With two-thirds of companies indicating that improving global trade management is among their three most important initiatives, (Aberdeen Group report: “The CFO’s Agenda for Global Trade”), middle market companies can no longer afford to have their business remain exclusively within U.S. borders.
Smart Business talked with Victor Notaro of PNC’s International Services Group to discuss the importance of doing business overseas, particularly some strategies for success in the global economy.
What should a company that is thinking about expanding internationally take into consideration?
Doing your homework and understanding the market is critical. Carefully think through your market entry strategy and plan for language, cultural and regulatory differences.
Regulations vary from country to country, including marking and labeling requirements. There are many different regulatory bodies with various levels of certification, depending on the industry type.
Also, you need to know who the local players are: competitors, distributors and customers. Knowing the nuances of how to do business with local players can make or break your business as you look to global markets.
In addition, understanding selling terms and documentation are critical to smooth transactions and ensuring you get paid.
What might be a typical strategy for market entry for a product or service?
Many companies first choose to work with a sales agent or distributor who provides local knowledge and guidance as the company tests the new market. If your product or service has a large demand, if you serve a specialized niche, or if buyers come directly to you (e.g., through trades shows), direct sales may be another option. A company may next look to set up a sales office or form a joint venture where an offshore firm can provide the local market expertise. A final phase of expanding internationally could involve building a plant or acquiring a local company once you are firmly established in that market.
What are some of the risks involved in doing business internationally?
Political instability increases financial risk. If governments are overthrown or violence breaks out, plan ahead to assure payment for your goods or services. Working with a financial institution that has relationships with offshore banks and using back-up documents such as letters of credit can mitigate payment risks.
Identify translation exposure and discuss hedging alternatives to reduce or eliminate foreign currency risk resulting from currency fluctuations. When currency values fluctuate, unrealized gains or losses may occur for the business. Likewise, if interest rates in one country change, an imbalance can occur in the currency markets. It is important for companies to work to hedge foreign exchange risk.
How can a middle market company protect itself and/or manage the risk of doing business internationally?
If cash payment in advance is not an option, one of the best tools available to reduce payment risk is a letter of credit where your bank works with the bank of the offshore company. The correspondent bank determines the customer is creditworthy, and your bank validates the correspondent bank. While this option covers the most risk, there is an associated cost.
As you build relationships with offshore buyers, a documentary collection is another vehicle used to ensure the title documents of the sale are secured until payment has been made or drafts have been accepted. It is less costly than a letter of credit.
Finally, you might establish an open account settlement with credit terms directly between you and your foreign buyer. It carries the most risk, and in true risk-reward fashion is the least expensive.
Again, companies should develop a hedging strategy to protect against currency exposure. It’s important to deal with a trusted financial adviser who understands currency fluctuations, economic risk, and how to ensure payment.
What other strategies can a company employ to improve its business globally?
Identify a trusted adviser who is a specialist in international services and who understands your business and the global markets you seek. A financial institution maintaining key relationships with foreign banks and alliances with important partners such as the U.S. Department of Commerce and Export-Import Bank will have the experience and expertise to help you navigate smoothly through international waters.
This was prepared for general information purposes only and is not intended as specific advice or recommendations. Any reliance upon this information is solely and exclusively at your own risk. PNC is a registered trademark of The PNC Financial Services Group, Inc.
VICTOR NORTARO is senior vice president and group manager of PNC’s International Services Group. Reach him at (412) 768-3066.
Interested in learning more about global strategies? Join PNC for an informative Web seminar “Insights into Global Strategies” on Nov. 16 from 10 to 11 a.m. (EST). To register: http://livemeeting.viewcentral.com/reg/pncbank/1116061116sb or send an e-mail to [email protected].
