Step-by-Step Guide to Exporting - Step 6 - Opening the door: entering your target market

Table of contents

• Step 6 - Opening the door: entering your target market
  • 6.1 Understanding entry strategies
  • 6.2 Refining your entry strategy
  • 6.3 Methods of market entry
  • 6.4 Free trade agreements
  • 6.5 Evaluating use of intermediaries
  • 6.6 Selecting the right intermediary

6.1 Understanding entry strategies

Developing a market-entry strategy simply means finding the best methods of delivering and distributing your goods. Or, if you're exporting services, it means setting up ways to obtain and manage contracts in the foreign country.

Global Affairs Canada has trade commissioners across Canada who can:

• help you finesse your market-entry strategy
• connect you to the trade commissioners and global contacts you need, in more than 160 cities around the world, to help you with the challenges of market entry.

6.2 Refining your entry strategy

You've chosen the most promising markets for your product or service. Now, based on your market research, you must decide which entry method best suits your needs.

Some factors to consider:

• How is business conducted in your target market and industry sector?
• What are your company's export strengths and weaknesses?
• What is your company's financial capacity?
• What product or service are you planning to export?
• How much service and after-sales support will your customers require?
• What trade agreements or barriers apply to your target market?

6.3 Methods of market entry

The traditional means of market entry fall into four broad categories: direct exports, indirect exports, partnerships and acquisitions/investments. We'll examine each of these and then look at the question of intermediaries: agents, distributors and other go-betweens.

6.3.1 Direct exports

For products, you market and sell directly to the client. For services, you negotiate, contract and work directly with the client.

Advantages of direct exporting

• A higher return on your investment than selling through an agent or distributor
• Allows you to set lower prices and be more competitive
• Close contact with your customers

Disadvantages of direct exporting

• You don't have the services of a foreign intermediary
• Customers or clients may take longer to get to know you

6.3.2 Indirect exports

For products, you market and sell to an intermediary such as a foreign distributor. You can also retain a foreign agent or representative who does not directly purchase the goods.

For services, you contract with an intermediary who then negotiates and contracts on your behalf.

For many new exporters, an intermediary may be the best way to enter a market.

6.3.3 Partnerships

You might find it advantageous to partner with a local company whose strategic position complements or enhances your own. A well-structured partnership can benefit both parties in the following ways:

• Your partner can complement your capabilities and provide the local expertise, insights and contacts.
• Each company focuses on what it does and knows best.
• Both partners share the risk.
• You can pool ideas and resources to help keep pace with change.
• You can approach several markets simultaneously.
• Your partner may provide technology, capital or market access that you might not be able to afford on your own.
• Partnerships may help resolve problems related to professional accreditation, movement of personnel across borders and tax and legal status.
• In a highly competitive global market, combining the technical and financial strengths of two businesses can make both more competitive.

You develop a partnership strategy in three steps:

1. Decide whether or not a partnership can work for you. If your needs can be satisfied in-house, a partner may not be necessary. If you need financing, you may be better off looking for investors. But if you require special expertise or a local market presence, then a partnership might work very well.
2. Define the form, structure and objectives that a partnership must have to suit your needs. To do this, evaluate your company's goals, its ability to achieve them and where you need help in doing so. Then identify how the partnership must work in order to fill in those gaps.
3. Find a partner who meets these criteria and who will be a good "fit" with your company. It is very important to select a partner that has the values and approach to businesses that match your own for a partnership to be successful.

There are several different forms of partnerships. The primary options are:

• Licensing - a licence is the granting of rights to another business so that it can legally use your proprietary technology and/or intellectual property. This usually does not involve granting all the rights to the property.
• Franchising - more than licensing, the franchisee is given the right to use a set of manufacturing or service delivery processes, along with established business systems or trademarks, whose use is controlled by a licensing agreement.
• Cross-licensing - each firm licenses products or services to the other for sales purposes.
• Cross-manufacturing - a type of cross-licensing in which companies agree to manufacture each other's products.
• Co-marketing - carried out on the basis of a fee or a percentage of sales to take advantage of existing distribution networks and domestic markets.
• Co-production - the joint production of goods, enabling your business to use its skills and resources to provide cheaper manufacturing.
• Joint venture - each business contributes capital to a newly created corporation that they operate together, or the Canadian and the local business enter into a general partnership agreement and operate the joint venture as a partnership.

Using the expertise of lawyers, accountants, bankers and other professionals is vitally important when setting up any type of partnership.

All parties must be absolutely clear on who holds which rights and which responsibilities.

