So You Think The World Is Your Oyster
Winnebago, a town of nearly 2,000 nestled in the fertile blue-earth plains of southern Minnesota, might not seem like an obvious place to look for globetrotters. But there sits Meter-Man Inc., where 25 employees make agricultural measuring devices. In 1989, the 35-year-old company began exploring the idea of exporting and three years later began shipping products to Europe. Today, a third of Meter-Man's sales are in 35 countries throughout Europe, South America, the Far East, South Africa, and Israel. The company expects international sales to account for about half its business by the turn of the century. "When you start exporting, you say to yourself, this will be icing on the cake," says James Neff, director of sales and marketing. "But now I say going international has become critical to our existence."
Meter-Man is far from alone. With the collapse of communism, the embrace of freer markets by much of the developing world, the completion of the North American Free Trade Agreement, and the conclusion of the Uruguay Round of the General Agreement on Tariffs & Trade, world trade in the 1990s is growing twice as fast as the overall world economy. These days, America's highly competitive manufacturers are grabbing a growing share of global merchandise trade. What's more, the U.S. is also the world's top service exporter. With the the ranks of the middle class swelling around the world, governments everywhere deregulating their service industries, and the rapid spread of information technology, everyone from graphic designers to software developers to investment bankers is finding increasing opportunities abroad.
True, big companies still dominate international trade. Yet the share of small and midsize manufacturers that sold 10% or more of their products abroad rose from 27% in 1994 to 51% last year, according to a survey by Grant Thornton, the accounting and consulting firm.
Ah, the joys of the global economy. A diversified stream of revenue. The promise of fatter profits. Dinner with customers in London and Buenos Aires. Research shows that U.S. exporters enjoy on average faster sales growth and employment gains than nonexporting companies, says Andrew Bernard, economist at Massachusetts Institute of Technology. And owners aren't the only ones who benefit: Wages for workers in jobs supported by exports are 13% to 16% higher than the national average. "Over time, you learn that the more people you can trade with, the more money you can make," says Abby Shapiro, head of International Strategies Inc., an electronic publisher of global business information.
Sounds terrific, doesn't it? But the risks from exporting are just as impressive. Fluctuating currencies. Impenetrable cultures. Faraway customers. Delayed payments. Byzantine business practices. "Small business sees the growth prospects outside the U.S., but the international market can burn and kill you in terms of cost," warns Browning Rockwell, president of Horizon Trading Co., an international trading company based in Washington. Adds Roger Prestwich, director of education at the Minnesota Trade Office: "Just because the U.S. is part of a global economy doesn't mean all--or any--of the 200-plus countries in the world are interested in your products."
CRITICAL FACTORS. How can a small-business owner succeed overseas? Consultants, financiers, and small-business owners with export experience cite several critical factors. Do lots of homework at the beginning. Plan on investing heavily in your overseas expansion. Tap into a network of professional consultants well versed in the quirks of international trade. And understand that going global is a long-term commitment. The typical small business should expect to spend anywhere from $10,000 to $20,000 just to do basic market research, take in a trade show, and fly overseas to visit a country or two. And it may take as long as three years to see any return on its investment.
Market research is increasingly easy to come by. Much of the information is available for free or at a low cost. Federal, state, and local governments, which have become near-zealots in their fervor to get small business to think globally, can be a great resource. Private companies are eager to teach small businesses everything from the basics of trade finance to unusual foreign business customs. Trade associations, meanwhile, believe a vital part of their mission is to help their members join the world economy. And many colleges and universities are expanding their course offerings on doing business abroad. "All over the country, more and more institutions are coming up with an exporting program," says E. Martin Duggan, president and chief executive of the Small Business Exporters Assn., a nonprofit trade association in Annandale, Va.
The Internet offers an easy portal into the many export programs offered by the federal government, nonprofit organizations, and the private sector. Click on the Commerce Dept., the Small Business Administration, the Export-Import Bank, or the U.S. Business Advisor, and you can study the basics of exporting, learn how to apply for loan guarantees, get country and industry data, download customs and export-loan documents, and find links to trade resources elsewhere on the Net.
