Listing | WEGO Research Institute
In the context of overcapacity and international supply chain adjustment, going overseas has become a choice that many small and medium-sized enterprises have to make.
Although the whole process is difficult, small and medium-sized enterprises can still find differentiated living space by relying on the supply chain of large enterprises, focusing on smaller market segments, and developing non-popular countries or regions, and even gradually become bigger and stronger.
Small enterprises have to face a lot more "incremental problems" overseas than "incremental markets", including multiple challenges such as risk compliance, capital, supply chain, employment, and exploitation of Chinese and foreign Internet platforms.
In order to survive and thrive in overseas markets, SMEs have a lot to do. However, the current situation shows that the vast majority of small and medium-sized enterprises are not aware of and prepared for these problems.
At present, most small and medium-sized enterprises choose to use e-commerce platforms when entering the international market, which is a relatively simple solution. Secondly, localization - that is, being able to truly integrate into the overseas business ecology is crucial, which can directly determine the upper limit of the enterprise in the international market. Finally, companies need to build a solid enough sales channel overseas that they can control, which can help them master their own development and ensure long-term competitiveness.
01 Relying on the platform: the choice of most small and medium-sized enterprises
In 2023, the total export value of mainland trade in goods will reach 23.77 trillion yuan, an increase of 0.6%, while the total export value of cross-border e-commerce will rise to 1.83 trillion yuan, an increase of 19.6%, far exceeding the growth rate of traditional foreign trade exports.
Behind this growth, SMEs have played a role that cannot be ignored. As a bridge between the domestic industrial chain and the overseas consumer market, cross-border e-commerce has greatly lowered the threshold for small and medium-sized enterprises to export goods overseas, opening up a broader market space for them.
In the traditional foreign trade model, enterprises need to go through a series of cumbersome intermediate links such as quotation, ordering, payment, stocking, packaging, customs declaration, etc., which are not only complex processes and long account periods, but also face multiple challenges such as rising raw material prices, surging shipping costs, and sharp increases in labor costs in recent years. Against this backdrop, SMEs struggle with complex processes and lack bargaining power at every stage. The rise of cross-border e-commerce has enabled small factories and small sellers to reduce various consumption in intermediate links, and the threshold for goods to go overseas has been effectively lowered.
In addition, cross-border e-commerce has also greatly reduced the channel cost of small and medium-sized enterprises, and has the opportunity to enable enterprises to achieve brand breakthroughs.
Under the traditional model, channel resources are often in the hands of overseas importers, wholesalers, and retailers, and large enterprises can obtain channel advantages through equity participation or acquisition of overseas local enterprises, while small and medium-sized enterprises are usually in the production and processing links with lower profits due to the lack of channel resources, and there are products but lack of brand influence. Nowadays, through Temu, Amazon and other e-commerce platforms, enterprises can not only use online channels to build online brands, but also accurately collect and analyze customer information and carry out targeted product development, which not only enables the brand to be recognized by overseas markets more effectively, but also greatly facilitates the international promotion of the brand.
For example, Chuangxiang 3D, which has been deeply involved in the 3D printing industry for many years, was originally founded in 2014, mainly engaged in OEM and ODM order business, and after entering Amazon in 2019, Chuangxiang 3D was able to move from behind the scenes to the front of the stage, directly targeting C-end consumers, and now the company's annual revenue has exceeded 1 billion yuan, with a cumulative shipment of more than 5.5 million units, becoming the first echelon brand of 3D printing.
Although cross-border e-commerce provides opportunities for small and medium-sized enterprises to go overseas, it is also accompanied by many challenges, the most direct of which is the fierce competition in the same industry on the platform.
Source: Hugo.com
According to the survey data of Hugo.com, 58% of cross-border sellers' revenue will decline year-on-year in 2023, and these sellers with declining performance are mainly small and medium-sized sellers. At the same time, 73% of sellers will not increase their profits in 2023, and some sellers whose profits will increase are also due to the expansion of revenue scale, but the actual gross profit margin has declined seriously.
