WHAT IS INTERNATIONALIZATION?
Internationalization is the process of entering foreign markets to export products, expand your business, manufacture merchandise, or outsource tasks in order to maximize revenue.
Internationalization is also a journey. You may feel that internationalizing is an "unnecessary" or "unaffordable" journey, especially if you are generally satisfied with the condition or trajectory of your business. In today's globalized economy, internationalizing has become essential to sustaining sales, reducing costs, and keeping pace with the competition. The ongoing COVID-19 pandemic has actually amplified, rather than diminished, this trend—seeing as if your domestic customer base has declined or your production (wherever it may be) has been curtailed, then your only viable option is to seek solutions elsewhere (namely, in another country). This type of diversification, even in the best of times, is a smart strategy—since it allows you to offset losses in one market with gains in another, as well as broaden your brand and gain first-mover advantages in markets where your competitors have yet to establish themselves.
Despite the necessity of internationalizing, you still may be hesitant to embark, because you feel the voyage is "too risky." We assure you that the numerous benefits of internationalization far outweigh the possible risks—especially if you have us to guide you from start to finish. At M74, our goal is to provide you with as much knowledge as possible about the market you are intending to enter, so that way you can feel fully confident in your decision-making. After all, as the legendary investor Warren Buffet says, "Risk comes from not knowing what you're doing"—which is something you won't have to worry about with us by your side.
Why export or expand abroad?
By exporting your product or commodity, or by expanding your company's presence overseas (including via franchising or licensing), you will have access to significantly more customers. This is particularly true in large developing countries with rising middle classes and nations that are signatories to free trade agreements (like RCEP and AFTA in the Asia-Pacific, the USMCA in North America, and the AfCFTA in Africa). Moreover, by establishing operations within a European Union (EU) member state (such as Spain or Portugal), your business becomes instantly connected to all 31 of the countries that comprise the European Single Market.
If you are a small or medium-sized enterprise (SME), you may think that offering your goods abroad is something that only the big guys can do. While this may have been true in the past, it is certainly not the case now. According to the European Central Bank, "more than a third of SMEs" and "a quarter of micro-firms" in the EU were exporters in 2018. The Bank also found that "exporting SMEs tend to be more profitable and innovative than non-exporting ones." In the United States (US), "9% of American small businesses export." This figure comes from a 2019 survey conducted by the US Chamber of Commerce. The Chamber goes on to note that "small businesses' export revenues as a share of total revenues increased by 20% since 2016" and "small businesses that export saw substantially faster overall growth from 2016 to 2018: average revenues of exporting small businesses increased by 24.3%, compared with a 14.1% increase for non-exporting businesses." The Chamber also believes that "if small businesses had better access to export markets, their export sales would increase by over 14% during the next three years (2020 through 2022), which would increase US economic output by $81 billion and add 900,000 American jobs." One of the main barriers to this type of access is the inability of domestic businesses to find trusted distribution, wholesale, or retail partners in unfamiliar foreign markets—which is exactly what we at M74 are here to help you do.
Why manufacture abroad?
For decades, businesses of all sizes and types have manufactured, sourced, or designed their products in countries that were less developed than their own. Their primary motivation has always been to save money. This practice is known as "low-cost country sourcing." Not only are materials and components cheaper throughout the developing world, but also so are production expenses associated with labor, machinery, and facility overhead. Moreover, businesses that partner with factories in developing countries benefit from economies of scale. This means that increased outputs by the factory result in decreased unit costs to the business.
Although China remains the "world's manufacturing superpower" for the time being, its controversial response to COVID-19, compounded with its trade war with the US (since 2018), has led to many foreign businesses looking elsewhere to fulfill their manufacturing needs. Surveys conducted in 2020 by the EU and US Chambers of Commerce in China reveal that, as a result of China's handling of the pandemic, 11% of EU companies are considering divesting from China, while 4% of US companies are already doing so. Furthermore, 24% and 12% of US companies in China say they plan to "adjust" their sourcing and production, respectively, "partially outside of China." Meanwhile, during the height of the US-China trade war in 2019, a DHL survey of foreign firms in China found that 20% "were seeking components and assembly outside of China," while 11.8% were "shifting all manufacturing out of China."
