Entering Overseas Markets
The export potential of a business should be considered both in terms of its readiness to trade abroad and the suitability of its products and services for overseas consumption. Market research is vital to identify and evaluate the target market. The business should have a marketing strategy, financial resources and the required personnel.
The exporter must have knowledge and understanding of the regulatory requirements for export from Ireland and in the country of import. The suitability of a product for export must be considered. Product standards and specifications in the overseas market need to be considered.
There are a number of ways in which to enter an overseas market. The principal methods are as follows;
- selling directly from Ireland;
- opening an overseas operation;
- using an overseas sales agent;
- using an overseas distributor.
Methods of Distribution
The choice of distribution arrangement will have significant financial, legal and taxation consequences.
It may be possible to export some products directly. The EU facilitates the sale of goods and provisions of services from one EU State into another.
Another option may be to sell through a local distributor. Distributors may be appointed on an exclusive or non-exclusive basis. They are independent traders in the state of export The domestic business sells to the distributor which is its agent. The distributor contracts with customers.
A foreign sales agent sells products on behalf of the business abroad and puts customers into contact with the business. The agent receives a commission. The sale transaction is between the business and the customer in the state of export.
A joint venture with a local business abroad might be appropriate. The domestic business obtains a share of profits. Depending on the structure, there may be a taxable entity in the state of export.
A local office branch or subsidiary may be appropriate. It requires the presence of a taxable entity in the state of export.
Selling direct from Ireland is easy and cost efficient. However, because of distance from the customers, it may impede development. It may be possible to extend the scope of a domestic based sales force to generate direct sales via telephone, the internet and email. An e-commerce website can be set up for accepting overseas orders.
The principal advantages of direct selling are that existing resources can used, full control is maintained over the process and no profit sharing is required. The business stays totally within the domestic taxation system. However it may have to comply with foreign regulations in respect of goods and products and exporting and importing.
A disadvantage is that the distance from the market impedes the building of relationships. The business remains responsible for logistics such as shipping and customs formalities. It will bear all the risks of exporting. It may be necessary to invest in language training and support.
Distance Selling Rules
Consumer protection (distance selling) regulations cover all businesses that sell to consumers by way of mail order, telephone, fax, over the internet, digital tv or other remote method. These rule apply to all sales within the European Union. The rules regulations require the following:
- that the consumer is provided with specified information before the order.
- that the consumer is provided with specified written information in a durable medium prior to conclusion of contract.
- that the consumer is sent an order confirmation in good time and before the service is finished.
- that the consumer has a right to cancellation.
It will also be necessary to comply with any other applicable laws for example Sales of Goods Act, Unfair Trading Regulations and other appropriate obligations in the jurisdiction of sale. There are common EU rules in most of these areas.
It may be necessary for the seller to register for VAT in other EU States, where its supplies to consumers exceed a certain level.
Direct Operations and Overseas Markets
Local regulatory matters may impinge and restrict options. Assuming that these do not apply, a number of options are possible. Within the EU, there a significant freedoms, which are very significant in this context. They are dealt with at length in other sections.
- Formation of a branch or local office. This will be taxable on the branch profits as well as in Ireland. Double taxation relief may be allowable but tax will be on the higher of the two rates.
- Local registered companies. This will be a new company subject to local company employment and tax rules. It will be fully taxable in the country concerned and its profits will usually be taxable in the domestic jurisdiction when remitted.
- A joint venture, in which the business and a partner (often a local business) set up a new business in the other country.
The presence in the overseas market allows direct contact with the customer base. It increases flexibility and control. It improves credibility which may be very relevant in terms of after sales services.
The disadvantage is that the full range of corporate employment and tax laws of the other country will apply. It may be necessary to re-brand the business to attract local attention or to change it, if it is potentially confusing with an existing business.
Overseas agents act on behalf of the domestic company in the overseas market on a commission basis. They seek customers. They bring the advantage of their knowledge of the local target market.
A sales agent avoids issues regarding recruitment, training and payroll costs of employees. The agent should be well placed to identify and exploit opportunities and should have a solid relationship with potential buyers. Using an agent allows the exporter to maintain more control over price and brand image than may be the case under a distributor.
A distributor buys goods and takes full responsibility for selling them in the overseas market. A distributor is the business’ overseas customer. Currency related risks are avoided. It will usually be easier for a distributor with an established reputation and contacts to introduce a new brand in the market then it would be for the overseas firm. The distributor will often be in a better position to offer credit to local customers. They can also bulk buy and take care of warehousing and monetary control in the overseas market.
In return for taking these risks, distributors will expect heavy discounts and generous credit terms. Control will be lost over marketing and pricing. Distributors will often demand a long period of exclusivity so it is necessary to choose them carefully.
The contract with agents or distributors should cover key points including the products concerned, the territory, exclusivity (or not), any exceptions, pricing, commission, payment terms, period, confidentiality, after sales care and marketing.
Franchising My offers the opportunity to secure the distribution for products and services faster than what would otherwise be the case. The franchisor may be able to increase purchasing power reduced overheads may be able to produce and increase profitability in small units.
The disadvantage of franchising is loss of control. Although a franchise agreement may impose restrictions the franchisees are independent third parties who maximise profits on their own account.
The franchisee operates his business under the franchisors trade name so that it appears to the outside world to be franchisor. The franchisor would expect to have significant influence and control over the way the franchisee operates its business.
There are a number of methods of setting up franchises overseas. The franchisor might grant franchisees directly to a franchisee in the target country. A joint venture set up between the franchisor and a resident of the target company. A joint venture acts as a franchisor.
The franchisor may grant a master franchise agreement. This master franchisor is given exclusive right to operate and grant franchises within the territory. It undertakes to appoint a franchisee on the basis of franchise agreements stipulated by the franchisor.
A master development agreement. The master developer has no right to sub-franchise but is obliged to operate outlets itself.
A franchisor allows the franchisee to use a name and business methods associated with the franchisor. The franchisor can exercise its continuing control over the franchisee. The franchisor provides assistance and the franchisee periodically has to make payments.
Joint ventures are a means by which companies and businesses undertake activities and projects jointly. They may be undertaken when a project is beyond the capacity of an individual company. They are particularly important in the cross border context and provide opportunities for a company to enter into new markets and industries abroad.
The terms of a joint venture are entirely a matter for agreement. There are a number of different means by which joint ventures are structured. If one or more business are based in different countries it is usually desirable to form a new vehicle or company in the overseas jurisdiction.
The first choice to be made is whether or not a separate legal entity will be established as a vehicle for the joint venture. The alternative is to proceed with another arrangement such as legal partnership or limited liability partnership under new UK legislation. A further possibility is a purely contractual cooperation agreement.
The forms reflect different degrees of integration. Under a corporate structure, all trading activities, assets and liabilities relating to the venture are placed in a single vehicle or its subsidiary. Where the arrangement is in the nature of a relationship and there is no pooling of assets a sharing of revenue and costs under the terms of a contract may suffice.