International Trade eLearning Suite for SMEs-InTeLS


Entering overseas markets

4.1.1.     Introduction

                                 

There are various ways of entering overseas markets. You can manage the process yourself - selling directly from your own country or setting up an operation in the target country. Alternatively, you can use an intermediary such as an agent or a distributor.

Deciding how to enter an overseas market will be a crucial part of your export strategy. Different methods will be appropriate in different markets or for different types of product. You should not assume that you can take the same approach in all cases.

This guide outlines the different ways of entering an overseas market and helps you identify which will be best for your situation.

 

 

4.1.2.      The different ways to enter overseas markets

                                 

When you decide to enter an overseas market, it's important that you identify the best approach for your business. There are four main ways to sell to customers in overseas markets. You may find you need to use more than one entry strategy, depending on the markets you target and the products you offer.

Selling directly from the UK

This typically involves making periodic sales visits to the country, supplemented by telephone sales or accepting overseas orders on an e-commerce website. It can be a simple and cost-effective way to enter an overseas market. However, it may leave you remote from your customers, and unable to share the exporting workload with partners or intermediaries.

Opening an overseas operation

This involves opening your own branch or subsidiary in the new market, or entering into a joint venture with a local business. Having a presence on the ground can be valuable, but setting it up and maintaining it may involve major resource commitments.

Using an overseas sales agent

A sales agent acts on your behalf in the overseas market, making sales for which they receive a commission. The key benefit of using an overseas sales agent is that you get the advantage of their extensive knowledge of your target market.

Using an overseas distributor

A distributor takes more responsibility for exporting than a sales agent. The distributor buys goods from you directly, and is then responsible for selling them at a profit in the overseas market.

Important considerations

There is much more to exporting than simply generating overseas sales. An intermediary can help you with issues including customs and other paperwork, shipping, warehousing and after-sales service. Selling direct means you will have to handle these issues yourself.

Trading internationally can also involve important legal, financial and accounting considerations. You should take advice from your solicitor, accountant or business adviser.

 UK FOOTNOTE

See the page in this guide on opening operations in overseas markets.

See the page in this guide on using an overseas agent.

See the page in this guide on using an overseas distributor.

See the page in this guide: choose how to enter overseas markets.

 

4.1.3.      Choose how to enter overseas markets

                                 

When selling overseas, you can sell your product or service directly to customers or use an intermediary. You may decide a mix of these approaches is best for your business. There is no "one size fits all" solution.

You should consider the implications of each method in terms of:

  • the direct and indirect costs, such as investment in an overseas operation, or the heavy discounts often demanded by distributors
  • how much control you'll retain over how your product is sold, and how much you'll need to delegate to partners or intermediaries
  • which export-related risks you'll have to bear, such as exchange-rate movements, non-payment risks, longer trading cycles and delays due to documentation problems

An intermediary may be able to handle issues such as paperwork, shipping and warehousing. However, you will have less direct control. Selling directly may give you more control, but you will have to bear higher costs.

Making the right decision

Investigate your new market and how your product will fit into it. Consider the following questions:

  • What's your priority - minimising potential costs or controlling the process?
  • Do you have the market knowledge (and language skills) to make contacts and generate sales?
  • Do you have the time and money to invest in setting up a local branch or subsidiary?
  • Are there restrictions on the way you can enter the market? For example, some countries may insist you form a joint venture with a local business.
  • What is appropriate for your product? If it requires specialist after-sales support, selling through an intermediary may not be suitable.
  • What are the usual distribution channels for products like yours in the target market?

Answering these questions will help you with the strategic planning for exporting your product.

UK FOOTNOTE

See our guide on how to decide what to outsource.

To help you decide on the best option, see our guide on Researching overseas markets.

 

 

4.1.4.     Selling direct from your own country

                                 

Selling direct from your own country is an easy and cost-effective way to enter an overseas market. However, you will be far from your market and potential customers, which may cause you some problems.

There are a number of ways to use direct selling. You could:

  • extend the focus of your existing national sales force and generate direct sales via telephone and email
  • set up an e-commerce website and accept overseas orders

Occasional sales visits to your target market can be a valuable way of boosting sales efforts. They help you to identify buyers, build key sales relationships and close deals.

