There are many
good reasons (or benefits) for
exporting. These include the
Exporting is one way of increasing your sales
potential; it expands the "pie" that you earn money
from, otherwise you are stuck trying to make money only out
of the local market. In the case of South Africa, our market
is relatively small in comparison to the markets of North
America, Europe and Asia. While the local market may represent
enough sales potential for smaller firms, for medium and
larger companies the local market is just too small and the
only way to expand sales is to export.
It should be said, however, if you are not
yet selling regionally and nationally, then you should first
aiming at expanding your market share within the local market.
Once you have saturated the national market, only then should
you look beyond the borders of South Africa. It has been
said that there are no sales barrier that automatically begins
where your border ends. Increased sales also impact upon
your profitability (although not always positively), your
productivity by lowering unit costs, and may increase your
firm's perceived size and stature, thereby affecting its
competitive position compared with other similar-sized organisations.
What is more, research and development (R&D) and other
costs can also be offset against a larger sales base, or
the move into exports may contribute to the company's general
expansion. For others, exports may be a way of testing the
opportunities for overseas licensing, franchising or production.
Clearly, you are not likely to enter the export
market in order to make a loss. Companies generally strive
to make profits and the bigger the profits the better. In
many instances, exports can contribute to increased profits
because the average orders from international customers are
often larger than they are from domestic buyers, as importers
generally order by the container instead of by the pallet
(thereby affecting both total sales and total profits). Some
products - especially those that are unique or very innovative
in nature may also command greater profit margins abroad
than in the local market. Having said this, it is also not
uncommon - indeed, it is highly likely - that you may receive
smaller profit margins from your export sales compared with
the local market. The reason for this is the highly competitive
nature of global markets that forces exporters to lower prices,
squeeze profits and reduce costs. You may also find that
in some markets you generate higher profit margins, while
in other markets your profit margins are considerably lower.
Reducing risk and balancing growth
It is risky being bound to the domestic market
alone. Export sales to a variety of diverse foreign markets
can help reduce the risk that the company may be exposed
to because of fluctuations in local (and foreign) business
cycles. At any one time, the UK, Australia and Germany will
be enjoying different growth rates. By selling in all of
these countries, the risk of low growth in one or more of
these countries will be offset by increased growth in the
others, thus resulting in a balanced portfolio of growth
overall. In addition, with the challenging labour conditions
that many firms in South Africa face today, exports may help
to create and/or maintain jobs thus reducing the risk of
a labour dispute that could otherwise cripple the company.
Lower unit costs
Exports help to put idle production capacity
to work. This is generally achieved the more efficient utilisation
of the existing factory, machines and staff. What is more,
because you are now selling more products without increasing
total costs to the same extent, this has the effect of lowering
your unit costs which represents a more productive overall
operation. Lower unit costs make a product more competitive
in the local marketplace as well as in foreign markets, and/or
can contribute to the firm's overall profitability.
Economies of scale
|Exporting is an excellent way to enjoy pure
economies of scale with products that are more "global"
in scope and have a wider range of acceptance around the
world (in other words, they can be used in other parts of
the world without much adaptation). This is in contrast to
products that must be adapted for each market, which is expensive
and time consuming and requires more of an investment. The
newer the product, the wider range of acceptance in the world,
especially to younger "customers," often referred
to as the "global consumer".
With increased export production and sales,
you can achieve economies of scale and spread costs over
a larger volume of revenue. You reduce average unit costs
and increase overall profitability and competitiveness. Long-term
exports may enable a company to expand its production facilities
in order to achieve an economic level of production.
should not be confused with increased throughput on existing
capacity, as discussed above.)
Minimising the effect of seasonal fluctuations
Being in the Southern Hemisphere, South Africa
has seasons that are opposite to those in the Northern Hemisphere.
For companies that sell seasonal goods such as fruit growers,
and swimwear or suntan lotion manufacturers, being able to
sell these goods in the Northern Hemisphere when our season
ends, helps achieve a longer and more stable sales pattern.
This increases the sales potential for these goods and also
helps reduce risk.
