The Export Bust
For nearly 15 years, the global marketplace was good to Al Merritt. Since launching MD International Inc., a Miami exporter of medical equipment, in 1987, Merritt's revenues have grown by at least 25% a year. His once-tiny startup is now a $60 million company with 85 employees, many of whom work in a shiny, $5 million headquarters. Customers from Latin America and the Caribbean come to train on the new equipment in the company's state-of-the-art operating room.
But these days, and for the first time in his career doing business abroad, Merritt is learning that the global economy isn't always such a friendly place.
Over the past 12 months, