Small and medium size businesses (SMBs) contribute the largest percentage of total and new jobs created, GDP creation, and technological innovation within the U.S. economy, yet they have a relatively low rate of exporting, measured by their international sales as a percentage of total sales. Why? It is a commonly quoted statistic, from various studies, that only about 5 – 10% of SMBs in the U.S. engage in any significant level of exporting, even while the rate of exporting by larger U.S. corporations continues to grow. The question of why this is the case was the subject of my doctoral dissertation last year, a study in which the members of the Manufacturers Alliance played a significant role by responding to my survey on exporting behavior (and thank you for that!).
In this first part of a two-part article, let’s explore some of the reasons why SMBs should give serious consideration to exporting, and what some of the risks are. In the second part, published next month, we will look at some of the findings from my survey of Manufacturers Alliance members, and how you can approach the question of exporting. One of the findings of the survey was that there is a strong interest among Minnesota manufacturers in initiating or expanding exporting (a higher rate of interest than of actual exporting), but more about that later.
Let’s start with the advantages accruing from exporting, and let’s define exporting here simply as: manufacturing products in the U.S. and proactively selling them to foreign buyers, through whatever sales and distribution channel.
So why export? Remember that over 90% of the world’s population, and 70% of the world’s purchasing power, lies outside of the U.S. The simplest reason for exporting is that if you aren’t, your competitors are, and some of the benefits they are experiencing include:
• Gaining exposure to new and larger markets, and new customer bases;
• Generating increased revenues and improved cash flow;
• Learning new technologies and developing new products;
• Reducing production costs through extending product life cycles, greater economies of scale in production, and more efficient management of supply chains;
• Maintaining and expanding your supply chain relationships with your larger customers, who themselves are increasingly moving overseas for production and sales and want you to follow them;
• Competition in the U.S. domestic market continues to increase, as foreign companies, understanding that we are the richest single market in the world, are entering the U.S. marketplace, challenging your own market position;
• Diversifying away from your risk and vulnerability to a single-country market; remember that while the U.S. and Europe suffered extensively during the 2008 recession, many parts of Asia and Latin America did not, and those U.S. companies that exported to Asia and Latin America fared better than those companies that didn’t;
• Many trade experts are suggesting that we are entering a Golden Age of exporting for SMBs, due to: increases in the number of Free Trade Agreements; the expansion of capabilities and reduced costs of e-commerce; the expansion of global distribution and fulfillment capabilities, especially for SMBs; and the continued expansion of the global mobility of capital, labor and intellectual property; and
• Trade can increase your Enterprise Value, especially when you want to sell your company in the future; studies show that companies with strong exporting sales tend to have higher valuations, higher Returns on Investment (ROI), and higher multiples.
All of these are only potentials, and not panaceas. Exporting has significant risks as well as benefits, including: economic risks (such as currency exposure); legal risks (including local employment, product liability, environmental regulations and standards); duties and tariffs; sales risks (dealing with a new and different customer market); distribution risks; payment risks; and political risks.
These potential risks counterbalance the potential benefits, and more than one SMB has attempted to initiated or expand exporting with less than optimal results. The challenge is to incorporate decisions on exporting into your overall strategic planning process, and approach exporting with the same deliberate analysis and decision-making as you would any other major decision, including acquiring a company, starting a new product line, or expanding into another area of the U.S. The potentials are tremendous while the risks are significant. Let’s review the data on exporting in Minnesota, and how you can approach exporting, in Part 2 next month.
Exporting for Your Manufacturing Company? – Part 2
In part 1 of this article, published earlier, I noted that small-medium size businesses (SMBs) in the U.S. tend to export at a relatively low rate, as a percentage of total sales. Why is that? My recent doctoral dissertation (with great cooperation from you members), focused on some of the company characteristics of Minnesota SMBs that may have an effect on the decision by an SMB to export. The study defined “propensity to export” as an interest in exporting, and “intensity” as the actual level of exporting, considered the relationship between the two, and looked for company characteristics that may affect this relationship. Some of the findings of this research, based on the survey of MA members, included:
• Management Structure: 27% of the respondents are managed wholly or mostly by family members, 25% are managed by a blend of family and outside managers, and 48% are managed wholly or mostly by outside managers; this highlights a distinction between family ownership and family (or outside) management.
• “Intensity”: 55% of the respondents reported international sales of less than 10% of total sales and 80% reported international sales of less than 20%; these are higher numbers than the national average;
• “Propensity”: around 40% of the respondents indicated a medium to high level of interest in exporting, a higher number than actually engaged in exporting, suggesting a pent-up interest in exporting that has not yet been actualized;
• Use of Resources: Almost none of the respondents made any significant use of the public resources for export assistance, including federal and state agencies, chambers of commerce, and other non-profit sources; at the same time, a majority of the respondents made regular use of the private resources available, including banks, consultants and attorneys;
• Availability of Resources: a majority of the respondents felt that export assistance resources were not available or accessible, an interesting counterpoint to the earlier finding about Use of Resources – SMBs in Minnesota feel that export resources are not available or accessible, yet they also fail to use the public resources that are in fact available.
Several observations were made in the dissertation which may be of interest to you. First, there is a relationship between the management structure of an SMB and its intensity of exporting, with family-managed firms less likely to engage in exporting than outside-managed firms. The reasons suggested in the research literature are that (a) family-managed firms are more risk-averse, since it is their own capital at risk rather than that of outside investor/owners, and (b) the skill sets needed to engage in international trade may not be as prevalent when management is restricted to family members, as opposed to bringing in outside people with those skill sets.
Second, there appears to be very little use of the public export assistance resources available to SMBs; it is not clear whether this reflects a lack of awareness of these resources, or a sense that they are not accessible or easy to use. But it is certainly evident that the resources out there are not being used to a meaningful degree.
Third, the level of interest in exporting is significantly higher than the level of actual exporting, suggesting that there is considerable room for growth in exporting activity, under the right management structure and with greater use of the public and private resources that are available to SMBs.
So what is next? The decision to initiate, or expand, exporting (and other forms of international trade, including contract manufacturing, joint ventures, licensing, or foreign direct investment) is a major and complex one, at the same level as any other major strategic initiative. The likely advent of more Free Trade Agreements, and increased exporting possibilities through technological advances, should give Minnesota SMBs an opportunity to evaluate exporting as a major strategic direction, suggesting several actions: (a) consider carefully your management structure and your inventory of skill sets and expertise; going international may require that you bring in additional senior people, either in-house or under contract; (b) get up to speed on the array of export assistance resources available to you, including the Export-Import Bank, the Minnesota Trade Office, and the SBA; (c) start an in-house marketing review and competitive analysis about what products you could realistically export, to where, and at what price; and (d) start discussions with your immediate stakeholders and partners, including your financial institution, your law firm, and your accountants, to determine whether you have sufficient resources at hand to initiate exporting (especially capital resources), and be sure to get a whole-hearted buy-in from senior management and owners.
Exporting, and other forms of international trade, offer both considerable opportunities for gain, and considerable risks and costs. But the potential is too interesting to ignore; even if you decide eventually not to engage in exporting, you should make that decision based on an intensive analysis of the costs and benefits of the opportunity.
[a more detailed summary of the dissertation is available upon request from Dr. Keysser, below]
Dr. Don Keysser, CM&AA, is Managing Principal of Hannover Ltd., a consulting firm based in Minneapolis, that offers a broad range of business finance consulting services, including assistance in expansion into international trade. Don has over 30 years experience as an investment banker, and is also an Associate Professor of Finance at Saint Mary’s University. 612-710-0995, email@example.com