Diversification is an important trade concept. Find out about the advantages to geographically diversifying your exporting portfolio.

Part 1 of 3 in a Series

Diversification: An Exporting Essential

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In this first of a three-part series, Omar Allam, founder and CEO of the Allam Advisory Group trade-consulting firm, explains why diversifying to several different international markets is essential to a company’s survival. After learning how diversification can help you find new opportunities as well as spread out risk, part two helps you get started with Market Diversification Begins with Free Trade Agreements, followed by part three’s Step-by-Step Guide to Diversify Your Canadian Business.

In this article, you’ll discover:

When it comes to diversification, Omar Allam doesn’t mince words. “Diversify or die,” says the founder and CEO of Allam Advisory Group, a global trade consulting firm headquartered in Ottawa. Geographically diversifying where you export — meaning selling into or investing in several different markets at the same time — allows exporters to spread out their risks and opportunities.

“Diversification can help SMEs survive in tough economic times,” Allam said. “With the face of global politics and international trade changing so quickly, Canadian companies need to pivot and commit to doing business in new markets, beyond traditional markets like the U.S. and Mexico. To sell globally, you need to target regions that will serve as springboards to other fast-growing markets.”

“Diversification can help SMEs survive in tough economic times.”Omar Allam, Allam Advisory Group

Canadian companies tend to concentrate their trade efforts on the U.S. A full 76 per cent of Canada’s goods exports go to the U.S. as do 55 per cent of service exports such as software, transportation, accounting and financial services.

But with the Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union expected to come into force this spring, and with a degree of political uncertainty in the ever-important U.S. market, there’s no better place to do business, Allam said. Today, only 7 per cent of Canadian goods exports go to the EU.

“You’ll soon have access to the world’s largest trading block with 500 million consumers,” he said. “And using Europe as a business hub, you can move goods and services into EU countries and beyond its borders as well.”

If he were designing a Europe strategy for a Canadian company, Allam said he would also leverage EU trade deals either directly with other countries or regions where companies have a competitive advantage. “If you buy an existing business in Europe, or set up a manufacturing plant, research and development facility, or even open a sales office, you’ve increased your chances of doing business in other markets across Africa, the Middle East and Gulf Cooperation Council.”

The EU has free-trade agreements with much of the world, he says, making it an ideal way to compete more effectively and export more to countries and regions outside the EU.

“Diversifying the destination of sales or investment is key to mitigating risks to economic, financial or political events.”Todd Evans, Export Development Canada
Todd Evans, Director of the Corporate Research Department at Export Development Canada, said diversification is important to decrease your overall business risk.

“If I’m selling 100 per cent of goods to the U.S., there’s a high level of risk if something goes wrong there,” Evans said. “Diversifying the destination of sales or investment is key to mitigating risks to economic, financial or political events.”

Evans said many companies are currently expressing concern over talk coming out of the U.S.  about a border adjustment tax, import tariffs and border issues.

“So here’s a catalyst or opportunity to really start thinking about markets elsewhere,” he said. “Canadians should be looking globally, but with CETA coming on line very soon it makes a lot of sense to look at the EU now.”

Through CETA, the opportunities for Canada cross many sectors and products, including agriculture, aerospace, automotive, financial and business services, petroleum and chemical products and forestry wood and paper products.

Evans said companies that are more diversified typically have a more sustainable business. They tend to see better sales growth and more stability in their business.

“Being in different markets, particularly if you’re a small company that wants to get into a large company’s supply chain, is useful because you can tell the bigger players that you have experience in these markets. That gives you a leg up when you’re approaching large global firms and buyers.”

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Evans noted that Europe isn’t one market. In fact, there are 28 markets that are party to the CETA agreement and agrees with Allam that once you have footholds in those markets, you are closer to the neighbouring markets as well. If you’re in Croatia, for example, you can then access Northern Africa, Turkey and the Middle East.

Evans did caution, however, that Europe isn’t a homogenous market. “The strategy you might have in Spain isn’t the same as the one you might have in Poland,” he said.

He also stressed that diversification isn’t just about where you sell your goods or services — there’s also a role for Canadian Direct Investment Abroad (CDIA) and the establishment of foreign affiliates.

“When you’re talking about global trade, you can’t just talk about the export angles; you’ve got to talk about the investment side,” he said. “You’ll often see exports follow in the wake of foreign investment. CDIA and the establishment of foreign affiliates opens up a path for exports to flow into that market. It might open up paths to other Canadian exporters, but it also increases your opportunities in that market and surrounding markets. If you have a presence in Spain, that could improve your chances of winning business in North Africa.”

The part of the CETA agreement that was ratified by the EU Parliament doesn’t have the investment dispute mechanism, Evans said, but investments are still part of the agreement. The dispute mechanism will come at a later date, but 90 per cent of the deal is still going through soon.

“If you’re diversified between the U.S. and the EU, don’t stop there.”Todd Evans, Export Development Canada
And, he said, even in markets like Europe, exporting is not without risk — there are elections coming in France that may see populist and protectionist candidate Marine Le Pen become president; elections in the Netherlands just narrowly avoided a similar situation.

“So if you’re diversified between the U.S. and the EU, don’t stop there,” Evans said. “Use that to go elsewhere — Asia, Africa, South America.”

Allam said the key to diversifying successfully is to make sure you have a good strategy and the right people to manage the strategy and move it forward. CETA, he said, can be the platform or the launch pad to explore a market exporters haven’t already thought of.

“With a rising tide of global uncertainty and business complexity, for Canadian companies that want to be real contenders and not pretenders, it really is about ‘diversify or die’,” he said. “There are a lot of companies that will fail because they remained stagnant, and didn’t diversify, or because they weren’t innovative in their diversification strategy or its implementation.”

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Diversification: An Exporting Essential was last modified: August 8th, 2018 by Export Development Canada.
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