EDC’s Regional Vice-President for Small Business Solutions Denis L’Heureux speaks and writes regularly on export trends and tips for Canadian small and medium-sized enterprises (SMEs). He draws on his experience managing a team of 35 people that deals with some 4,500 small businesses every day. Here he combines this knowledge with the latest EDC research to report on who’s doing business abroad, where they’re going, how and why – or why not.
What do you find most encouraging today about the state of small business?
When EDC recently asked SMEs what their number one priority was, they overwhelmingly told us that expanding their sales outside Canada was top of mind.
There has also been a definite trend among Canadian business, over the past decade, towards diversification of exports to emerging markets. In 2000, more than 85 per cent of Canadian exports ended up in the United States; today that number is less than 75 per cent. The difference is going primarily to emerging markets.
Is this a trend you’re seeing among EDC’s own exporting customers?
Absolutely. EDC is seeing more and more of our own clients – 80 per cent of whom are SMEs – expanding their sales in key emerging markets. Our customers’ business volume in those markets, that is, the value of their sales and investments using our insurance or loan services, increased by more than a third between 2009 and 2010.
All this is good news for two reasons: it helps reduce Canadian businesses’ dependence on just one external market, the United States, and it makes our companies more competitive against foreign companies that are diversifying their exports too.
Better still, the number of Canadian direct investments abroad that EDC facilitated grew by 20 per cent to nearly 575 transactions in 2010. This is a good barometer of what other Canadian companies are doing or want to do.
So, what’s motivating SMEs to export and invest abroad more seriously than before?
There are several factors that can explain this phenomenon. Not surprisingly, the value of the Canadian dollar, relative to the U.S. currency, and the current state of the U.S. economy have been the mother – and father – of necessity for Canadian companies. The strong demand for commodities in emerging markets is also a big factor.
Companies say they invest in emerging markets mainly to grow their sales and diversify their market base – trying to offset a downturn in one market, by an upswing in another. Other reasons include being closer to key customers, where after- sales service is a big part of their offer. The ability to reduce production costs and avoid tariffs also influences their decisions.
And here’s the reward: while sales to the U.S. have been stagnating in many sectors, three-quarters of the 335 exporting companies we recently surveyed were experiencing 5 to 15 per cent, or more, sales growth in emerging markets. And they see this growth as a sustainable trend.
What are the toughest hurdles for SMEs when they enter emerging markets?
SMEs often express to us the desire to diversify into faster growing emerging markets, but they say their resources – both people and financial – are stretched thin keeping up with their day-to-day business.
When we asked them about the biggest hurdles to international trade, they voiced three main concerns: the value of the Canadian dollar, the volatility of the global economy and access to financing.
Can you be more specific about their challenges and anxieties?
Many companies say they lack the expertise and time to address a new set of unknowns, which can be quite overwhelming. For example, they are not sure how to identify the right business partners – something that is critical to success abroad.
Next, they are concerned about dealing with local bureaucracies and regulations, which is something those already exporting to emerging markets find equally frustrating. They also think trade barriers such as customs logistics, tariffs and duties may be too complex and costly.
Two other challenges revolve around obtaining financing and evaluating political risks, such as possible insurrections or expropriations, that can come with trade in emerging markets.
What can SMEs do to overcome these concerns?
Obviously they first have to want to grow and believe that exporting will be more rewarding than risky, and the evidence of that is certainly convincing. In an ideal world, SMEs would also have an employee who can concentrate on an export strategy, risk mitigation and supply chain management, but this is not always possible.
Thankfully, there are several organizations that can help SMEs on these issues. The federal government’s Trade Commissioner Service has employees in Canada and abroad who are there to answer these questions. And the various provincial governments too have excellent organizations that can provide valuable export advice and support. There are also loads of online resources, including those put out by EDC on edc.ca and exportwise.ca, which also link to these partners. Just reading this article is a good start!
On the financing side, EDC can make a big difference. We can work with SMEs, usually by partnering with their regular banks or insurance companies, to provide a whole host of credit insurance and financing tools, along with market and risk mitigation expertise. We call this our “partnership-preferred” principle.
Facts & Figures
Small businesses create the most private sector jobs in Canada and make up most of Canada’s exporters. However, their influence looks much different when it comes to the share of firms that actually export. Only two per cent of Canada’s 1.14 million SMEs (with a payroll of at least one person) were exporters in 2009. There is one proviso: most SMEs are in the service industry and this data may not fully capture all such exports.
From EDC’s surveys, we see a strong correlation between high-growth firms and their export plans and activities. They also typically invest more in R&D – as much as 10 to 20 per cent of their revenues or more; for slower-growers it’s usually less than 10 per cent.
When one considers that only about half of businesses that enter the marketplace survive for five years, it is left to many SMEs to adapt – by innovating more, exporting and investing abroad more – if they plan to be around for the long haul.
