Why do we import our exporters and how to stimulate home grown companies to succeed in exports?

Due to a shortage of own home-grown exporters Serbia had no option but to import them. With the exception of only a single state owned company which is for sale to foreigners anyway, all other companies from the list of top 15 Serbian exporters during H1 2018 are already in foreign hands (between 51%-100%). There isn’t any locally owned private company on that list! Why is so and can it change to include at least a third of locally owned in the next 5-10 years?

Let me remind you: the biggest Serbian exporter in H1 2018 was FCA (Fiat Chrysler/Italy) with 471,4m EUR worth of exports followed by HBIS Group (China) 403,4m EUR, Tigar (Michelin/France) 190,8m EUR, NIS (Russia) 190,2m EUR, Robert Bosch (Germany) 127,2m EUR, Tetra Pac (Swiss) 106,9m EUR, HIP Petrohemija (Serbia, state owned) 103,2m EUR, Grundfos (Denmark) 100m EUR, Hemofarm (Germany) 90,5m EUR, RTB Bor (now China, takeover executed during 2018) 88,4m EUR, Leoni (Germany) 86,1m EUR, Yura (South Korea) 83,9m EUR, Henkel (Germany) 80,2m EUR, Gorenje (Hisense/China) 73,3m EUR and Delphi Packard (UK) 59,4m EUR.

Foreign Direct Investment (FDI) business model is quite clear in this case. A foreign company brings (1) competitive product including design, consistent quality and brand which is already proven with customers in other countries, (2) enough production capacity to satisfy export demand and (3) secured sales abroad, either externally or within its own supply chain. In addition, critical enablers such as production technology and work management system as well as capital come with.

Foreigners are primarily driven by higher profit opportunity. They can get it in Serbia via (1) direct and indirect government subventions (even upfront), (2) skilled, educated and substantially cheaper than EU workforce (these 2 factors are subject to ongoing local criticism), (3) lower fixed and variable costs, (4) acceptable infrastructure at the EU border (for non-European companies Serbia has good strategic location for exporting to EU and for Europeans, it has close proximity to their supply chains), (5) free trade agreements which Serbia holds with some other attractive markets, primarily with Russia and Turkey, not to mention opportunity to (6) sell in local and regional growing markets.

On the other hand Serbia benefits tens of thousands of new and saved jobs (those saved in unprofitable state owned companies after their privatisation through FDI and turnaround), development of own SMEs which now become part of foreigners’ supply chains as well as increase in local trade and tax revenue as a result of growing consumption of those employed. This is why FDI mustn’t be side-lined even it comes with heavy local subsidies.

However, counting exclusively on foreigners for export dollars weakens long-term potential of local industry adding very little to a competitive advantage of the nation. State of the art proprietary technology and secured sales of proprietary products in foreign markets are only temporary transferred capabilities as the most competitive elements always remain in foreign hands and could be withdrawn almost instantly (the risk which could be easily materialised in case of Serbia entering a major dispute with the country of foreign investor or its alliance!). In such foreign owned companies R&D is often limited to (local) process development and design of peripheral products and components. Adding to this, locally owned private companies can hardly compete with these international giants even in the home market (let alone abroad). As a result they rarely achieve critical mass/economic power to afford effective R&D which is a gatekeeper to reaching competitive advantage through innovation. Not to mention transfer of profits abroad. This is why it is utmost important to support and work on the development of locally owned businesses in order for them to enter and capture at least a third of the above list.

In order to better understand obstacles which locally owned private businesses face in their pursuit of export growth I designed and conducted a survey among selected Serbian business people who share their contacts with me on LinkedIn. I asked each participant to evaluate and mark on the scale 1-5 (“completely dissatisfied” to “fully satisfied”; mark “3” = “semi-satisfied”) the level of own satisfaction against each of the 10 pre-selected elements of business environment in Serbia according to its impact on building export competitiveness of own or other well-known to him/her Serbian business enterprise(s). The list of 10 factors was a result of my preliminary research and past business experience.

I must say that according to all answers the participants are generally dissatisfied with the export business environment in Serbia. It comes from the overall average mark of 2,27 which falls below “semi-satisfied” (3). Furthermore 9 out of 10 components scored below “semi-satisfied” and the only one that scored just above it was “availability of advanced technologies” (3,03).

