Exploring new E-Commerce Markets - A blueprint for small and medium-sized enterprises

E-commerce is big business. More than 1.3 billion people now buy goods and services online, and enterprises are increasingly sourcing through digital means – an opportunity representing $25 trillion in annual sales.

Most of these sales happen in domestic markets, where large e-commerce sites such as Amazon, Flipkart, Rakuten, and Taobao hold significant shares. Getting onto these marketplaces is not always easy for foreign enterprises, however, because they cannot satisfy the commercial rules or compliance obligations.

Multinationals have long recognized the benefits of having branches in foreign markets, wherever possible adopting legal structures that allow them to trade as local operators. A subsidiary, once incorporated locally, can operate in a customs union with full market access and many of the advantages of local enterprises. It can pay import duties and taxes, and include these costs in local operations. A subsidiary can also enter into business contracts in the same manner as its local counterparts and benefit from deals that are often only available to other local enterprises.

In the age of e-commerce, many small enterprises see going international as a priority. Having local representation is important to making this happen. Before the digital age, these advantages could only be found by hiring international lawyers and setting up expensive structures to manage the international business. The growth of digital services mean many business registration requirements can be met online, independently or through service providers, greatly simplifying the process and lowering its costs.

This can be a route for small enterprises from developing countries to enter new markets. But it may mean more than gaining access to site listings and payment solutions – it can also open up the potential to work with other service vendors such as marketing agencies, logistics enterprises and tax advisers.

We help micro, small and medium-sized enterprises in developing countries access global e-commerce through training and coaching that shows them how to tackle the barriers that prevent them from trading online. Our work helps these enterprises build their capability to select and prepare products, manage inventory, enter online marketplaces and organize promotional activities. Small enterprises increasingly understand the potential of e-commerce, and many remain frustrated by restrictions that block them from participating.

The cost of setting up a foreign structure may be too heavy for a small enterprise. As a rule of thumb, export sales should exceed €100,000 to justify creating such a structure. A better alternative initially may be to explore and develop an international presence through partners.

Another option is to collaborate with other businesses. Along with our Singapore counterpart Cherishma Consulting, we examined how clusters of enterprises could work together to share promotional activities and other resources. Combining these collectively managed entities with an export structure opens market entry. An added benefit of this route is that the costs to set up and manage an international business structure would be shared.

This framework and its lessons are set to be the basis of future work with small enterprises in developing countries. Together with local partners, we will train and advise when and how to set up representative structures and, in doing so, facilitate access to new services in foreign markets.

Advantages for developing country Enterprises

An international business structure allows developing country firms to control some or all of the export, import and distribution processes in the target market. This saves them time and money, and gives them more independence. There are many benefits to such structures.

Direct market access

Fewer or no intermediaries can mean higher profit margins and faster decision-making. African SMEs often must go through many intermediaries before their product or service reaches the final consumer. Avoiding go-betweens usually means a company keeps a higher share of the consumer price.

Branding control and exposure

A company may have to build and own a retail entity in the target market to keep one brand in front of the final consumer. Branding is one of the most important aspects of ‘price perception’ building among consumers in a given market. Building and nurturing a brand can be one of the most important elements of a business’s long-term vision.

Import process control

Importers often point to the complexity of the import process to pressure foreign merchants to reduce their prices. Sellers who can clear their merchandise into the country of a potential buyer may be able to double their prices, especially for commodities.

An offer covering all Incoterms

Once a company has an international structure, it can act as the official importer in the target market. This allows the enterprise to offer any International Commercial Terms, or Incoterms,10 that a buyer may expect, in a cost-effective manner and without having to use an intermediary.

Control over distribution channels

A developing country brand can use an international structure to access all channels in the target market. As a local entity, the international structure can meet compliance and trust requirements more easily than the origin enterprise. From online marketplaces to physical stores, a foreign brand is free to select from all available distribution options, as a function of the profitability of the product. Such a structure enables a business to eliminate intermediaries or reduce its reliance on local partners.

Market-side value addition

New value-added options such as product processing become available. The foreign entrepreneur still owns the imports and can hire service providers in the target market to transform and add value to these goods. This can add significant value for much less money and time than going through the same steps in the country of origin.

This is especially useful for commodities that are easily exported and are subject to lower import tariffs, VAT and certification requirements in their raw form rather than as final products. For instance, it is easier and cheaper to import coffee into the European Union under a dry fruit classification (green beans) than as a non-compliant packaged, roasted coffee product.

Access to competitive local providers

After goods are cleared for import, an international structure can turn to local service providers that a foreign enterprise would be unable to approach. This means access to price-competitive providers in sectors such as transport, payments, insurance and marketing. Providers are more willing to offer their services at better price to a business in their jurisdiction as the legal risks are mitigated because local laws apply.

Better logistics and returns management:

International business structures can contract more easily with local logistic providers, so a foreign business can offer a local return address to buyers. Services such as Fulfilment by Amazon require a local return address and offer a wide choice of local relay points where consumers can drop off the products they wish to return.

Like any business venture, taking control of key processes comes with a cost and the burden of taking on direct responsibilities. The methodology laid out in the following section makes it easier for enterprises to make the right choices so they can successfully branch out into international markets.

Going international: Yes or no?

