Why SMEs must go global
Businesses can no longer prosper and expand in only domestic markets. Today’s market is global and companies can nibble on your domestic market and take over your dominant position if you don’t think globally.
Once, you could expect a 4-year economic cycle of ups and downs with some slight regional differences. Today, world economies are interconnected — a crisis in one country can result in a domino effect that impacts another country on the far side of the world.
From the Covid-19 pandemic to the Financial Crisis of 2007-8, to the crash of oil prices in 2014 to the Russian invasion of Ukraine.
International business is also an opportunity. You can invest today and harvest the future. To do this, you need information.
This article at a glance
Higher birth rates are driving growth and industrialisation in developing nations, providing enormous new markets for exporters. This article will explain the reasons why you must expand overseas to stay competitive. How you can increase your profits and sales, and why exporting gives you a great chance to extend the life cycle of your products and services.
Why you need to conduct international business.
- Your domestic market is too small, you need new markets
- Increased Global competition.
- You want to expand your products and services
- New markets and new opportunities, the world is changing from west to east
- The global market has increased competition
- You want to spread the risks
- You want to increase profitability
- Extend the life cycle of your products and services
- New professions and jobs are emerging
- Global population, labour force/ labour markets
- Large companies and their influence on international business
- The power and influence of emerging markets
- Difference between Domestic and International Marketing
Export Pro Inc. Canada www.exportpro.com
The global market today
Markets are more open than ever before. There are many free trade agreements you can benefit from in which customs duties have been lowered. Many non-tariff barriers — like standard and labelling — have been eased. Logistics and communication, along with getting paid, are easier too.
Luckily, smaller companies have an advantage over their larger competitors — their decision-making process is faster and so their overheads are lower.
Businesspeople must continuously follow the international markets and adapt to not only what is happening in their domestic market but also what is happening across the globe.
GDP (Gross Domestic Product) in a country
We often measure a country’s development by looking at changes in GDP.
GDP is like a country’s sales. A change in GDP is a country’s change in sales. A normal increase in GDP for industrial nations is 2-3% per year — however, developing countries have a 5-10% increase, or even higher.
Top 10 countries GDP, 2050
|Country Ranks||GDP (trillion $ PPP)|
PPP = Purchasing Power parity Source "The Wealth Reporter" 2012 (Citigroup)
Export Pro Inc. Canada www.exportpro.com
Growth and GDP
- Trade is growing twice GDP
- Major growth in emerging markets
- Emerging markets accounted for 80% of growth 2010 and will increase 5-fold by 2050
Look at expanding markets with growing populations and increasing GDP per capita — a 7% increase in GDP per year will soon mean a doubling of that country’s GDP in 10 years.
Many emerging markets have a fast-growing young population. With income, more people are moving into the middle class with money to spend. GDP is increasing fast as well as wages and salaries. This makes them your future customers.
Economic growth between 2010 and 2050
|Rank Country||GDP (trillion $ PPP)||Rank Country||GDP (trillion $ PPP)|
|1. USA||14.12||1. India||85.97|
|2. China||9.98||2. China||80.02|
|3. Japan||4.33||3. USA||39.07|
|4. India||3.92||4. Indonesia||13.93|
|5. Germany||2.54||5. Brazil||11.58|
|6. Russia||2.20||6. Nigeria||9.51|
|7. Brazil||2.16||7. Russia||7.77|
|8. Great Britain||2.16||8. Mexico||6.57|
|9. France||2.12||9. Japan||6.48|
|10. Italy||1.75||10. Egypt||6.02|
Source "The Wealth Reporter" - 2012 (Citigroup)
Look at China. In 2000, only 3% of the Chinese population was middle class. By 2018, it was more than 50% of the population — that’s 700 million people with more buying power and a new market for previously considered luxury goods.
Emerging markets have better buying power and increased consumption. And although they will experience increased labour costs — making them less competitive — they will create a larger consumer market.
Population and population change
An increase in population means more consumers and more people who share a country’s overhead. A young population means also more individuals actively involved in production while an increasing percentage of old or retired people puts a burden on that country’s economy.
Industrialised nations have stagnating or decreasing populations because of low birth rates. Many of those countries must import labour — immigrants — to keep the population up and have a sufficient labour force.
Meanwhile, the Asian population will increase from 4 to 5 billion people between 2010 to 2050. Africa will more than double from 1 to 2.5 billion, while Europe will stay at 711 million, Latin America and Caribbean 762 million, North America 425 million and Oceania 57 million.