Although accelerated by recent events, this global disenchantment with China is not new. Over the past decade, due to a variety of factors, China's comparative advantages (namely, in terms of manufacturing) have gradually diminished. In 2017, 58% of US businesses and 55% of EU ones said that rising labor costs were the most significant challenge to their operations in China. Other top challenges widely cited by these US and EU firms were regulatory ambiguities, competition from domestic firms fueled by protectionism, and the plateauing of the Chinese economy. The DHL survey also asked foreign businesses that had already relocated from China to an alternative market (or were in the process of doing so) about the difficulties they were facing. An average of 20% answered that their main challenge to adapting to their new market was "identifying and building new connections with local suppliers"—which is our specialty at M74.
A plurality (11%) of the respondents to the DHL survey said that India was the primary market they were considering relocating to from China. The EU and US also made the list at 8% and 7%, respectively. When you think of "manufacturing abroad," low-cost country sourcing is most likely what comes to mind. However, manufacturing in the EU and US, while generally more expensive, also has its benefits. Not only are manufacturing outputs exponentially increasing in the EU and US, but also so are the levels of labor productivity in those countries' factories. The most tangible reward, though, is access to EU and US innovation—which is bolstered by consistent quality standards and robust intellectual property protections. The European Commission reports that "manufacturers in the EU represent 77% of the EU's private research and development (R&D) investments." Meanwhile, the US National Association of Manufacturers found that "manufacturers in the US perform 63% of all private-sector R&D in the nation, which has risen from $132.5 billion in 2000 to $271.3 billion in 2018."
Why outsource a business process?
One of the most difficult aspects of running a company is having to perform all of the ancillary functions that are required to support your core business. While functions like customer service, technical support, accounting, human resources, and digital marketing are all very important, handling them in-house requires a lot of time and money, which can detract or distract from the mission of your organization. That is why many companies wholly or partially contract these functions offshore. This practice is known as business process outsourcing (BPO). Not only does BPO free up a company's capital and capacity so that it can better focus on its core business, but it also empowers the company to access function-specific expertise and innovations via a BPO provider that would have been expensive and time-consuming to cultivate in-house. That is why many businesses and even governments have embraced BPO in recent years. For instance, a 2016 survey of large multinational corporations by Deloitte revealed that an average of 54% outsource "various business functions." "Information technology" was at the top of the list, with 72% of respondents indicating that they outsource those types of roles. Furthermore, an average of 54% of the respondents said that they planned to increase the use of BPO in the future. At 36%, "finance" was the category of processes they intended to increase the outsourcing of the most.
BPO is not limited to big businesses or government agencies. In fact, a 2019 survey of US small businesses by Clutch revealed that 37% already outsource at least one business process (including 29% of entities with 50 or fewer employees), and 52% planned to do so that year. Arguably, BPO makes even more sense for smaller businesses than it does for larger ones. This is because startups and mom-and-pop operations are much less likely than big corporations to have the necessary knowhow or cash on hand to handle things like customer service or digital marketing all by themselves.
Over the past decade, the rise of cloud computing has made BPO even more accessible and appealing across the board. A 2018 survey of international businesses of varying sizes in multiple sectors by Deloitte found that 93% were "considering, or have already adopted" cloud-based services. Application hosting, along with data storage and management, are the most common functions to be outsourced via the cloud. These types of services are especially popular among technology firms. More traditional BPO offerings (like call centers) that cater to non-technical businesses are also being transitioned to the cloud, which makes them even more efficient and cost-effective than they already were.
While India is the "undisputed BPO industry leader," and the Philippines "also holds steady in the rankings," the US and EU also boast substantial BPO capacities. Call centers in Spain and Portugal, for instance, abound. While no African countries make this "top 30" list by Kearney, Nigeria definitely has the potential to break into the BPO industry given its young, well-educated, English-speaking population, and emerging technology sector.
Whether you're a huge multinational or a garage startup, M74 will connect you with the best BPO providers in the most conducive locations to meet your unique needs, so that way you can get back to the business of actually running your business.
Are you ready to internationalize?
Now that you know what the journey of "internationalization" entails, and understand the 3 paths you can choose from, are you ready to embark on this exciting voyage with us?