Jeremy Gray Season 5 Show 3
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Overseas Expansion - is the target country a good fit for my business?
In last week’s show we discussed whether your company, your staff and you as the entrepreneur were ready to take your company overseas. We asked Do you have the financial resources to fund your foreign expansion? Is your home business robust enough that a market downturn will mean you have to abandon your plans? I suggested that a sensitivity analysis to model what a 5% or 10% downturn in business will do your business. A cash flow model is essential, overseas expansion will require investment and that means cash. Even a modest venture will require funds. I also counselled caution when putting together your timeline. This will take longer than you probably expect.
Assuming you have the financial wherewithal to proceed, it is time to look at your staff. Do any of them have international experience you can call on? If not do they have an open mind that will enable them to work with folks with different cultures views and ways of doing things? Can they suspend their political views when working abroad? The advice is while in a bar never to discussion religion and politics, the same applies on business trips. Here in Asia countries with some of the most exciting prospects have communist governments which you will need to accept if you are going to do business in those countries. Fortunately, if you are in Shanghai, Ho Chi Minh City or even in the more rural cities in China and Vietnam it will not be obvious that these are communist countries.
Its not unusual to feel nervous when venturing overseas, I remember thinking in 2006 as my plane left Singapore for Shanghai China, well you are committed now. I did have concerns. I had been a child in the sixties when Communist China was seen as a very different place from the West and some of those perceptions still lingered in my mind. Suspend your preconceived notions and take Asia as you find it, not as you expect it to be.
The language of business is common across all cultures. That is why IBGR is listened to in 169 countries around the world. And as we broadcast in English it shows that the language is understood in at least that many countries.
You may conclude that you need access to more international experience than currently exists in your company today. You have the option of hiring someone who has worked overseas or finding a partner in your target country who can help you. Fortunately, there probably expats living in the countries you are considering who can help. I am not dismissing using locals, in fact I would recommend that approach, as it is hard for an expat to fully understand the local culture. But you might find it easier to deal with someone from your own culture who has the local knowledge.
We discussed several skills that are needed to be a successful international entrepreneur but, in my experience,, net working skills and the ability to empathize. or your EQ, Emotional Quotient, with different cultures are the most important. And this is best achieved if you are willing to adapt to the local culture, eat the local foods and follow local customs.
Having decided you are ready to expand internationally, how do you decide where to target? Which country or countries is the best fit for your business? I have lost count of how many countries there are in the world, it keeps changing and to some extent depends on your perspective. But let’s go with IBGR’s number of 195. That’s a lot of potential countries. Some will not be open to you, if you are a US based company you will not be allowed to do business in some countries. Such as Iran and North Korea for example. Some countries prohibit foreign companies for operating in certain sectors, military and essential infrastructure are common areas for restrictions. There can be religious restrictions, if you market alcohol you will not be welcome in Brunei. But even with these legal, governmental and religious restrictions there will still be many to chose from, so how do you select the countries that are right for you.
One criteria I feel is important and one that is often overlooked when folks prepare lists of what to consider is proximity. There is a huge difference operating in a country that is a two hour plane ride away to one that is 24 hours away. And I am not just talking about jet lag which can be brutal. If you live in London you can visit most European countries on a day trip, you cannot do that if you are travelling to Asia, Africa or Latin America,. Of course at the moment you cannot travel to Asia at all for all except for the most essential of travel, but I am looking forward to the days when travel opens up again. Time and cost means the less likely you are to visit the potential market on a regular basis. This has implications regarding the quality of the staff required in the country. If you can be at a customer the next day to manage any issues that arise you may be able to use sales reps in country with you acting as the sales manager. If you cannot respond quickly you need more experienced and therefore more expensive in country staff. The same goes for all functions across the company. Having said that if you are entering a low cost market such as Vietnam, an experienced Vietnamese sales manager may cost you less than a junior sales rep in your home country. It is simpler to enter a market that is close by. But of course they may not be the most attractive markets. Again using my London analogy, close by markets in Europe are moribund compared to the potential of markets in South America, Africa and Asia. Interestingly if you look at the IMF forecasts for GDP growth in 2021/22 Guyana in South America is the fastest growing economy in the world. Other economies that are expected to grow rapidly in 2022. are, perhaps not surprisingly are the tourist based economies with Macao, Maldives, Antigua and Aruba ranked near the top. The Caribbean region is forecast to grow 11.1% in 2022. Bangladesh which I talked about is forecast to grow 7:5% in 2022, Vietnam 7%, ASEAN 6.1%. I attach a link to the IMF forecasts to 2026 in my show notes if you want more details.
