Exporting to the United States - Entering your chosen U.S. market

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• 3. Entering your chosen U.S. market
  • 3.1. Direct selling
  • 3.2. Payments, returns and warranties
  • 3.3. Selling through intermediaries
  • 3.4. Finding and checking out an intermediary
  • 3.5. Working with your intermediary
  • 3.6. Partnerships, investments and acquisitions
    • 3.6.1. Partnerships
    • 3.6.2. Investments and acquisitions
  • 3.7. U.S. government procurement
  • 3.8. Market entry for service exports
  • 3.9. Special issues for service exports
    • 3.9.1. Cross-border movement of Canadian workers
    • 3.9.2. Service exports and U.S. immigration classifications
  • 3.10. Innovation: Science and technology exports

3. Entering your chosen U.S. market

Your research may suggest several ways of entering your new market. Depending on your product, service and resources, you might establish a United States business presence to sell directly to your buyers. Or you might use a manufacturer’s representative or set up a partnership with an American business.

These are just two of several possible approaches. In the sections that follow, we will examine these and other methods of entering the U.S., and what they might offer you. For more background information on market entry, you can consult the Step-by-Step Guide to Exporting.

3.1. Direct selling

Direct selling is a simple concept - you sell directly to your American end users. This end user might be another company, a level of government or an individual.

There are several modes of direct selling:

• Establish a U.S. presence

  You can do this either by opening a U.S. branch of your company or by establishing a separate U.S. subsidiary, such as a corporation. While having a U.S. presence makes your operations more complex, it can be advantageous — for example, it could allow you to operate a retail outlet in the heart of your U.S. market. In addition, some types of U.S. business entity can protect your company’s Canadian assets by restricting your U.S. legal liabilities to your American operations. Your business will also be seen as more "American," and that may attract buyers who might avoid a perceived foreign product or service.

  If you decide to set up a business presence in the United States, you should obtain the services of an American lawyer or a lawyer well acquainted with U.S. law. He or she can recommend the best type of entity to establish and the state whose business laws are most favourable to your type of company. Your lawyer will also manage the set-up process, which includes:

  • establishing the business, which might be a branch of your Canadian company, a U.S. limited-liability company, a U.S. corporation or some other kind of business entity;

  • obtaining Certificates of Authority for each state in which you will do business;

  • registering with local, state and federal tax authorities; and

  • obtaining any professional licences necessary.

  You can familiarize yourself further with the basics of American business.

• Sell by catalogue

  This involves obtaining a well-targeted mailing list, and producing and distributing a catalogue. You will also require a mechanism to take orders and payments, and a way to deal with returns and warranties. (We will examine payment methods, returns and warranty issues in more detail in the next section.)

• Sell by direct mail

  With this approach, you send brochures and other promotional material to many potential customers. As with catalogue sales, you will need a targeted mailing list, an order-taking procedure and a returns procedure.

• Sell through e-business

  The Internet may be a very fruitful sales channel for your company. Even when doing business online, though, you will still have to deal with matters like shipping and customs regulations. Furthermore, you will need to ensure potential customers that any electronic transactions they make with you are secure, and that their privacy and personal information will be protected.

• Take orders at American trade shows

  Unless you have a U.S. work visa, you cannot accept money for your goods when showing them at a trade event being held in the U.S. However, you can take orders for your products and then ship them from Canada to your buyers.

3.2. Payments, returns and warranties

If you intend to sell directly to your U.S. customers, you will need efficient methods of handling payments, returns and warranties. Your solutions will vary according to your particular business and product, but the list below describes some of the factors you will need to consider.

• Payments

  You might deal with payments in U.S. funds by:

  • converting them to Canadian funds when you receive payment;

  • using a U.S.-dollar bank account at your Canadian bank; or

  • using a U.S. bank account.

  Remember to account for any fees the bank will charge for handling the payments.

• Returns

  You might deal with returns by:

  • having the returns shipped directly back to Canada by the buyer;

  • renting a U.S. warehouse to store returns until there are enough to merit a shipment back to Canada; or

  • subcontracting with a U.S. company that will collect your returns and either deal with them in the U.S. or ship them back to Canada.

