Investing In Australia
Market Entry Strategy
Successful market entry strategies for Australia have three common elements: understanding the market, selecting the optimal partner, and providing ongoing support to that partner in the market. A common language and familiar business framework may lead Americans to overlook Australia’s cultural and market diferences. It is vital to first gain an understanding of the Australian context for a product or service, its competitors, standards, regulations, sales channels and applications. Success in the Australian market requires establishing a local sales presence. For many American exporters this means appointing an agent or distributor. The bounds of that appointment are negotiated, and may include only certain states of Australia, the entire country, or New Zealand as well. An increasing number of businesses and investors see Australia as a secure platform from which to serve third markets in Asia. The distance from many of their trading partners and the sheer size of the Australian continent – comparable to the continental U.S. -- causes Australian firms to stress the importance of local support and service. American companies should visit Australia both to meet prospective partners and demonstrate ongoing support, as this is the common practice of their competitors. Most of the criteria American firms use to select agents or distributors can be transferred to Australia, with expectations adjusted to the scale of the market. Performing due diligence is just as important as in the United States, and numerous resources are available to assist in that work.
Using an Agent or Distributor
The following describes the distinctions between a sales agent or representative and distributor as understood in the Australian context. While this report is produced for the benefit of U.S. companies, we use the term ‘foreign company’ because it applies to third country companies as well.
Sales Agents
Sales agents or representatives solicit business for a foreign company and serve as a conduit for purchase agreements. In most cases, a sales agent does not have the power to negotiate terms, or to finalize the sales contract. Instead, the sales representative forwards the contract to the foreign company, which either accepts, rejects, or proposes modifications. The sales representative, nonetheless, is considered to be an agent of the foreign corporation, and under the general laws of agency, the foreign corporation may be bound by the actions of its agent.
Agents assume a number of duties and obligations once a representation contract with a foreign company is finalized, including adherence to the principal’s instructions, good faith in the interests of the principal, and maintenance of proper accounts. The agent retains the right to remuneration and the right to an indemnity for liabilities or for losses incurred due to improper termination. However, there is no precedent for required indemnity payments in Australian law.
Parties may stipulate specific causes for termination in the agreement. Either party may terminate the agreement upon receipt of reasonable notice of termination. Although no specific time period exists which defines a reasonable notice period, courts may take into consideration the nature and length of the contract when determining whether reasonable notice was given.
Distributors
A distributor acts as an independent contractor, purchasing products from the foreign corporation and distributing them to wholesale buyers or sometimes to retailers. Generally, the foreign corporation cannot restrain the distributor from selling competitors’ products. However, because the distributor is not considered to be an agent of the foreign corporation, the foreign company is not bound by the acts of the distributor. Australian distributors often ask for exclusive geographic rights to market a foreign corporation’s products. Because of the size of the market, these rights often cover several states or are nationwide.
American companies can choose to have Australian or U.S. law govern their contracts when drafting an agreement. However, the choice of foreign law does not preclude the application of mandatory provisions in Australian law. Without a stipulation of law, Australian courts will apply the law of the jurisdiction where the agent or distributor works, that is, Australian federal law and appropriate state and local law. Therefore, notification of agent/distributor appointments should be submitted in writing to satisfy various state jurisdictional laws, especially when they last for more than one year or include terms for commissioning the agent. Either fixed or indefinite-term contracts may be employed. However, repeated renewal of fixed-term contracts will not cause the contract to achieve indefinite-term status.
It is important to note that foreign companies providing consulting and other services in Australia are required to register for an Australian Business Number (ABN). U.S. firms can register online for an Australian Business Number. Foreign companies exporting products (as opposed to providing services in the market) do not require an ABN number.
By registering for an ABN, the Australian Tax Office is able to ensure that the Australian customer will pay GST on the services it receives. The invoice issued to the Australian customer should include a GST component. In fact, the customer pays the GST which the vendor in turn, pays the Australian Tax Office.
The U.S. Commercial Service in Australia provides a range of services to help American companies identify, qualify, meet and select potential agents or distributors. American companies can arrange these services directly or through their local U.S. Department of Commerce Export Assistance Center (EAC) in the United States.
