Small and midsize manufacturers can still benefit from exporting without accepting too much risk.
Exporting isn’t just for the big multinationals anymore. The expansion of e-commerce and evolving global value chains are opening up new export opportunities for small and midsize enterprises (SMEs), according to a 2016 World Trade Organization report.
But SME participation in trade isn’t as strong as it could be. In developed countries, on average, firms with fewer than 250 employees account for 34% of exports, according to the WTO’s 2016 World Trade Report. The bulk of this trade comes in the form of services, such as accounting, the WTO reported.
One of the reasons small and midsize manufacturers may hesitate to enter the export market is the inherent risk that new markets bring.
“A lot of middle- and small-sized companies (in the U.S.) they just avoid international,” says Mark Robinson, senior vice president of global operations, UPS Capital. “They just say, ‘There’s a lot for me to deal with here; I’m just going to keep selling in the U.S.A.’ And in the U.S. market, it’s easy to file lawsuits and collect if you need to collect. Because the U.S. market is so big, many small- and middle-size companies wait a long time before they stick their toe in the water on the international side.”
The result: Many SMEs miss a significant opportunity for major growth. During the initial stages, smaller firms typically have a lower chance of surviving as exporters, but they grow more quickly than large firms if they do survive, according to the WTO report.
The benefits of exporting are evident. So how can SMEs enter the export market with more confidence? Trade experts suggest SMEs protect themselves with various insurance policies and export strategies.
Consider Credit Insurance
Late payments and nonpayment are significant concerns for exporters, says Robert Ginsburg, president for trade advisory firm RBG Global.
“When you’re selling to countries that are well-developed economies, the risks are less, but they’re still there, and if you get into a dispute with your customer and you’re not getting paid, you’re going to have to go to that country and file a lawsuit in that country and go through that system and try to get paid,” says Robinson. “And it’s difficult for a middle-sized company to pull something like that off without help.”
Ginsburg suggests companies that plan to export consider credit insurance to protect themselves. Trade or export credit insurance as a policy that protects an exporter against nonpayment by a foreign buyer. Export credit insurance typically covers nonpayment risks, “such as insolvency of the buyer, bankruptcy or protracted defaults/slow payment and certain political risks,” according to the International Trade Administration. It also covers changes in trade regulations, currency inconvertibility and expropriation.
Trade credit insurance may offer competitive advantages, as well.
“This policy also helps exporters capture additional market share by allowing it to offer more favorable payment terms than without it,” Ginsburg says.
In addition to credit insurance, manufacturers should conduct business with companies that are familiar to them, says Harriet Greenberg, co-managing partner with Friedman LLP, a New York-based accounting and business consulting firm.
“Unknown international customers should not be sold on credit,” she says. “Also, make sure to get payment in advance or at the least a letter of credit from a large international money center bank. If international business gravitates to small international customers, I would consider having the U.S. company sell to an agent internationally who then can resell the products.”
Get Paid in U.S. Dollars
Currency fluctuations can wreak havoc on profits. For example, many manufacturers have taken advantage of the export opportunities in Mexico, which is the United States’ third-largest trading partner. But after the U.S. presidential election, Mexico’s peso had its largest two-day loss in 22 years, Bloomberg news reported.
Robinson recalls speaking with a small U.S. manufacturer at a recent conference who lost money on a contract with a large retailer because the company signed an agreement to receive payment in pesos
“He has to provide product that he pays for in dollars here in the U.S.A., and then he has to sell it in Mexico in pesos to a company that’s going to hold his feet to the fire, and then the currency moved 50%, so it went from being a profitable contract to an unprofitable contract,” Robinson says.
Lesson learned: “Think carefully about agreeing to pay or get paid in foreign currency,” Robinson says. “If you’re going to do that, go through someone who is knowledgeable about how to mitigate that and the cost of it. There’s lots of ways to hedge foreign currency, but it costs money and you have to include that before you sign the agreement.”
A couple of ways manufacturers can protect themselves include invoicing in the currency of their home country or having a contractual agreement that transfers the risk to the buyer, Ginsburg says.
Keep Cargo Safe
Another risk factor that manufacturers should be aware of when exporting is cargo safety. In 2015, cargo theft caused $22.6 billion worth of damages, according to a report published last year by BSI Supply Chain Services and Solutions. Manufacturers may want to consider cargo insurance policies to safeguard high-value goods while they’re in transit.
“The risk of loss and theft is different in different parts of the world,” Robinson says. “It may be very safe to ship a container of bicycles from New York to Florida, but if you’re going to ship a container of bicycles from El Paso to Mexico City, it’s a completely different kind of profile.”
Don’t rely on the buyer to cover the cost of any losses in the event that the customer doesn’t want to pay, Robinson says. In addition, many manufacturers may assume that carrier liability will cover any losses. But carrier liability is not insurance and will require a painstaking process to prove that the carrier is at fault, says Kristin Debates, director of marketing communications and PR at UPS Capital.
With cargo insurance, the cargo insurance provider will fight the battle for the manufacturer.
“At the end of the day, if you get into a dispute and you’re uninsured, you’re in their country, hiring a lawyer there, trying to get them to pay,” Robinson says.