Advantages

There are many advantages to selling to an overseas market from your own country

  • You can use existing resources to start exporting into your new market.
  • You maintain full and direct control over the process - including all aspects of the marketing of your goods.
  • It is a good way to experiment with exporting - the strategy is easily reversed if it isn't working out.
  • You keep any gains you make - you don't have to share profits with partners or intermediaries.

Disadvantages

The clearest downside of exporting this way is your distance from the market and from potential customers. This may make business opportunities difficult to identify. There are other issues to consider:

  • You will need to know the market well to find buyers and build relationships.
  • You will be responsible for logistics such as shipping and customs formalities, although you could pay a specialist freight forwarder to handle this for you.
  • You will bear all the risks of exporting. Non-payment is the most serious, but even minor problems with export documentation can lead to cashflow problems.
  • You may need to consider investing in language training for your staff, or recruiting the skills you need.

UK FOOTNOTE

See our guides on International transport and distribution, International trade paperwork: the basics and Manage the risk of exporting.

 

 

 

4.1.5.      Opening operations in overseas markets

                                 

Opening an operation in your overseas market is generally the most costly and time-consuming way to enter it, but the rewards can be great.

Local rules may restrict your options, but the three main ways to open an overseas operation are to set up:

  • a local office, staffed by one or more of your employees
  • a locally registered subsidiary company - a new business in the target market, subject to local company, employment and tax rules, and generally hiring some local staff
  • a joint venture, in which you partner with a local business to set up a new business with ownership shared between you

Advantages

Exporting in this way gives you the chance to identify and exploit opportunities in your target market. It also gives you the flexibility to control your operation, and expand if necessary. There are other benefits:

  • While intermediaries may opt for short-term sales, this way you can plan for the long term.
  • Your customers will take you more seriously if you have a local base. This is particularly true if your products require specialist after-sales service.
  • If you use a joint venture, you will be able to share the risk. You will also benefit from your partner's local knowledge and reputation.
  • If you operate alone, all profits from the enterprise remain yours alone.
  • A local subsidiary company offers limited liability if things go wrong. It is also easier to expand than a local office.

Disadvantages

This option may require significant resources, and involves greater administrative and managerial burdens than other approaches to entering overseas markets:

  • You will need to understand corporate, employment and tax law in the new territory, and use local specialists to help you.
  • Costs will be high if things go wrong.
  • You have to take all the risks yourself (if you don't work with a local partner). These could include non-payment or regulatory compliance problems.

There are important legal and financial implications involved in setting up an overseas business. You should take advice from your solicitor, accountant or business adviser, as well as from similar professionals in the target market.

 

 

 

4.1.6.     Using an overseas agent

                                 

A sales agent acts on your behalf in the overseas market and is paid a commission for any sales they make. The key benefit of using an overseas sales agent is that you get the advantage of their extensive knowledge of the target market.

However, while there are clear benefits, agency relationships can have their downsides too.

Advantages

  • You avoid the recruitment, training and payroll costs of using your own employees to enter an overseas market.
  • An agent should be well placed to identify and exploit opportunities.
  • Your agent should already have solid relationships with potential buyers - it might take you some time to build up your own contacts.
  • Using an agent allows you to maintain more control over matters such as final price and brand image - compared with the other intermediary option of using a distributor.

Disadvantages

  • You remain responsible for shipping and other trade-related logistics - although your agent should be able to help.
  • After-sales service can be difficult when selling through an intermediary.
  • You may lose some control over marketing and brand image, compared with entering the market yourself.

Getting the relationship right

Make sure you get an agent with experience of selling your type of products and who has potential buyers interested in the kind of goods you sell. Otherwise, you risk tying yourself into an unproductive relationship.

Take advice from your legal adviser before concluding an agency agreement. There is a wide range of issues you need to cover in the contract.

 UK FOOTNOTE

See the page in this guide on finding and choosing overseas agents and distributors.

See the page in this guide on contracting with overseas agents and distributors.

 

4.1.7.     Using an overseas distributor

                                 

A distributor buys your goods from you and then takes full responsibility for selling them on in the overseas market. While the role of a sales agent is to find you customers, a distributor is your customer.

Advantages

  • The main advantage of using a distributor is simplicity. Distributors enable you to access international markets while avoiding logistics issues and many trade-related risks.
  • The distributor is usually responsible for the shipment of goods, and the accompanying customs formalities and paperwork.
  • If you sell to a UK-based distributor, you avoid currency-related risks.
  • It would be easier for a distributor with an established reputation and contacts list to introduce a new brand to the market than it would be for you.
  • Distributors generally spend on marketing to support their sales effort, although they will sometimes expect you to make a financial contribution.
  • A distributor will often offer credit facilities to potential customers.
  • Many distributors carry a stock of the products they sell - so they buy in bulk, and take care of warehousing and inventory control in the overseas market.