Private companies and nonprofit groups are also working hard on developing programs that will allow for finance, insurance, freight forwarding contracts, and other export business to be done over the Web. Horizon Trading's Rockwell, for instance, created a company called Trade Compass three years ago after he saw how the Net could expedite cross-border transactions. "People will call up and say, `I want to export blue jeans to Mexico. What do you think?"' says Eileen Cassidy, director of the SBA's Office of International Trade. "The first thing I say is, `do you have a computer with an Internet connection?"'
Still, the electronic world is only one avenue. State governments began embracing the global economy during the tumultuous 1970s and early 1980s, especially in the Rust Belt states of the Midwest and the former agricultural states of the Southeast. Today, every state actively devotes resources to promoting exports. State trade agencies run classes and seminars on the basics of exporting for small businesses, and they offer lots of information on market prospects and industry competition overseas. State governments, on their own or linked to a federal program, offer loan guarantees and export insurance for small business. Most states also host overseas trade delegations and aid local company participation in international trade shows.
Federal- and state-sponsored export councils and trade missions offer another route for gathering information. Take the experience of Lucille Farms Inc., a manufacturer and marketer of cheese products in Montville, N.J. Its chief executive, Alfonso Falivene, wants his company to wade slowly into the international arena. He recently joined the U.S. Dairy Export Council established by the Commerce Dept. Council members have taken trips overseas to study trade prospects and dairy competitors. Its meetings offer a forum for dairy people to share their experiences and frustrations. In addition, "I have stacks of information in my office," says Falivene. "If I had to go out and get the information on my own, it would cost me thousands and thousands of dollars."
Many small-business exporters say trade shows are among the most valuable ways for a company to gain market intelligence, establish contacts, and swap global war stories with like-minded entrepreneurs. Meter-Man participated in a huge agricultural trade fair in Paris when it decided to expand into Europe. Over the course of five days, company executives held 21 meetings with potential customers and distributors. One contact from those meetings is now a major Parisian distributor of its measuring devices.
Which markets make the most sense to target? Obviously, it depends on what industry you're in and what your analysis of particular countries shows. Perhaps your software package or new drug will sell well in Spain but not in Italy, or flourish in Australia but fall flat in Southeast Asia. In general, trade experts say the bigger opportunities for small business probably lie in the rapidly expanding areas of Latin America and the Far East. And of course, with their proximity and market size, Canada and Mexico are popular export spots. But no matter how grand the market research suggests your prospects may be, keep your ambitions in check. "The big mistake we see is people taking a shotgun approach," warns one old hand at the small-business exporting game. "We take a rifle approach. We concentrate on one area before we move to another one."
Once you've done your homework, chosen your market, and developed a few contacts overseas, you'll need some professional help to navigate your way through unfamiliar business terrain, such as trade finance, international law, documentation, and local customs. Thanks to an alliance among the SBA, the Commerce Dept., and the federal bar association, new exporters can get a free consultation with an international attorney drawn from the Export Legal Assistance Network (ELAN). To get the name of the ELAN regional coordinator in your area, contact your local SBA district office, or call the Small Business Answer Desk at 800 8-ASK-SBA.
MAZE OF RULES. Service-sector firms, especially, seem to rely on joint ventures and other cooperative arrangements to smooth their way into a local market. The knowledge of local institutions is often invaluable in dealing with the bewildering maze of local rules and regulations that typically envelop banking, insurance, telecommunications, education, health care, and other service industries. "You can't just take a successful American practice or service overseas without making real adjustments for the local market," says Joseph Hartnett, director of international services for the central U.S. at Grant Thornton. "How you sell will be different."
Edaw Inc., a well-known landscape architecture firm in San Francisco, has built up an international business over the past 15 years. The 450-employee company first gained a strong reputation in the U.S. so that when an overseas company wanted to tap into American expertise and talent, Edaw was on the short list of contacts. It also had one or two people willing to take long flights, eat lousy food, and stay in hotel after hotel. In Europe, Australia, and Asia, the company has linked up with local partners, and it is buying a majority position in a Hong Kong company. "You have to go with local, recognized partners that are well-entrenched," says Jim Heid, partner and director of development at Edaw. "It's almost impossible to build up a business by sending a bunch of expatriates overseas."