Small and/or saturated domestic markets
One good reason to begin exporting is when
the local market is too small to support a firm's output
or when the market becomes saturated. For companies that
produce heavy industrial machinery or that have invested
in large factories, they need to be able to sell enough of
their manufactured goods to justify the investment and to
insure that the unit price of goods are kept acceptably low.
With relatively small markets such as South Africa, it is
usually not long before the local market becomes saturated
and offers limited additional opportunities for sales. Many
of South Africa's larger manufacturers have had to turn to
foreign markets to justify their existence. Examples include
most of the motor vehicle manufacturers such as Opel, VW
and BMW; the paper producers such as Mondi and Sappi; and
mining houses such as Anglo-American and De Beers. The same
is true of international firms such as Volvo, Philips and
Roche. They only way firms such as these can justify their
investment is to sell abroad because their respective local
markets are just too small.
Overcoming low growth in the home market
It is not uncommon for a recession in the local
market to act as a spur for companies to enter export markets
that may offer greater opportunities for sales. While this
may have the benefit of offering ongoing sales potential
for the firm in question, the danger with this approach is
that when the local market improves, these companies abandon
their export markets to focus on the now buoyant local market.
Overseas importers become disillusioned with this type of
exporter and often see all firms from South African being
the same and will want nothing more to do with South African
exporters, even if they are serious.
Extending the product life-cycle
All products go through a product life-cycle.
In the beginning they are novel and sales increase quite
dramatically, then sales level off and they become what is
referred to as mature products and eventually sales start
to decrease and the product goes into decline. Now, a product
that has entered its decline stage may have a life elsewhere
in the world and by finding a market where this product could
be sold anew, you are essentially extending the life-cycle
of the product. Alternatively, even if it is a fairly common
product, it may also be nearing the end of its life cycle
in other overseas markets (particularly in bigger markets
such as Germany, the UK and the US) and they may decide to
discontinue the product. Although the market may have declined
to a point that makes it uneconomical for these companies
to continue manufacturing the product in question, the market
may still be big enough for you to supply the declining market.
This has the effect of making more efficient use of the existing
factory infrastructure and other investment spent on producing
the product. This extends sales, lowers the unit costs even
further and may allow for higher margins to be generated.
When you have a product that is nearing its life cycle, you
should always strive to see if you can find a market for
the product abroad.
Improving efficiency and product quality
The global market is a highly competitive place
and by participating in this marketplace, you need to become
equally efficient and quality conscious. It is generally
the case that successful exporters are also very successful
in their home markets because of their heightened efficiency
and focus on product quality.
A company may have a very unique product that
is not yet available elsewhere in the world. In this instance,
these untapped markets are likely to drive the firm's export
activities. Other firms may want to take advantage of high-volume
purchases in large markets overseas, such as in the US, Europe
Addressing customer, competitor and cost
The more formal theory of internationalisation
discusses customer, competitor and cost factors that drive
the internationalisation process. The theory argues that
in some cases companies may go global in response to their
customers moving abroad. Alternatively, they may follow their
competitors abroad, or may decide to enter a particular foreign
market in order to attack an overseas competitor that has
entered the firm's domestic market, in the competitor's own
home market. Finally, companies may go international to take
advantage of lower labour costs, skilled workers or other
cost factors (such as lower telecommunication or energy costs)
that are much better in a particular foreign market. For
example, expanding into India to take advantage of programming
skills and lower salaries could translate into a major advantage
for a local software development firm. It should be said,
however, that these factors are more likely to be relevant
to larger firms, instead of small scale export operations.
Status as an exporter
For some companies, the status of being involved
in international trade is very important to them.
The wrong reasons for exporting
Too often, however, many local South Africa
companies simply follow their domestic competitors into exports
or they turn to export markets because of the difficulties
encountered in the local marketplace(see low growth in home
market mentioned above). Alternatively, a company may use
exports as means of offloading excess production capacity.
None of these reasons are very solid reasons for moving into
exports. In the latter case, when local sales pick up again
the "fair-weather" export firm then ignores its
export markets to concentrate on domestic sales again, often
leaving foreign companies in the lurch thereby creating a
bad impression and a resistance to future export sales.