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Direct vs. Indirect Exporting

Companies that want to export products have to make a choice: become indirect export businesses and rely on brokers to ship, market and sell their goods abroad; or manage the process directly and handle all the work — and profits — themselves.

An indirect export business outsources all of its export steps to a third-party trading company or an export management company, says Dario Gomez, associate administrator at the Office of International Trade for the U.S. Small Business Administration in Washington, D.C. “These intermediaries can get you into an international market without a lot of risk, and you can explore the growth opportunities,” he says. “But you have a lot less control.”

When businesses export indirectly, they rely on either an export trading company or an export management company to find customers and market their goods, Gomez says. They typically have little say over how much effort or time the trading company puts behind selling their products, or whether that company is representing multiple competing products that could eat into their international sales.

“Companies that export are more resilient, and they are more likely to stay in business.”

— Dario Gomez, associate administrator at the Office of International Trade for the U.S. Small Business Administration

An export management company is basically a manufacturer’s rep for international sales. The representation contract between an exporter and an export management company can set forth certain benchmarks and deliverables that can be reviewed on a regular basis, such as an annual review. This provides greater control than working through an export trading company, which basically buys and resells a manufacturer’s products.

Indirect exporting may also mean losing part of the business’s margin, as well as diminishing the ability to develop direct relationships and grow business with customers in foreign markets, says Denis Csizmadia, manager of the Greenville, S.C., U.S. Export Assistance Center of the U.S. Department of Commerce.

“For small companies, it’s appropriate to consider doing indirect exporting through an export management consultant or export trading company until they gain the confidence to export directly,” Csizmadia says. “But ideally, we want our clients to become direct exporters. Direct exporting allows the U.S. firm to communicate directly with the customer so as to provide a quality product and service, and the managerial commitment necessary to ensure long-term growth and success. The seller also has say over the entire marketing mix including payment terms, product modification, local support, distribution, finance options and much more.”

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Making the Move

Making the transition to direct exporting requires an investment of time and resources for market research and international brand development, Csizmadia says. “The most important factor a new or experienced exporter should have is managerial commitment,” he says.

To establish themselves as direct exporters, companies must determine which countries they want to enter, assess whether their products will sell in those new markets, and adapt their products and/or packaging to accommodate local customers’ needs, Gomez says. In addition, small businesses should consider establishing relationships with banks that have an international division, and possibly a trusted online foreign exchange service that can secure preferred foreign exchange rates for sending and receiving international payments.

When international business owners become more familiar with currency-related issues, they gain a better understanding of near-term costs and are better at predicting future currency changes. Keeping track of the currency trends and the factors that are behind the movement of those exchange rates is crucial. An online foreign exchange service can help a business manage its foreign exchange exposure with some basic risk management tools that have the potential to protect profits and improve cash flow. For example, email market-rate alerts enable business owners to stay abreast of the current foreign exchange rates. And bids — also known as standing orders or limit orders — allow businesses to specify the exchange rate or range at which they would like to purchase a currency. When that exchange rate becomes available, the transaction is then executed.

This discovery phase should also include research into regulatory issues, tax laws and customs processes, which could impact product shipping and distribution.

Then, companies need to find distribution channels and build customer relationships in the market — and that means actually going to the country and meeting distributors face to face.

Traveling to a foreign market can be the scariest part of the process, says Randy Hudson, owner of Hudson Pecan Company, a grower and exporter based in Ocilla, Ga. Hudson began exporting pecans in 1998 after a bumper crop caused U.S. pecan prices to plummet. At that time the economy in China was just taking off, and Hudson thought it could be a great market for his business. “So I packed my bags and went to China,” he says.

Knowing no one, he hired a translator and made appointments to meet with four large nut companies. “They had never even heard of pecans,” he says. Three of them turned him down, and the fourth agreed to swap half a container of shelled walnuts for a whole container of in-shell pecans. That was his first international sale. Fifteen years later, he’s selling $15 million worth of pecans in China every year.

Hudson is a great example of the success that can be achieved through direct exporting — if small business owners are willing to commit the time and resources to make it work.

“It can take three to five years to get a return on investment in exporting,” Gomez says. But it’s worth the effort. “Companies that export are more resilient,” he says, “and they are more likely to stay in business.”

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