Deciding if it is worth opening an international structure can be difficult. We propose a simple step-by-step approach to help entrepreneurs make the decisions that lead to successful internationalization.

An entrepreneur must answer five questions, moving from one step to the next in the most realistic way possible.

? Do I need an international structure?

If the answer to this question is ‘yes’, the four following questions must be answered:

? Which jurisdiction should I choose?

? Which legal form is appropriate?

? Which channels am I targeting?

? Which payments methods must I have?

Is an international structure necessary?

Creating or expanding a business structure can be costly and involve legal responsibilities that must be considered. It is essential to ensure the mid- to long-term sustainability of the business before taking the first step – that is, making sure it will survive for a year or more, depending on the time needed to reach the breakeven point.

Many entrepreneurs wonder if they should set up a foreign company or just use their country-of-origin infrastructure, with the pros and cons they already know. Exporters can also work with a wholesale partner or agent in the target market who can sell their products online and offline.

We propose a simple methodology to help entrepreneurs decide whether they need a business structure in the target market.

The need for an international structure depends largely on how challenging it is to sell directly to that market from the origin country. It may simply not be viable to serve countries that are especially difficult to enter without using some form of international structure.

The Way forward

Having an international business structure that makes it possible to trade on similar terms to local enterprises enables small enterprises to compete in e-commerce markets. This is not a route to circumvent restrictions; it is a legal, transparent and professional way of trading internationally that multinational enterprises have used for years.

Thanks to the greater transparency on procedures and costs that the internet has created, and competition between service providers, it is now easier and more affordable for smaller enterprises to set up and manage such structures.

Small enterprises in developing countries have particularly strong incentives to learn about and use this particular business practice. By ‘going local’, they can immediately access a whole suite of services otherwise unavailable to them. But more than that, they can overcome various restrictions attached to the origin of the business and operate on more equitable terms with enterprises in the host country.

This solution is not for everyone, however, and probably not for the smallest enterprises. As a rule of thumb, they would need to turn over about €100,000 a year to justify annual operating costs (less if the business has particularly high margins).

We recommend the following steps to develop an international presence in e-commerce:

1. Explore foreign markets, working with local partners where possible

Enterprises should start by doing research before investing in a foreign entity. This begins with using publicly available tools (such as ITC’s market analysis tools) and potentially field research including visiting trade fairs and distributors in the target market.

A good starting point, with minimum risk, is to develop a distribution relationship with a partner, distributor or commercial agent in the target market. Ideally, this would be a partner with a strong presence in e-commerce who is willing to share data and insights into marketing and customers. Success working through such an agent can prove that further potential can be developed, and justify the investment to develop an independent presence in the market.

Such partners may require a sizeable commission equivalent to most of the margins on the product, leaving little in the way of profitability for the producer. For this reason, it is best to consider these arrangements as a short-term entry strategy, though the enterprise should be sure to capture the learning and build experience for an independent commercial presence.

2. Work with other enterprises at home in a collaborative structure

Grouping small enterprises at origin means the costs to set up an international structure are shared. It also brings other advantages, such as pooled knowledge and greater negotiating power.

The cooperative legal form is often appropriate for ownership of foreign entities.

3. Study suitable options for international structures

Choosing where to set up a representative company involves many factors that are unique to the particular enterprise. It is both natural and potentially the best choice to target the most important trading partner country. If exports or commercial relationships have been established with a certain country, it may be the best place to set up an international structure.

Conclusion

Small enterprises from developing countries that want to sell their products and services online face a host of challenges. Having an international business structure could remove many of biggest barriers, such as ownership of a foreign bank account, exclusion from online payment solutions, restricted access to the major marketplaces and dealing with value-added tax (VAT) and customs duties.

An enterprise that sets up a registered company in a foreign jurisdiction becomes, in effect, local. This means that many of the challenges of being a foreign enterprise simply disappear.

This article explains why micro, small and medium-sized enterprises (MSMEs) in developing countries should consider setting up, and possibly sharing, international business structures to engage in e-commerce – and how they can do it.

The main advantages of setting up such a structure in the foreign markets are:

? Access services only available to local enterprises. Most relevant local services, including payment solutions, banking and access to online marketplaces, are available only to companies in the United States or the European Union. It is also easier to access other service providers in sectors such as transport, insurance and marketing at locally competitive rates.

? Direct market access. Fewer or no intermediaries are needed to enter markets, meaning higher profit margins and faster decision-making.

? Better import process control. It becomes easier, and sometimes less expensive, to access services to declare third-party customs duties and VAT. Import processes are simplified because the company has its own Economic Operators Registration and Identification and VAT numbers.

? Control of distribution channels. A developing country brand can technically access all channels in the target market. As a local entity, the international structure can more easily satisfy all compliance requirements and better generate trust – for example, by joining local associations or obtaining certifications offered to local enterprises.

? Better logistics and returns management. A foreign business can offer local return addresses to international buyers, making it easier to contract with local logistics providers.

Despite these benefits, the costs of setting up and administering an international structure may outweigh the advantages. The pros and cons must be carefully considered.

The size of the business is key.

A small enterprise just starting to expand internationally and operating alone from a developing country would probably not be able to justify the costs of incorporating in a foreign market. Grouping with others in an association or cooperative, however, could be appealing.