What it means
Exporting involves many specialist tasks, such as identifying customers, checking regulations, arranging shipping, preparing customs documents and getting paid in foreign currencies. A small manufacturer may not have anyone who can do these jobs well.
An export management company provides that expertise on a contract basis. There are two common ways the arrangement works.
In the first, the EMC acts as an agent, finding buyers and earning a commission on each sale while the manufacturer still sends the invoice. In the second, the EMC buys the goods and resells them abroad, taking on more of the risk in return for a larger margin.
The attraction for the manufacturer is speed and lower fixed cost. Hiring an export manager, training staff and building overseas contacts takes time and salary expense, whereas an EMC is paid only when sales occur.
This turns a fixed cost into a variable cost, which is helpful when a business is testing a new market. There are drawbacks as well.
The manufacturer gives up some control over how its products are presented and priced, and the EMC may also represent competing products. Because the EMC owns the customer relationships, a company can find it hard to take the business in-house later unless the contract allows it.
When choosing an EMC, check its experience with your product type and target countries, ask for references and read the contract carefully. Key terms include the commission rate, the exclusive territory, the length of the agreement and the rules for ending it.
Be aware that the letters EMC are also used in other fields, such as electromagnetic compatibility in engineering, so check the context. Payment terms need care.
If the EMC acts as an agent, the manufacturer bears the risk that the foreign buyer does not pay, so it may require a letter of credit (a bank's promise to pay once documents are presented) or payment in advance. If the EMC buys the goods, the risk shifts to the EMC, but the manufacturer will usually accept a lower price in return.
In practice
Real-world examples.
Example
A family-owned furniture maker with no export experience signs with an EMC to sell its products in the Middle East. The EMC finds three distributors in the first year, and the maker adds $400,000 in sales without hiring anyone. The maker keeps control of production and pays the EMC only when orders arrive.
Example
A food producer uses an EMC that buys its products and resells them in Asia. The producer gets paid on delivery to the EMC, which removes the risk of customers failing to pay. This arrangement transfers the risk to the EMC, though the producer accepts a lower price in return.
Example
A medical device start-up finds that its EMC also sells a competing device in the same region. The start-up decides to renegotiate the contract to add an exclusivity clause and a minimum sales target. The EMC agrees, and the start-up now receives clear quarterly reports on enquiries.
Formula
Calculation
EMC commission = export sales x commission rate. Net proceeds to the manufacturer = export sales - commission.
Worked example: a manufacturer of kitchen equipment sells $800,000 of goods abroad through an EMC that charges a 10% commission.
1. Commission = $800,000 x 10% = $80,000
2. Net proceeds = $800,000 - $80,000 = $720,000
3. Compare with an in-house export manager costing $120,000 a year in salary and expenses
At $800,000 of sales, the EMC costs $40,000 less than the in-house option ($120,000 - $80,000). The break-even point is the sales level at which the commission equals $120,000, which is $120,000 / 10% = $1,200,000.Case study
Seen in the real world.
Bayview Tools is an illustrative, fictional manufacturer of garden equipment with annual sales of $5,000,000, all in its home country. The owner wanted to explore exports but did not want to commit to a full-time export manager.
The company signed a two-year contract with an export management company that charged a 12% commission. The EMC researched three markets, arranged trade fair attendance and handled the shipping documents for the first orders.
In the second year, export sales reached $600,000, costing $72,000 in commission. Because that was well below the cost of a full-time team, the owner kept the arrangement while building a plan to bring some customers in-house. The illustrative lesson is that an EMC can be an inexpensive way to test a market, as long as the contract protects the manufacturer's customer relationships. The owner also asked the EMC to share monthly reports on enquiries, quotes and orders, so that the company could judge the progress of each market.
Watch out
Common mistakes.
- Handing over all control of pricing and branding to the EMC without clear guidelines.
- Signing a long contract without performance targets or a way to exit if results are poor.
- Assuming an EMC removes all export risk, when the manufacturer is still responsible for product quality and compliance.
Questions
People also ask.
What does an export management company do?
It acts as an outsourced export department, finding buyers, handling paperwork and arranging shipping on behalf of a manufacturer.
How is an EMC paid?
Usually by commission on sales, by a retainer fee, or by buying the goods and reselling them at a margin.
Is an EMC the same as a distributor?
No, an EMC works for the manufacturer in finding customers, whereas a distributor normally buys goods and resells them in its own market.
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