With the increasing number of sellers settled in e-commerce platforms, sellers continue to compete in product quality, product diversity, marketing promotion, operation, pricing, etc., the prices of Chinese goods on overseas e-commerce platforms continue to fall, and sellers' profits are seriously eroded in the competition.
High operating costs are also one of the problems faced by small and medium-sized enterprises. Taking Amazon as an example, the total rate of its cross-border e-commerce platform consists of three parts: transaction commission, advertising fee and fulfillment service fee, and the comprehensive rate may exceed 50%.
For small and medium-sized sellers, they are mainly active in domestic cross-border e-commerce platforms such as Temu, which mostly adopt a fully managed model, although advertising fees and transaction commissions are omitted, but once merchants join Temu's supply chain, it means that they lose the pricing power of products and can only be forced to participate in the platform's low-price competition. In May 2023, Temu launched a new bidding system that already hints that only through the low price strategy can sellers get traffic and orders.
Driven by this mechanism, merchants have to keep prices extremely low, and it is becoming more and more difficult to make a profit.
02 Localization: the key to the internationalization of SMEs
If you want to expand your business and implement production capacity overseas, localization is a step that SMEs must take, and it is also the key for SMEs to truly achieve internationalization.
Before entering other countries to carry out physical operations, SMEs have to do a lot of work, including feasibility analysis, market research, user research, solving legal and financial problems, cultural adaptation, etc. Finally, companies may also need to restructure their products and services according to the realities of the target country.
Market Study:
The first thing to do in market research is to assess political risks. Some SMEs tend to ignore political risks when deciding on a country to go overseas, but in fact this is crucial in their overseas business. If possible, try to choose a country with a stable political environment and friendly relations with China.
For example, in Myanmar's Taiping River hydropower project, long-standing tensions between the Kachin Independence Forces and the Burmese government army have intensified, leading to military confrontations. The conflict escalated, culminating in the destruction of a bridge over a hydroelectric dam by a Chinese company. If it is a small project, it is even more difficult to avoid the poison of various conflicts.
In addition, companies must also deeply analyze the macroeconomic and industry conditions of the target market. This includes a relatively comprehensive understanding of economic potential, demographics, industrial layout, business environment, industry size, growth trends, profitability, ecosystem, competitive landscape, and relevant laws and regulations.
There are many angles that can be analyzed from this point. Taking the data of listed companies as an example, in 2023, the overseas revenue of the electronics industry of listed companies will account for more than 50%, and the overseas revenue of household appliances, power equipment, automobiles, and basic chemicals will also account for more than 30%, and the proportion of overseas income of listed companies is high, reflecting that these industries have been relatively mature and large-scale, so small and medium-sized enterprises in these fields can consider avoiding the mainstream market and doing non-mainstream markets.
In market investigation, on-site inspection is an indispensable part, through which enterprises can have a more real impression and systematic understanding of the target market, so as to better conduct business. If you don't have any connections in the local area, it is more realistic to sign up for various study tours for a fee.
The picture shows the inspection activities organized by Linyi Mall in Saudi Arabia
User Research:
Market research helps companies grasp the market overview, and user research directly enters the "main research" link of product supply. The first task of user research is to create a clear user portrait, and the more accurate the description, the better.
To C companies need to integrate and purify user data on various platforms, and label users' gender, age, family status, spending tendencies, economic strength, payment behavior, and loyalty.
For To B enterprises, the target customer group is usually clearer, but the trust crisis faced by small and medium-sized enterprises when doing To B business overseas will be relatively large, because domestic small and medium-sized enterprises basically do not have any brand influence overseas. In this case, in addition to basic sincerity and patience, it is important to find a way to reach customers through the faces of local people.
In terms of research methods, in addition to common methods such as questionnaires, interviews, media, and research reports, small and medium-sized enterprises can also choose overseas crowdfunding platforms. The users of overseas crowdfunding platforms are a group of "players who are willing to invest time and energy into new and interesting products", and small and medium-sized enterprises that lack funds can get the support of the first batch of "seed users" on overseas crowdfunding platforms.
