With its 28 member states and the likelihood of further expansion, the European Union represent an enormous trading opportunity for UK firms looking to export. The EU is essentially a single market designed to make trade between member states as easy as possible. Unlike the USA, many of the biggest EU markets, such as France, Germany and Spain, are only a short distance away, linked to the UK by ferry, trains and short-hop flights. Put simply, it’s relatively easy to move products and people to EU markets.
But such advantages do not mean finding a market and selling your product within the EU will be easy. Exporting to an EU member state requires the same level of focus on market research, pricing, product positioning and sales as any effort to exploit demand in far-flung territories such as the US, Brazil or China. Although we’re not quite there yet, the aim of the single market is to create a regulatory environment in which trading with a buyer in, say, Lyon or Berlin will be as easy for a UK company as selling to a customer in Aberdeen or Birmingham.
Arguably, the biggest attraction of the European Union market is the simple fact that when goods are shipped across borders there are no duties to pay. This can make a considerable difference to both sales and product positioning. In the wider world, duties are often imposed to protect local industries by ensuring that imported goods are sold at an unfavourable price compared to domestic products, but this is not the case within the EU.
A relatively simple VAT system is also hugely helpful. When you sell to European consumers or VAT-registered businesses you can record the transactions on your own tax return forms. However, when selling to individuals or non-VAT-registered businesses, tax is charged at the UK rate. When selling to a VAT-registered company elsewhere in Europe, that company will pay tax at the local rate.
The introduction of the Euro was intended to simplify trade by removing the need for currency conversions within the EU. However, the currency has always been controversial and over the last few years we have seen as yet unresolved problems arise relating to the maintenance of a single rate of interest across regions containing very different domestic economies. The Euro Area or ‘Eurozone’ is a union of EU member states that have adopted the Euro as their sole currency. Seventeen member states have joined so far, and the remaining 11 are expected to join once they fulfil the criteria, unless an opt-out has been agreed, as is the case with the UK.
“Although the EU is a single market, UK exporters must be sensitive to the fact that the economies of each member state runs at a different speed and maintains a different business culture.”
Establishing common product standards has also made it easier to export to the EU market. A product compliant with UK law is unlikely to fall foul of standards elsewhere in the EU, although certain modifications may be required.
Understanding the market
As when exporting to any market, it’s vital to identify your potential buyers. From a B2B perspective, this means researching prospect businesses, understanding what their requirements are and with whom they trade, while also gathering as much information as possible about their purchasing procedures and buyers. You must also look at what your competitors are offering.
For consumer-facing companies, it’s a question of understanding who your consumers are, where and how they buy, and how your product might fit within the existing marketplace. Your consumer research may reveal that you can reposition your product to greater advantage. For example, a handbag that might be considered a middle-market choice in the UK may be regarded a premium product elsewhere in Europe where incomes are lower. It’s also important to understand the routes to market, including distributors, agents, franchising, etc.
Research is best conducted on a country-by-country basis. Although the EU is a single market, UK exporters must be sensitive to the fact that the economies of each member state runs at a different speed and maintains a different business culture.
Pricing and finance
Pricing is always tricky, particularly in relation to what your competitors are offering. Formulae such as ‘cost plus’ or ‘competition-based’ can help, but comprehensive research will provide the best possible guide.
You will also have to decide whether to charge in the local currency. As a rule of thumb, most UK exporters prefer to price in sterling, while customers prefer their domestic currency. You may end up having to price in the overseas currency and accept a certain amount of exchange rate risk, which must also be factored into the pricing. The good news on this front is that if you begin to trade across multiple EU countries, the chances are you’ll be pricing in just one currency: the Euro.
There are some financial risks associated with export to the European Union. In some European countries (notably those in Southern Europe), customers often expect generous credit terms and may take up to three months to pay after receiving an invoice. Chasing late payments can also be much more complicated when you’re dealing with overseas buyers.
So before pressing ahead with an export deal, it’s important to have sufficient finances in place to cover upfront costs and any cashflow problems associated with long payment terms or late payment. Invoice finance in the form of factoring is an increasingly popular solution here and it can be set up on a cross-border basement with the provider taking on the responsibility of chasing late payment.
Europe offers huge opportunities, but preparation – as always – remains crucial to export success.
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