Marie-Christine Daignault | Desjardins Group
Depreciation of the Canadian dollar, the signing of new free trade agreements… conditions are ideal right now for competing successfully in foreign markets.
But before taking the leap, SMEs should guard against unpleasant surprises. Here are 4 tried-and-true strategies for making the most of globalization opportunities while avoiding traps.
1) Protect yourself!
Whether you’re selling or buying overseas, you’re exposed to currency fluctuations that can quickly turn profits into losses. And the risk is universal—all businesses, big and small, are affected.
Many SMEs don’t protect themselves against exchange risk. This forces them to indirectly speculate on currency markets, which can be profitable, but also very costly!
2) Prepare yourself for the big leagues
If you want to compete against major players, you’ll need a certain amount of leeway.
That mostly means increasing productivity—not just reducing costs, but also investing in staff training, upgrading equipment and optimizing processes.
Another asset: innovation.
Unless you can keep your production costs as low as in emerging countries, you’ll need to focus on your value-added: research and development, new products and services, innovative technologies… But beware of imitators! In some markets, it’s not always easy to protect intellectual property.
3) Join a global value chain
Globalization isn’t just about exporting products overseas. It can often be more profitable to focus on one part of a product or on one part of the manufacturing process.
By carefully assessing each market, you’ll be able to identify the weak links in the value chain; that’s how you’ll be able to sell your expertise most effectively, by complementing established players.
Inserting yourself in a global value chain means that you’re both buying and selling overseas, which mitigates against exchange risk.
Canada’s tentative economic outlook, combined with aging demographics, encourage SMEs to pursue growth abroad.
Although the U.S. is still our main trading partner, their share of total Quebec exports dropped from 86% to 70% between 2000 and 2014, while Western Europe’s share went up to 12% and that of the BRIC countries (Brazil, Russia, India and China) rose to 5.7%. That’s a good thing.
Exporters would be wise to diversify their markets to increase opportunities, particularly in emerging countries with strong growth potential. This also allows them to spread the economic risk—if demand in one country slows, another can pick up the slack.
Exchange rate risk increases with the number of currencies you trade, which is why you should use hedges (see point 1). But the potential for higher margins abroad is worth the cost of protecting yourself.