Tag: Exporting

Going Global

Currently, the UK government is promoting the idea of exporting to small and medium-sized businesses.  This is a bit counter-intuitive as at the same time, the government is in such a mess with Brexit, it is highly likely that the conditions for exporting past 29 March 2019 will be such, and barriers to trade so high, that for many small businesses the costs of exporting may become prohibitive.

So what should a small business consider when looking to market their products abroad?

The world is, in many ways shrinking.  Faster communications occur the rise of the internet and cloud computing.  We have faster transport links through the development of faster aircraft and ships.  We have high-speed rail lines and improved road networks.  The result of this improved communications and logistics infrastructure has meant a boom in international trade.

Many companies now like to see themselves as ‘global firms’ which operate across countries, regions and continents.  Going global has allowed these firms to make gains in terms of research and development, production, marketing and financial structures.  They have been able to build cost and reputational advantages which are not available to firms which operate on a domestic basis.

However, to globalise successfully, companies need to ask themselves pertinent questions:

  • What market position do we want in a particular country or region?
  • Who are our competitors, in the chosen market and globally?
  • Can we operate on our own in a new market or do we need a strategic alliances?

If you are considering global expansion, you need to understand the frameworks under which trade will take place. Is there a free trade or cooperation agreement in place?  Are their tariff free quotas? Are you operating on WTO tariffs?  Does GATT24 apply to any trade deal? Do you know the status of the various international trading blocs such as the EU, Mercosur, SADC, TPP, NAFTA, etc.

The WTO developed out of the General agreement on Tariffs and Trade.  Over seven rounds of international talks, the WTO has lowered the average tariff for manufactured goods from 45% to 5%.  However, significantly high levels of tariffs still exist in certain goods classes, e.g. the tariff for motor vehicles and components is 12% and speciality foods can have tariffs of up to 40% on the importation value.

In recent years, the progress of the WTO has stalled.  The eighth round of trade talks, the Doha round, stalled.  Several countries, particularly the Trump administration have distinctly protectionist policies which have weakened the WTO.  In particular, Trump is refusing to appoint members to the WTO council and looks to implement punitive tariffs against individual countries, particularly China, in breach of WTO rules.  Such moves are threatening the viability of the WTO and increasingly it is seen as a failing organisation.

International trading blocs, such as the EU and NAFTA, have been major drivers of trade internationalisation.

This is one of the fascinating things about the Brexit debate.  Brexit supporters shout that they want a global Britain; but the EU record on international free trade is astonishing.

The EU/EEA has 31 member states.  The EU also has 54 FTAs with both countries and trading blocs such as the Southern Africa Development Council.  On top of those deals, the EU offers unilateral free trade to the world’s poorest 48 nations under the Everything but Arms policy.  The WTO has 164 member nations and the EU has free trade arrangements with nearly three-quarters of them.  In addition to full free trade agreements, the EU has a number of cooperation agreements with nations, many of which allow for tariff free quotas for certain products.  For example, the EU has a tariff free quota arrangement with New Zealand for lamb meat.  New Zealand hasn’t exceeded this quota level for a number of years.

The EU is currently in the process of negotiating trade deals with Morocco, Egypt and the South American trade bloc Mercosur.

It is highly unlikely that the UK post-Brexit, will be able to quickly negotiate trade deals equivalent to those of the EU and simply due to market size, it is unlikely that the UK alone will be able to obtain the levels of commitment included in EU deals.

To succeed in international markets, you need a deep understanding of the regional and national attributes of your chosen market.

Firstly, what type of economy is your target market?

There are four basic categories of economy:

  1.  Subsistence Economies:  Where the majority of the population work in basic agriculture and where most output is consumed domestically.  This large parts of Africa.
  2. Raw Material Exporting Countries:  A country or region that is rich in a particular raw material resource, e.g. The Democratic Republic of Congo which has large cooper reserves and which supplies much of the world’s cobalt.
  3. Emerging ‘Industrialising’ Economies:  This includes the BRIC economies.  These countries have a rapidly growing middle class where there is increased demand for Fast-Moving Consumer Goods.
  4. Industrialised Economies:  Which often had lower levels percentage of GDP growth (but actual value of that economic growth can be far more that of emerging economies).  This category includes the USA, most of Europe and Japan.  These countries export manufactured goods and professional services.  They are rich markets for all types of goods.

It is interesting to note that many Brexiters see Africa and the UK’s former colonies as a solution to the trade lost with the EU due to leaving the bloc.  However, you have to consider that the GDP of the whole continent of Africa is less than half that of France.

Secondly, what is the income distribution of your chosen international market?

Developed nations often have a mix of high medium and low-income households.  Developing nations tend to have a small rich elite class and the mass of the population have low incomes, so if you sell products aimed at the ‘middle ground’ such a market may not be viable.  Much of the interest for exporters in the BRIC nations is their growing middle class.

