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ABCs of EMCs

By Courtney Fingar

In the era of the internet and in-house sales operations, is there a space for export management companies?

Export management companies have been around for decades, and have changed little in form or function over the years. But they remain something of an enigma to many U.S. manufacturers, says Nelson Joyner, a former EMC proprietor and now chair- man of the Federation of International Trade Associations, which represents some 300,000 North American companies and organizations involved in international trade.

The FITA estimates that there are about 600 EMCs in the United States, with each representing an average of 10 suppliers, which means about 6,000 U.S. companies are using EMCs. But Joyner says there are "thou- sands upon thousands "of companies that should be using EMCs yet aren't, including many large companies proud of their in-house sales operations. He attributes this to "lack of knowledge of what an EMC does and how to get in touch with them."

U.S. firms trying to sell goods in Asia may benefit most from the export expertise of an EMC because of the difficulty in cracking new markets and in overcoming language and cultural barriers. So manufacturers who are relying on a sales rep stuck behind a desk in the home office to make sales in Asia, and then wondering why their products aren't flying off the shelves in Taiwan, may want to look into what an EMC could do for them.

Below are a few basics on EMCs:

Who's Agent?

EMCs are international trade intermediaries that represent U.S. manufacturers in foreign countries. Although most EMCs are independent businesses, they vary in size and scope. The larger ones may manage lines from 50 or more manufacturers in a variety of industries and sell to most everywhere in the world. Some may represent only a few major clients, or principals, in certain export markets; others are generalists.

Irmo, S.C.-based Transcon Trading Company, for instance, has been in business more than 20 years, and last year made sales in some 70 countries. Although Transcon deals mostly in animal health products, it also represents a company that makes go-carts and another company that makes bug zappers. "We don 't feel uncomfortable in any region," says president Jerry Smith. Indeed, the company 's staff speaks 10 different languages.

Similarly, Edward Benhoff, president of TradeCom International, says his EMC will "sell anywhere in the world where people have an interest in buying and the money to pay for it."

Although the terms EMC and ETC - export trading company -are often used interchangeably, they are not the same thing. An ETC handles mainly procurement for foreign clients. EMCs, on the other hand, while sometimes hired to handle procurement, generally focus on making sales, functioning as a de facto agent for exporters. Another difference is that whereas an ETC generally has no loyalty to one supplier or another, and will work with any company that can meet the needs of the buyer it represents, an EMC represents exporters on an exclusive basis.

Matters of Degree

One way to understand EMCs is to look at them essentially as out- sourced export departments, which function in foreign markets much like a sales rep or exclusive wholesaler would in the domestic market. EMCs will usually represent all of a manufacturer 's product line and receive exclusive rights to sell those products overseas. Although some have actual foreign sales and ware- housing subsidiaries, most just appoint export representatives and networks of exclusive distributors and dealers in each foreign market.

An EMC operates in one of two ways. Under the more common approach, the EMC actually takes title to the goods, acting as an exclusive distributor on a "buy-sell "basis. The EMC buys products from the manufacturer at a set price and then resells them to foreign customers at prices established by the EMC. The EMC is therefore responsible for invoicing and bears the risk of non- payment. The EMC pays the manufacturer on agreed terms -usually similar to the manufacturer 's terms for their best U.S. customers. When the EMC acts as a distributor, the manufacturer may have little or no control over the export price and may not even know who the foreign customers are. However, many EMCs coordinate with their clients on both pricing and customer relations, especially if the products are highly technical.

Other times, an EMC will act only as agent or sales rep and never takes title to the goods. Invoicing is done in the name of the manufacturer, and the EMC assists the manufacturer with all the details of the export transaction. The manufacturer bears the risk of nonpayment and may be asked to extend credit to the foreign customer. The EMC may suggest an export price, but the client has final say on price and whether to accept the order.

Matters of Degree - Living off the Middle

EMCs sometimes request a monthly retainer, especially in the early stages of establishing export sales. Generally, however, hiring an EMC involves little up-front costs. Agent EMCs earn a flat commission for their sales efforts. The rate varies according to industry, typically about 10%for consumer products and 15% or more for industrial products.

EMCs working under a buy-sell arrangement will want a price as low as what a manufacturer charges distributors in the United States, plus an extra discount. EMCs that do accept the manufacturer 's best U.S. price will usually have to mark up the product more than a U.S. distributor in order to make a profit, Joyner says. "The manufacturer doesn't have marketing costs because that 's the EMC's responsibility, so the manufacturer will hopefully reflect that in their pricing. "There is a limit to how high, however, he says. "EMCs are going to try to ensure that manufacturers don 't price themselves out of the market."

