Venturing overseas: what SMEs need to know

SINGAPORE - Increasingly more small and medium- sized enterprises (SMEs) are heading to overseas markets, to seek greater opportunities and to expand their market in order to achieve sufficient scale for greater productivity.

A survey conducted last year by International Enterprise Singapore also found that 67 per cent of SMEs are aiming to increase the number of overseas markets they are in, a stark increase from 14 per cent a year earlier.

The Business Times held a roundtable with three industry players to find out what SMEs - often bereft of resources - would need to look out for in expanding their footprint regionally and globally.

The Business Times: Expanding to overseas markets is increasingly seen as a popular way to increase sources of revenue. What do SMEs need to do internally to prepare for overseas ventures?

Lim Lee Meng: It is important that the SMEs conduct feasibility studies before they pursue any overseas venture. Firstly, research to understand the market, for example, to determine if there is a demand for their products. Are there substitutes for their products? What are the competitive advantages? Are their products more affordable, of better quality, or have more functions? What are the spending habits of the target customers? What are the channels that they can tap to reach out to the target customers?

Secondly, SMEs need to understand the country's political environment, as well as the rules and regulations of operating the ventures. For example, what does it take to set up a company, the licences they would need, custom duties that will be imposed on the import of their products, foreign exchange control, manpower issues, foreign investment restrictions in certain trades, tax rules, etc.

Thirdly, SMEs are encouraged to draw up their business and financial plans. Set realistic goals and ascertain the financial resources needed to fund the expansion. They will need to consider capital expenditure and the working capital requirements of the new business. If external financing is required, they will need to evaluate how they can go about securing the funding prior to embarking on the ventures.

Lastly, one of the most important questions that SMEs need to ask themselves is if they have the right people with the experience and skills to help them roll out the plan.

Vincent Patru: For SME owners assessing if they are ready to expand, the very first thing on the checklist is to ensure that the core essentials of having strong operational fundamentals, streamlined processes and a well-managed cash flow system are ready to be duplicated into a new market.

Cost control, data availability and policy compliance become critical not only to plan budgets, but also increases negotiation power with preferred suppliers in new markets. Internally, companies should invest in systems that are simple, secure and which work for them, freeing them from the effort and time spent on consolidating expenses and filling up paperwork.

Particularly, for companies that handle numerous transactions as part of their daily operations (eg retail and service industries), allowing acceptance of electronic payments extends its reach to customers and suppliers all over the world.

Danny Lai: We find that SMEs seeking to expand are usually financially sound and operate profitably, but do not always know what makes them successful or what makes them distinctive even within their local market.

A company which is strong locally primarily because of its distribution or long heritage in the market may not enjoy the same advantage as they venture into the region. As such, it is important for SMEs to crystalise their reason for being, or their defining strengths, within their local market before expanding.

Business owners and managers operate and see their companies at such depth that it may not be apparent why customers choose them. The simplest way to get a view of why customers like you and what makes you different is to talk to customers.

BT: What are the common hurdles, both internal and external, to expanding beyond Singapore, and how can these be overcome?

Mr Lai: Building a working understanding of the terrain, and the extent to which challenges are similar to or different from the local context, is often the main challenge that businesses face when they are deciding on entering a new market.

Ironically, although the investment required to enter a market is huge, SMEs often try to spend as little as they can to evaluate the feasibility and likely success of starting shop in a new market, choosing often to rely on gut feel, bits of published statistics, one or two market visits.

If you are planning to enter a developing Asian market, you are best served by spending a bit of money to get a good reading not just of macroeconomic indicators and population stats, but also details which will be specific to the success of your business

How much should you spend on research?

A simple rule of thumb would be $8-$10 for every $100 you plan to invest, whether your investment is a new product, new ad or a new market. If you are not spending about 10 per cent of what you are likely to invest in your venture to size up the market, the competitive landscape and consumer needs, then you are spending too little.

Mr Lim: SMEs are more likely to face hurdles if they venture into new overseas markets without doing their homework. They may underestimate the costs of conducting the business and have to deal with unanticipated matters concerning regulatory and manpower issues.

Due to unfamiliarity with the environment, the culture and the "way of business", they may also find difficulty in clinching business deals. To overcome these hurdles, SMEs can talk to other SMEs, those which are successful and those which have failed in their overseas ventures and learn from them. Visit the country, talk to prospective customers, engage professionals including lawyers and business services firms and gather as much ground information as they need. These will certainly help SMEs avoid falling into the common pitfalls.

SMEs can also consider collaborating with reliable business partners who are familiar with the new market and can help them navigate the rules and regulations in the new markets.

Mr Patru: Maintaining a healthy operational cash flow is the number one concern for SME owners when expanding overseas. Cash flow hiccups may harm the business by making it more vulnerable to the penalties of late payments and tightening credit lines.

As a smaller operation, SMEs are also highly sensitive to cost. Key to a healthy operational cash flow and cost control is the SME's ability to track and manage their transactions and costs. This is achievable by simplifying the business' procurement processes, streamlining reports and enforcing expense management.

BT: Which are the most popular countries now for SMEs venturing into a foreign market for the first time, and why? Has there been any change since three-five years ago?

Mr Lim: Generally, countries like Malaysia, China (including Hong Kong) and Indonesia remain the most popular countries for SMEs. We also observed that due to the escalating costs of operating in China, there has been an increased popularity of Malaysia as a choice destination for SMEs venturing overseas.

The increased attractiveness of Malaysia as the top destination may be partly attributable to Iskandar Malaysia, the special economic zone in Johor that has attracted many Singaporean companies due to its close proximity to Singapore.

Mr Lai: While Malaysia and China remain the main destinations for expansion - either setting up shop or backend - we have recently also been encountering clients who are expanding into first-world markets like Japan and the United Kingdom. We think this is an exciting development and says something about the growing stature of Singaporean brands.

Mr Patru: Asia remains a hotbed for key market expansion for SMEs - this has not changed over the last few years, with markets such as Malaysia, Indonesia and China consistently taking the top few spots. However we do see a greater interest in emerging markets, such as Myanmar, which hold great opportunity for SMEs.

BT: What new risks will they encounter, and how should they resolve these?

Mr Lai: The largest risk in expanding overseas is the risk of complacency - assuming that what has made you successful in one market will easily translate to another, that the same products or pricing models will work in the same way.

Compared to the 1990s, it does seem that the Singaporean businessman venturing out today has become much warmer and wiser as a business partner - a lot more conscious of differences in cultural and business norms, more accepting that the rest of the region does not run like Singapore, and is more prepared to play on different rules (or very few rules). As such, we think that they are much better equipped today than before.

Mr Patru: In venturing overseas, some key considerations for SMEs are the ability to understand and adhere to the differing regulatory requirements, unforeseen hidden/additional costs (eg manpower, currency exchange, etc), and the intensity of competition in the foreign market.

Mr Lim: The risks associated with venturing overseas are not new. Companies doing business across borders are subjected to risks including political risks, risks of regulatory changes, market risks, operational risks, credit risks, financial risks, risk on foreign exchange exposures and so on.

Besides understanding the risks they are facing, SMEs also need to mitigate their exposure to commercial and non-commercial risks when venturing overseas. SMEs may consider drawing up their risk management framework and policies so that they are guided to implement effective risk management practices to contain the risks in their overseas ventures.

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