Work out your budget on a beer matFail in foreign trade: budget
Mr. F is a businessman from head to toe. He runs a successful business in the third generation and manufactures welding equipment and accessories for shipbuilding. Of course, he is also suffering from the heavy competition from Asia that German shipyards have to endure. What he needs are preventive measures, to counter the constant changes that the market is currently subjected to.
It is against this background that Mr. F decides to offer his products at precisely the place where ships are not only being built now but will also be in the future, namely South Korea, home to the largest shipyard in the world, Hyundai Heavy Industries Co, Ltd.
Clearly, South Korea is not exactly around the corner, and it is a 12-hour flight to Incheon. You need to book early because there are only three flights a day from Frankfurt and they are rather expensive. Indeed, Mr. F has heard that South Korea is an expensive place all round, but this isn‘t enough to put him off.
So he decides to go over there and take a look. A flight in the business class costs 4,000 euros, plus hotel costs of 300 euros excluding breakfast, and then there is also dinner to think about. Mr. F. bites the bullet and pays up. He flies out to Incheon, spends thre days sizing up the situation and then continues to Ulsan.
Completely absorbed by the notion of doing business here, he sets up a company with the aid of an international service provider and rents an apartment for the German technician, who will work here as an expat. He is a welding expert and also has good knowledge of sales and marketing.
The first product presentations are actually successful and the plan reaches the execution stage. The technician is given a new employment contract, with bonuses for working abroad, and moves to Ulsan. The equipment is modified to South Korean requirements, the entire process is set in motion, and the costs in the monthly reports begin climbing at a remarkable speed.
As an SME businessman, Mr. F naturally doesn‘t have a CFO but like his predecessor, relies on the analyses provided by his accounts department, making approximate estimates of all the expenses he is likely to incur. Mr. F had never spent more money than he had earned, he rarely owed the bank money, and his expenses were always determined by his cash flow. Until now…
Within the first six months, it becomes apparent that it would have made sense to sit and think more carefully about costs. The technician has had to fly to Germany and back no less than eight times to sort out problems with the refitted machines, at a total cost of 35,000 euros. The apartment in Ulsan costs 2,500 euros per month and the technician‘s monthly salary of 9,000 euros is actually on the low side.
And now, six months after making the investment, there is still no order in sight because the equipment is not as easy as envisaged to employ here and the competition is not exactly standing around watching how the German engineers are attempting to gain a foothold. And now the accounts department on the second floor has just announced that it is necessary to tap into the reserves because it is no longer possible to finance the venture from cash flow. Indeed, in only six months, costs of 250,000 euros have accrued and not a single order has been received.
Mr. F now has no choice but to approach his bank and ask for a loan. He has never dreamed he would ever have to go this far – it simply does not fit in with his business policy. Except that now he has no choice.
Investing in and developing new markets costs money, and frequently a lot of money. Unfortunately, the further the target market is from home, the more expensive it is, and this is something that every entrepreneur really needs to be aware of before going ahead with such an investment. It is of course to be welcomed that entrepreneurs wish to enter foreign markets, particularly when order numbers at home are dropping and potential new customers exist further afield. But before you fly over the Atlantic, it is essential to ensure your aircraft is fully fuelled and that you can afford the trip.
Experience has shown that the worst factor of all are the hidden costs, those that you are not expecting but are nevertheless unavoidable. After all, who would expect that a technician would constantly need to fly home and then at such short notice that only C-class tickets are available? In fact there is nothing more expensive than expatriates, because they receive so many bonuses in addition to their regular salary that it can really hurt. This is why many companies choose to dispense with expats entirely, and look for qualified personnel inside the country, who are then flown over to the parent company for training. In the medium-term, this strategy is considerably cheaper and in no way any less successful. On the contrary, having a local person to deal with there is actually very beneficial from the point of view of marketing.
It is therefore advisable to plan conservatively, and to include a worst-case scenario and an exit strategy. If possible, initial experience should be made in a relatively simple market, to begin gathering a few key figures relating to market development. We will go into this aspect in further detail in item 9. Anyone who has successfully set up a distribution company in London will generally have an idea of what to expect in Korea.
Incidentally, adopting a conservative planning strategy is not only advisable when tapping into foreign markets. At home too, there are several examples of entire industries being driven into bankruptcy because the planning phase did not take sufficient account of unpredictable (or perhaps they were predictable) events. The most recent example in Europe is the solar energy industry, where an entire sector based its business on subsidies. The government promises high feed-in tariffs, attracting many into the solar industry, but when there is no more money to finance the subsidies, the entire sector collapses. It is pretty courageous to base an entire business model on political subsidies and to invest huge amounts in something that could disappear overnight with a change of government.
What about Mr. F? Well, his bank was unfortunately unwilling to finance his plan. It was too bold, had no cost control, had a deficient business plan, and the results were uncertain, to name just a few of the bank‘s objections.