You need to consider a countries legal and political environment of your chosen international market.  For example, China has few intellectual property laws and enforcement of the laws that do exist is poor.  So do you want to sell your designer goods in a market where counterfeiting and trademark breaches are common?

Some nations are open to foreign firms; some are less welcoming.  India bothers foreign firms with import quotas, currency restrictions and other hindrances.

On the other hand, Singapore is a market which looks to attract foreign firms with extensive incentives and favourable tax and trading conditions.

Some countries, such as Canada, are extremely politically stable.  Others, the most prominent current example being Venezuela, are not.

You need to examine the cultural environment of your target market.  You need to ask how certain countries treat certain products.  For example, some Indian states have strict laws on the sale of alcohol and the quantity that can be bought (you may have to register with a certain retailer to be able to buy alcohol)). Until recently, it was illegal for women to drive a car in Saudi Arabia; yet in Western Europe many small family cars are directly marketed to women.  Italy has proven to be a difficult market for the large coffee shop chains.  How you drink coffee, and what and when you drink coffee, have strong cultural meaning in Italy.

You need to be aware of a countries folkways, norms and taboos if you are to successfully market your products and services in that market.

There have been some horrendous mistakes made by large firms where they have not taken into account cultural norms.

For example, in Africa, the norm is to label product packaging with the contents of the container.  For example, you show a chicken on tins of Chicken soup. Nestle made a huge mistake when they labelled packs of infant milk formula with the picture of a baby.

Burger King had to pull adverts when the showed a ham sandwich in the hand of a Hindu God (With the strap-line ‘the snack which is sacred’).  Hindu’s are vegetarian.  So a meat product being advertised through the image of a Hindu god was seen as highly blasphemous.  The advertising campaign had to be withdrawn

In many Arabic countries, using the left hand to hold or eat food is seen as highly insulting.  Traditionally, in lands where water and vegetation is scarce, the left hand is traditionally used for cleaning yourself after being to the toilet.

So what are the indicators of market potential:

Demographic Characteristics

  • Levels of Education
  • Population size and growth
  • Population age composition

Sociological Factors

  • Consumer lifestyles, beliefs and values
  • Business norms and approaches
  • Cultural and social norms
  • Languages

Geographic Characteristics

  • Climate
  • Country size
  • Population density
  • Transportation infrastructure and market accessibility

Political and Legal Factors

  • National priorities
  • Political stability
  • Government attitude to global trade
  • Government Bureaucracy
  • Monetary and trade regulations

Economic Factors

  • GDP size and growth
  • Income distribution
  • Natural resources
  • Financial and human resources

When deciding how to enter a market you need to consider whether to export directly or indirectly.  Do you use joint-ventures through licensing or contract manufacturing, management contracting or full joint ownership.  Some countries may require you to have a domestically based partner if you are to operate within their borders.  Do you invest directly in production facilities in the state.  Do you assemble products in those facilities or do you carry out full manufacture from raw materials?

Each of the above options increase the levels of risk in an expansion.  They may require increasing levels of control but equally profit potential may be increased.

You also need to consider whether to follow a global marketing plan where there is little variation in your offer between countries; or whether you develop specific marketing mixes for individual countries or regions.

Protected Food Names: The Next BREXIT Battle

Last week, Marcus Fysh, the hard Brexit-supporting Conservative backbench MP sent out a tweet evoking a post-EU Britain where we could enjoy American feta cheese and Chinese businessmen could quaff English champagne.

I found this tweet maddening as it highlighted some Brexiteers utter ignorance of current food protections and that by breaching them, British exports could be seriously endangered.

Let’s start with the American Feta.  What Mr Fysh does not seem to realise is that American ‘feta’ is a completely different product to the genuine Greek cheese.  Greek Feta is usually made from goat’s milk (and occasionally sheep’s milk).  The American version is made from cow’s milk.

American cheese, although there are some exceptions to prove the rule, is generally regarded as terrible.

Then there is the use of the term Champagne.  This has already been the subject of a long and bitterly fought trade dispute between America and France.  In fact a solution was only negotiated once the EU became involved and used its scale to exert influence on the US government.

Champagne has a PDO, a protected designation of origin.  This means that the use of the name champagne can only be applied to sparkling wines from that region of France.   The EU has negotiated with other administrations around the world to ensure that other wines do not use the term.

In America, some wine makers continued to use the term champagne to describe their wines.  In 2006 the EU and the US governments agreed that all new wine production would stop using the term champagne.  Wine that had already been produced could continue to use the name until stocks were exhausted.

As with most international agreements, there is a legal loophole.  This relates to the treaty of Versailles signed at the conclusion of World War One.  The treaty contained a clause to deal with a dispute on the naming of wines in France and Germany.  The US government was a signatory to the treaty but the US senate did not ratify the wine clause.

