to analyse thousands of customer ratings, and responds with changed product offerings within a few months. In the US market, this meant dropping British staples such as mango chutney—a food item that befuddled many Americans—and introducing such US standbys as cinnamon buns and peanut cookies.
The distribution and product development expertise developed in the UK worked to Graze’s advantage in the US, the world’s largest snack-foods market. Within a year of entering the US market, the company’s US sales reached an annualised US$35m a year. In 2016 Graze started selling through 3,500 US stores, including Boots’ sister company Walgreens. Overall, the firm grew quickly since its founding in 2007, reaching a turnover of £70 million in the year to February 2016.
Along the way, the firm’s “unique selling proposition” has evolved along with its product line and business model. Originally focusing on snack boxes containing health-oriented basics such as nuts, grains and berries, Graze has since introduced healthy variants on fat- and sugar-intensive snacks. For example, the firm’s American cinnamon buns are not the familiar dough-based, fatand sugar-intensive US staple, but rather are cinnamon fig rolls which, the company says, are healthier and lower in calories. Similarly, Graze’s package of “sweet and salty cookies” sold in America actually consists largely of nuts and is marketed as protein-rich and low in calories.
In adapting itself to the US market, Graze essentially exported business-model modifications— such as continuous product development and multiple-channel selling—that it first introduced in its home market. In this, it is typical of SMEs going abroad: Try an approach at home, develop expertise, and then use it in foreign markets. Yet Graze’s example also shows the importance of building a new brand identity in a foreign market that suits the specific tastes of that market.
USING A LOCAL TOUCH: THE TED BAKER EXAMPLE
Ted Baker, a British luxury clothing brand listed on the London Stock Exchange, offers another example of developing techniques in the home market and then exporting them, while also ensuring a local identity within each foreign market. Ted Baker’s global presence relies on investing in the design of its distinctive and sometimes quirky clothing—as well as paying close attention to smooth-running warehousing and distribution. Much of this foundation work, on both product design and logistics, takes place in the UK. But the work is done with a view to serving a global market.
So, for example, in October 2016 Ted Baker opened a giant warehouse in Derby, UK, run by US multinational XPO Logistics, to operate a Europe-wide delivery system. Efficient distribution forms the basis for a network of own-brand stores and other outlets that has spread beyond the UK to Europe, North America and Asia. In less than three decades after its founding in 1988 as a single store in Glasgow selling men’s shirts, Ted Baker has acquired a global presence. It now has a total of 470 stores, concessions and outlets worldwide, led by the UK (186), North America (106) and continental Europe (97), with smaller presences in Australasia, the Middle East and Africa.
Significantly, all of the Ted Baker stand-alone stores outside the UK are designed to match the local style and culture, rather than following a single global template. The new store in Amsterdam, for example, uses parquet flooring and interior design celebrating Dutch artists including 20th century painter Theo van Doesburg. In contrast, its most recent store in New York City features walls with a rough concrete finish and brushed brass strips lining the walls to recall grids such as the New York street system. Scale-model buildings attached to the walls add a three-dimensional element to the notional cityscape. The overall marketing message in the design touches: Ted Baker, while a global brand, aims to establish a local identity and appeal to local tastes.
In addition to offering a local touch within its global network, Ted Baker provides customers a multiplicity of purchase channels: through Ted Baker-branded stores, concessions within department stores, and online. This variety of sales channels has allowed the firm to weather retail downturns. Any problems at stand-alone stores, for example, can be compensated for by booming online sales, and by concessions and licensing agreements with outside retailers and distributors.
The firm’s global-local strategy, and its focus on central product design and seamless delivery, appear to be working. The company increased sales by 18% to £456 million in the year to January 30, 2016, and then by another 14% year-on-year in the following six months, despite a generally flat retail market.
PARTNERING WITH ESTABLISHED PLAYERS: THE APMT EXAMPLE
Not all firms start an international expansion from a basis of heavy investment in product design and logistics expertise in the home market, which they then use to enter export markets. Some take a more direct route, partnering with multinational companies or with other local players who already have the foreign-market expertise and the distribution networks in place, and use these to gain a toe-hold in new markets.
An example is given by Advanced Polymer Monitoring Technologies (APMT), a small company in New Orleans, which grew out of academic research at Tulane University in 2011. It holds several patents for real-time monitoring equipment that, claims CEO Alex Reed, can reduce chemicals plants’ production costs significantly. With revenues of about US$1 million, APMT is clearly a startup, but one with high growth potential among plastics and pharmaceuticals manufacturers, among others.
To capitalise on that potential, and develop international markets quickly, APMT sought joint ventures with companies that can take its products to foreign manufacturers. In October 2016 it reached an agreement with Austin Chemical Company, a services and products supplier to the life sciences and specialty fine chemicals industries. This agreement should “expand the reach of our offerings to an international network of manufacturers and researchers,” according to Reed. For APMT the challenge is to get its technology adopted by a global industry. “Any of the production plants could use it,” says Reed, adding that real-time monitoring of production allows factories to cut waste and increase efficiency.
In addition to the monitoring technology, APMT has developed a light-scattering tool that helps drug makers test the stability of drug formulas. It shines a ray of light onto the drug being produced, which causes the light to scatter, or deflect. If the drug formula is incorrect then this will be detected through variations in the light scattering, allowing the formula and the manufacturing process to be corrected quickly.
Since APMT feels it has a hot technology in its hands, its aim is to keep its focus on that technology and rely on others for the sales function. Its market-entry strategy, therefore, is to benefit from the local-market knowledge and the marketing and distribution expertise of larger players, rather than developing these skills itself. This approach can allow it to start from a very small base and build up export sales quickly and sustainably.
BUILDING ON A PROPRIETARY TECHNOLOGY: THE GLOBALSTAR EXAMPLE
Some companies sustain their international growth by trying to extend their product range, building upon a unique technology and/or on existing foreign sales and distribution networks. A case in point is Globalstar, a long-established firm with a strong global sales network, which nonetheless needs to find a way to unlock mass sales. Globalstar is a US satellite communications firm set up in 1991 with $1.8bn in funding from industry giants including Alcatel and Hyundai. Now private equity controlled, it supplies navigation and communications equipment to those out of range of conventional mobile phone signals. “Much of the world’s land mass lacks mobile phone connectivity,” says its chairman Jay Monroe. “Even driving across the US there would be large areas lacking coverage.”
Yet with annual sales of around $90m, the firm lacks the product line and brand recognition to reach consumers beyond its small niche. The company has a global sales network in place, since it sells to individuals and firms venturing into remote areas, and many of these are in developing countries, for example in Africa, where mobile phone coverage can be patchy. But the market for its products is limited if the firm remains focused on specialist equipment such as satellite phones.
To address that problem, Globalstar plans to introduce a device that connects conventional mobile phones to its communication satellites when they lose coverage. Partly, it will sell these through its existing international network of dealers and suppliers. The firm is also talking with car manufacturers, who may add the device to improve the connectivity of vehicles.
Whereas Ted Baker has established a brand to market globally, and APMT sought help from multinationals to market an existing and promising technology, Globalstar is approaching export marketing from the opposite direction: seeking to develop technologies which it can market through an established sales network. In doing so, Globalstar hopes to build not only on its existing sales network but also on its core advantage: a satellite system that would be hard to replicate.1
MODERATION IN ALL THINGS, INCLUDING GROWTH: THE WIGGLE EXAMPLE
Either way—whether seeking products for an existing sales network, or seeking a sales network for existing products—amassing a portfolio of export markets can be a tricky business for an SME. As the local-touch strategy implies, every export market is different, with its own culture and history, consumer preferences, and legal requirements. Some SMEs find that building a sustainable international presence means picking and choosing among individualised foreign markets, to avoid becoming overwhelmed by having to meet so many different local market requirements.
A case in point is Butler’s Cycles, a UK-based bicycle store that expanded abroad and found itself a victim of too much success. Two decades ago, the Portsmouth-based shop launched a company specialising in mail-order sales of bicycle parts and accessories. It relied on the thennascent Internet first to build a UK customer base, and then to sell products abroad, eventually changing the name of the firm to Wiggle. Today, half the company’s £179m annual sales come from export markets. With bulk buying keeping prices low, and with efficient delivery, Wiggle was able to compete successfully against local firms even in countries as far away as Australia.
With backing from private-equity owners, Wiggle quickly reached customers in 120 countries. But to make the business more manageable, and to protect profitability, the firm recently cut the number of export markets back to 70. In particular, it chose to focus on fast-growing and profitable markets in the UK and continental Europe. Other markets, for example in Asia, were less lucrative, particularly as exchange-rate differences hurt sales and margins.
Like Graze, Wiggle shows how a successful company can use the Internet to gain entry into export markets globally. But sustaining that success sometimes requires taking a step back and assessing whether all expansions are necessarily good expansions. That calculation is not inconsistent with a key success factor for SMEs entering export markets—namely, the importance of establishing a deep presence in each market. Spreading a small company’s limited resources too thinly around the globe can mean devoting too little attention to acquiring a firm foothold in the markets that matter most to the firm’s growth.
Developing a recognisable local brand, tailoring products to local tastes and ensuring efficient delivery all require a certain focus. If an SME wants sustainable international growth, it may find that, in amassing a portfolio of export markets, sometimes less is indeed more.
The same principle applies to amassing a portfolio of foreign subsidiaries. Each subsidiary represents a range of costs, from start-up to maintenance to ongoing compliance expenses. Velocity Global, a consultancy, estimates the global average cost of establishing a foreign subsidiary at US$15,000-20,000, and the average maintenance costs at US$40,000 per employee per year. To this it adds indeterminate ongoing costs of staying current on changing local tax laws, payroll withholding requirements, employment law, and new banking regulations, among others.
CONCLUSION
There is, of course, no “recipe” for success in sustaining international growth by SMEs. But the experience of some successful SMEs points to guidelines to consider.
The examples of Graze and Ted Baker show the importance of adapting products—and when necessary, entire business models—to suit local tastes and conditions. APMT’s example showcases the advantage of partnering with established players to ensure both initial and ongoing access to local markets. Globalstar’s example indicates the value of leveraging a unique technology and existing foreign sales and distribution channels to extend market reach.
Wiggle, the UK bicycle parts and accessories exporter, offers a cautionary tale concerning expansion that is too fast and too extensive. In its case, sustaining international growth required, first and foremost, focusing on a portfolio of foreign markets that it could manage effectively.
All these examples show the diversity of strategies needed to sustain international growth. While the examples are diverse, they share an important success factor in common: All show the importance of firms committing themselves to their chosen foreign markets. More than anything else, that commitment is a prerequisite for sustained growth in those markets.
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SMEs and Global Growth: The High-Tech Advantage
To a greater extent every day, information technology is levelling the playing field for small and mid-sized enterprises (SMEs). Export markets, in particular, are no longer the exclusive domain of large players with the resources to field global sales and production staffs. Today, even startups can use the Internet to sell abroad, and to commission foreign firms to produce their designs cheaply.
For some new firms, in fact, geographical boundaries hardly come into play at all: they market and sell to consumers worldwide directly, becoming global players almost from the start. A good example is Skype, an Internet phone service set up by two Scandinavian entrepreneurs in 2003. In short order, Skype grew from a start-up to a global player with US$2 billion in annual revenues.
Skype is a classic example of a ‘micro-multinational’, a phrase coined by Google chief economist Hal Varian to describe small firms that acquire a global presence by using technology. However, such instant international presence is more the exception than the rule. Most small companies have to build an international presence the slow way, by building up their brands and creating networks of international business partners. Information technology helps in this effort, but does not produce instantaneous results as it might with specialised communications services providers such as Skype.
Indeed, even technology companies typically need a certain scale and an established brand to expand beyond their home markets. A good example is IceMobile, a Dutch company that creates mobile apps and has launched a successful drive abroad. The firm did do so by first establishing its brand in the Netherlands, and then partnering with another Dutch firm with a complementary product—brand loyalty programmes—to expand abroad. Its experience illustrates that, for most mid-sized firms a certain initial size and heft in the home market is a prerequisite for export success.
Broadly speaking, technology has helped to foster three types of SME exporter. First, there are companies such as IceMobile with established brands at home, which can use technology to export their business models. Second, there are so-called ‘born global’ firms such as Skype, which sell products globally right from the start-up phase. And third, some mid-sized companies use technology to outsource and offshore a core activity.
VENTURING ABROAD
Although technology is fostering a new generation of smaller, export-focused companies, this development should be seen in perspective. Most SMEs remain focused on their home markets and have no plans to venture abroad anytime soon. This is particularly true of SMEs based in large markets such as the United States. US statistics show that 304,000 out of the country’s 5.8m companies—only 5.5% of the total—exported in 2014.1 Moreover, most of those exports went to neighbours Canada and Mexico. “The domestic market is big enough to grow sales in by itself, and small companies often lack the resources to export,” explains Erin Butler, a commercial officer of the US Commerce Department’s Export Assistance Centre in New Orleans.
