Why Overseas? `Cause That's Where The Sales AreJames E. Ellis
Talk to Sears, Roebuck & Co. Chairman Edward A. Brennan about the North American Free Trade Agreement, and he practically beams. Is the head cashier of America's Big Store hungry for inexpensive Mexican goods he can sell in the U.S.? Nope. Brennan's so excited because NAFTA will allow more and cheaper American-made goods to be sold in Sears' thriving stores in Mexico.
"There is an emerging consumer class in Mexico, and they want U.S. goods," says Brennan, who has seen Sears' Mexican sales quintuple, to $500 million, in just six years despite high tariffs on such key goods as appliances. "As NAFTA lowers tariffs, prices are going to be lower. And that's going to make a subsidiary that's already growing faster than the company grow even faster."
HOT PROSPECTS. U.S. executives like Brennan are increasingly seeking their companies' fortunes beyond America's borders--from Mexico to Malaysia. International sales by U.S. multinationals--from exports, direct investment, or joint ventures--were $1.2 trillion in 1991, 29% of corporate revenues. As economic globalization boosts demand in developing economies, and as trade barriers fall because of NAFTA and the recently revised General Agreement on Tariffs & Trade, that trend is likely to accelerate.
Indeed, foreign trade will remain crucial for U.S. companies in 1994. The hottest prospects are developing nations such as Korea, Taiwan, and Malaysia. Their economies should grow 5.5%, 6.0%, and 8.0%, respectively, after inflation, according to the Organization for Economic Cooperation & Development. After China's move to cool down its red-hot economy, growth in Asia outside Japan will slow slightly--to a still-torrid 6.9%, figures Merrill Lynch & Co. economist William P. Sterling. And he forecasts that Latin America will grow 4.5% this year, vs. 3.7% in 1993.
Even recession-battered Europe, U.S. industry's chief foreign market, will fare better in 1994. "The worst is over for the major industrialized [European] economies," says Lehman Brothers Inc. Chief Economist Allen Sinai. He forecasts European growth of 1.2% in 1994 and double that in 1995.
As foreign economies mature, they create a wave of demand for U.S. construction equipment, telecommunications gear--and McDonald's Corp. hamburgers. U.S. merchandise exports have grown tenfold since 1970 and have surged at a 7.6% compounded annual rate over the past decade, to $448.2 billion in 1992. Despite weak demand in Europe and Japan, U.S. exports grew an estimated 2.5% last year and should grow 3.1% in 1994, according to DRI/McGraw-Hill.
SAME SOUPS. No wonder many industries want in on the action. In the U.S. aerospace business, exports account for a record 34% of sales--up from less than 10% in the 1960s. Moreover, U.S. companies are raising production and adding people offshore: United Technologies Corp.'s Otis Co. Elevator unit logs 80% of its sales internationally, and five out of six employees work outside the U.S.
Wherever the production is done, growing internationalism is forcing many U.S. industries to rethink the way they do business. Campbell Soup Co.'s Mexican unit grew modestly when it mainly offered the same soups it sells back home. But CEO David W. Johnson, who covets strong international growth, pushed his product developers and marketers to listen to consumers in developing markets. When Campbell added regional favorites, such as cream of chile poblano soup, its Mexican sales accelerated. "We're formulating [recipes] to their tastes, which we had not been doing before," says Johnson.
SCOUTING MARKETS. In the future, some of the fastest international growth will go to providers of services. That's because many U.S. service industries have relatively low foreign exposure (chart). And the middle classes in developing nations are amassing the incomes needed to pay for business, household, travel, and medical services long common in the West and Japan. "There's a dramatic [worldwide] shift toward services, and American companies have shown they have winning formulas when they've been allowed to enter foreign markets," says Gary Hufbauer, senior fellow at the Institute for International Economics.
For instance, Toys 'R' Us Inc. is going gangbusters in Japan despite the meager 0.5% economic growth the OECD forecasts there next year. And Kmart Corp., which has a growing operation in the Czech Republic, will make an initial foray into Singapore in 1994. Explains Wal-Mart Stores Inc. CEO David D. Glass, who is scouting new markets this year after his chain's success with Mexican discount stores: "All over the world there's a great opportunity for our concepts to work--and to work well."
Just ask Juergen Bartels, president of Carlson Cos.' Hospitality unit. Pushing American-style service and high-tech reservations technology, Bartels has expanded his Radisson Hotels International Inc. chain into Mexico, the former Soviet Union, and Eastern Europe--a region whose economy should grow 2% in 1994 and 3% in 1995. Carlson's TGI Friday's Inc. restaurants have found success in the Far East with their mix of American memorabilia and chatty, high-fiving waiters. "The [sales] volume at our restaurant in Seoul is double the volume of our average restaurant in America," says Bartels. "We're exporting American culture, and our experience shows the term 'global village' is not a hollow phrase."
Other service-industry executives agree. Hospitals will step up efforts to recruit patients from Mexico, whose economy in 1994 is expected to grow 3.1%, the same as the U.S. The Mayo Clinic in Rochester, Minn., which already serves 7,000 foreign patients annually, has opened an international practice staffed by multilingual doctors--plus an air service for foreign patients. "A global economy means that you provide services where they're provided best, and for many types of medical procedures, that's the U.S.," says Francisco H. Recio, chairman of the new Miami Medical Centers Inc., which serves Latin Americans who fly to the U.S. for care.
U.S. industries that expand globally do face risks--from currency shifts to volatile economies. Lift-truck maker Hyster- Yale Materials Handling Inc., based in Portland, Ore., has suffered a profit squeeze because the strong yen has boosted dollar costs for Japanese-made engines and other parts produced by its joint venture with Japan's Sumitomo Corp. "The yen has clobbered us," says Hyster-Yale President Reginald R. Eklund, who will use cheaper components this year from a Northern Ireland plant.
Still, executives like Eklund aren't eager to slam the door on more liberal global trade. The potential rewards are just too great. "It will be tough for America to adjust [to global competition and expansion], but it's a matter of survival," figures Carlson's Bartels. If he's right, U.S. industry will never again be able to gauge its health just by looking in its own backyard.
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