It's also essential to line up enough financing to see you through the inevitable bumps in the export road. Taking on overseas customers brings with it the risk of political upheaval and currency fluctuations. What's more, it typically takes overseas companies longer to pay their bills, so new exporters often find their cash flow dwindling. The government offers a vast array of working-capital, loan-guarantee, and insurance programs for small-business exporters. The Ex-Im Bank, for instance, long criticized for being a banker solely for multinationals, is now eagerly wooing smaller companies. Its working-capital guarantees, with roughly 95% going to small exporters, reached $378 million last year, up from $181 million in 1994.
International transactions can be paid for in a variety of ways. The most common is the irrevocable letter of credit (LOC). The typical LOC costs $200 to $300, including the bank's examination fee, which can range from 0.10% to 0.25% of the sale. In essence, an LOC substitutes the bank's balance sheet for the customer's balance sheet once the transaction is confirmed. Problem is, many of the nation's banks don't offer LOCs, and some of those that do prefer not to do business with small exporters. The best places to start your search are with large regional or money-center banks, or the local offices of major international banks.
KEY QUESTION. Bankers can help out in other ways, such as advising on the structure of overseas contracts and directing you to public or private insurance for transactions. "The biggest problem at many companies I see is a lack of coordination between sales and finance," says Jeanne Derderian, in charge of business development for exporting at Chicago-based LaSalle National Bank, a subsidiary of the Dutch banking behemoth ABN AMRO Group. "Salesmen are out there making promises on what the terms will be and later on the finance people say, we can't do that."
Still, the key question is whether you will get paid by someone thousands of miles away. If an LOC isn't practical, try to protect yourself with an up-front payment. Edaw, for instance, often finds itself in intense competition with other international firms under tight deadlines, with no time for lawyers to review complicated contracts. To protect itself from currency moves, political uncertainties, and other risks, it requires 20% to 40% of its fee up front. It credits that to the overall invoice, before its architects ever get on an airplane.
Better yet, take things slowly. When it comes to relying on an agent, a broker, or a joint-venture partner in overseas markets, a hasty choice can turn out to be ruinous. "I see it all the time," sighs Mark Levine, director of customs and duties practice at Coopers & Lybrand. "People think they are getting a reputable agent or broker, and they are just a fly-by-night operator."
Super Vision International Inc., an Orlando-based maker of fiber-optic lighting, initially does business only with the largest companies in a country, often subsidiaries of U.S. multinationals. "If you are going into a new country, you don't have the revenues to knock on every door. So deal with the top players, who are reliable and justify your time and flights," says CEO Brett Kingstone. Over time, Super Vision nurtures a relationship with a local distributor, which then becomes Super Vision's conduit to smaller companies in a country. The recipe seems successful: Super Vision now gets about two-thirds of its revenues from overseas, much of it from developing countries.
Even with good planning and international savvy, going abroad is no cakewalk. Take the experience of California auto dealer Anthony A. Batarse Jr. In 1992, his four auto dealerships were pulling in about $17 million. He heard that the government of Cameroon was looking to spend $24 million on 500 customized vehicles and a service center. Batarse wasn't afraid of an international deal--the El Salvador native's father had been an exporter. Over two years, he got financing from the Ex-Im Bank and the State Dept.'s blessing. He even checked Cameroon's human rights record with Amnesty International. He took out his savings, refinanced his house, and mortgaged a couple of other buildings he owned. He sent engineers to Cameroon to start preliminary work on the service center and ordered the special cars from General Motors Corp. Then the State Dept. reversed itself, citing Cameroon's credit record and the risk that the vehicles would be used by abusive police. Batarse was forced to sell two of his dealerships to repay the $750,000 he had spent and is still in the red. "It almost put me out of business," he says.
Of course, luck knows no borders. When Meter-Man's Neff flew to a trade show in Barcelona a few years ago, he found himself sitting next to a man from Paraguay who was headed for the same show. The two struck up a relationship, and his travel companion ended up ordering about $200,000 of Meter-Man's product and is now a major South American distributor. "All the classes in the world don't get you sitting next to a guy interested in your product," says Neff. "I've tried drumming up business the same way another 50 times, but it hasn't worked again," he laughs. Whether doing business in Tuscaloosa or Timbuktu, success is a cross between hard work and good fortune.