There are many good reasons (or benefits) for exporting. These include the following:
- Increasing Sales
Exporting is one way of increasing your sales potential; it expands the “pie” that you earn money from, otherwise you are stuck trying to make money only out of the local market. In the case of South Africa, our market is relatively small in comparison to the markets of North America, Europe and Asia. While the local market may represent enough sales potential for smaller firms, for medium and larger companies the local market is just too small and the only way to expand sales is to export.
It should be said, however, if you are not yet selling regionally and nationally, then you should first aiming at expanding your market share within the local market. Once you have saturated the national market, only then should you look beyond the borders of South Africa. It has been said that there are no sales barrier that automatically begins where your border ends. Increased sales also impact upon your profitability (although not always positively), your productivity by lowering unit costs, and may increase your firm’s perceived size and stature, thereby affecting its competitive position compared with other similar-sized organisations. What is more, research and development (R&D) and other costs can also be offset against a larger sales base, or the move into exports may contribute to the company’s general expansion. For others, exports may be a way of testing the opportunities for overseas licensing, franchising or production.
- Increasing Profits
Clearly, you are not likely to enter the export market in order to make a loss. Companies generally strive to make profits and the bigger the profits the better. In many instances, exports can contribute to increased profits because the average orders from international customers are often larger than they are from domestic buyers, as importers generally order by the container instead of by the pallet (thereby affecting both total sales and total profits). Some products – especially those that are unique or very innovative in nature may also command greater profit margins abroad than in the local market. Having said this, it is also not uncommon – indeed, it is highly likely – that you may receive smaller profit margins from your export sales compared with the local market. The reason for this is the highly competitive nature of global markets that forces exporters to lower prices, squeeze profits and reduce costs. You may also find that in some markets you generate higher profit margins, while in other markets your profit margins are considerably lower.
- Reducing risk and balancing growth
It is risky being bound to the domestic market alone. Export sales to a variety of diverse foreign markets can help reduce the risk that the company may be exposed to because of fluctuations in local (and foreign) business cycles. At any one time, the UK, Australia and Germany will be enjoying different growth rates. By selling in all of these countries, the risk of low growth in one or more of these countries will be offset by increased growth in the others, thus resulting in a balanced portfolio of growth overall. In addition, with the challenging labour conditions that many firms in South Africa face today, exports may help to create and/or maintain jobs thus reducing the risk of a labour dispute that could otherwise cripple the company.
- Lower unit costs
Exports help to put idle production capacity to work. This is generally achieved the more efficient utilization of the existing factory, machines and staff. What is more, because you are now selling more products without increasing total costs to the same extent, this has the effect of lowering your unit costs which represents a more productive overall operation. Lower unit costs make a product more competitive in the local marketplace as well as in foreign markets, and/or can contribute to the firm’s overall profitability.
- Economies of Scale
Exporting is an excellent way to enjoy pure economies of scale with products that are more “global” in scope and have a wider range of acceptance around the world (in other words, they can be used in other parts of the world without much adaptation). This is in contrast to products that must be adapted for each market, which is expensive and time consuming and requires more of an investment. The newer the product, the wider range of acceptance in the world, especially to younger “customers,” often referred to as the “global consumer”.
With increased export production and sales, you can achieve economies of scale and spread costs over a larger volume of revenue. You reduce average unit costs and increase overall profitability and competitiveness. Long-term exports may enable a company to expand its production facilities in order to achieve an economic level of production.
- Minimizing the effect of seasonal fluctuations in sales
Being in the Southern Hemisphere, South Africa has seasons that are opposite to those in the Northern Hemisphere. For companies that sell seasonal goods such as fruit growers, and swimwear or suntan lotion manufacturers, being able to sell these goods in the Northern Hemisphere when our season ends, helps achieve a longer and more stable sales pattern. This increases the sales potential for these goods and also helps reduce risk.
- Small and/or Saturated Domestic Markets
One good reason to begin exporting is when the local market is too small to support a firm’s output or when the market becomes saturated. For companies that produce heavy industrial machinery or that have invested in large factories, they need to be able to sell enough of their manufactured goods to justify the investment and to insure that the unit price of goods are kept acceptably low. With relatively small markets such as South Africa, it is usually not long before the local market becomes saturated and offers limited additional opportunities for sales. Many of South Africa’s larger manufacturers have had to turn to foreign markets to justify their existence. Examples include most of the motor vehicle manufacturers such as Opel, VW and BMW; the paper producers such as Mondi and Sappi; and mining houses such as Anglo-American and De Beers. The same is true of international firms such as Volvo, Philips and Roche. They only way firms such as these can justify their investment is to sell abroad because their respective local markets are just too small.