Foreign affairs?
Looking overseas for growth opportunities could be one way to ride out the downturn, but there are risks involved
By Christian Doherty
Expanding overseas can mitigate the worst effects of the recession for some firms. It’s surprising, then, that in the midst of the current downturn, so few of the UK’s small businesses are considering exporting goods or services, despite the relative weakness of sterling being in their favour.
According to the British Chambers of Commerce, exporting doesn’t feature in the business plans of 43 per cent of firms. UK Trade and Investment (UKTI), the government body set up to promote overseas expansion and inward investment, wants to turn that around, adding that it has plenty of evidence to back the benefits of exporting overseas.
“A recent survey of ours showed 42% of our exporters had increased their turnover in the last year,” says Martin Cook, International Trade Director for UKTI’s London office. “Compared with 23% overall, that shows exporters are proving to be a lot more robust.”
Venturing overseas is not without its risks, however. Matt Therrien, Consultant with Baker Tilly Virchow Krause in the US, says firms thinking of expanding abroad often fail to answer one simple question: “What are we trying to accomplish?”
Historically, many companies have been unrealistically optimistic, especially when it comes to emerging markets. “The mentality of ‘China has 1.3 billion consumers – if we can get one-tenth of 1% of the market, then we’re made’ just does not produce results.”
If only things were that simple. Many firms fail to comprehend what they can realistically achieve before taking the plunge. They need to develop an understanding of the local market, culture, currency trends and competitive landscape before any investments are made, says Therrien.
Underestimating regional differences is another common mistake. “Companies talking about international expansion look at whole countries like they’re one entity,” says Jeff Horein, Partner at Baker Tilly Virchow Krause. “Even in the US, the difference between having a company in Wisconsin versus a company in New York is as big a difference as having it in Scotland or London.”
A few critical questions also need to be answered early on. How do customers differ from our home market? What’s the competitive landscape like? What do we need to know about local intellectual property laws and other regulation? And which channels do we need to go through to get things done?
UKTI’s Cook agrees: “The key is research. You simply cannot know too much about the market you’re entering or the partner you’ll be working with.”
Baker Tilly, through its international network, helps clients to conduct due diligence, identifying risks and opportunities, and clarifying what the business requires before any deal or expansion goes through. “Whether it’s emerging or developed markets, it’s much more expensive to go back and fix your mistakes than it is to do it right the first time,” says Therrien.
Knowing when to expand globally is also important. Three questions to consider when going global include: do we have the data to show this is a positive long-term opportunity? Do we have the management skills to expand? Do we have the full commitment to expand and work through the challenges we will face?
You should also ensure your business is fit for purpose. For many firms, Horein says, a successful transaction across borders involves a combination of internal resources that have expertise in those regions and insights from external advisers.
There are numerous ways to expand into overseas markets, from finding a local distributor to sell your product to owning a standalone operation. Now could be a good time to grow by acquisition. “There is so much opportunity because prices are down worldwide,” says Horein.
How a business accesses a new market is critical to controlling the level of risk it may be exposed to.
You need to consider not only financial risk, but also the IP (intellectual property) risk of geographical expansion. When looking to do a joint venture, you need to be careful that the distributor has the right capabilities, not just the right relationships, and that you manage your IP risk by choosing a trustworthy partner.
“To succeed, companies need to be dedicated to a rigorous process rather than simply putting a toe in the water,” says Therrien. “Now more than ever it’s about front-end due diligence and a full operation and ownership,” he adds.
It is clear the landscape has changed. Opportunities, especially in growing markets, have developed to such an extent that ignoring the possibilities is a risk in itself.
But whatever route a firm chooses, one thing is clear – determining clear objectives and understanding the local market are absolute musts before any dotted lines are signed.