Four-fifths of small businesses stick to the domestic market, Budapest Bank finds.
In contrast to the headline-catching achievements of companies such as Prezi, which has chalked up global success with its presentation software, the bulk of Hungarian small- and medium-size enterprises (SMEs) are unwilling or unable to undertake export sales, a recent study reveals.
Only one-in-five such companies report export sales, and a mere 4% declared an interest in doing so during the next three years, according to a survey, carried out for Budapest Bank on 500 Hungarian SMEs and micro-businesses with annual revenues of up to HUF 10 billion (USD 38.5 million), published on November 20.
Perhaps even more shocking, 77% of respondent companies, that is 385 of the 500 sampled, excluded the possibility of seeking out export sales in the same time period.
“This is despite the fact that export sales can give a major boost to sales: for companies already pursuing export activities, approximately one-fourth of the total sales is derived from exports,” the bank said in commentary on the results.
The primary reason justifying the lack of effort to probe foreign markets – mentioned by 57% of respondents – is that their products and services are unsuitable for export. A further 27% said their company was too small.
Yet the reluctance appears even more deep-seated. As the bank commented: “Two-thirds of the managers of companies with no export sales experience stated that even if they managed to overcome the current obstacles, they would not start selling abroad.”
This is in spite of 56% of those surveyed viewing foreign competitors appearing on the domestic market as a commercial threat.
Perhaps surprisingly, only 3% expressed concerns about being paid properly by foreign customers, and a mere 1% cited a lack of foreign language skills as a barrier.
The implications of such results are, of course, that Hungarian SMEs are ignoring potential markets and risking commercial oblivion in the face of foreign competition.
“Our experience shows that the majority of companies decide not to launch export activities because they lack the necessary skills, and therefore have a lack of confidence,” says Bernadett Engler Dancsné, head of Budapest Bank’s small enterprises business line. The results of “more daring” companies that do export reveal that “even the smallest can benefit from extending their sales activities abroad”, she argues.
The survey results imply an SME sector imbued with widespread smug satisfaction with domestic sales at best, or gross (and commercially dangerous) lethargy at worst. But are such conclusions fair? Respondents include anything from engineering firms to key cutters, smallholder agriculturalists to large-scale factory farms. Is it reasonable, or realistic, to expect a bakery in Kecskemét to pursue exports? “There are local companies everywhere in huge numbers, local companies which do not have any global growth potential,” says György Bőgel, professor of entrepreneurship at the Central European University in Budapest.
However, in the broadest sense, Bőgel supports the bank’s findings. “My general experience is the same: many small companies in Hungary are only working in the local market, and many of them do not want to go abroad,” he says. “We can call it a glass ceiling for companies; when they reach the borders of Hungary, they stop.”
The thoughts of large, lucrative export orders to customers outside Hungary may sound attractive to local entrepreneurs, but even those with language skills and some experience in foreign lands need to maintain a sense of realism, says Bőgel.
“The basis of [an export drive] must be a competitive product or a competitive service, and this must be based on hard work… and it should be unique, sophisticated, hi-tech and it should take years to copy it,” he told the Budapest Business Journal.
Many Hungarian companies have good ideas, but the final product is often not unique and is relatively easy to copy. “There may be need for it, but if other companies see it is useful, then many, many competitors will pop up, very quickly,” he said.
Bőgel believes “the core reason” for poor export performance among many Hungarian SMEs is “the weakness of innovation in Hungary”, pointing to the 2017 European Innovation Scoreboard, which ranked Hungary in 23rd place among EU countries with a score of 67.4, versus an EU average of 100.
“Innovation, I think, is improving, but our relative position is not improving, because the development of other countries is faster than ours,” he says.
Lacking the right products, services, language skills and connections, pioneering sales abroad can be an expensive business, especially if this involves setting up offices and servicing centers for products.
Bőgel also lamented that “many times” he sees Hungarian companies, even those with good ideas, are unable or unwilling to commercialize them, and sit back, satisfied with success on the domestic market.
Despite such issues, a number of flagship companies have won out on the global markets, proving that with the right products, dedication and preparation, SMEs can win international success.
“For example, Nav N Go [now renamed NNG, a navigation systems provider]: it’s a positive example. It’s a global success, a very sophisticated, competitive product. And it is what you need if you want to go abroad. Otherwise, you may compete on costs… which is unsustainable long-term,” he says.
Even in traditional industries, Hungarian SMEs can forge export markets for themselves, Bőgel insists, citing Master Good Kft., a poultry company located in Kisvárda, northeast Hungary.
“It’s one of the biggest chicken processing companies [in the region], It’s family-owned, absolutely hi-tech, and nobody knows the name,” he says, “but they have [significant] exports.”