  Remember that you might have to pay customs-brokerage fees and shipping costs when the goods are returned to Canada (although you can require the customer to pay the shipping costs).While these costs might make a return policy prohibitively expensive, do not forget that a "no returns" policy could make your customers go elsewhere.

• Warranties and guarantees

  Since you might incur customs-brokerage and shipping costs to have a returned item shipped back to Canada, it might be cheaper to have a U.S. subcontractor handle warranties and guarantees, including the repair of the product if necessary. Again, these cumulative costs might force you to consider whether such policies are feasible. Remember, though, that many buyers will not purchase anything if it does not come with a warranty or guarantee.

  You should be aware that U.S. law can be very strict about warranties and guarantees, either express or implied, and that courts can (and do) award large penalties against companies that are judged to have violated these agreements. The laws governing warranties and guarantees vary from state to state, so you should consult legal counsel to find out how you can best protect yourself.

  Product liability is a loosely related issue, since a company can be held liable for injuries and damages sustained by any consumer using its product. Refer to Section 4.11, "Product liability litigation" for more information.

• Service and support

  Many kinds of exports can require after-market service and support ranging from routine maintenance to emergency repairs. You may be able to provide these services by sending staff from Canada to your customers, an approach that can work well in many situations.

  However, if your customers require local access to service personnel or demand rapid response to requests for support, you may have to establish a U.S.-based service presence. For a larger company with a high volume of U.S. sales, setting up a subsidiary to deal with customer service might be cost-effective. However, if you are a smaller business, it can be preferable to arrange servicing through a U.S. subcontractor that is geographically close to your customers and can react quickly to their needs.

3.3. Selling through intermediaries

The most common intermediaries are distributors, trading houses and representatives (these last are also called agents, manufacturers’ agents or manufacturers’ representatives). One advantage of using an intermediary is that you get an immediate presence in the United States market without setting up your own sales operation. Disadvantages include, but are not limited to, a greater separation from your customer base and less control over the marketing of your product.

• Distributors

  A distributor will buy your product, import it into the U.S. and sell it on to its end users. Depending on your product, the distributor may also offer after-sales and warranty service. The drawback is that your profit margins may be lower; you will also have less immediate control over your product. You may also not know who your customers are, which can affect your manufacturing decisions and marketing approaches. Moreover, if you stop using the distributor, you will probably have to rebuild your customer base.

• Representatives

  These agents work on commission and usually specialize in related kinds of products. Unlike distributors, they do not at any point own the products they represent. They often have particular territories and sell to a particular set of customers. A representative will contract with a U.S. customer on your behalf and monitor the progress of the deal until its completion.

• Trading houses

  If you want to be an exporter without actually doing the work of exporting, a trading house may be the answer. These are Canadian- or U.S.-based firms that will handle the entire process of exporting your product to the U.S., from initial market research onward. However, you will not have a chance to develop your own exporting expertise, and you will have very little control over the way your product is represented and sold.

3.4. Finding and checking out an intermediary

Contacts at U.S.-oriented trade fairs, on either side of the border, can often introduce you to potential intermediaries. The Canadian Trade Commissioner Service, trade associations and local chambers of commerce (both American and Canadian) can be very helpful as well, and you can ask other companies in your sector about their experiences with intermediaries.

There are also online sources of information about U.S. intermediaries. For manufacturers' representatives, a good place to begin is with the Directory of Manufacturers' Sales Agents (MANA); it is a subscription-based service that allows you to search its listings by state, territory or sector.

No matter how you find potential intermediaries, it is essential to carry out your due diligence before choosing one. Do not sign up with the first candidate who looks suitable, even if he or she has a good track record and reputation. You will make better choices if you know what the competition has to offer.

To evaluate a prospective intermediary in detail, you can use the checklist in the "Choosing an Intermediary" section in the Step-by-Step Guide to Exporting.

3.5. Working with your intermediary

No matter whether you use a distributor, trading house or manufacturer’s representative, the usual principles of good business relationships apply. In the case of a representative, you will get the best service if you pay attention to:

• providing suitable product literature, case studies, application information and promotion;

• giving speedy attention to the representative's questions and requests;

• supplying accurate information about company policies, competitive factors and product development; and

• paying commissions promptly and at competitive levels for your industry.