What this means is that US wine producers who have been in continuous production since the 19th century can continue to use the term Champagne as long as they use the statement ‘California Champagne’.

In the 1920s, America went into the prohibition era.  The sale and consumption of alcohol was all but banned (some individuals could get a certificate from their Doctor stating that they could consume alcohol, on prescription, for health reasons!).

What this meant was that the vast majority of wineries were shut down by the US government.  A handful, who were producing for export only, survived.

Even after prohibition, the US wine industry struggled.  It went into a steep decline and only recovered in the 1970s.

There are a handful of Californian wine producers (I can only find four) that can continue to use the term ‘California Champagne.  As most US wineries only date from the 1970s, they cannot use the term.

It is also worth mentioning that ‘California Champagne’ is a different wine from that produced in France. French champagne is a wine made from Chardonnay or Pinot Noir grapes.  ‘California Champagne’ tends to be made from Zinfandel grapes.

Of course, the term ‘California Champagne’ can only be used within the United states.  One winery bottles its export product under the term ‘California Sparkling Wine’.

Mr Fysh also fails to recognise the disparity between the size of the French wine industry and that of the UK.  UK wine production is a growing niche sector.  French wine production dwarves the UK industry.  Fysh is expecting an industry which employs around 1200 people to compete with one which employs twenty times that number.  It is like saying Morgan cars are a direct competitor of Ford.

There are effectively three layers of protection for speciality regional foods within the EU.

Products such as whisky are protected by a specific EU directive (the Spirit Drinks Directive).  Whisky is defined as; “grain alcohol matured in oak barrels for a minimum of three years”.  Scotch is given additional protection in that the maturation process must take place in Scotland.

Then there are PGOs.  These are protections where the location of the food production is protected.  For example, Scotch Beef and Welsh Lamb must be reared and produced in Scotland and Wales respectively.  Often it is the place of production alone that offers the protection.

Finally, there are PDOs.  These are protected designations of origin where there is a specific recipe, production method or list of ingredients which is representative of a particular geographic area.  Foods with PDOs include Parma Ham, Parmesan cheese, Melton Mowbray Pork Pies, Stilton Cheese, Rutland Bitter, Arbroath Smokies, Cornish Dairy Ice Cream and the Cornish Pasty.

To use a name with a protected designation of origin, it must follow the declared production process AND it must be produced within the declared geographic area.  For example, a Melton Mowbray Pork Pie must have its crust moulded around a wooden dolly, not rolled out with a rolling-pin; the pie must be produced within the specified area around the town of Melton Mowbray.

There are around 80 UK foods which are given EU-wide name protection. Until recently, there were campaigns to add further UK foods to the PDO/PGO list.  For example, in Scotland, campaigns were started to get both Dundee Cake and the Forfar Bridie PDO protection.

Geographic protections guarantee product consistency and quality.  They create a marketable branding identity.  They can add a price premium.  They can help to protect jobs and artisan production.

Most geographic protections have arisen from campaigns by producer groups, consumers and local people.  Many such groups have fought for years the ensure protected status.

And then along comes Brexit.

With six months to go until the UK leaves the EU, there is little solid information as to what will happen to protected name status after Brexit.  The UK government has stated that it intends to create a separate system of food protections.  The EU has put protected food descriptions near the top of their demands as part of the exit settlement.  The EU has stated that it will not revoke existing UK food name protections within the bloc after Brexit. However, if the UK does not reciprocate, that position could change.

However, six months to go leave insufficient time for protected food producers to plan for life outside the EU.

Clearly, the UK government can regulate as to what happens within the UK market.  It is questionable whether it will have the negotiating heft to demand that similar protections exist outside UK borders.

Food name protections are a factor in the UK negotiations at the WTO.  And the sharks are circling.

In New England, where Cornish fishermen and tin miners emigrated in the 18th and 19th centuries, pasties are a common food.  Producers in that part of the United States want to apply the description Cornish to their products.

American distillers have already stated that they want to reduce the prescribed maturation period for whisky from three years to two.  They want to mature whisky in metal tanks, not oak barrels.

Asian whisky producers want to describe their products as ‘Scotch’.

So what happens if Mt Fysh gets his wish? What happens if the UK accepts American Feta and sells sparkling wine to Asia with the description Champagne?

The likely impact on UK exports to the EU would be disastrous.  EU states would simply refuse to allow UK production into their markets.  Bear in mind that the vast majority of UK food exports go to Europe.  UK foods containing ingredients such as ‘American Feta’ would not be allowed into our biggest export market.

Then there is the impact on UK producers.  If American distillers flood our market with 2-year-old gut rot;  if Chinese distillers start producing ‘Scotch’ for their domestic customers; the impact on the Scottish distillery industry will be disastrous.

With his crass, and frankly insulting, tweet, Marcus Fysh is putting at risk premium food exports and thousands of UK jobs.