Indirect exporting is often an easier market entry strategy to implement than direct exporting, especially for small and medium-sized businesses.

Indirect exporting is the other trading market entry strategy an organization may choose, and requires fewer dedicated resources than direct exporting. In indirect exporting, organizations sell to an intermediary in their own country. This intermediary then sells the goods to the international market and takes on the responsibility of organizing paperwork, permits, shipping and marketing.

By using an intermediary, the organization avoids various types of risk, including currency risk. There are several intermediaries that may be used in indirect exporting, including trading houses and confirming houses.

Trading houses

Trading houses are firms that buy goods from manufacturers specifically to export them. They have a long history, with the first established in Italy about seven hundred years ago. As they developed, they prompted worldwide exploration and trade.

The Hudson’s Bay Company was one of the trading houses responsible for the fur trade that opened up Canada to European exploration and settlement. The East India Company, another trading house, played a pivotal role in establishing British rule in India and was instrumental in opening British trade with China. Foreign firms controlled Japan’s export trade for many years until Japanese trading organizations, such as Mitsui and Sumitomo, expanded and began to control their own country’s trade.

There are hundreds of trading houses worldwide and organizations can work with them for numerous market entry strategies, although they are most likely to be used for indirect exporting. Other ways in which trading organizations can act in a market entry strategy include the following:

• Providing investment funds through their merchant banking operations
• Acting as a foreign buyer for direct exporters
• Becoming a licensee or franchisee
• Becoming a joint venture partner

By using the services of a trading house, organizations relinquish title to the goods they are exporting before they leave the country, and the trading house assumes all responsibility for selling and shipping the goods. This has both positive and negative implications for the manufacturing organization.

On the positive side, the trading house assumes all the risks and costs of finding foreign buyers and delivering the goods to them. The producer is assured of payment when the trading house signs the contract, and does not need to be concerned with anything else regarding the export transaction. Many trading houses specialize in specific types of goods (such as processed foods, electronic parts, or clothing and textiles) or they have developed expertise in certain parts of the world. This means they might be able to find a broader market for the goods they sell or get a better price than the producer would.

On the negative side, the manufacturing organization has no control or influence over how the product will be positioned, marketed, priced and delivered. Therefore, the trading house option is not suitable for organizations interested in establishing a reputation for their products in a foreign country or in developing market share abroad. The trading house is within its rights to sell the products to foreign buyers who may repackage and relabel them to the point where they can no longer be identified as the producer’s.

Indirect Exporting Through Trading Houses

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Confirming houses

Confirming houses or buying agents represent foreign firms that want to purchase products or services. They seek to obtain the desired items at the lowest possible price and are paid a commission by their foreign clients. In some cases, they may be foreign government agencies or quasi-governmental firms empowered to locate and purchase desired goods. An example is a foreign government purchasing mission.

A good place to find these agents is through foreign government embassies and embassy websites.

Finding and choosing the best indirect intermediary for your business

In many cases, an interested intermediary will contact the organization. If an organization wants to move into indirect exporting, it can find intermediaries using the following strategies:

• Search exporter’s associations
• Contact chambers of commerce and trade associations
• Contact foreign embassies and trade commissioners in target markets
• Access commercial databases of organizations operating in target markets
• Participate in international expos and trade shows

Organizations reflect on their situational analysis and risk analysis when deciding what type of intermediary they will pursue. Their choice will depend upon the type of product or service they offer and the target markets they are trying to reach.

Regardless of the type of intermediary, organizations must identify their own goals and perform due diligence before choosing a particular intermediary. They should outline the specific selection criteria to be used in the selection process. A commercial risk analysis should be completed on any potential intermediary.

Next steps in your indirect exporting process

In some cases, there are programs and services organizations can access to assist them with their indirect exporting goals. Government and non-governmental programs may provide organizations with financial support. As indirect exporting does not require any complicated financial risk, most organizations will approach their local financial institution if they require additional resources for launching an international initiative.

As with any new venture, organizations must make sure they are prepared to implement the required processes and meet the new requirements. For indirect exporting, organizations must ensure they can meet contractual requirements related to quantity and quality, such as products being compliant and properly labelled. The intermediary may also require documentation that is new to the organization.

Some organizations will always use indirect exporting as their only market entry strategy. For others, indirect exporting can be a first step to developing competence and confidence in international trade. As this competence and confidence grows, organizations may consider using multiple channels of market entry to achieve their goals.

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To select the best strategy, organizations must consider the markets they have selected, the products or services they wish to sell and their overall aims for international trade. The range of elements to consider might seem daunting, but without a full analysis of the situation for each potential market, an organization might select an inappropriate strategy.

Two of the most popular strategies are direct and indirect exporting. Which one, if either, would make the most sense for your business?

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What is direct exporting?

Direct exporting involves an organization selling goods directly to a customer in an international market.

Organizations can sell to a wide range of customers, some of whom act as intermediaries in the target market. Even if an intermediary is involved, the export is still direct because the intermediary is a customer based in the target market.