A balance between proximity and potential should be part of your considerations when selecting your target market.
Another criteria not often discussed is Market Receptiveness, how receptive are the consumers in the target country to products from your home country?
One way to look at this is to review the top 10 or 20 export countries from your home. This confirms that there is an acceptance of your countries products in your target markets. Of course this also means that there is established competition in place. If you can access more detailed information about the type of exports you might find that your industry/service is not well represented and this could mean an opportunity.
How are products from your home country perceived. When consumers think about products from your home country, what are their initial thoughts? As an example British Education is well regarded in Vietnam, and indeed across much of ASEAN. Not too surprising Scotch Whisky has a high approval rating in much of Asia. Although whiskies from other countries are making great strides in entering the market both at the entry level and premium level. I was a little staggered to see a bottle of Taiwan whiskey being sold for about US$2000 in my local liquor store in Singapore. British foods are also well regarded in Asia, American baby formula and vitamin supplements are among the leading sellers on on line retail stores. It's quite likely that your government can provide information about which products have high export potential. And if your government does provide not this type of detail then you can, thanks to the internet grab information from other governments. It may not be quite as specific to your situation but it can still be invaluable. In the show notes I add a link to information provided by the Department of Trade and Industry in the UK.
My next selection criteria may surprise you, the entrepreneur the focused business man but I believe it is important. Do you like the country where you hope to operate? I have worked in most Asian countries and I enjoyed some more than others. I will not tell you which were my least favourites, although none of them were unpleasant. But I was much more willing to jump of a plane to visit some countries than others. But there is more to this than how happy you are to travel, your perception of the country will affect how you react to setbacks. Setbacks are inevitable when entering new markets, abroad or at home, if you dislike the country you will react badly to setbacks, blaming the people, the government, the culture etc. This type of negative reaction will not help. On the other hand if you like the country you are much more likely to be forgiving as problems arise which will put you in a position to handle the situation well. Another consideration is that most people love their country, they are proud of it and if they sense you do not feel similarly about their home land they will not go out of their way to help you. As entry into a country requires building up a network and this is much easier if you genuinely like the country where you plan to set up. Note this also extends to your employees, not everyone is going to feel the same about your target market, avoid sending someone who is not comfortable in the country, they will not develop the rapport needed.
Those are some soft criteria that you should consider when choosing your target market or markets, there is nothing to say that you should choose only one. For example if you are interested in the rapidly growing FinTech market in Lithuania, it might be a mistake not to include the other Baltic States of Estonia and Latvia.
Another criteria in your market assessment is what is the competition like? There is likely to be local competition and probably international competition that have entered the market before you, find out as much as you can about their products or services, pricing, quality, distribution methods, is there national and regional competition? How are they perceived? What is their after sales service? A SWOT Strengths, Weaknesses, Opportunity Threats analysis could be helpful in assessing the potential competition.
You should consider the Macro Economic climate. We have talked about GDP growth but extend this to look at per capita income, demographics, does the country have a young growing demographic? Such as many African countries where more than 40% of the population is under 15 years of age. Niger’s under 15 year olds represent half of the country's population. The country with the lowest under 15 years population? Singapore at 12.3%. Also look at the trend of the working population size. China’s working population has been declining for a decade and this impacts their investment strategy. They want high added value industries to invest in their country. Singapore follows a similar strategy, although that is driven more by lack of land than population demographics. These demographics will to some extent determine how welcome you are in your chosen location. If there is a large young population, the government is facing the challenge of finding jobs as these folks enter the job market. If education standards are low and if you can provide low skilled employment you are more likely to be encouraged to invest in their country.
Climate should be another consideration, are there challenges in how your product will perform or be received in your target market. There are some obvious examples, home heating appliances are almost non existent in hot humid Singapore, but there can be more subtle limitations, for instance some sprayed waterproofing products do not work well in humid climates. If operating conditions are a challenge will your product suffer an acceptably high level of failure resulting in claims. Fortunately climate data is available for most countries so with that knowledge and an understanding of your product you can avoid this issue.