China has had extremely rapid economic growth but also a fast increase in wage level — going from a low-cost producing country to one with a labour shortage, high labour costs, and a larger bulk of middle-class consumers. The result? A large part of Chinese production has moved to lower-cost countries.
Word Population and Demand
- Population grows by about 80 million a year
- Growth concentrated to emerging market and more than half in Africa
- 25% of European population over 65 years by 2035
- Labour force in emerging markets will increase by 1.5 billion people 2015-2050
- Developed countries will see a reduction of 100 million
- China and India 40 of labour force 2016
|Rank Country||Population (million) 2050||Percentage of world total|
|10. Dem. Republic of the Congo||160||1.8%|
|World total (Source Un.org)||8,909||100.0%|
The benefits of expanding your business overseas
Selling your products and services overseas is similar to trading on the stock market.
When you’re trading in the stock market, you don’t want to have only one stock — that would be putting all your eggs in one basket. A good investor wants no stock to be more than 5% of their total.
A good investor also diversifies by having stocks in different industries and different countries. Thus, even if one stock goes down by 50% that only represents 2.5% of that investor’s total assets.
The same principle applies to exporting — you sell your products and services on many markets.
The opportunities for international business aren’t exclusive to exporting. You can source products and services overseas to expand your opportunities to sell more on the domestic market.
You want to keep your product cost low and have the latest technology. Sourcing components overseas can be one solution due to lower labour costs but also allowing more advanced technology.
The cost of your product or service is based on:
- R&D — the time and money you spent to create products and services
- Tooling for producing the product/service
- Raw material
- Labour costs and overhead costs
When you increase the sales, you have already paid for some of those fixed costs, so your marginal cost is much lower.
|Development cost/R&D for product||$ 1,000,000|
|For 50,000 units = $ 1,000,000/50,000 or||$ 20 per unit|
|For 500,000 units = $ 1,000,000/500,000 or||$ 2 per unit|
|Tooling costs are $ 50,000 for up to 250,000 units|
|For 50,000 units = $ 50,000: 50,000||$ 1 per unit|
|For 500,000 units $ 100,000 ($ 50,000*2)/500,000 =||$ 0.20 per unit|
|Material||$ 20 per unit|
|Labour||$ 12 per unit|
|Administration||$ 3 per unit|
Export Pro Inc. Canada www.exportpro.com
In the sample below the ‘marginal cost' include tooling ($ 0.20) plus material ($ 20) and labour ($ 12). A total cost of $ 32.20.
By increasing your sales, your marginal cost becomes lower. Your normal profit of $ 7 per unit now is $ 30.80 per unit.
Reaping the rewards of currency fluctuations
Depending on your domestic currency and the changes in the foreign market you can utilise the currency situation.
Today, the US dollar is strong while the euro is weak. On March 22, 2022, a euro was worth 1.1158 US dollars. By September 24, 2022, it was worth 0.9685 US dollars — that’s a drop of 15.2%.
How do you turn this to your advantage? Let’s say you’re a European exporter. You can utilise that difference by either selling your product at a lower price in the USA or cashing in the benefit at a higher profit. Let’s say you invoiced your US distributor in US dollars In March 2022 — now you would receive 15.2% more in Euro. Learn more here.
Remember, it’s the end-user — the importing country — that decides on your pricing, not your domestic price or your manufacturing cost.
Extending the product life cycle
When you develop a product and service, it’s ‘new'. Once you introduce it and sales slowly take off, it’s not new anymore and sales will slow down. Finally, you cannot sell it on the market you designed it for.
You can extend the service life. Although the new market has matured, the less developed countries have now reached the stage where your technology is of interest. In other words, you now have a new market for your technology. Soon, the lesser developed markets will follow.
For instance, if the product needs spare parts, you now have a larger market for this.
Your initial clients hopefully will use the product for a long time. However, they will also need spare parts. By later producing products for the less developed market, you can at the same time manufacture spare parts for the “older” products used by the industrial countries.
As to your costs, see the marginal cost calculation above. You have already paid for most of the costs, so you have a very marginal cost. You are selling ‘old' products and services at a very high profit, still enabling you to produce spare parts for your ‘old' clients.
Why you should conduct international business
International business is mostly common sense — you must understand the customer and the distribution in the foreign country and adapt to that. In some countries, you can agree very fast, while in others you must take the time to build up the relationship.
The previously dominating industrial nations are losing out to emerging markets.
By being on the international market you will have a better understanding of what is happening, allowing you to be better prepared for any changes.
Expanding overseas increases your competition, but it enables you to expand your market, spread risk and increase profitability.