Exporting to foreign markets takes two forms. Direct exporting means setting up expensive subsidiaries or establishing contractual relationship with foreign companies. Direct exporting does give greater control over sales channels and intellectual property protection, but the entry costs, time to market, and ongoing costs are higher.
The other type is indirect exporting, which means selling goods to foreign buyers through third parties such as export agents, export merchants, or buying houses. This is an especially good mode of entry for the novice exporter or for a manufacturer who lacks country knowledge.
China is a good example. Many exporters do not have the expertise to enter the Chinese market successfully. But when they use indirect exporting, they offer their products through intermediaries who take the product directly to the markets. This way time to entry in the Chinese market is shorter and more flexible. Exporters can receive payment earlier and risks are minimized, particularly volatile foreign exchange markets and credit risks.
One of the greatest benefits is the ability to obtain export know-how and personal contacts through the export merchant or agent. The exporter can possibly realize greater sales volumes since the foreign export agent often represents several different related products or product lines and thus can deliver on economies of scale. Also, exporters find it easier to ascertain whether their products will sell well in a foreign market without the effort, financial investment, or risk. They do not have to worry about all the complexities; they merely give instructions to the agent about packing, labeling, and transportation, and so forth.
However, there are quite a few disadvantages. Perhaps the biggest is that the indirect exporter has very little contact with the foreign agents or distributors, let alone with end users and customers. That means it is more difficult for them to acquire the needed experience in entry into the foreign market. Indirect exporters, especially from smaller firms and smaller countries, may find it difficult to get an export trading house to take on the products without a great deal of paid promotion and advertising. What is worse, the exporter may lose control of pricing and marketing, and even of intellectual property. In addition, the exporter receives a smaller profit margin than through direct exporting.
There are several basic channels for indirect exporting.
- The export merchant buys the local firm’s product outright and assumes the risk of being able to resell it profitably abroad. The type of company typically has expertise in a particular product line and/or in a special geographical market.
- The export agent usually represents several non-competing manufacturers and receives a commission. The agent does not take title of the goods directly and so does not assume the risk of not being able to sell them abroad. The function of the export agent is to appraise the export potential of the local manufacturer’s products, advertise them abroad, look for foreign buyers, obtain export orders, and advise on or arrange for the documentation, shipping, and insurance once a sale has been made
- The export management company, also known as a trading house, is a private firm that serves as an export department for several manufacturers. This company solicits and transacts export business on behalf of its clients in return for a commission, salary, or retainer plus commission. In addition, some export management companies will purchase the product and sell it themselves to foreign customers. Export management companies can facilitate the export process by handling all of the details—from making the shipping arrangements to locating the customers.
- Foreign distributors have similarities with the trading house. The distributor takes title to the goods and has to resell them down the distribution chain. The big difference is that transaction (transfer of ownership) may take place in the home country of the distributor. This means that the producer must do the packaging and delivery and assume more risk, but is in a better position to capture more value from the transaction.
- Foreign agents require the exporter to retain title until the goods are delivered to the buyer or even to the consumer. The agent merely “represents” the producer but never takes ownership of the goods. Motivated agents like to work on a commission basis because they capture an agreedupon percentage of every transaction, often even with an escalator clause for great sales. That gives them the incentive to maximize sales volumes.
- Daniel C. Bello and Nicholas C. Williamson, “Contractual Arrangements and Marketing Practices in the Indirect Export Channel,” Journal of International Business (v.16/2, 1985);
- Michael R. Czinkota, Ilkka A. Ronkainen, and Marta Ortiz-Buonfina, The Export Marketing Imperative (South-Western, 2004).
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