Establishing an Office
The Australian Securities and Investments Commission (ASIC) is the national authority responsible for the administration of companies and securities law throughout Australia. ASIC provides a nationwide system for the registration and regulation of companies, securities and futures markets. The requirements for starting a business are uniform in each state, and the same rules apply for local and overseas companies. While companies are registered with the ASIC, business name registration is required in each state where business is transacted.
Australian business practices are similar to those in the United States. Establishing a business in Australia, either singly or in partnership with a local company, is relatively straightforward, and a foreign company can choose from a range of business structures. The most common forms of business organizations are representative offices, branches of parent companies, subsidiaries, sole traders, partnerships, trusts, companies, and joint ventures. Overseas investors may set up an operation using any of these forms, irrespective of the business structure they have elsewhere.
Most significant businesses operating in Australia are incorporated as either private or public companies. Under the Corporations Law, the entity is registered automatically as an Australian company, upon its registration with ASIC, enabling it to conduct business throughout Australia without further registration in individual states or territories. Local companies may be fully controlled by foreign owners. All registered companies must conform to Australian company law administered by the ASIC, covering accounting, financial statements, annual returns, auditing and general meeting requirements, and the necessity to maintain a registered office open to the public.
A private company is the most typical structure for an overseas investor if it is to be a wholly owned subsidiary of a foreign company and if public offering of shares is not intended. The regulations that apply to a private company are simpler and less costly than those applicable to a publicly traded company. A private company may be converted into a publicly traded company at any time.
Branch offices of overseas companies are established in Australia by registering the overseas corporation as a foreign company under Australia’s Corporation Law. A branch office does not require directors to be Australian residents but must have a registered office address and a statutory agent responsible to fulfill the requirements of the Corporations Law. The branch will be assigned an Australian Registered Body Number (ARBN), which must be shown with the corporation’s name on public documents. In addition, if a business in the U.S. has an office in Australia, that office will be required to register for an Australian Business Number (ABN) under the Goods and Services Tax (GST) introduced on July 1, 2000. Information on the GST and its impact on foreign companies with or without operations in Australia, and the ABN application process can be found on the websites of the Australian Taxation Office and the Australian Government’s Business Entry Point.
While establishing an office is fairly straightforward, we encourage American companies to obtain expert legal and financial advice, readily available from Australian and multinational providers. Nominal costs for company incorporation include filing fees payable to the ASIC, legal costs for preparing the charter and bylaws, and registration. Application forms are available from ASIC Business Centers in any Australian state and can be filed in any city.
Franchising
Franchising is well established in Australia with more franchising outlets per capita than any country in the world, and three times more per capita than in the U.S. It is considered both a large and mature sector contributing US$96 billion dollars to GDP. There were approximately 960 business format franchise systems in Australia in 2006, compared with 850 in 2004. In addition, there are approximately 5,700 fuel retail outlets and 2,690 motor vehicle retail outlets. The number of franchisees in Australia increased to approximately 62,000 in 2006.
The best opportunities for franchising in Australia are within the retail non-food industry (29 percent of franchisors and 36 percent of franchise units) followed by the property and business services sector accounting for 21 percent of franchisors and 7 percent of franchise units. Most franchising activity occurs in New South Wales with 34 percent of total units. Victoria holds 24 percent and Queensland with 21 percent of franchising activity. Generally the degree of franchising activity is related to the distribution of population across Australia’s states and territories. The graph below, shows a breakdown by state.
American franchise systems have been able to benefit from the opportunities for franchising in Australia. Many of the largest and most successful chains in Australia have American origins. However, as noted above, Australia is a highly sophisticated and competitive market. Ninety-three percent of franchise systems are home-grown, and on average, Australian franchisers have been operating for 14 years, and franchising for 11 years. To be successful, U.S. franchisors must be flexible enough to “Australianize” their systems in order to suit the local market.
Legal Requirements
The Australian franchise industry is regulated by the Australian Competition and Consumer Commission since 1998 (www.accc.gov.au). A cornerstone of the regulation is the Franchising Code of Conduct. The Franchising Code of Conduct has been created to assist the ongoing relationship between the franchisee and franchisor. Issues covered include:
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Disclosure of the pertinent information regarding the Franchisor,
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Conditions contained within the Franchise Agreement, and
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Complaint handling and dispute resolution procedures.
