Tackling Contracting Domestic Demand

In the current economic environment many companies across Europe are faced with a domestic environment that is registering decreased, flat or even negative gross domestic product (GDP) growth. While European Commission (EC) figures suggest German GDP will grow by 0.8% in 2012, for France and Italy predicted growth is 0.6% and 0.1% respectively, and recent official figures from the UK showed a 0.2% contraction in GDP in the last three months of 2011.

The squeeze on profits brought about by this decreasing domestic demand can mean tough decisions for businesses which are faced with either streamlining their costs, through reducing production or cutting their overheads, or seeking alternate revenue streams. Identifying new markets to trade with can be an excellent way of finding new sources of income and for many European companies there has never been a better time to boost overseas trading – or indeed start trading internationally if they don’t already.

HSBC’s recent ‘Global Connections’ report predicts that world trade volumes will grow by 86% by 2026. And while European markets may be facing challenging economic times, the forecast identified many countries outside the region are creating growth opportunities by defining their own ‘trade routes and corridors’. For example, Germany is leveraging its existing relationship with Mexico to forge new links within Latin America, particularly Argentina, by exporting automotive goods to the continent.

It’s clear therefore that while domestic markets may remain tough, there is a wealth of opportunities further afield for European businesses, particularly those that look to create new supply chains to open up trade corridors.

Mitigating Risk

But while the continuing economic situation may be rendering international trade more important than ever before, there are also increased risks associated with such business activity. In addition to considering cultural differences and local terms of payments, starting or increasing overseas trading raises questions for businesses about production capacity, and whether they have the resources to expand further. Similarly, companies must consider carefully their cash flow, as the time lag between ordering goods, and receipt of sale proceeds, can put a significant strain on companies’ resources, while seasonal peaks in demand, long transit times and lengthy credit terms can all add further pressure. Ensuring financing is carefully tailored to meet these fluctuations, accommodate varying payments terms and fulfil day to day working capital requirements will help ensure a firm’s success.

With many businesses worldwide under pressure from the current financial situation, companies trading internationally may wish to pay closer attention to counterparty risk than they have done before. Conducting a fresh assessment of the risks associated with trading partners, including commodity price risk and foreign exchange risk, will allow a business to establish exactly how much risk they are prepared to accept for each particular transaction, and take steps to mitigate the risk where it is found to be unacceptably high. Establishing whether the price of this risk is factored into the cost of goods they buy or sell will also enable a business to keep a tight control on costs and make accurate profit projections.

The use of traditional products, such as letters of credit (L/Cs) and documentary collections, are as effective today as they have always been, and enable businesses to build trusted trading relationships around the world.

Identifying New Markets

There is a plethora of information available to businesses seeking to identify new relevant markets to enter. Government export promotion agencies (GEPAs) across Europe provide a wide range of services and support to business looking to establish trading relationships, including participation at selected trade fairs, outward missions and providing bespoke market intelligence. Chambers of Commerce and their continental counterparts can also provide valuable insight into how other businesses have succeeded, highlighting the pitfalls to avoid and providing advice on achieving exporting goals. Attending sector or market briefings, and talking with fellow businesses which have experience in the markets you wish to target will also help you learn from both their successes and failures.

Speaking with your bank about supporting your decision to export to new markets should also be central to any business plan. Businesses need to ensure that they have the relevant funding and protection in place to support trading. A bank with expertise in international markets will enable businesses to benefit from their experience in diverse markets.

Even something that sounds a simple as ‘cultural differences’ can provide major barriers to trading; misunderstanding local courtesies and expectations can lead to damaged relationships and potentially lost trading opportunities. Thoroughly researching local ways of doing business, including preferred payment terms and shipping timescales, will help new trading relationships get off to a solid start. Exhaustive research into where European business skills and products are most in demand will also help you pinpoint exactly where your business stands most chance of success. Thinking laterally about their supply chains, rather than automatically targeting traditional trade routes or focusing on the current ‘hot’ markets that are experiencing growth, will enable business to identify their most relevant opportunities.

Turning Crisis into Opportunity

Despite the current economic situation carrying challenges, it also offers potential rewards for businesses with an agile international strategy. In fact, the Chinese word for ‘crisis’ comprises a character representing opportunity as well as one representing danger – something that most European businesses will be au fait with.

And while there are additional risks associated with international trading, now is not a time for businesses to be looking inward, but rather searching far and wide for opportunity. Such an approach can help businesses counter current trying market conditions, while building a stronger and more diverse business to guarantee future success.

18 views

Related reading