Most European SMEs focus on their national markets, too, despite the advantages of the European single market. Only about one-fourth of continental European companies trade internationally, according to the Confederation of British Industry (CBI). In fact, the figure is driven upwards by Germany, where more than half (54%) of all manufacturing companies export, according to the Deutscher Industrie- und Handelskammertag (DIKW), an industry body. In the Netherlands, a big trading country, around 20% of firms export, often as suppliers to local multinationals, says the Dutch business federation MKB.
Similarly, France has comparatively few exporting companies, with foreign trade dominated by a relative handful of large firms. In a recent survey, United Parcel Service, the world’s largest package delivery company, found that only 10% of French companies export.2 French government figures show there are only 120,000 French exporting companies, a third of the number in Germany. In the UK, just 8% of companies export directly, and another 7% supply foreign markets indirectly as part of multinationals’ supply chains, the CBI says.
Yet there is evidence that the Internet is changing this picture, encouraging more SMEs to look abroad for growth. For example, Petit Bateau, a privately-owned French children’s clothing company with 2013 sales of €300m, now sells successfully to other European countries over a website launched in 2006. The web site built upon an international chain of shops started by Petit Bateau in 2001, which, in turn, built on a mail-order business the firm started in the late 1980s. The web site, in short, enhances the firm’s international offering, but is not the basis for it. The basis is a fashion business that was developed over decades in the home market, and then expanded through mail order and traditional bricks-and-mortar shops.
Similarly, the director of a successful UK fashion brand, which now earns around half of its £380m annual revenue in foreign markets, expects explosive growth from Internet sales—but sees this growth as building on the firm’s existing brand strength. “The Internet technology became available for us to increase our presence abroad around six years ago,” says an executive of
the firm, who requested anonymity. The web site automatically detects where a user is based, enabling options such as home delivery or “click and collect” at a local store.
As with Petit Bateau, these marketing channels complement, rather than replace, an established foreign presence. The UK firm opened its first foreign store in the US in the late 1990s, and then steadily built up a network of shops worldwide, as well as supply arrangements with foreign department stores. As these examples show, the companies that benefit most from leveraging their established brands via the Internet are often those occupying a specialised market niche, such as a fashion brand or a unique technology.
‘BORN—OR RE-BORN—GLOBAL’
Many ‘born global’ companies, in contrast, sell a high-technology product internationally right from the start. As noted above, Skype and social media platforms such as Facebook fit this description. Another example is Bausey Medical Solutions, a US firm marketing a medical diagnostic app. The firm says it has attracted interest from Europe as well as the US. In Germany, start-ups such as SoundCloud, a global online audio distribution platform, and the photo-editing and photo-sharing app EyeEm, have quickly built a global presence.
In some cases, the growth afforded by Internet marketing is so rapid that a company is, in effect, ‘re-born global’. IceMobile, for example, built an established national presence by providing mobile apps for Dutch companies such as ABN Amro bank and the Albert Heyn grocery store chain. It then proceeded to build an international presence. In 2012 it merged with another Dutch company, BrandLoyalty, which produces loyalty programmes for retailers. Most of its revenues now come from foreign markets, as the combined company uses IceMobile technology to offer shoppers mobile access to their accounts. Clients include companies such as Lowes Foods (US), Dutch-owned SPAR China, and Danish retailer Coop, says its chief executive Jeroen Pietryga. “The possibilities are increasing fast,” he adds, pointing to the possible use of customer data to design and implement loyalty schemes.
Similarly, Globalstar, a listed US communications company, grew quickly in international markets after making major technology investments. “It cost us US$1bn to launch our satellite network,” says Jay Monroe, Globalstar’s chairman, with industry backers including Deutsche Aerospace and Vodaphone funding the launch of a system that supports satellite phone and data transmission. That investment enabled the company to occupy a niche selling global positioning and tracking devices, including satellite phones for individuals visiting remote regions.
Mr Monroe talks of bringing the retail price down to US$100 (less than half of the launch price at the start of next year). “The potential market could be 500,000 units a year in time,” he claims, with interest from the major car makers (looking for reliable connectivity for their vehicles) as well as retailers. That would be a large increase for a company with 2015 revenues of US$90.5m. The potential is being factored into its share price: the company is valued at more than US$1bn. Like IceMobile’s, Globalstar’s experience shows that technology companies can tap into global markets to win rapid growth, but must have an initial scale and established technology to do so.