Further information can be obtained from the following documents:
Australia’s first quality accreditation system for franchises was introduced in 2005. It uses 200 questions to examine the business of a franchise and delivers a rating according to performance. The accreditation compliance application is available at a cost of US$11,500 compared with up to US$150,000 for an ISO standards accreditation.
Direct Marketing
Direct marketing is a growth sector of the Australian retail market, as a result of technological developments associated with database applications and advancements within the telecommunications industry. The effectiveness of direct marketing is increasing, resulting in rising consumer response rates. Australia’s $11.9 billion direct marketing industry has become more sophisticated and offers innovative ways of reaching consumers. A wide range of communication channels is used in this highly competitive industry. This includes telephones (telemarketing and mobile phone text message), mail (catalogs/direct mail), traditional broadcast and print media (direct response advertising via television, radio, newspapers, and magazines), and electronic media (the Internet). Telemarketing is the biggest sector of the direct marketing industry, with approximately 39 percent share. There are an estimated one billion calls a year made by telemarketing firms in Australia, plus calls from firms based outside Australia. Banking, financial services, and insurance industries operate the major share of call centers. Telecommunication companies, utilities, charities, and market research firms are among others also using this medium.
Following consumer complaints, the Australian Government enacted legislation in 2006 that will allow people to put their telephone numbers on a Do Not Call register that telemarketers will be required to respect or face fines. The Australian Communications and Media Authority will implement the legislation, and expects to establish the register in 2007. Registration will be available for fixed line and mobile telephone numbers and will be free. The call ban will apply to Australian telemarketers and overseas callers working for Australian companies. Organizations exempt from the new rules include charities, government bodies, religious organizations, educational institutions, and registered political parties.
Direct mail is the second largest category of the direct marketing industry, with about 35 percent share. This sector is experiencing significant growth, largely in the finance industry but also in retail, community services, communications, insurance, utilities, government, entertainment, and travel channels. Television ranks third, followed by radio, newspapers, the Internet, and magazines. In 2004, the Australian Government introduced the Spam Act, which prohibits the sending of unsolicited commercial electronic messages with an Australian link. Electronic messages are defined by the Act to include messages sent by e-mail, instant messaging and Short Message Service (SMS) and Multimedia Message Service (MMS). The Act requires that all commercial electronic messages are sent with the express or inferred consent of the recipient, and that they include accurate sender information and a functional unsubscribe facility. The Act also prohibits the supply, acquisition or use of address-harvesting software for the purpose of sending unsolicited commercial electronic messages. The Australian Direct Marketing Association is Australia’s principal body for information-based marketing and represents more than 500 member organizations. ADMA works closely with government, consumer, and industry groups on the development of codes of practice for direct marketing.
Joint Ventures
Joint ventures (JV) are a common feature of Australia’s commercial and legal environment. Broadly similar to U.S. practice, joint venture forms in Australia include:
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Unincorporated Joint Ventures. Under this type of joint venture, the rights and obligations of the joint venture parties are set out extensively in the JV documents. An unincorporated JV is sometimes more suitable for a single project or business venture, for example, in sectors like the mining and oil and gas industries. The joint venture document is usually drafted in such a way as not to reflect a partnership for certain tax advantages and also to avoid the application of partnership laws in areas such as joint liability to the joint venture.
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Incorporated Joint Ventures. This usually involves the joint venture parties’ conducting their business through incorporation of a JV company or trust. The parties commonly set out their respective rights and obligations in a shareholder or unit holder’s agreement to resolve any dispute not regulated by the Corporations Law or the constitution of the company or trust.
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Unit Trusts are devices that enable the separation of legal and beneficial interests in assets and the income derived therein. In a joint venture situation, the participants wish to insure that their entitlements are fixed rather than discretionary. A unit trust is a legal entity in which the entitlement of beneficiaries is expressed in units relative to the total number of fixed units.
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Limited Partnerships are creations of statute. They remain partnerships of general law and, therefore, do not give rise to the existence of separate legal entities. A limited partnership structure requires at least one general partner to have unlimited liability and partners whose liability is limited to the extent of their investment in the partnership. Limited partnerships are rarely used in Australia.
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Hybrid Forms comprise elements of each of the foregoing. They can also be created to suit the needs of the particular participants. For example, one participant in an unincorporated joint venture could be the trustee of a unit trust, while one shareholder in an incorporated joint venture could also be the trustee of a unit trust.