6.3.4 Acquisitions and investments

A partnership isn't the only way to tap into the resources of a foreign company. Acquiring a firm in your target market, or making a substantial investment into one, can achieve the same results.

Through acquisitions and investments, you immediately gain access to the local market, as well as patents and other intellectual property, resource availability, access to capital, specialist expertise, proprietary technology and product differentiation.

You may also enjoy lower operating and production costs in your foreign operation than at home.

Working abroad

Exporters of services should be aware of the personal and business issues involved in working outside Canada. Global Affairs Canada publishes Travel Advice and Advisories to tell service exporters about potential problems, visa requirements and how to best handle issues that arise.

6.3.5 Selling to foreign governments

Foreign governments can present a rich source of contracts for exporters. The United States government alone procures more than $500 billion in goods annually. Canada Business provides information on how to navigate foreign government procurement and has services to help you succeed.

To help Canadian businesses sell to foreign government customers, the federal government established the Canadian Commercial Corporation (CCC), a Crown corporation that acts as Canada's government-to-government contracting organization.

Canadian businesses can navigate complex government procurement markets abroad with confidence with CCC at their side. CCC is a trusted Government of Canada partner that offers companies services that reduce risk, improvx`e their access to prospective buyers and differentiate their offer with CCC's government to government contracting approach and guarantee of contract performance.

CCC also specializes in contracting with the U.S. Department of Defense (U.S. DoD). All U.S. DoD contracts over USD $150,000 are contracted through CCC based on DFARS 225.870. For more information, visit the CCC's Department of Defense page.

Your opportunities for selling to the U.S. government aren't limited to defence and aerospace, of course. Global Affairs Canada's Sell2USGov provides a detailed explanation of U.S. government procurement and how you may be able to take advantage of it.

6.3.6 Selling to multinational corporations

To sell goods or services to foreign corporations, it is essential to conduct research to understand their supply chain sourcing practices. Incorporating the mechanism by which you access the supply chain should be considered in developing your market-entry strategy. Corporations have different sourcing needs, practices, guidelines or entry points to their supply chain. Some approach their supply chain management in terms of Tier 1 and Tier 2 suppliers, for example, with Tier 1 suppliers selling directly to the corporation and with Tier 2 selling to Tier 1. Also, some require their potential suppliers to register their business on an online portal for consideration. Many multinational corporations also have corporate supplier diversity initiatives to source from women, minorities and other groups that are traditionally underrepresented in supply chains. For these initiatives, the key contacts and process for entering the supply chain are typically different (i.e. potential requirement for certification). This, however, does not preclude designated groups from accessing other parts of the supply chain; it is simply a unique entry point that may provide them with a competitive advantage.

You may be wondering where to start in understanding the complexities of accessing corporate supply chains. Information on websites, talking to corporate representatives in Canadian subsidiaries, or meeting with representatives during business fairs or networking events can shed light on sourcing needs and practices. The Canadian Trade Commissioner Service can also assist with providing business intelligence and qualified contacts. If you are part of a Canadian women-owned business, contact the TCS's Business Women in International Trade Program.

6.4 Free trade agreements: understanding the role of trade policy in reaching your export and investment goals

6.4.1 Navigating the global trading environment

The global trading environment has become increasingly complex. The World Trade Organization (WTO) has provided an effective foundation for establishing and enforcing global trade and investment rules. In addition to pursuing their interests in WTO forums, WTO member countries have increasingly sought out other tools to generate opportunities and ensure fair treatment for their businesses, as well as create advantages relative to competitors.

There has been a proliferation of trade and investment agreements:

• on a bilateral or regional basis, that is, outside the WTO:
  • free trade agreements (FTAs)
  • foreign investment promotion and protection agreements (FIPAs);
  • air transport agreements (ATAs); and
• sector-specific initiatives within the WTO, including:
  • WTO Agreement on Trade Facilitation (TFA);
  • WTO Agreement on Government Procurement (GPA);
  • Trade in Services Agreement (TISA);
  • WTO Information Technology Agreement and its recent expansion (ITA);
  • WTO Environmental Goods Agreement (EGA), among others.

So what is the trick to finding your way through all these agreements?

• Stay focussed on what you sell and where you want to sell it.
• Identify which barriers and rules could apply to your specific goods or services in these markets.
• Find out if Canada has any agreements in place that might make it easier for you to sell to, or invest in these markets.

Global Affairs Canada provides information on Canada's FTAs and other trade policy initiatives.

6.4.2 Advantages of FTAs

So what are some of the benefits of an FTA to Canadian businesses?

