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The race is on for companies to research, target and grow an effective presence in new overseas markets. It’s a tough game, says Simon Banham, but one where banks can really help.
Consider Russia. Last month’s confirmation that it has at last ended its 18-year negotiation to join the World Trade Organisation (WTO) is as timely an illustration as any of the seismic changes convulsing global import and export patterns – with big potential benefits for UK companies.
Here’s a country with a population less than half that of the European Union but with a huge growth prospects for traders looking in – its estimated GDP is barely 15% of the EU’s $17.6 trillion. Until now, Russia has been the largest economy outside the WTO, but it’s already the EU’s third biggest buyer (£85 billion) of goods.
Under WTO rules, Russia will lower its import duties, limit its export duties and grant greater access to European companies. Analysts reckon average tariffs could fall by a third – and, on foreign cars, by as much as a half – by 2019.
Small wonder it’s one of around a score of the high growth markets identified by UK Trade & investment as priority export targets in the urgent national campaign to re-balance our economy from the currently sluggish prospects in our major Eurozone and North American markets.
The eyes of corporate strategists are now firmly turning to global territories whose prospects now look as exciting as they are, in many cases, still unfamiliar to UK players. The market contrasts are startling (see table): from China to Brazil, UK exporters have still cornered comparatively small sales volumes against their giant current outlets across the English Channel and the Atlantic. But the growth rates already look impressive compared to our ‘Large but slow’ traditional markets.
So the race is on for companies to research, target and grow an effective presence in new overseas markets. A recent government analysis* forecasts UK export growth of 8.5% a year over the coming decade and, in particular, to the BRICs economies averaging 11.7% a year, ‘as their expanding middle classes demand increasing volumes of consumer goods and services’.
The challenge is particularly pronounced for smaller and medium-sized companies which ‘are looking increasingly to exports as part of their growth or survival strategy’. Right now, almost a quarter of SMEs export, and nearly half of these are considering entering new overseas markets.
But it’s a tough game and there’s understandable caution about actually taking the plunge. Surveys persistently show the degree to which some UK companies assessing export opportunities in new markets continue to feel constrained by the challenge of surmounting so many barriers of culture, market intelligence, business practice and regulatory know-how.
This is where banks really can help. The sector has deep knowledge of these key growth markets abroad, through well-established alliances with leading incountry banks, and through years of work with other financial institutions and trade agencies.
That experience gives the banking sector unrivalled scope to advise companies about how to break into new export markets – how to research the opportunities and assess the risks; how to make an export plan based on your own USPs; how to get to grips with the legal and regulatory issues; how to marshal the logistics and find agents and partners; and how to confront the language and cultural challenges.
Most important of all, of course, is being clear about getting paid. Trading internationally often increases the risk of late or even non-payment. So that means, settling on acceptable payment terms and methods and considering forms of protective insurance.
UK Export Finance (formerly ECGD) will help with advice to minimise the risks of non-payment, but it’s vital to research the market conditions in the target country and the creditworthiness of potential customers long before starting to trade.
There are also tricky currency issues to consider. In some countries where there are restrictions on access to foreign currency, your customers may face problems getting currency to pay you. In this case, it’s worth insisting on a (confirmed) irrevocable letter of credit that secures payments according to the terms of the credit and often at an agreed rate.
Businesses selling on credit to foreign customers can also use factoring or invoice discounting to free up cash flow. Export factors specialise in the collection of money from overseas. The factoring company pays you a percentage of the invoice value up-front and the balance (less their percentage) once they have collected payment.
Breaking into new markets abroad is a test of detailed preparation and homework in which the global experience of the bank sector will be invaluable.
This article appeared in Trade Finance magazine September 2012 edition.
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