Similarly you need to understand the environmental issues, regulations and concerns in your target market. If you plan on building a plant either at the start or later once demand is established what environmental restrictions exist. In most countries an environmental impact assessment will be required. Know what is covered in such an assessment. If you are in the chemical industry you may be restricted where you can locate your plant. And the definition of a chemical industry can be wide, it covers more than the massive chemical plants such as are operated by BASF. Small companies with non reactive chemistry are usually included. Many countries have chemical inventory registers which list the chemicals that can be used in that country. Are your products or raw materials on the list? If not, what will it cost to get them approved? This is usually not a trivial amount. Are there the facilities to safely store your products if they are hazardous? These are just some of the environmental questions you need to ask.
Trade barriers; both tariff and non-tariff barriers need to be understood. Tariff barriers are relatively easy to understand, countries publish tariff rates usually classified under HS Codes. HS stands for Harmonised system which is administered by the World Customs Organization. This should be straightforward but interpreting the correct HS code for your product is not always easy. You will probably be tempted to classify your product under the HS code that has the lowest duty tariff. The country’s customs officials may have other ideas. Getting it wrong can be costly, there will be back duty and penalties to pay. And do not be tempted to use different HS codes in different countries to lower duty rates. Consistent use of codes in each jurisdiction can show honest intent which can help reduce penalties.
Non-tariff barriers can be harder to assess, they can include packaging and labelling regulations, safety standards, license requirements. Also check if there are import quotas that might restrict your business. Also note that standards might not be consistent across the whole country.
These are just some of the considerations you need to take into account when assessing if a country is right for you. Other such as infrastructure, currency conversions, distribution methods repatriation will be covered in later shows.
None of these should frighten you away from your global expansion. You might hit unexpected prohibitions, for example it is not allowed to import used production equipment into China. So it you were thinking of bring that under-utlized production capacity from your home country to China, forget it.
Where can you find the information needed to make your target selection. This is a three step process, target – identify the countries you are interested in, screen, use research to find the countries most suitable for you and then select where you will start.
By now you should be at the screening stage. You have identified the countries you think have potential for you and now you need the information to confirm or refute your initial thoughts.
Fortunately there is a huge amount of information available free of charge although this might be of a more generalist nature.
Firstly your home government likely has a department focused on encouraging exports. This is often country specific so a huge amount of information can be gained there.
The target country’s government may have a function that encourages overseas investment – this is another great source of information.
In many countries there are private companies that provides services helping new companies set up in their home base. These companies often provide a great deal of information about the country, its regulations, culture etc. There are often more than one such company in most emerging markets so you can cross reference the information.
Google of course is another great tool for research. Just be careful, there can be a lot of misinformation on the internet. So assess the reliability of any website you visit and make sure you validate what you learn.
LinkedIn is another useful site. Using this you can find companies that operate in your field in your target markets. You can find locals with experience in your industry who may be able to tap for information, Or experts for hire.
In addition you can find research organizations who survey countries and industries and produce reports that can be purchased for a fee. Although the cost of these reports can cause sticker shock their price will be a very small part of your overseas expansion budget. Just ensure you get a sample first so you can assess the suitability of the report for your purposes.
You can also hire firms to do customized research. This should deliver the highest quality market date but it will come at a price.
But the most important research is the research you conduct yourself in the country of your choice. You should try to meet potential customers, suppliers, competitors, market experts, industry associations, your country's chamber of commerce in the country. Do not over pack your schedule, if you are traveling across time zones take jet lag into account. In my experience adrenaline will get your through the first day, it would be sensible to plan a quiet day for the second day of your trip. And allow a couple of open days at the end of your visit for follow up meetings and research.
Of course international travel is severely restricted at the moment put do not allow this to put your plans on hold. There is still the internet, zoom, teams conversations are part of business life these days. And as these are often free most international contacts will be available on these platforms.
IMF April 2021 GDP Forecast:
UK Government support for doing business in Vietnam
Enterprise Singapore doing business in Vietnam
Of course there is similar information available for the countries on your target list. I am using Vietnam as an example.
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