FTAs help our economy by:

• enabling Canadian businesses to better compete with:
  • local firms in the partner country by providing preferential market access, and
  • competitors from other countries that enjoy preferential access to that market.
• improving market access by eliminating or reducing tariff and non-tariff barriers to trade in goods.
• providing fair and equitable treatment, greater predictability and transparency to Canadian exporters, service suppliers, investors and innovators.

Essentially, FTAs enhance Canada's competitiveness and support business' access to global markets.

Look at the North American Free Trade Agreement (NAFTA) as an example.

NAFTA:

• eliminated almost all duties on goods covered by the Agreement;
• established a framework of rules providing fair and equitable treatment, transparency and predictability;
• addressed certain non-tariff barriers to trade; and
• provided formal mechanisms for resolving disputes.

Since NAFTA's implementation in 1994, Canada-U.S. trade has increased nearly 173%. Over $2.4-billion worth of goods and services now cross the border every day, and some 2.5 million jobs in Canada depend on Canada-U.S. trade.

6.4.3 Market access for goods: an FTA's 'bread and butter'

Parties to an FTA commit to reduce or remove trade barriers for goods.

Not all tariffs are eliminated immediately upon entry into force of an FTA, as countries seek to protect sensitive products or mitigate the effects of tariff elimination by phasing out tariffs over a defined period. The tariff outcome of each FTA is reflected in the parties' tariff schedules. The modalities for tariff elimination are outlined in the National Treatment and Market Access for Goods (NTMA) chapter.

All of Canada's FTAs seek to secure the best possible market access outcome for our producers, manufacturers and exporters, while taking into account Canadian sensitivities. Naturally, our trading partners are seeking to do the same for their stakeholders.

That's why it is important for you to be able to understand the implications of these FTAs for your business.

For example, the existence of an FTA between two countries does not automatically mean that a good exported from one country to the other will not be subject to duties. To take advantage of preferential market access provided in a particular FTA, a good must meet the rules of origin set out in that agreement. Therefore, you need to be aware of:

1. The product's tariff classification under the Harmonized System (HS) Code, which will allow you to identify the applicable tariff rate.
   1. While HS codes are harmonized internationally up to the sub-heading (6-digit) level, each country differs at the domestic nomenclature level. In Canada, the domestic nomenclature is eight digits while other countries may be longer.
   2. The Government of Canada offers a HS database search engine tool to help you find the appropriate six-digit level HS code that best describes your product used anywhere in the world
2. The tariff rate that applies to your products in the countries you are targeting.
   1. It is also useful to know whether your key competitors from other countries benefit from a lower tariff rate.
3. Whether the tariff rate is being reduced or eliminated for Canadian products as part of a free trade agreement between Canada and the country in question.
   1. If so, the staging category for your products will determine if a tariff is being eliminated immediately upon entry into force of an FTA or if it will be reduced or eliminated over a defined period.
4. Whether other tariff treatments apply to your products, such as tariff rate quotas, whereby products within a specified quantity are eligible for a preferential tariff rate.
5. Whether safeguards (a temporary re-imposition of tariffs to protect a local industry against import surges) could be applied to your products.
   1. Safeguards are typically applied only in exceptional circumstances for certain products as permitted under the WTO or an FTA.
   2. You can contact the country's Customs Authority for more information on any safeguards that are in effect in that country.
6. What Rules of Origin (ROOs) apply, both the general ROOs that appear in the body of an agreement's text, as well as the Product-Specific Rules of Origin (PSROs) in the annex.
   1. If your products do not meet the ROOs, they will not be eligible for the preferential tariff rates from the FTA.
   2. Meeting the ROOs in one of Canada's FTAs does not mean that you meet the ROOs in another. You need to look at the specific provisions of a particular FTA.
7. What are the origin procedures outlined in the FTA (e.g. who can apply for an advance ruling on origin and how).
   1. An advance ruling can be a key tool. It can give you an idea of how your product will be treated by the importing party even before the product has left Canada.

6.4.4 It's not just about tariffs

There are three important trends to note regarding tariffs and global trade:

1. Overall, global tariffs have decreased as a result of unilateral tariff reductions as well as WTO agreements. Bilateral and regional trade agreements also provide for the elimination or reduction of tariffs, but only on a preferential basis (e.g. only for goods originating from each party to the agreement).
2. Because tariffs have generally decreased, there has been an increased focus on non-tariff measures that can affect trade (known as non-tariff barriers). These measures are permitted to meet legitimate public policy objectives, but governments need to ensure that they are the least trade-restrictive option necessary to achieve those objectives. The goal is for regulations to be in place to protect the public, while at the same time allowing trade to flow.
3. Modern FTAs increasingly address not only tariffs, but also non-tariff barriers that are restricting or distorting trade.