The buy-sell approach has become more popular in recent years, and EMCs don't do as much commission work as they once did. However, EMCs still like to represent larger, established firms on a commission basis because it is better to have a well-known name attached to the product, rather than that of a trading company.

In addition to commissions or discounts, an EMC may charge for other services. For example, some EMCs will ask for "special event "contributions. One example might be a 50/50 sharing of costs to exhibit a company 's product in a foreign trade show. EMCs may require a contribution for Advertise and other promotional activities, usually on a shared basis.

Orphaned by the Internet

The Internet and other improvements in communication capabilities and technology have cut into the number of companies that use EMCs. The Internet and other improvements in communication capabilities and technology have cut into the number of companies that use EMCs these days. "It 's not as easy [to recruit new business] as it was at one time," admits Benhoff of TradeCom. "There are other ways for companies to learn export markets now." Practically speaking, however, Benhoff insists that using an EMC is still one of the best and least expensive ways to get into international markets if you have good products. Especially in the complex markets of Asia, Internet research and online matchmakers are no substitute for the kind of first-hand knowledge and long-standing relationships that a good EMC can bring to the table, Benhoff says.

Since a good EMC presumably has already laid the groundwork and established a presence in the market, its clients can take advantage of that without investing their own time and resources. "Why reinvent the wheel?" says Smith of Transcon. "If an EMC already knows the industry and has a customer base, they can just plug into that at no extra cost."

In addition to making the sales, an EMC also takes care of all the little details that can bog down a novice exporter, like how to answer inquiries, prepare quotations, enter orders, handle shipping and receive payment.

One of Smith's clients, Mass.- based manufacturer WF Young, says that 's exactly why they signed on with Transcon. The company, which sells its topical products for humans and horses in 37 countries, switched from having its own export sales officer to using an EMC in 1991 "because of economics -the cost of the in-house person versus letting Transcon do the work, "says general manager Nick Woods. The EMC also simplifies WF Young 's job, he says. "They do all the paperwork. We just sell them the product and they take care of it," he says.

Smith suggests a threshold of $3 million in export sales to a particular market before a company really should even consider handling its export management there in-house. This rule holds no matter the company 's size, he says.

But EMCs are not the answer for all export situations, Joyner cautions. Because many EMCs are relatively small and have limited financial resources, they may not be able to adequately stock your product, or to offer extended financing to foreign customers. Also, EMCs naturally focus their efforts on those products that bring them the most profits, so newer lines, or those with limited potential, may be overlooked. And when working with an EMC, the manufacturer must be prepared to relinquish much of the control over customers, prices and the promotion strategy.

Who Chases Whom?

Though there are hundreds of EMCs out there, they do not necessarily make themselves easy to locate. Most are independent, low- profile and rarely advertise. To add to the confusion, they are often categorized with other types of export intermediaries that may not be suited to handling your products on an extensive basis.

When looking for an EMC to represent your firm, a good first step is to visit FITA's website, which has a directory of EMCs that is searchable by product capability ( Your industry trade association and trade publications, as well as the regional U.S. Department of Commerce Export Assistance Center, should also be able to suggest proven and reputable EMCs.

Once you've picked out a few candidates, talk to them about their services and fees. Find out what other companies the EMC represents; talk to those companies and ask how their current product lines are doing. Much like selecting a U.S. distributor or agent to make domestic sales, a manufacturer should choose an EMC that handles products that are similar but not directly competing with their own products. "It 's like finding a good rep in the United States, "Benhoff says. "You don 't just take the first one that comes wandering down the pike."

But in the end it 's usually the EMC that chooses the manufacturer, not the other way around."[EMCs] don 't add products without carefully evaluating the potential," Joyner says. "The EMC wants to make sure there truly is a market for the product, that it fits with current distribution channels and that the supplier is ready to support necessary marketing activities."

Narelle E. MacKenzie, William Major and Winfred Heitwritter are with the accounting firm of McGladrey & Pullen. Narelle MacKenzie is with San Diego, California office, William Major is with the Schaumberg, Illinois office, and Winfred Heitwritter is with the firm's San Bernadino, California office. This article previously appeared in the April 2000 edition of The Tax Adviser.

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