Exporting to emerging markets

For a SME, exporting into new markets means choosing to enter markets characterized by strong growth and potential. However, it also means accepting new risks, against which it is advisable to take precautions.

Foreign exchange risk: The political and economic instability that exists in some emerging markets may increase foreign exchange risk, i.e. the risks connected to the fluctuations of the country’s currency.

A decrease in exchange rate may cause the loss of value of assets denominated in foreign currencies. Similarly, the increase in exchange rate may mean an increase in the domestic currency value of liabilities denominated in foreign currencies. All these risks can generate additional costs, in terms of both imports and exports.

To protect themselves, SMEs can ask their bank to help them implement a policy of managing foreign exchange risk, for example through foreign exchange hedging.

Non-payment

Obtaining payment guarantees is a major issue for SMEs in emerging markets, which are sometimes characterized by a combination of fragile banking system, strong legal constraints, high level of corruption and high exposure to transfer risk.

All of these represent difficulties for local businesses, which can quickly find themselves unable to meet their payment terms. In such cases, the exporting SME has to deal with non-payment.

To ensure maximum protection against these risks, it is important to perform certain checks once a trading partner (buyer or seller) has been identified in the country:

Checking the buyer or seller’s creditworthiness
Monitoring the buyer or seller’s credit risk
Checking the buyer/seller’s payment history

There are three ways to cover against the risk of non-payment:

Using documentary credit: also called a letter of credit: this technique offers the exporter payment guarantees on sales of goods;
Credit insurance: Some insurance companies offer credit insurance tailored to specific emerging markets and developing countries. Operators such as COFACE offer export credit insurance services;
Selling via trading companies: trading companies (also called overseas trading companies) are responsible for selling export goods on your behalf and bear the risk of non-payment.

Logistics risks

Protection of the logistics system, including the operational management of physical flows of goods, order and stock management, is a major issue for SMEs wishing to import/export from/to an emerging market.

The main risks for SMEs in emerging markets concern transit times, problems of the supply chain and the complexity of customs clearance.

In order to cover against these risks, it is essential to be careful in drafting sales contracts and purchase contracts, while paying particular attention to the legal clauses of the offer, and to rely on the international standardised system of incoterms, which define the duties and obligations of sellers and buyers as part of international commercial transactions. It is also recommended to create a safety stock.

For more information, see our Tips:

Intellectual property risk

Risk related to intellectual property rights is larger in the emerging markets, where the legislation in this area may sometimes be inadequate.

Regardless of its area of activity, a company may fall victim to counterfeiting of its patents, trademarks, industrial designs and models, which will have a negative impact on its image.

The management of intellectual property risk relies on both legal tools and insurance solutions, such as Liability insurance or other specific types of insurance contracts.

The World Intellectual Property Organisation can provide support when dealing with industrial property issues abroad. It is also recommended to work with a lawyer specializing in intellectual property issues, to ensure the company’s compliance with the law and reduce the risk of litigation.

For more information, please consult our Tips:

Political risk: The current social and political situation of some emerging countries may be confusing and its future development uncertain.

For foreign businesses, this creates a number of specific risks, not only physical (the security of local staff, repatriation), but also economic (the adoption of restrictive measures by the government, such as imposing limits on repatriation of funds; expropriations, nationalisations, etc.)

To protect one’s business against these risks, some analytical models permit to measure and assess political risk. Credit insurers may offer country risk ratings: Coface, Ducroire

The very high political risk which currently prevails in some countries requires the business to subscribe a political risk premium coverage provided by a bank, as a rate which is included in its credit insurance policy and depends on the particular country’s rating.

Cultural risk: Working in a foreign market also means understanding the particularities of the local marketplace. In different contexts, the same action can indeed have very different consequences.

For the SME there exists a real risk of failing to understand local laws and regulations, as well as the way in which its partner(s) operate.

It is also essential to enquire in advance about the country’s rules of communication and trading, about its cultural values and variations, and to rely on a network of reliable partners, who are perfectly integrated in the local environment.

It is also possible to use the services of a trading company, or an international assistance company, which can free you of some of the work necessary to understanding the target country. For a SME that wishes to export this is often a much more efficient option and one that enables it to successfully complete its project much more quickly.