Some of the most important customers for direct-exporting organizations include importers, wholesalers, distributors, retailers, government procurement departments and consumers themselves.

Advantages and disadvantages

Direct exporting as a market entry strategy has its advantages. The organization:

• Controls all its manufacturing processes, which are based in its facilities, thus avoiding the risks associated with production overseas (e.g. poor production standards, use of child labour) and the risks associated with political instability in a foreign market
• Can withdraw from the market relatively cheaply and easily, if needed
• Can obtain in-depth information about trade in the target market, enabling it to make future decisions about whether to invest in facilities in the market

However, direct exporting can be difficult, especially for organizations new to international trade. Organizations should consider the following disadvantages:

• The need to invest significantly in researching market information and preparing marketing strategies
• A lack of exporting skills and experience leading to expensive errors.
• The difficulties breaking into target markets in trade blocs
• The difficulties the exporting organization will have when the domestic currency is very strong against the target market’s currency

The inability to rely on intermediaries, who will be representing other organizations and may not operate in the best interests of the exporting organization

When is direct exporting a suitable strategy?

Direct exporting is a simple entry strategy, potentially suitable for organizations wanting to expand their market share or maximize profits. An organization of any size can start direct exporting activities. Although not all will have the necessary resources in terms of skills, knowledge and finances. Direct exporters must make the export sale, arrange for shipping and insurance, organize permits and licences, prepare all the paperwork and process the letter of credit that provides for payment. These tasks are time consuming and require skill to perform correctly—mistakes can result in serious business losses. To appropriately promote and price goods and services, considerable time must be spend researching the market.

Direct exporting can be very successful if the selected market is readily accessible and has similar regulations and customs to the organization’s country. If the target market has different regulations, legal systems, cultures or ways of conducting business, and the organization is inexperienced in international trade, direct exporting might be very difficult and risky. In these situations, organizations should consider another strategy.

Depending on the market selected, the distance goods must be transported and the means of transportation, direct exporting can make goods too expensive for customers to purchase. These factors might also seriously impact profits made in the market.

With direct exporting, organizations must be comfortable with a substantial element of risk.

A direct exporter of products must assume responsibility for all losses during shipping and storage overseas. Substantial amounts must be invested in marketing and sales activities, and there is a risk that these expenses will not be recouped if the venture is not successful. Political and economic instability in the market will also present the risk of business losses.

Direct exporting does provide the exporter with a lot of control over how the product is positioned and sold. It also presents an opportunity for high profits when markets are chosen carefully. If an organization is interested in long-term growth in an international market, direct exporting can be a suitable entry strategy because it enables the organization to gain knowledge of the market and develop distribution channels.

What is indirect exporting?

Indirect exporting involves an organization selling to an intermediary in its own country. This intermediary then sells the goods to the international market and takes on the responsibilities. These responsibilities include organizing paperwork and permits, organizing shipping and arranging marketing.

An indirect exporter can sell to the following intermediary customers: export houses (trading houses or export merchants, confirming houses, and foreign organizations based in the organization’s country (buying offices).

Advantages and disadvantages

Indirect exporting is the cheapest entry strategy available to an organization. It is flexible, and exporting activities can cease immediately if required. Its greatest advantage is that the intermediary organizations handle all the exporting activities. No exporting experience or skills are required; and the intermediary organization takes on all the risks associated with shipping and organizing payment from the international market.

The main disadvantage is that the control of activities overseas transfers to the intermediary organization. Organizations interested in expanding into a target market will not gain valuable knowledge about how that market functions. It is also impossible for organizations to establish after-sales service or value-added activities. This can have an adverse effect on their reputation in a foreign country.

When is indirect exporting a suitable strategy?

This market entry strategy should be considered by organizations that want to enhance cash flow or increase profits. However, it will not be useful for those that want to develop long-term market share. It is also not suitable for organizations with a service to sell rather than a product.

Organizations of any size can engage in indirect exporting, but it’s a strategy often chosen by smaller and newer organizations.

This is because once the intermediary business to sell to has been identified, the organization does not have to worry about additional planning, marketing or expenses. It is also a very useful strategy for organizations that cannot deal with considerable risk. With indirect exporting, the buyer assumes all risk associated with exporting and selling the product.

Organizations that choose an indirect exporting strategy must be able to make product adjustments as dictated by the businesses purchasing them. Buyers will also specify delivery times, levels of quality and packaging requirements. If an organization cannot meet these requirements, it can lose the deal with the buyer.

Because the buyer takes responsibility for exporting and selling the goods, the organization has no control. The buyer decides the market products are sold to, how they are sold and marketed, and the price obtained for them. If organizations must control the export or marketing of products to maintain their reputation, this market entry strategy is unsuitable. Organizations interested in modifying their products to meet demand in other markets will find indirect exporting unsuitable. This is because they will be unable to develop direct contact with the end user.

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