Disadvantages

  • In return for taking on your trade-related risks and burdens, distributors will expect heavy discounts and generous credit terms from you.
  • You may lose control of the way your products are marketed and priced.
  • If you use a sales agent, you can use the commission structure to motivate them - there's no similar mechanism with a distributor.
  • Distributors often demand a long period of exclusivity, so you need to be sure that you choose one that has experience selling your type of products and has customers for the kind of goods you sell.

It's important to seek advice from your legal adviser before concluding a distributorship agreement.

  UK FOOTNOTE

See the page in this guide on finding and choosing overseas agents and distributors

See the page in this guide on contracting with overseas agents and distributors.

 

 

4.1.8.      Finding and choosing overseas agents and distributors

                                 

Make sure you research before selecting an agent or distributor. Draw up a shortlist of at least three, then carefully compare what each can do for you.

Where to find agents and distributors

There are many organisations that can help you with your search, including:

  • trade associations covering your sector
  • your local Chamber of Commerce
  • the Chambers of Commerce in your target country
  • the local business phone book - look under "Export Agents and Consultants"
  • membership bodies for businesses trading between your country and your target country
  • major banks - these have trade teams which may be able to help

You may also have the opportunity to join trade visits or attend exhibitions in your target country.

Choosing which intermediary to work with

The most important thing to establish is that an agent or distributor has proven experience in your target market. But there are many other factors to consider:

  • Are they well located, with the geographical coverage you need?
  • Are they well established in the market, and how do they compare with their own competition?
  • Look at the product lines they currently sell - will your product fit in well?
  • Ask about their strategy for the next five years - does it fit well with your objectives in the market?
  • How large and experienced is their sales team? Is it well managed and given effective incentives?
  • Can they provide you with market research to feed into your sales forecasts?
  • Do they have the warehousing, servicing and other facilities you're looking for?

It's also important to look into their financial standing to ensure you're dealing with a reputable business that can be relied upon to pay you. This can be more difficult with overseas businesses, but it may be possible to conduct a status query through your bank.

 UK FOOTNOTE

find your local International Trade team on the UK Trade & Investment website

find trade associations for your industry on the Trade Association Forum (TAF) website

find contact details for Chambers of Commerce in your target market on the BCC website

find your target market's embassy on the Foreign & Commonwealth Office (FCO) website

 

 

 

4.1.9.      Contracting with overseas agents and distributors

                                 

Make sure any agreement with an agent or distributor is formalised in a clear written contract. This will reduce the chances of disagreements or problems arising later. It's worth seeking expert advice - from a lawyer with trade-related experience. Make sure you understand every part of the contract.

Key points the contract should cover

  • Parties - the names and addresses of the businesses involved, and the nature of the relationship, eg agency or distributorship.
  • Products - a clear description of your goods.
  • Territory - the geographic area within which the agent or distributor will sell your goods.
  • Exclusivity - will they have sole rights to sell your goods?
  • Exceptions to exclusivity - for example, can you sell direct to customers you already have in the market?
  • Pricing - what price will you receive from a distributor for your goods? What price will an agent charge their customers?
  • Commission - what commission will an agent receive?
  • Payment terms - when will payments be made, in what currency, and at what exchange rate?
  • Period - set a termination date for the agreement, and include clear provisions for ending the agreement before that date.
  • Confidentiality - make sure that sensitive information about your business or products is protected.
  • Intellectual property - what rights will the agent or distributor have to use your business name, brand names, trade marks etc?
  • After-sales care - for example product liability, insurance and warranties. Who is responsible at each stage of the trading process?
  • Marketing - what promotional activities will support your products and who will pay for them?
  • Rights - ensure that rights you assign can't be transferred to a third party.
  • Jurisdiction - which country's rules will apply to the contract? This can affect the employment, performance and termination provisions of agency contracts.

If you can't agree on terms with your agent or distributor, or if a contractual dispute arises, consider resolving the issue through the International Chamber of Commmerce (ICC) International Court of Arbitration or a similar body. 

UK FOOTNOTE

Read about arbitration on the ICC International Court of Arbitration website.