• All countries, including Canada, employ regulations and other measures to meet legitimate public policy objectives, such as ensuring the safety of our food supply or preventing the spread of pests or diseases.
• Regulations are also necessary to ensure that products are not harmful to consumers, such as specifications on an infant's crib.
• However, these measures should not be used to unnecessarily restrict trade or discriminate against foreign products.

6.4.5 Let's get back to the rules

What are some of the shared objectives in strengthening rules around trade and investment in an FTA? Generally, FTAs aim to:

• enhance the predictability and transparency of doing business
• establish an effective framework that will govern how trade and investment is conducted
• address today's common challenges to trade and investment
• level the playing field by seeking to ensure strong labour and environmental standards are upheld as trade is liberalized, as well as provisions on Responsible Business Conduct (RBC) and anti-corruption

We recognize that with increased trade in the digital environment, more extensive global value chains, rapid integration of emerging economies and higher risks associated with intellectual property protection, among other challenges, companies like yours need clear, effective and predictable rules in targeted markets.

It is important for you to be aware of the provisions related to these issues in a trade agreement. Understanding what the rules are and how they can help you, will go a long way in ensuring you maximize the benefits of an agreement.

For example, free trade agreements typically contain provisions related to the following subjects:

National Treatment and Market Access for Goods (NTMA)

• Establishes National Treatment -, i.e. treatment no less favourable than that accorded to domestic goods and import/export restrictions, ensuring that no prohibition or restriction of importing goods is allowed.

Electronic commerce (e-Commerce)

• Provisions for e-commerce focus on addressing tariff and non-tariff impediments faced by consumers and businesses that trade in the electronic environment. A key element for Canada is a commitment to a permanent customs moratorium on digitized products that are delivered electronically.

Specific competition issues, such as state-owned enterprises (SOEs)

• May establish rules that require greater transparency in the operation of SOEs, or preclude the provision of subsidies to SOEs competing with private sector entities.

Investment

• May include measures to protect Canadian investments abroad. In the event of an expropriation, measures may require that expropriations be restricted to those for a public purpose, be accompanied by due process and non-discrimination, and have prompt, adequate and effective compensation.

Customs administration and/or trade facilitation

• Intended to make it easier and less-costly for exporters to get their products across foreign borders.

Cross-border trade in services

• Intended to promote non-discrimination, as well as greater predictability, stability and transparency for service businesses.

Temporary entry of business persons

• Intended to facilitate the entry of certain categories of business persons and address certain types of restrictions, such as labour market tests and quotas.

Intellectual property (IP)

• May establish rules and cooperation-based activities that set a minimum standard for the protection and enforcement of IP rights.

6.4.6 What else do you need to know?

Exceptions and reservations

Just as you need to familiarize yourself with the market access benefits associated with free trade agreements, you also need to be aware of the exceptions and reservations, in other words, what is not covered by an agreement.

• Exceptions are typically laid out in an agreement's Non-Conforming Measures (NCMs) and other annexes that contain exclusions from the obligations of the text.
• Exceptions may take the form of specific entities or may refer more broadly to a type of good, service or sector (e.g. health and public education).
• Reservations and exceptions preserve policy space for the government in potentially sensitive areas (e.g. national security).

There are also issues that are beyond the scope of trade agreements, such as visa requirements, immigration and permanent employment.

Recognizing the limitations of an agreement can be just as important as being aware of the new market access the agreement affords.

Administration of the agreement

• The provisions in an agreement will also provide guidelines when there is more than one agreement in place in a market (e.g. a trading partner is covered by both a bilateral agreement and a plurilateral or regional agreement).
• Typically, agreements will operate on the basis of "co-existence," whereby exporters can continue to use the rules that are the most appropriate and most trade-facilitating in a particular situation.

Information on how an agreement's rules will intersect with those of other agreements (i.e. the agreement's relation to other agreements) is typically contained in an agreement's Initial Provisions and General Definitions section. This section, along with any preambular language, is a good starting point for understanding the overall objectives of the agreement, as well as familiarizing yourself with the terminology used in the text.

What can you do if you believe your business is facing unjustified barriers to trade or investment?

Report the issue to your Trade Commissioner in market, providing as many details as possible.

