As many of your know, my main business is consulting to firms that sell their goods and services outside of Canada. Canada has some enviable rules regarding offshore sales and, while CRA is zealous about transfer pricing (that is the price at which the Canadian company sells its goods to its captive reseller) the rules are quite manageable. An oversimplified example: If I sell a widget that costs $1 to a foreign customer for $10 I will receive $9 of profit subject to Canadian tax. it may be possible to sell it to a captive purchaser (that is a company that I own in, say, Barbados) for $5 and the captive purchaser will resell it to the customer for $10. In that way there is a $4 profit in Canada and $5 profit that is earned offshore at a tax rate of about 2%. What's more, I can repatriate my profit tax free to my Canadian company through dividends from my captive purchaser. All highly legal. These rules (except for the usual tinkering by CRA) have been in force for 30 years or more.
Lest you think that this is an unabashed commercial for my consulting company, this is not the reason for the post. I recently read an article in The Economist (See: The mystery of the Chinese Consumer: http://www.economist.com/node/18928514) that deals with the trials and tribulations that can occur when a North American company tries to do business abroad. The Chinese are as culturally different from Canadians as chalk is from cheese. Much closer to home Canadians don't take into account significant cultural difference between Canadians and Americans. Selling abroad is taking a leap into the chasm of worlds very different from our own.
It is almost axiomatic that selling abroad requires a local partner who knows the territory and how it can be negotiated. An example: in China, the central government must approve the accounting package that will be used in a Chinese enterprise. Heavy handed, you say. Not so fast. This is done because most off-the-shelf accounting packages do not account for the arcane system of "social taxes" that companies must pay on behalf of the workers. In addition, insistence on strict accounting policies may threaten local managers because such insistence is a slight on their honesty. Most Chinese will reverse engineer any machine and convert it to Chinese manufacture. When challenged on this point they will say that culturally they believe in common ownership of inventions and patent infringement is not a cultural gaff. All this is changing as World Trade Organization rules are making China tow the line on patent infringement. However, India is probably the largest infringer. When dealing in India it is best to hold firmly onto one's underwear lest it be removed from you when you aren't looking.
With all of this angst, why bother selling abroad? Canada is small country whose population is spread across a 5,000 mile swath coast to coast. Canadian companies simply cannot mass produce enough goods for the Canadian market and yet be competitive to imported goos. Many of our Canadian goods go south. However, more Canadian companies are looking for markets that are outside the lower 48 States. This is because the US market is vulnerable to economic swings and trade retaliation such as Buy America. Many Canadian companies want to put eggs in baskets elsewhere.
One of the largest emerging markets is in South America and of these markets Brazil is emerging faster than others. Many are flocking to that market without understanding the cultural difference between doing business in Canada and doing business in Brazil. One of the best secrets in this regard are the services provided by the Government of Ontario to assist Canadian business in doing business abroad. However, that said, entering that market requires time and patience--sometime over several years. However, the rewards are rich enough to warrant the effort. But remember, doing business in Brazil almost always requires a Brazilian partner. Some of the cultural differences can be subtle. Brazilians speak Portuguese. The rest of the Continent speaks Spanish. However, Brazilians are very protective of their language (sounds familiar?) and rarely speak English. It's your job to conform to their society.
Even if sales in foreign markets are possible, transportation and support may make these products uncompetitive in the foreign market. While Canadian goods are highly regarded, worldwide, it's price that is the determining factor. In order to make these goods competitive it may be wise to think of a technology transfer to a local (and well connected) business. They do the manufacturing and sale under license. In that way the local business can take advantage of cheaper labour and a significant reduction of transportation costs. Also, the local producer can service the products. What you get are royalties. This post will not deal with the intricacies of royalties but suffice to say that this is a relatively inexpensive way of accessing foreign markets for a nice return.
The point of this post is that it is not only the Fortune 200 companies that engage in foreign trade. A surprising number of small businesses are selling abroad. With some planning and forethought this can become an excellent profit center. Try it, you'll like it.
Bernie.
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