3.6. Partnerships, investments and acquisitions

A solo entry into the United States market may not always be the best approach for an exporter. You might find it preferable to form a partnership with an American company to operate in a particular U.S. market, or acquire (or invest in) a U.S. firm whose strategic position complements or enhances your own.

These approaches can make operating in the U.S. considerably easier for both goods and service exporters, because it can help resolve problems related to professional accreditation, movement of personnel across the border, and U.S. tax and legal status. Moreover, combining the technical and financial strengths of two businesses can make you more competitive — a big advantage in the aggressive U.S. business environment.

When setting up such arrangements, however, it is very important to make appropriate use of lawyers, accountants, bankers and other professionals, so that all parties are absolutely sure who holds which rights and which responsibilities.

3.6.1. Partnerships

There are several different approaches to partnerships. Your major options are:

• Licensing

  A licence is the grant of rights to another business so that it can legally use your proprietary technology and/or intellectual property; for example, to allow an American company to manufacture a product of your design and sell it in the United States. It usually does not involve granting all the rights to the property — in the example above, the licence might be for the U.S. market but not for the European.

  Franchising is a more specific form of licensing. The franchisee is given the right to use a set of manufacturing or service delivery processes, along with established business systems or trademarks, whose use is controlled by the licensing agreement.

• Cross-licensing

  In this form of alliance, each firm licences products or services to the other for sales purposes. Cross-manufacturing is a type of cross-licensing in which companies agree to manufacture each other's products. It can also be combined with co-marketing or co-promotion agreements (see below).

• Co-marketing

  Carried out on the basis of a fee or a percentage of sales, co-marketing lets you and your U.S. partner take advantage of each other’s existing distribution networks and domestic markets.

• Co-production

  This arrangement involves the joint production of goods, enabling your business to use its skills and resources to its best advantage. It can also provide cheaper manufacturing through economies of scale.

• Joint venture

  Joint ventures in the United States are commonly structured in one of two ways: either the two businesses each contribute capital to a newly created corporation that they operate together, or the Canadian and U.S. businesses enter into a general partnership agreement and operate the joint venture as a partnership.

3.6.2. Investments and acquisitions

Canada’s net direct investment asset position improved in 2011 as investment stock abroad grew faster than inward investment stock, partly due to the revaluation effect as the Canadian dollar depreciated during the year against the currencies of most of Canada’s partner countries.

Foreign direct investments (FDI) are of significant size; according to the 2012 edition of Canada’s State of Trade, issued by DFAIT’s Office of the Chief Economist,

"Investment flows from the United States grew 10.0 percent during the year and accounted for just under half of the total. The highlight of U.S. activity was the acquisition of Consolidated Thompson Iron Mines Ltd. by Cliffs Natural Resources Inc. for US$4.4 billion.

By sector, 54 percent of global FDI inflows to Canada were directed toward energy and metallic minerals, followed by machinery and transportation equipment (11 percent), finance and insurance (4 percent), service and retailing (4 percent), and wood and paper (1 percent). The remaining 26 percent went to other industries.

Canadian direct investment abroad (CDIA) refers to capital outflows from Canada that are invested in industries and businesses in other countries. With respect to CDIA, while the shares of total Canadian direct investment in the United States had been declining for several years, in 2011, the United States’ share edged up to 40.3 percent. Canadian direct investment stock flows to that destination increased by $22.7 billion to reach $276.1 billion."

It is clear from the above that while CDIA into the United States has diminished during the past two decades, the U.S. remains a crucially important destination for investment by Canadian businesses. This is because a substantial capital commitment to a U.S. firm, or the outright acquisition of a U.S. company, can help a Canadian exporter in several important ways.

• You immediately gain access to the enormous U.S. market, allowing you to expand sales and promote company growth. Operating in the U.S. market can also lead to sales in other countries.