Greatest dissatisfaction has been revealed with the following four components which scored between “predominantly dissatisfied” (2) and “completely dissatisfied” (1):

  • “access to export/project finance at reasonable price” (1,73)
  • “efficiency of government administrative offices/service” (1,83)
  • “presence of long-term export oriented strategic planning in enterprise management” (1,87)
  • “on-time payment and fair treatment of SME producers by large exporters” (1,90).

export environment survay graphics

The remaining 5 elements of the export business environment in Serbia also received dissatisfaction leaning marks between “semi-satisfied” and “predominantly dissatisfied”:

  • “sufficient production/export capacity to meet demand” (2,13)
  • “regional/local availability of export infrastructure such as export & shipping agents, trade chambers, trade representatives etc.” (2,33)
  • “availability of transport infrastructure (roads, rail, airports, ports)” (2,43)
  • “availability of talented and skilled labour” (2,63)
  • “availability of reliable and good-quality supply chains” (2,83).

Increase in exports is almost always a priority for any government who wants to stimulate economic growth and the best way to promote export activity is to remove/reduce obstacles in business environment which make functioning of home-grown exporters difficult, especially SMEs. Based on my survey results the main problem lays in financial weakness of these companies pointing that most of the work should be done here. On one hand businesses can’t get their accounts receivable on time and on the other they can’t get affordable finance to overcome that situation. This creates almost permanent cash flow problem which practically eliminates capacity for project and/or development finance with export probably suffering the most.

I believe that the government can make life easier in both areas. Although laws that govern handling of accounts payable between companies exist they are not adhere to. The government can first review and amend the existing laws if necessary and second, create mechanisms for their enforcement. Furthermore and not neglecting the existing government work with banks in providing additional guaranties for crediting SMEs I propose a creation of new Export Development Fund – a public-private partnership between Serbian government (tax money) and commercial banks, local and foreign companies, international development banks and other relevant/interested organisations. The Fund would have exclusive mission to increase exports of privately owned home-grown companies by financially supporting their (a) long-term development of export capability and (b) concrete export projects. It would be organised to actively search for potential industries and industrial clusters in Serbia and match them with specific world markets based on thoughtful market research – supply and demand as well as technological and consumer long-term trends. Only those companies that fit those “models” and have potential to satisfy medium to long-term future demand in agricultural and industrial goods would qualify.

Besides strengthening financial capacity of home-grown companies the government must keep on improving own public service and administration. A lot has been done (e.g. “e-government” project) but obviously not enough. Likewise there is still a lot of opportunity for the government to help in other ways e.g. building more duty-free industrial zones and introducing “export subventions” for domestic companies – maybe only for SMEs. If foreign companies can get subventions for creating jobs in Serbia, home-grown enterprises should receive similar help in their export endeavour.

Another critical obstacle to growing home-grown exporters is absence of long-term export oriented strategic planning in their management – quite the opposite from foreigners. In my experience owners and managers of Serbian privately owned companies rarely understand the importance of strategic planning let alone practice it in a structured manner. Businesses, irrespective of size, are generally run opportunistically with annual budget being probably a single ‘strategy’ document. Focusing on local growth and sales and on the side trying to catch every export opportunity wherever and whenever it occurs will produce only sporadic and unreliable results. Therefore it is obvious and foremost for business owners and managers to change their own approach to running a business and utilise a structured strategy planning process. However there is a role for the state even here, particularly in business training.

Purposefully designed training programmes which will include strategic planning, market research principles, export marketing and sales, export administration, logistics and so on can be delivered on all sites and regions where export potential has been identified. This activity can then be outsourced to private training providers and individuals while the state remains assurer of the curriculum and quality. Chambers of commerce and trade, international trade agents and providers of relevant professional services should be encouraged to follow and make permanent/periodic presence on those sites. Strategy is not everything in business but without it a company certainly won’t become large exporter (… among other unreachable goals).

 

Finally some advice on how to kick off your export planning:

  • If you are a beginner in export activity first create a preliminary list of attractive countries and world regions based on local demand and need for your product. In the same time create a list of criteria for evaluating each of those countries/regions. These criteria must reflect your aspirations, capabilities, product portfolio and target market segment characteristics in order to be relevant and effective. Pay attention to quality of your preliminary market research and collected information as their impact is critical to your success. Some criteria examples are: geographical distance and means of shipping, local demand for similar products and how does your product portfolio fit into it, current state and potential of local economy, buying power, historic trends and projections of future exchange rate, local and imported competition – price and differentiation, laws and regulations, WTO and/or other trade cartel membership etc.
  • Make a decision how to approach a target market: sell directly, use local distributor or agent or create a joint venture with local partner.
  • After performing thorough research and understanding the needs of your target market customers you have to make a decision about your selling points which will be used in direct contacts and via media to explain why your product is superior to those of competitors. To do that properly you must first learn about selling points of competitors and, after doing this, you may realise that some changes in design of your product is necessary.
  • Besides products and markets your plan should cover human resources, knowledge and skills, capacity, logistics and packaging among others. Keep in mind that success doesn’t build exclusively on product quality and price but on marketing too.
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