6.5 Evaluating the use of intermediaries

Before you jump on a plane and start knocking on doors, think about using an intermediary. The right one can save you an enormous amount of time and money. There are several types: agents, representatives, trading houses and distributors.

6.5.1 Agents and representatives

Agents and representatives aren't exactly the same. An agent secures orders from foreign customers in exchange for a commission. A representative specializes in sales within a specific geographic area.

Both types of intermediaries may be authorized and commissioned to enter into contractual sales agreements with foreign customers on your behalf. This is usually less costly than setting up your own direct sales operation. Such an arrangement also gives you control over the price of your product or service, an important advantage.

Good foreign agents or representatives can research markets, advise on financing and transportation options, clear goods through customs, provide access to potential customers, make collections and supply information on local business practices, laws and cultural traditions.

6.5.2 Trading houses

Trading houses are domestic intermediaries that market your goods or services abroad. A full-service trading house handles a great many aspects of exporting, such as market research, transportation, appointing distributors or agents, exhibiting at trade fairs and preparing advertising and documentation.

Some trading houses act as "principals" or "export merchants," buying products outright from Canadian suppliers, while others act as "agents," selling on commission.

If you prefer not to sell directly to foreign customers or worry about finding a foreign intermediary, you might consider using a trading house.

6.5.3 Foreign distributors

Unlike agents, distributors actually purchase your product or service and resell it to local customers. Often, they set the selling price, provide buyer financing and look after warranty and service needs.

A bonus is that the distributor can usually provide after-sales service in the foreign market. On the other hand, using a foreign distributor may reduce your profit margins and result in a loss of control over your product and/or price.

6.6 Selecting the right intermediary

You can obtain information about potential intermediaries from the Canadian Trade Commissioner Service in Canada and abroad, as well as from Canadian and foreign trade associations, business councils and banks.

Before you meet in person, talk to several firms and then carry out your due diligence to make certain they're reputable. You can also protect yourself by entering into a limited term trial agreement.

To evaluate a prospective intermediary in detail, use the questionnaire below.

• Size of sales force
  • How many field sales personnel does the agent or distributor have?
  • What are its short- and long-range expansion plans, if any?
  • Will it have to expand to accommodate your needs properly? If yes, would it do so?
• Sales record
  • Has its sales growth been consistent over the past five years? If not, why not?
  • What are its sales objectives for the next year? How were they determined?
• Territorial analysis
  • What territory does it now cover? Is it consistent with the coverage you're looking for? Is it willing and able to expand?
  • Does it have any branch offices in the territory you wish to cover?
  • Are its branch offices located where your sales prospects are greatest?
  • Are there plans to open additional offices?
• Product or service mix
  • How many product or service lines does it represent?
  • Are they compatible with yours?
  • Does it represent any other Canadian firms?
  • Would there be any conflict of interest?
  • Would it be willing to alter its present product or service mix to accommodate yours, if necessary?
  • What would be the minimum sales volume needed to justify handling your lines?
  • Do its sales projections reflect this minimum figure?
  • From what you know of the territory and the prospective agent or distributor, is its projection realistic?
• Facilities and equipment
  • Does it have adequate warehouse facilities?
  • What is its method of stock control?
  • Are their computers compatible with yours?
  • What communications facilities does it have?
  • If servicing is required, is it equipped and qualified to do so?
  • If new equipment and/or training are required, to what extent will you have to share these additional costs?
  • If necessary, would it be willing to inventory repair parts and replacement items?
• Marketing policies
  • How is its sales staff compensated?
  • Does it have special incentive or motivation programs?
  • Does it use product managers to coordinate sales efforts for specific lines?
  • How does it monitor sales performance?
  • How does it train its sales staff?
  • Would it be willing to share expenses for sales personnel to attend seminars?
• Customer profile
  • What types of customers is it currently in contact with?
  • Are its interests compatible with your lines?
  • Who are its key accounts?
  • What percentage of total gross receipts do these accounts represent?
• Principals represented
  • How many principals does it currently represent?
  • Would you be its primary supplier?
  • If not, what percentage of its total business would you represent? How does this percentage compare with other suppliers?
• Promotional thrust
  • Can it help you research market information?
  • What types of media does it use, if any, to promote sales?
  • How much of its budget is allocated to advertising? How is it distributed?
  • Would you be expected to share promotional costs? If so, how will this amount be determined?
  • If it uses direct mail, how many prospects are on its mailing list?
  • What printed materials are used to describe its company and the lines it represents?
  • If necessary, can it translate your advertising copy?
  • Does it have its own website?