• It allows you to take advantage of the U.S. firm’s assets to increase your competitiveness in the United States, in Canada and possibly elsewhere abroad. These assets can include patents and other intellectual property, resource availability, access to capital, specialist expertise, proprietary technology and product differentiation.

• In some parts of the U.S., you may have easier access to supplies, lower labour costs and lower transportation costs than you would in Canada.

• You have somewhat better protection from changes in U.S.-Canadian exchange rates, since a falling American dollar makes assets in the United States cheaper and business costs lower.

• Many of the biggest manufacturing regions of the U.S. are within easy reach of Canada’s major business centres. This means that a Canadian company can be more closely involved in the operations of its U.S. business, and, if the U.S. company is providing inputs to the Canadian firm, the costs of transportation and logistics will be lower because the Canadian and U.S. production plants are geographically close.

• Because Canadian and U.S. markets are so closely interrelated in so many sectors, customers will have similar needs and preferences. This leads to lower costs for market research and product differentiation.

Because Canadian and U.S. markets are so closely interrelated in so many sectors, customers will have similar needs and preferences. This leads to lower costs for market research and product differentiation.

3.7. U.S. government procurement

The government of the United States buys a huge array of products and services on the commercial market, and this can present a rich source of contracts for Canadian exporters. Selling to U.S. government agencies and departments is a complex business, however, and can overwhelm the resources of a Canadian company that tries to undertake such a deal on its own. To help such companies, the Government of Canada has established the Canadian Commercial Corporation (CCC), a Crown Corporation that acts as Canada’s international contracting and procurement agency.

The CCC brings Canadian exporters and foreign government buyers together by assisting with the negotiation and execution of contracts. It does this not only for U.S. government procurement, of course, but also for buyers from numerous other national governments. The U.S., however, is by far the largest of these customers.

To facilitate exports at this level, the CCC signs two contracts: one with the U.S. buyer, and the other with the Canadian exporter. As the intermediary, the CCC ensures that the contract is completed according to the conditions of the agreement, and transmits the contractual obligations to the Canadian exporter. The result is a secure government-to-government contract on the best possible terms and conditions for all concerned. In addition, CCC manages the cycle of payments from the U.S. government buyer to the Canadian exporter in order to maintain a predictable and timely payment schedule.

Because of the enormous size of the U.S. defence and aerospace sectors, the CCC also specializes in managing export contracts that originate with the U.S. Department of Defense and NASA. To find out more, refer to the CCC website. For a more detailed explanation of U.S. government procurement and the opportunities it offers, visit DFAIT’s SELL2USGOV website.

3.8. Market entry for service exports

Unlike goods, service exports tend to be intangibles such as scientific knowledge, technical expertise or intellectual property. Nevertheless, the major methods of delivering services fall into categories that are quite similar to those for delivering goods. For example, exporters of goods and exporters of services can both benefit from direct selling; in fact, if you are a service company with a unique skill or knowledge, you might consider contracting your service directly to American clients.

Alternatively, you might market your service indirectly through an intermediary who negotiates a service contract for you with the client. Or you might establish a partnership with a firm whose services dovetails with yours, to the advantage of both companies.

The method you choose will depend on the nature of your service, the resources available to you and the particular U.S. market you are entering. No matter which approach you select, however, you must focus on establishing an awareness of your firm in the target market and on demonstrating the credibility, competence and professionalism of the service it offers. And, as always, you will have to ensure that your management and staff are sensitive to the culture, values and business practices of your American clients and/or business partners.

3.9. Special issues for service exports

Exporting to the United States can be more complicated for a service company than it is for a manufacturer of goods, especially if you need to send personnel across the border to provide the service. If you use this form of service export, you will have to comply with the strict immigration and labour laws that apply to non-Americans entering the U.S. to work.

It will often be easier to send your employees to the United States if you set up a formal U.S. business presence, such as a wholly owned subsidiary. This also gives you added flexibility in providing the service, because you will be able to hire American workers directly if it suits your purposes. Indeed, if you hire only Americans, the whole immigration issue will vanish.

U.S. immigration classifications are examined in more detail in Section 6, "Business Travel to the U.S.," but we will explore them briefly here, in the special context of service exports.

