MARKET INSIGHTS: Selling overseas-if you are serious about the global photonics market
In my many years as an entrepreneur in the photonics industry, owners and managers of photonics companies have been asking me if it makes sense for them to consider selling in foreign markets.
In my many years as an entrepreneur in the photonics industry, owners and managers of photonics companies have been asking me if it makes sense for them to consider selling in foreign markets. My answer is clear: A decision not to do so will most likely cause a substantial if not severe limit on growth potential.
Although this may not be as profound for those companies based in the US—and to some extent, China—given the size of their domestic markets, in most other countries excluding foreign markets is not an option for any photonics company that has the ambition to grow into a substantial business. The global photonics marketplace has been traditionally broken down as follows: US–45%, Europe–25%, Asia–20%, with 10% rest of the world (ROW). However, the recent strong growth in Asia makes a ratio of 40-20-30, with 10% ROW, more realistic. Regardless of the precise numbers, any business located in the US, Europe, or Asia declining to engage in foreign business excludes itself from between 60–80% of the world photonics market.
With practically all photonics companies having a web site, it has become much easier to sell in foreign markets. Managing your site such that it can be found on the web in those areas that are really important for the business is one of the easiest ways to generate sales “overseas,” by which I mean across national borders. So when market share numbers indicate an absolute need for doing business internationally, why do many photonics companies choose to restrict themselves to their domestic market and limit foreign sales to their web sites?
Reasons may include the difficulty in managing and financing such an operation; perceived loss of control; currency risks; expense of doing business overseas; and unfamiliarity with local culture, language, and legal systems. By themselves these are legitimate concerns, particularly for smaller companies, but they should not be a justification to shy away from serving overseas markets.
Reaching those overseas markets
I remember the case of a major, well-established European optics company that tried to get market share in the huge US market by selling direct from their home office but never achieved its goal. In fact, the size of the US market and the company itself were big enough to require a manufacturing base in the US. As a consequence, this company always remained a small player in the US photonics market, in particular in the OEM segment.
Although the Internet has made the world much smaller, topographically it is still a pretty substantial chunk of territory, with almost 7 billion people speaking hundreds of languages. So how do you go about expanding business in those markets while keeping risk at an acceptable level? The route usually runs through these successive stages:
1. Selling direct from the home office, mainly through the web site
2. Using representatives
3. Having your own sales/service business
Selling direct. The least expensive and most convenient approach is to sell directly from your home base, as it does not require any investment in foreign markets and the web site is the primary tool. It is essential that in countries like China and Japan—and, to a lesser extent, Germany—web sites appear in the local language. Given the size of these markets, this is economically justified. This kind of selling is more effective for those companies selling proprietary products with more or less fixed specifications, such as instruments. If, on the other hand, your company is more focused on components and/or serving OEM customers, then depending on a web site will be substantially less effective because close customer interaction is essential in securing OEM contracts.
Using representatives or distributors. Choosing the right representative is essential for your success in any foreign market. In Europe it is fairly common for a rep business to have offices in several countries, but in the North American market it is rare for rep companies in the US to also represent client companies in Canada and vice versa. The following criteria are important in choosing the right representative:
1. Quality of sales engineers employed by the rep company. When you sign a contract with a rep, unless it is a very small business, it will almost always be with the owner, who is rarely the person to actually handle your product line. It’s therefore essential that you interview the sales engineer who will be responsible for your product line to make sure that person is capable of handling your business at the technical and sales levels that you require. This has to be done not only with the rep’s main office but for all offices they may have in other countries. It is convenient to have one organization representing your company in several countries, but if you have any doubts about the quality of the person who will represent your company you are better off looking for a different rep.
2. Review the rep’s current list of principals to ensure there is no conflict of interest with your own business.
3. Note the years in business and financial status.
4. If you have any customers already in your target country, ask them their opinion of the rep.
5. Decide whether to give a rep exclusive or nonexclusive representation rights. This is an issue that is relevant mostly when dealing with larger countries such as the US or China. Giving any rep an exclusive in most cases should go together with an agreed quota on sales volume.
6. Distributors are more involved with your company. They maintain inventory, often having some kind of service facility, and set prices and invoice customers themselves. The drawback of using distributors is the lower level of control over the target market. Never enter into an agreement with a distributor company that refuses to disclose its other customers.
Many principals complain about non-performing reps who consistently fail to meet their sales targets. In my experience, non-performance is more often the consequence of failing support by the principal than by non-performing reps.
Supporting your rep means promptly responding to queries, providing adequate tech support and ongoing training, sharing in the expense of advertising and tradeshows, but also actively following up on quotes. The person who has the responsibility to sell your product line also serves other companies, so intensive communication with your rep is essential for your product line to get the attention it needs.
Setting up your own sales/service business. Dealing with reps or distributors will increase sales, but at some point this will reach a plateau and the best way to continue growing your overseas business is to start your own. Given the inevitable overhead that needs to be covered, I recommend starting a business when sales have reached a level of about $2 million. As reps on average take 15% commission, this target will provide a roughly $300,000 cushion to cover initial overhead and pay the first employee’s salary and expenses. I do not recommend appointing someone from the parent company unfamiliar with the local situation to become the manager of the new venture other than for a transfer phase.
Hiring the right person to run the business is obviously key to this venture and the image the company will present to the local market. It must be someone who is technically qualified and intimately familiar with the local market. From a legal standpoint I recommend establishing a corporation that is owned by the parent company, limiting its exposure should things not work out with the new venture but also enabling the local company to allocate some stock to the manager of the business. This is essential to attract, motivate, and retain talented people and create a sense of ownership. Reserving between 5 and 10% of the outstanding stock for this purpose is fairly common. As tax regimes vary widely around the world, it is important to consult with a local tax expert to set up the new business in a legal format that is most attractive for the parent company. Failure to do so may turn out to be very expensive in the future.
Jan Melles is president of Photonics Investments and was the co-founder and later chairman of Melles Griot. He is currently on the board of numerous public and private photonics companies, and invests in and brokers the mergers and acquisitions of photonics companies. E-mail: email@example.com; www.photonicsinvestments.com.