There are many good reasons (or benefits) for exporting. These include the following:
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. (This should not be confused with increased throughput on existing capacity, as discussed above.)
Minimising the effect of seasonal fluctuations in sales
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 and Asia.
Addressing customer, competitor and cost factors
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.