President Obama’s call for a doubling of exports by U.S. companies over the next five years holds enormous potential for the U.S. economy.
More than 95 percent of the world’s population and 75 percent of the world’s spending power is now located outside the United States. Thirty-five percent of the world’s consumer spending occurs in developing countries. And every $1 billion in additional exports means 6,000 new jobs for American workers, according to the U.S. Commerce Department.
Unfortunately, many U.S. companies trying to heed the president’s call frequently find themselves frustrated. Time after time they have a better product at a lower price, but they lose the deal to a foreign competitor. Why? Because the competition has an extra tool in its toolbox.
U.S. companies are renowned the world over for their ability to manage, innovate, improve productivity and generate return on investment. But when it comes to closing an export deal, most are babes in the woods.
Who can blame them? Less than 1 percent of U.S. companies export. Take away companies that export only to NAFTA partners Mexico and Canada, and that number drops to 0.5 percent. Of that half percent, large multinationals generate most of the sales volume. Very few small- and medium-sized U.S. companies export.
Contrast that with Europe, where fully half of all companies export. Exports represent 39 percent of sales for companies in the European Union. The continent is now home to 61 of the world’s top 100 multinationals, compared with just 19 in the U.S.
But the real action is with what economists call Europe’s “hidden champions” — small and medium-sized, high-tech, high-quality, high-value-added companies. Many of them export as much as 80 percent of their production overseas while creating high profits and lots of high-paying jobs. This is exactly what President Obama is hoping for.
Here’s where U.S. companies are going wrong: Let’s suppose an overseas customer is looking for a hydraulic pump of a certain volume and pressure. The customer gets three bids — two from European companies and one from a U.S. company. Although the U.S. company offers a better pump at a lower price, chances are the deal will go to one of the foreign competitors, because U.S. companies don’t understand the importance of credit terms as part of the negotiation.
It’s a buyer’s market. As such, buyers are in a position to demand favorable terms. And more than in the U.S., credit terms play an important role in the purchasing process overseas. What we might consider excessive or overly generous is normal in other markets.
For example, 120 days is standard in Italy or Spain. Longer terms aren’t unheard of in Africa or Asia. In the U.S, the terms typically are 30 to 60 days. Remember, no matter how good your product is, someone else is going to take your business if you’re unwilling to compete on terms.
So how do they do it? How are foreign competitors able to offer such favorable terms without worrying about the credit risk? Simple. They transfer the risk, in this case to a credit insurer. With credit insurance, if a customer defaults, you still get paid. Collecting is the insurance company’s problem, not yours.
Nearly half of all European companies use credit insurance. Without having to worry about the credit risk, they can deal aggressively and tell customers exactly what they want to hear.
There are other ways U.S. companies can transfer credit risk. Companies can move transactions through the Export-Import Bank, for example, but that takes time and there may be restrictions. A letter of credit is another option, but buyers don’t like them because they tie up their money. Both of these methods restrict your ability to deal quickly and decisively.
Credit insurance provides competitors additional advantages. The companies underwriting the insurance typically have large staffs of economists who monitor country risks, sector risks, the business climate and other factors. They use this knowledge to help their customers gauge demand for products, identify new markets and advise on prevailing credit terms. So if it seems as if your foreign competitors are always one step ahead, it’s because they are.
Foreign markets offer U.S. business tremendous opportunity, but a superior product at a lower price isn’t enough. U.S. companies wishing to compete overseas must be prepared to compete aggressively and offer generous credit terms.
Kerstin Braun is executive vice president of credit management firm Coface North America. Contact her at email@example.com.