Licensing
Australian industry is known for its ingenuity and practical approach to problem solving. In this context, the role of licensing is of particular importance for Australian commerce and industry. License agreements involving Australian companies should contain the usual terms one would find in a license in the United States, for example, type of license being granted (i.e., sole, exclusive or non-exclusive), territory covered, license fee or royalty, licensee’s duties and obligations, period of grant and field use of the technology involved, maintenance of quality control, ownership rights in improvements and innovations made by licensee, warranties and indemnities, technical assistance and confidentiality, sublicensing and assignments, and termination. On the whole, there are few legal and administrative requirements governing the field of licensing in Australia. Exclusive licenses of patents, copyrights and other statutory rights require compliance with certain minor formalities.
The Trademark Act of Australia provides for the registration of licensees (or ‘users’, as they are called in the legislation.) A license agreement drafted carefully and without ambiguity is an important factor in the success of a license relationship. The common language and cultural similarities make negotiation and reaching understanding of the parties’ mutual obligations easier. Selling to the Government Return to top Australia is the only major industrialized country that is not a signatory to the multilateral WTO Agreement on Government Procurement (GPA). As a consequence, Australia is not bound by the GPA’s rules on open and non-discriminatory policies in government procurement.
The Trade Agreement between the U.S. and Australia (AUSFTA) commits Australia to open its federal and state government procurement market to U.S. suppliers at all levels and eliminate discriminatory preferences for most domestic suppliers. Distribution and Sales Channels Return to top Distribution channels in Australia tend to be more generalized than those in the U.S. This is primarily due to Australia's relatively small population and industrial base. In most cases, Australia's distribution and sales channels are comparable to those in other industrialized countries. U.S. exporters commonly use importers, distributors, agents, wholesalers, and manufacturers’ representatives. Foreign companies also export directly to end-users and this method is often observed where equipment is manufactured on a custom or one-off basis. Many large retail chains, including department stores and supermarkets, can purchase in bulk rather than using traditional wholesale channels. However, these retail chains tend not to import and prefer to deal with local firms.
Selling Factors & Techniques
Market Research
Before entering the market, prospective exporters to Australia should evaluate their selling techniques thoroughly to ensure that they are appropriate to the market, and that there is sufficient demand for the product/service in Australia. An effective way to evaluate the situation is to do some basic market research and then follow through with a personal visit. There is no substitute for a first-hand investigation and knowledge.
Common Sales Arrangements
Most U.S. companies use an agent or distributor to sell products in Australia, as was discussed in detail in the preceding section. Because of market size, Australian distributors often seek exclusive geographic and/or product rights. Joint ventures, franchising, direct marketing, and licensing are all good alternative market entry techniques. These methods entail more investment and commitment than simply appointing an agent or distributor, but they may be more effective in the long run.
Electronic Commerce
In Australia there are approximately six million Internet subscribers. These comprise 867,000 business and government subscribers and almost 5.1 million household subscribers. At the end of June 2006, there were 2.8 million dial-up subscribers and 3.1 million broadband subscribers. The broadband market now represents 53 percent of total Internet subscribers in Australia compared with 31 percent at the end of March 2005. There are 2.6 million households with broadband connection (defined as always on Internet connection with speeds equal or greater than 256 kbps). This equates to 51 percent of total household subscribers. In the government and business market, 64 percent of subscribers have opted for broadband access. Digital Subscriber Line (DSL) remains the predominant access technology used for non dial-up accounts, with almost 76 percent of total non dial-up subscribers utilizing this technology.
Large Australian retail stores like Harvey Norman, David Jones or Myer have traditionally not focused on providing comprehensive online websites where consumers can purchase goods. They use their sites rather to provide customers with product information. Customers then need to go to the stores to purchase goods. By far the biggest online sales in Australia are through U.S.-based sites, E-Bay and Amazon. According to local analyst group Hitwise, E-Bay and Amazon pulled in 38 percent of shopping visits in the week ending November 18, 2006. Recent figures indicate that business-to-business (B2B) commerce equates to just over one percent of GDP. Nonetheless, B2B e-commerce continues to expand, with many industries refining supply chains and integrating systems with suppliers to improve efficiencies in operations. Many industries have aligned themselves with vertical online buying exchanges, as buyers realize the cost savings that are possible with ordering over the Internet.