Solving legal and financial problems:
Small and medium-sized enterprises should fully consider legal and financial issues at all stages of going overseas.
For example, when it comes to data protection, the laws of many countries are stricter than they are at home. In the European Union, the use of personal information must be based on legitimate purposes and with the explicit consent of the data subject, and violations of the regulations can result in heavy fines of up to 20 million euros.
In addition, products need to meet various qualification and certification requirements before entering different markets, and standards vary from country to country. For example, home energy storage products need to obtain UL certification for export to North America, CE certification is required for the European market, and Australia and Japan recognize CEC and JIS certifications respectively.
In the process of going overseas, enterprises may also face compliance and fraud risks. According to a survey by the Ministry of Commerce, the bad debt rate of China's export business is as high as 5%, 10 to 20 times the average of developed countries, and many startups are unfamiliar with overseas markets and have encountered fraud in channel development and consulting services. Some overseas "Chinese Chamber of Commerce" organizations have also been exposed to profit mainly by defrauding Chinese companies, which requires enterprises to be vigilant and take effective measures to prevent risks when going overseas.
The picture shows the trial of the Dubai wire fraud gang in China
Acculturation:
Enterprises must adapt to the local culture for their overseas products or services, which involves many aspects such as brand name, product design, and employment, which are more complex - different from place to place, from country to country, and from product to product, requiring a high degree of differential treatment and flexible judgment.
For example, in terms of brand naming, domestic companies like short English names, such as DJI, VIVO, etc. But in the West, a brand made up of letters is similar to a brand made up of strokes in China, and the West is more inclined to take brand names made up of words like Facebook and Microsoft, or phrases like small door and matter of fact, which are meaningful and recognizable.
In terms of product design, the preferences of different countries are also different, for example, Japanese consumers like the style of "kawaii", while European and American consumers do not like excessive packaging, and tend to accept more environmentally friendly materials such as biodegradable.
In terms of work habits, there are also significant differences between overseas and domestic work, which means that there are various problems to adapt to when hiring local employees. In Brazil, an employee's annual salary increase is protected by law; In Europe and the United States, although the statutory holiday of Christmas is 15 days, it is generally customary to start the holiday a week in advance, and in fact there may be 22 days; Vietnam's local labor law stipulates a maximum of two hours of overtime per day, and overtime pay must be paid......
In short, when it comes to localization, companies inevitably have to deal with a number of complex issues. Given that these issues can drain a lot of energy and resources from SMEs, it is a good idea to leverage the expertise of a third-party service company.
Overseas employee management is a common problem faced by overseas enterprises
Refactoring products and services:
After market research and acculturation, it is necessary for companies to adapt their products and services according to the results of the survey, so as to jump out of the inertial thinking of the Chinese market and adapt to the specific needs of overseas markets.
In the United States, for example, Pizza Hut, a fast-food brand that specializes in fast food and pulled pizza, has adapted pizza and other meals to a full-fledged meal format to meet local consumers' preconceived notions of Western food such as pizza in China. In terms of domestic enterprises, Pop Mart will launch special and customized products such as Canada's maple leaf and Japan's beckoning cat figures according to the cultural characteristics of different countries and regions.
In the face of the transition from the domestic market to the overseas market, enterprises should first recognize the huge differences between the market environment, competitors and users' language, customs and aesthetics compared with China, and then carry out various adjustments with this mentality. One product or service cannot meet the needs of all markets, and localization strategy and flexible adjustment are the keys to the success of enterprises going global.
03 Build a pipeline: Ensure long-term competitiveness
Small and medium-sized enterprises, especially those in the industrial manufacturing category, benefit from the established e-commerce channel, but at the same time suffer from it.
In addition to the fierce competition in the same category and the high marketing costs that need to be paid, the unified interface and rules of cross-border e-commerce platforms will lead to the blurring of merchants' brand personalities, and it is difficult for merchants to highlight their product characteristics and brand culture through cross-border e-commerce, which limits the personalized development of sellers and the long-term competitiveness of products and brands.