Industry Canada classifies small business by number of employees – firms producing goods are considered small if they have fewer than 100 employees; for services, the cut-off is 50 people. Above those sizes, and just below 500 employees, a firm is medium-sized. EDC defines small exporters as companies with total annual sales of up to $10 million.
See: Key Small Business Statistics, July 2011 at www.ic.gc.ca
What advice do you have for SMEs before they launch or expand their export plans?
First and foremost, SMEs need to make sure they have a solid foundation at home before considering expanding into emerging markets. If the company is not in a stable financial position, adding more risk by exporting to emerging markets is not a good idea. This also makes it difficult for EDC to provide appropriate services.
Do you have any other dos and don’ts?
From time to time, we get a request from, for example, a $2-million company going after a $20-million contract abroad. The company dreams big, and that’s good, but then fails to fully assess its ability to deliver. They should ask themselves two questions in this case: Do we have an appropriate level of financial capacity to enter into such a contract? Do we have the technical expertise to deliver a contract that is 10 times what we have done before? On occasion, we have helped companies lift much more than their weight – propelled by their exceptional expertise, a strong financial position…and lots of guts!
The third challenge is dealing with a small firm that has reacted to an opportunity, but has not researched even the most basic risks. For instance, is their buyer credible? Have they considered the legal risks – the way the contract is written, the delivery requirements, and more?
Although we do experience these situations from time to time, more often we see SMEs that are ready to expand in emerging markets, and our team is always excited when we can help!
From your work with so many successful small exporters, what are they doing right?
First of all, they have an export plan and are proactively targeting emerging markets. Most high-growth companies have several foreign buyers and sell to more than one foreign market.
Secondly, these companies are investing internationally to different degrees – from keeping inventory abroad, setting up a sales office, entering into a joint venture or setting up a manufacturing facility abroad. The strong loonie has increased this opportunity for Canadian companies by making the purchase of foreign assets more affordable.
Thirdly – and this is something that may be easier for many SMEs – they try to get into the global supply chain of a large Canadian or U.S.-based multinational company and get their product or service “known” in an emerging market that way. This has led to companies being approached directly by a foreign buyer, or discovering a niche to spin off their own business in a new market.
Is there anything else that these firms are telling you?
One common thread that runs through all the advice we hear from successful small exporters is the importance of finding a reliable and knowledgeable agent in the market you target. Before you hire someone, it is critical to get advice from experts whom you already trust – such as business partners, trade commissioners, and our own market reps. You should ideally travel to the market more than once and meet the potential agent face-to-face – you want to be comfortable that the person truly understands both the commercial and technical sides of your business.
Working with a local agent is a good first step in getting your feet wet in a certain market, before possibly investing there.
Which are the most popular emerging markets for SMEs?
Among EDC’s clients, China, India and Brazil are the most sought-after emerging markets due to their strong growth – forecast to be at least triple (China and India) and double (Brazil) that of the U.S. market over the next five years. Canadian companies are also telling us they are very interested in Mexico, thanks to NAFTA and the country’s relative proximity. Some 2,500 Canadian businesses of all sizes already have affiliates or other local presence there.
Other SMEs prefer to target smaller Asian countries like Thailand or Indonesia, or some of the fastest-growing markets in Latin America, like Panama, Peru, Chile and Colombia, which have become much more stable in recent years. These secondary emerging markets may see less competition from large companies and can potentially be good targets for SMEs.
Interestingly, Industry Canada reports that in 2009 small businesses exported disproportionately more than medium-sized or large firms to India, Egypt, Turkey and South Korea, in that order.
Stages of Growth
Do you have an example of a company that started small when it first came to EDC and has shown impressive global growth?
Wow, it’s hard to pick one; there are so many successful entrepreneurs we know! Let me just tell you about a firm we recently interviewed for a video. If you’ve attended an outdoor festival, you’ve probably seen a mobile stage made by this client. Its product was a huge innovation when Stageline started the company in Montreal’s south shore about 25 years ago.
Imagine – its stages could be set up by four or even fewer workers in just a few hours, compared to conventional set-ups that took up to 30 people a full three days! But when Stageline started to attract international interest, about 12 years ago, it had to get the financing to turn out its products for overseas sales. Not an easy task for a small unknown company at the time!
So, how did Stageline overcome that challenge and take its product around the world?
In a nutshell, the company originally came to EDC on its bank’s recommendation, when it received its first international order from the U.K. We provided a guarantee at the time, on a loan from one of our small business financing partners. We also adapted our credit insurance policy to cover its complex leasing contract; the large stage-trailers are sometimes leased, rather than purchased outright. Pardon the pun – it all went without a hitch!
Today, Stageline is the world’s leading designer and manufacturer of mobile hydraulic stages, selling to more than 35 countries. This year, for example, three units were flown to Nigeria and the company introduced a new ultra-portable model. Like so many other companies, Stageline had to cut costs during the recession, but sales remained relatively steady, thanks to its diverse markets.