OUTSOURCING AND OFFSHORING A CORE ACTIVITY
Mid-sized companies can also expand abroad in a third way: outsourcing a core activity, such as manufacturing, to a foreign partner, using information technology to ensure close adherence to product specifications and guidelines. Mid-sized manufacturers based in Germany in particular have led the movement to move manufacturing to lower-wage partners in Asia and Eastern Europe. In many cases, such moves are in response to technology-driven offshoring of production by the SMEs’ key multinational customers.
This pattern is well established, and predates the Internet revolution. Many German mid-sized firms set up production in Asia as they followed their multinational customers there; leading automakers, for example, have been manufacturing in China since the 1980s. The German Chamber of Commerce says that more than 5,000 German firms now operate in China and that, with local production so well established, attention has shifted to exploiting the huge Chinese market. By now, 93% of German firms say that they are in China for its sales potential, while just 43% are there because of lower production costs.
The shift wrought by information technology is not that it allows firms to outsource or offshore core activities, but that it makes it much cheaper and easier for smaller companies to follow the lead of bigger companies in doing so. A good example is Bowers & Wilkins, a UK company that produces loudspeakers and other audio equipment. Three quarters of its £125 million annual revenue comes from a plant it opened in China to cut costs. That plant allowed it to market speakers priced at just a few hundred pounds, compared to the £35,000 price of some of its UKmanufactured systems (or up to £1 million for a bespoke stadium system).
Beyond facilitating offshoring, the Internet combined with technologies such as 3D printing and automated manufacturing are changing the nature of manufacturing itself. A case in point is Local Motors, a US company that uses open-source online vehicle designs and then manufactures the vehicles through a global network of small plants, sometimes through 3D printing. The firm employs just 15 full-time staff, relying on an online network of 12,000 freelance designers. To date, it has produced about 50 off-road vehicles, and plans to produce another 1,500. Its combination of open-source design and distributed manufacturing allows this mid-sized firm to compete with automotive giants burdened with large fixed costs.
A LOOK AHEAD: CONSTRUCTIVE DISRUPTION
Examples such as Local Motors show how new technologies that benefit SMEs also disrupt established business models across a range of industries. In manufacturing, a shift to flexible manpower and online intellectual property is calling into question the old fixed-plant business model, which requires mass manufacturing to benefit from economies of scale.
Moreover, highly automated production—for example, the use of robots—will eventually erode the cost advantage of basing production in low-wage countries, as labour becomes less important to costs, says Erik Brynjolfsson, a professor of management at the MIT Sloan School of Management and director of the MIT Initiative on the Digital Economy. This will allow mid-sized firms to shift production away from low-wage countries and into target markets abroad, or indeed back to their home markets to facilitate close monitoring of quality and product design.
Rossignol, the French ski equipment maker with 2015 sales of €243m, provides an example of ‘backshoring’—moving previously offshored production back to the home market—as the cost advantage of offshoring was eroded. The company said in 2010 that was moving production back to France that it had off-shored to Taiwan three years earlier. Its aim, it said, was to produce better researched products and react more quickly to changes in the ski equipment market. Modern manufacturing technology has helped to protect the company’s price-competitiveness despite its return to a higher-wage manufacturing base.
Non-manufacturing industries also provide examples of business-model disruption driven by new technologies, which in turn opens new opportunities for SMEs to challenge established giants. In financial services, small players are building new markets in developing countries by offering basic, mobile-based banking services to previously under-served populations. An example is bKash, a mobile banking platform in Bangladesh. It launched in 2011 and had 11m accounts two years later. In retailing, small web-based shopping platforms such as Konga and Jumia in Nigeria are challenging the predominance of companies like US-based amazon.com, and have seen rapid growth in their customer bases as well. Jumia was launched by a German e-commerce investor, Rocket Internet, in 2012. It is losing money, but its sales have surged to US$150m a year.
Across manufacturing and service industries, then, technology is not just enabling leaps in efficiency. It is changing the very way that some sectors operate. For mid-sized firms, this opens the door to explosive growth, if they are able to spot and exploit new market niches, and use new technologies to leverage their success.