In addition, because consumer data is in the hands of the platform, the autonomy and flexibility of enterprises in responding to market changes will be limited, and the ability to innovate will be restricted. Even with high-quality products and thoughtful services, it is difficult for enterprises to get rid of the labels of "seller" and "merchant", and they cannot stand out from these cross-border platforms, let alone gain a foothold in the international market.
In fact, overseas consumers' dependence on e-commerce shopping is not as serious as that in China, in addition to e-commerce, overseas users generally prefer to buy offline, or place orders on large social platforms and search engines through independent stations. At the same time, due to the perfect credit payment system, overseas users are not worried about the safety of shopping on some independent platforms, which means that small and medium-sized enterprises still have a lot of room to build their own channels after completing the first step of going overseas through cross-border e-commerce.
Even small and medium-sized enterprises (and even some large enterprises) that go overseas through traditional cross-border trade channels cannot actually control their sales channels independently, and it is not uncommon for them to be controlled by local sales and channels.
According to Hugo's research, 22% of sellers have cooperated with overseas offline channels, and 36% of sellers plan to expand offline channels in 2024. At the same time, many sellers have sold more than one e-commerce platform in the past two years, and the trend of multi-platform layout is becoming more and more obvious. Clearly, this is a clear trend that is recognized, although at the moment there is still a relatively limited amount of what people can do.
In addition to cross-border e-commerce, which is the most standardized platform, small and medium-sized enterprises can also consider the following ways if they want to establish channels:
1. Establish an independent station. The independent station is similar to the company's own "official website", through the independent station, the enterprise can grasp 100% of the user's behavior and consumption data, which is an important position for the enterprise to strengthen the brand image and improve profits. However, there will be no natural traffic after the construction of independent stations, and it is difficult to attract traffic in the early stage, which requires high marketing investment, especially paid cooperation with international Internet platforms such as Google, Facebook, and Tiktok. Independent stations are still relatively new to China's small and medium-sized enterprises, and the usage rate is not high, but the proportion of sales among boutique sellers with strong brand power is increasing year by year. Enterprises can consider this model after establishing a certain level of popularity on the e-commerce platform, especially in overseas markets.
2. Enter the supermarket convenience store. Entering well-known supermarkets and convenience stores is an effective way for To C SMEs to enhance their offline brand awareness. However, the threshold for joining chain supermarkets such as Walmart, Carrefour, and 7-eleven is high, and it involves multi-dimensional evaluation of product quality and market potential, so SMEs can consider accumulating good market performance through online platforms to increase their bargaining power for offline entry.
3. Self-operated stores or experience stores. Enterprises that attach more importance to brands can choose to open brand stores or experience stores overseas, but this method has certain requirements for capital strength and management capabilities, and store staff management is a major problem, which requires enterprises to investigate the relevant laws and regulations of the target market in advance and respect the professional habits of local people.
4. Participate in overseas exhibitions and connect with direct customers. In the early stage of establishing a marketing network, small and medium-sized enterprises that do To B business can contact local direct buyers (rather than channel providers) by participating in overseas exhibitions, and find suitable overseas distributors or agents in the process, and gradually establish their corporate image and improve brand awareness through product promotion.
04 Write at the end
At present, small and medium-sized enterprises are standing on the cusp of going to sea. How to correctly understand the risks and opportunities is very important for small and medium-sized business owners.
How to find business opportunities and maintain profits under high operating costs, and how to move forward steadily in a complex international environment, rather than stepping into a river that does not know the depths, are questions that small and medium-sized enterprises need to think about.
Relying solely on cross-border platforms is not enough. If SMEs want to gain a firm foothold in overseas markets, they must localize and actively explore the establishment of their own sales channels to better grasp the market initiative and enhance their long-term competitiveness. This is the right trend, but it is also a process of facing more risks and pressures.
Small and medium-sized business owners need to put in a lot of effort and consider many issues to have a chance to successfully land. But no matter what, it can shine on the international stage and win the recognition and trust of consumers around the world. It is what many entrepreneurs dream of and are willing to invest and sacrifice for it. In many cases, this is more of a mission than a cost-effectiveness or operational safety consideration.