3.9.1. Cross-border movement of Canadian workers

Even if you establish a U.S. business presence, however, getting your people across the border can be difficult, especially in sectors such as the construction services industry. One big issue is timing. For example, a Canadian paving company that obtains a road service contract in the U.S. may need Canadian labour to do the job, but may be unable to get its employees cleared by U.S. immigration authorities by the time the project has to start. This can have serious financial and legal consequences if it causes your company to default on its contract. Any service company that lands a U.S. contract with tight deadlines may find itself in this sort of difficulty.

The variety of immigration classifications also means that a service company has to understand very clearly who it can and cannot send to work in the U.S., and exactly how its employees must be classified in order to enter. For example, it is a mistake to use a B-1 classification for an employee who is going to the U.S. to provide services for an American client. The B-1 is the business visitor classification, and only allows the holder to undertake marketing activities in the U.S., not to do any work.

3.9.2. Service exports and U.S. immigration classifications

The most common visa classification is the H-2B, which allows foreigners to work temporarily in the U.S., provided there is no American worker available to do the job — a condition that you, as the contractor, are required to prove. Other visa classifications are the TN-1 for NAFTA professionals (engineers and scientific technicians, for example) and the L-1 for intracompany transferees (including executives, managers and "specialized knowledge" personnel). Choosing the most suitable classification for your workers and getting their permits cleared is complicated, so be sure to get legal advice from a professional well versed in U.S. immigration law. And while it may be tempting to go around the rules and put people to work in the U.S. before getting clearance, it is very, very unwise to do so. If detected, your employees may be expelled from the U.S. and may not be allowed back into the country for several years.

Some types of service firms, such as companies providing software development services, may be able to export to the U.S. without sending workers there at all, except perhaps for marketing employees who would use the B-1 classification. If your company provides its services in this way, your U.S. clients will often ask you to file a "Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding," or form W 8BEN. This form applies when goods or services, for which the Canadian firm will receive payment from the American client, are provided in the U.S. by a Canadian firm.

3.10. Innovation: Science and technology exports

Historically, Canada’s major exports have been generated by our natural resources industries, especially agri-food, forest products, minerals and energy. But if we are to maintain our global competitiveness, we need to expand and diversify our international trade in sectors related to science and technology (S&T).

Our close economic relationship with the United States is an enormous advantage in this regard. The U.S., of course, is a world leader in Samp;T innovation, and one of its strengths is the willingness of its businesses and research institutions to collaborate with their counterparts in other countries. Most regions of the U.S. are home to at least one major S&T cluster, and the country as a whole presents enormous opportunities for Canadian Samp;T companies working in what has become known as the "knowledge industry."

In recognition of this, the Government of Canada has established S&T development as a major economic priority for the foreseeable future. This includes not only advanced R&D, but also the commercialization of Canadian S&T innovations and their transfer to the U.S. and global markets. This outward-looking approach is important because strong international S&T linkages help connect Canadian firms to the world marketplace of ideas, talents and technologies. In turn, this ensures that Canada’s exporters have access to leading-edge research, which boosts their competitiveness and productivity.

Looking abroad, especially to the U.S., is even more important when one considers the relatively small size of the Canadian market for many advanced technologies. In aerospace, for example, the volume of domestic demand simply cannot support the full-fledged commercialization of a service or product, so having access to the U.S. aerospace industry is absolutely vital for the survival of Canadian companies in this sector. This example could be repeated across a wide range of industries, and if your company operates in one of them, you will almost inevitably have to become an exporter. And because of its geographical accessibility, its vast S&T market and the willingness of its companies to work with Canadian firms, the U.S. is the most obvious destination for Canadian businesses that can supply technologically advanced products, services and knowledge.

But "exporting to the U.S." in this context means much more than shipping goods or providing services. It can also mean joining a U.S/global value chain through R&D collaboration with a company in the United States; forming a Canada-U.S. partnership to commercialize a product; or investing in a U.S. business whose R&D or innovations complement your own. U.S. sectors that offer excellent prospects for such investments and partnerships include aerospace and defence, life sciences, environmental technology, renewable energy and information and communications technology.