Evaluating trends and controlling risks of importing
Share current LOB: SmallBusiness
The United States is the world's largest importer, recording over $2.7 trillion of imported goods and services in 2013. Imports of food and beverages, capital goods (including machinery, tools, aircrafts and parts), automotive vehicles and consumer goods were the highest on record in 2013.1 China remains the number one country of origin for U.S. imports, followed by Canada, Mexico, Japan and Germany.2
Importing has grown dramatically for US businesses over the last quarter century. As companies took advantage of labor rate arbitrage and began outsourcing manufacturing, export oriented developing countries became our workshops, supplying more than $38 trillion of imported goods.3 In a little over 10 years, since the turn 21st century, imports by US businesses have increased close to 200%. 3
Just because the numbers are large doesn’t mean that international trade is only for large, multi-national companies. Advances in technology, online trade services, free trade agreements and government export promotion programs have spawned a new breed of importers within the U.S.: small and mid-sized enterprises. A few short years ago, many small and medium-sized businesses didn't have access to many of the advanced systems or in-depth information that would allow them to expand their businesses by importing desirable and reasonably priced goods and services.
Today, 97% of all known US companies who import are small and mid-sized enterprises with less than 500 employees, accounting for 31% of imported goods value. The largest year over year increase in the number of companies importing also comes from the segment with 100 to 500 employees. According to SunTrust research , more than a third of companies plan to harness the power of international business to grow and increase profits. That leaves many looking to identify the potential pitfalls and advantages of importing goods and services into the United States.
If you are considering importing as a strategy to build growth for your business, you will need to fully understand the changes taking place in the world of importing today and in the future, as well as the potential risks, in order to be successful.
Recent trends in importing
Traditionally, the market demand for imported goods has been evaluated on three factors: Price, scarcity in the local market and/or desirability and prestige. The latter two factors remain fairly consistent indicators of the value of an imported item - products that are not manufactured, grown or produced locally must be imported to match demand; just as certain foreign products hold prestige among the buying public (such as French wines, Italian designer clothing, Egyptian cotton). Recent trends, however, suggest that low cost pricing is no longer a singular reason to import items.
Consciousness of sourcing
Cheap labor in developing countries has certainly made many items more affordable than those that are domestically produced. But recent news stories have drawn attention to the sub-standard working conditions some foreign companies utilize when producing their products. More and more global importers are realizing that their importing business can't be just about low cost, they have to understand who their suppliers are, how they do business and the sustainability of the entire process - from manufacture to shipment. Finding the right partners is vital to developing a successful international trade business.
Accelerating Innovation Cycles
Companies today must move at a faster pace than ever before. With improved technology, communications and available resources in countries of origin, the cycle of innovation has become much more rapid. In the past, a product might remain current for five or more years. In today's changing world, companies must develop and supply new products faster as well as determine how to integrate those products more quickly.
Supply Chain Integration
Developing a network of businesses and suppliers that provide everything necessary for the development, manufacturing and delivery of your imported goods is a relatively new phenomenon in international trade. Efficient supply chains provide companies with improved inventory management, visibility into suppliers' business procedures, improved planning systems and high levels of customer service. The challenge with the international market is that a large portion of the foreign suppliers with whom your business will contract are not used to this type of integration. They rely on what is, for them, more traditional (and time-honored) forms of contracting and payment.
Managing the risks of international trade
Conducting business overseas can be lucrative but it comes with numerous risks, such as longer cash-to-cash cycles, currency fluctuations and possibilities for loss of goods being purchased. "Successful companies take the time to understand four of the most prevalent international sourcing risks, and use the many tools available to mitigate them," says Susanne Keough, Senior Vice President and head of the Global Trade Solutions division at SunTrust Bank.
Buying and selling in different currencies exposes a business to changes in the cost of money. It is not uncommon for currency prices to change significantly during the life of a contract. These changes can radically impact top and bottom lines. Keough also explains that "within some companies, there is a misperception that if paying in U.S. dollars, the business will avoid any currency risk. This is simply not true. A conversion is still taking place on the other end of the transaction. Companies need to recognize that fluctuations will occur to both currencies and plan accordingly."
Most U.S. businesses operate domestically on open credit terms (or cash on delivery) and Are not familiar with managing new risks presented by international trade. The track record of overseas trading partners can be hard to determine, even if you feel that a partner is trustworthy, there are still things that can happen to spoil the deal. "Even if it is just a wire transfer, or a simple transaction, it is important to think about what is going on in the country of origin and how that environment could affect your shipment," Keough says. "Having a trusted partner who is knowledgeable about your business and the market from which you are sourcing is a priority when importing goods internationally."
In a volatile world, political situations can occur very quickly. As an importer, you must be aware of the potential and be prepared to react just as rapidly. Political unrest may impact your ability to not only move the goods you have purchased out of the country, but also any money that may be parked there to pay for those goods.
Operations in foreign countries
Many times, operations in foreign countries will differ from what businesses are accustomed to in the U.S. Different languages, cultures, business practices, accounting methods or customs regulations can easily derail the most prepared importing plan. The World Bank's Ease of Doing Business rankings (http://www.doingbusiness.org/data/exploretopics/trading-across-borders) provides helpful insight into the time and cost associated with importing goods from 189 countries. However, finding an experienced trade partner knowledgeable in your particular business and the country from which you wish to import can be invaluable.
Expertise matters in trade
The saying 'it's not what you know, but who you know' applies particularly well to Global Trade. To be a successful importer, your company needs knowledge of economies, business environments, appropriate financial products and services and much more. Our Global Trade resources guide gives you additional information on where you can go to find the information your company needs to create a successful import business. A critical factor to your company's success is also the selecting the right partner to assist in developing Global Trade strategies, both domestically and locally in the chosen market.
Keough explains SunTrust's outlook on global trade services as "consultative listening and understanding of clients' needs in order to help them avoid pitfalls while growing their international business. Our people are technically sales people," she goes on to detail, "however they have enormous background and experience in the foreign trade field. We provide the knowledge of international markets so that the client will understand how they can navigate the various risks found in selected markets in order to achieve their growth objectives."
Building long-term partnerships with knowledgeable experts should be a primary goal when embarking - or expanding - your company's global business opportunities. The key to success is to find and work with partners who can simplify the complexity of global business and accelerate your progress by bringing years of trade experience and local market knowledge to your management team.
Talk to your SunTrust relationship manager or global trade specialist about your global expansion plans. SunTrust’s deep expertise in working with businesses expanding global trade – both importing and exporting - and its solutions supporting international trade can help you move quickly to take advantage of opportunities in today’s markets.
2 U.S. Department of Commerce, Census Bureau, Foreign Trade Division, http://www.trade.gov/mas/ian/build/groups/public/@tg_ian/documents/webcontent/tg_ian_003364.pdf. Accessed 9/11/14
3 U.S. Census Bureau, U.S. International Trade in Goods and Services, Balance of Payment Goods and Services: United States, Seasonally Adjusted Imports; data extracted on December 17, 2014
4 U.S. Census Bureau, Statistical Abstract of the United States: 2012; released 2014
5 SunTrust Q2 research of 500 business owners, $2mn- $150 million in revenue
This content is educational in nature and is not an advertisement for a loan or business solicitation. It does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
Most financial professionals are more comfortable delivering services than promoting them. At the end of the day, demand generation — your ability to generate interest, inquiries, new leads and proposals — is a good thing for your practice and your reputation.