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Talking US trade: The view from Hong Kong
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Terms of Trade: Understanding trade dynamics in the US
The findings are based on an executive survey of 531 companies that trade with the US, conducted by The EIU in March and April 2016, as well as desk research and interviews with experts.
Key findings:
- Companies are optimistic about future trade activity with the US. Two-thirds of respondents in our survey anticipate that their company’s trade with the US will increase over the next five years, with over 43% expecting an increase of 10% or more.
- Companies face a number of issues in trading with the US, but none of these are perceived to be insurmountable. Survey respondents cited exchange-rate volatility (41%), transport costs and delays (32%), trade-related infrastructure (32%) and making payments (32%) as their top challenges.
- The overall quality of trade-related infrastructure in the US is rated highly. Deeper investigation, however, points to shortcomings with ports and land borders, revealing that infrastructure development has not kept pace with the increase in trade activity and requires significant investment for expansion and automation.
- Delays at ports and land-border crossings arise primarily as a result of regulatory requirements. The top sources of regulatory challenges include customs duties and valuation (26% of respondents), licensing requirements (23%) and product-quality standards (20%).
- The post-9/11 security paradigm shift has increased the administrative requirements faced by foreign companies.
- Trade-related regulatory challenges impose significant additional costs on foreign companies. Over 40% of survey respondents indicate that trade-related regulatory challenges increase the cost of doing business by 10-30%, with an additional 15% reporting an increase of more than 30%.
- Payment-related challenges arise from a range of issues, particularly process inefficiencies (52%) and limited payment visibility (52%).
- Foreign companies look to key developments in policy and politics to understand the outlook for trading with the US, closely tracking the rhetoric on the campaign trail for the 2016 US presidential election.
- The negotiation of new trade deals, the Trans-Pacific Partnership (TPP) in particular, will bring new opportunities. Survey findings strongly corroborate this sentiment: 49% of respondents expect the TPP to improve opportunities for trade with the US market moderately, while an additional 29% believe it will improve opportunities substantially.
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The Hinrich Foundation Sustainable Trade Index 2018
Yet the enthusiasm in Asia for trade does not appear to have waned. This broad societal consensus behind international trade has enabled Asian countries to continue broadening and deepening existing trading relationships, for example, by quickly hammering out a deal for the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in early 2018 following the US’s withdrawal from its predecessor in 2017.
Asia, then, finds itself in the unique position of helping lead and sustain the global economy’s commitment to free and fair trade. It is in this context that the need for sustainability in trade is ever more crucial.
The Hinrich Foundation Sustainable Trade Index was created for the purpose of stimulating meaningful discussion of the full range of considerations that policymakers, business executives, and civil society leaders must take into account when managing and advancing international trade.
The index was commissioned by the Hinrich Foundation, a non-profit organisation focused on promoting sustainable trade. This, the second edition of the study, seeks to measure the capacity of 20 economies—19 in Asia along with the US—to participate in the international trading system in a manner that supports the long-term domestic and global goals of economic growth, environmental protection, and strengthened social capital. The index’s key findings include:
Countries in Asia, especially the richer ones, have broadly regressed in terms of trade sustainability. Hong Kong is developed Asia’s bright spot, recording a slight increase in its score and topping the 2018 index. Several middle-income countries perform admirably, led by Sri Lanka. For the economic pillar, countries generally performed well in terms of growing their labour forces as well as their per-head GDPs. For the social pillar, sharp drops for some countries in certain social pillar indicators contribute to an overall decline. For the environmental pillar, with deteriorating environmental sustainability in many rich countries, China, Laos and Pakistan are the only countries to record increases in scores. Sustainability is an ever more important determinant of FDI and vendor selection in choosing supply-chain partners. Companies are improving the sustainability of their supply chains by restructuring and broadening relationships with competitors and vendors.![](https://impact.econ-asia.com/perspectives/sites/default/files/styles/featured_thumbnail/public/TRACIT.png?itok=7haCbdkP)
The Global Illicit Trade Environment Index 2018
To measure how nations are addressing the issue of illicit trade, the Transnational Alliance to Combat Illicit Trade (TRACIT) has commissioned The Economist Intelligence Unit to produce the Global Illicit Trade Environment Index, which evaluates 84 economies around the world on their structural capability to protect against illicit trade. The global index expands upon an Asia-specific version originally created by The Economist Intelligence Unit in 2016 to score 17 economies in Asia.
View the Interactive Index >> Download workbook