Our Trade Odyssey - Part II: Diversification

In the midst of our deteriorating relationship many commentators have suggested that selling our goods and services to markets other than the US is an attractive option. However, based on my experience, it is an understatement to suggest that this option is easier said than done. On the other hand, under certain circumstances, diversification is an option that should be explored. The good news is for businesses willing to make that exploration, there is a plethora of assistance and services available to help with the effort, which I intend to address in due course.

Before we consider the possibility and benefits of a trade diversification strategy, it is instructive to consider the reasons why diversification is very difficult for enterprises that may be locked into arrangements in the US market. The list of these reasons is long and somewhat daunting, yet to know and acknowledge what challenges exist, is the first step in overcoming them.

What are the export diversification options?

Diversification can take many forms. For example, companies can export directly to a foreign market, undertaking all the market entry requirements on their own such as finding customers, distributors or other partners to eventually make contacts and sales. Companies can also pursue an indirect exporting strategy using intermediaries, either in their domestic market or the foreign market. A domestic intermediary, like a Trading Company for example, purchases the product from a Canadian producer, therefore executing a domestic sale for the Canadian firm. The trading company then undertakes the export process, finding buyers and leading to the sale in the foreign market. This arrangement is very common in commodities, like grain or even large quantities of food products - chickens to Korea for example and minimizes risk.

Intermediaries for the exporting firm can also be obtained in the foreign market. An example of this intermediary is a sales agent or representative who is remunerated by commission or retainer and makes contact with customers or buyers to make the final sale. Foreign distributors can also be contacted directly and work in a similar fashion to domestic distributors, purchasing products that they carry in inventory for eventual sale to end users. This is very common in the industrial products sector. 

Other, more complex options include engaging in strategic alliances which can take many forms, involving the transfer of the responsibility to produce a product in the foreign market through a licensing or technology transfer arrangement. This option is common in the beverage industry for example where production capacity exists in the foreign market and the "right" to manufacture or provide the product is transferred to the the foreign production entity. A licensing fee is often collected or a royalty is paid on the subsequent volume of sales that are realized. These arrangements are usually used by larger firms with the wherewithal to structure and enforce legal partnership agreements or contracts.

Larger firms may also engage in direct contact with retailers in the foreign market or undertake direct investment, the latter by establishing their own presence in the market.

Theses exporting strategies clearly increase in expense, scope and scale as one moves along the spectrum of options. However the point to be made is that all these options exist for a Canadian firm that may wish to diversify its sales away from the US market.

Key Elements of a Successful Diversification

Along with the increase in cost there is also and attendant increase in a requirement for detailed research to identify and minimize the additional risks that exist in entering a foreign market. The list of considerations in regard to these matters is extensive, but again, with a structured and thorough process for ticking all the boxes on that list, access to a target market is achievable.

A thorough and structured research effort should address the following:

1. How favourable are the political and economic conditions in the target market? Attention to key economic indicators like inflation, employment and income factors (e.g. disposable income, income distribution, purchasing power).
2. What economic and trade barriers exist? Do tariffs or quotas apply to the product to be traded? What is the "type" of economy in which the company will trade? (A command economy where the government is heavily involved in ownership of firms, a market or capitalist oriented economy or a mix of the two?)
3. What is the regulatory environment as it pertains to the exported product? What safety, quality and reliability standards exist which will require compliance through assurances or product modification?
4. What is the condition and reliability of the foreign "infrastructure" in all its forms? This includes: communications/telecommunications, transportation (roads, rail, ports & airports), commercial (financial institutions, legal regime and professional services), utilities (electrical grid, water, sewage, fuel sources).
5. What socio-cultural factors need to be considered that will affect the acceptance or possible rejection of the product? These factors include language, education level, religion, ethics and values, social organization and business etiquette. This is a highly sensitive area of business conduct when one considers that the colour, shape or chosen set of words about a product may mean something very different in the foreign market than what is taken for granted in a home market.
6. Competition and the assessment of competitors in the foreign market is critical. The analysis in this realm also requires a detailed assessment of who competitors may be and their relative strengths and weaknesses as well as the degree of competition a new entrant may face. Structured models to perform such an analysis exist to evaluate all facets of the competitive environment and should be employed in a venture such as a foreign market entry.

Although all the foregoing sounds like a textbook crash course in the conduct of international business, it represents an indispensable summary of what a company must consider if it wishes to diversify away from a total reliance on the US market.  More importantly, I would be remiss if the difficulty of diversification was glossed over in favour of general statements about the need to do so. Nevertheless, many Canadian companies have been and continue to be successful in markets other than the United States with the right amount of preparation and planning.

The Assistance Available for Success

The success of Canadian firms abroad is facilitated by an extensive network of embassies and consular offices in over 280 locations in 180 countries. These offices are staffed with commercial officers responsible for assisting companies on the ground with their market entry ventures. Under the wing of Global Affairs Canada, the Trade Commissioner service provides valuable market intelligence across a variety of sectoral opportunities as well as in country assistance with arranging contacts, appointments and office space for Canadian companies to meet with prospective buyers or customers.

https://www.tradecommissioner.gc.ca/index.aspx?lang=eng

Global Affairs also provides detailed market reports by country as well as sectors of importance to the Canadian economy, all available in the public domain. 

https://international.canada.ca/en/services/business/trade/reports-market-intelligence-data

Trade Commissioners are supported by locally engaged nationals who know the market and assist with all aspects of a market entry assessment. The TCS also has individuals who have returned to Canada from postings in offices across Canada for businesses to contact locally. https://www.tradecommissioner.gc.ca/offices-bureau-canada.aspx?lang=eng

Once a market is selected there is a plethora of programs and services available to support and fund a market entry initiative. Assistance to identify and attend trade shows in a market or participate in a trade mission are just two examples of assistance available to a prospective Canadian exporter. 

https://www.tradecommissioner.gc.ca/funding_support_programs-programmes_de_financement_de_soutien.aspx?lang=eng

The Forum for International Trade Training (FITT) also offers detailed courses and training for individuals who wish to undertake or become well versed in all aspects of international business. FITT also provides a path to certification and as an trade professional (CITP), a designation held by many in the Trade Commissioner Service. 

https://fittfortrade.com/

In short, if a Canadian company is interested in diversifying some or all of its sales away from the United States, there is no shortage of opportunities for them to do so.

From my experience in working in this field, more Canadian companies need to tap this assistance.  We have become complacent with access to the US market. Even if the hostility in our relationship fades in the future, Canadian firms interested in markets beyond their borders have no excuse for not investigating and executing a diversification strategy.

Moreover, on the government side of the equation there is a need to pump up the Team Canada trade missions that lay the groundwork for contacts and contracts in new markets. Global Affairs contains a large repository of information but they need to transfer the information to action, working harder to recruit firms, identify markets of opportunity and provide direct on the ground assistance to increase the success rate of prospective exporters.

Next: Which markets beyond the US should be on our radar for diversification opportunities?