The USA can be seen as an easy country in which to do business and continues to be the UK’s number one export destination. UK companies approach the market directly, perhaps appointing sales agents operating largely on commission. American buyers like the reassurance of being able to contact their suppliers locally i.e. within the USA. This can result in the UK exporter realising that they need to set up a virtual or representative office with a local address and phone number.
If you incorporate a company in the US, the US company can act as an agent or distributor, so the UK parent should decide on the best business model. As a distributor the UK parent will sell stock to the US corporation whereas under an agent arrangement the UK parent will invoice the US customers and pay a commission to the US corporation. It is a very easy process to register a company in the US but thereafter a UK company should obtain professional advice from specialists. It is important to obtain both legal and financial advice as the lawyer and accountant will give you their view on what needs to be done.
For example, each state has its own legal and tax system. A US company has to file a tax return in each state if it has an office, stock, company registration, or even visits by salesman to that state!
Different models of market entry can be more suitable for certain countries. While appointing an agent or distributor is frequently the first step, in this chapter we have selected some key markets and looked at the usual or most appropriate options for developing business. Here we look at export to India.
India is a huge market of over 1.2 billion consumers and as it is further behind China in terms of development is regarded by many UK companies as offering untapped potential. Companies often look at direct exporting and then search for agents and distributors. These may not prove successful as much is promised and not delivered particularly regarding total market coverage.
After building up some experience with visits to major cities in India, companies may well conclude that they really need a local partner to access and develop the market. In addition, import duties and supplementary taxes can add around 35% or more to the landed cost. Therefore, some local manufacture or assembly or in the case of services, delivery with locally engaged staff, may be necessary to reduce costs in a price sensitive market. These considerations may result in the setting up of a joint venture with a local company.
It should be noted that establishing a business in India can demand patience and perseverance as this is a very bureaucratic country. For 2015, The World Bank ranks India 142 out of 183 countries in their “Ease of Doing Business” index. www.doingbusiness.org
Different models of market entry can be more suitable for certain countries. While appointing an agent or distributor is frequently the first step, in this chapter we have selected some key markets and looked at the usual or most appropriate options for developing business. Here we look at export to China.
Most companies that start looking at China as an import or export market make direct visits, and soon realise that it takes time and many repeat trips to build up trust with their potential customers, suppliers or partners. Chinese intermediaries are frequently involved which means you are not dealing with the end customer or supplier. The common export route is to use one or more agents or distributors (also sourcing agents) which can help to “open doors” if they prove to be as well connected as they purport to be. China is a vast country and one agent or distributor is unlikely to have the connections or infrastructure to service more than his own region.
However, to assess a huge and growing domestic demand, UK companies can consider establishing some type of local presence. This may be setting up an informal operation with a Chinese contact address. China Britain Business Council (CBBC) offer their Launchpad scheme, whereby you can have a “hotdesk” facility and they will employ a local manager or salesperson on your behalf.
UK companies can establish their own representative office but as the name suggests this office cannot engage in business activities and is restricted to liaison, marketing and exchange of technology.
Joint Ventures used to be the only way to enter the market and so from the time they were introduced in 1979 an Equity Joint Venture (EJV) was popular but not necessarily successful. Early Chinese JV partners were often existing or ex-state trading organisations which were inefficient and bureaucratic and there are many horror stories of foreign investors losing their capital and IPR (Intellectual Property Rights), and eventually cutting their losses.
In the mid 1990’s WFOEs (Wholly Foreign Owned Enterprises) were permitted, allowing 100% foreign ownership, without a local Chinese partner. WFOEs quickly took over as the preferred form of Foreign Direct Investment (FDI) giving independence, control and more protection of the foreign company’s IPR. A key point about WFOEs is that initially they were only permitted for export oriented or import substitution activities. Later it was made much easier for WFOEs to sell to the domestic market.
Finally, in 2004 the Foreign-Invested Commercial Enterprise (FICE) was introduced. This allows the foreign investor to set up a trading operation doing wholesale, retail or franchising.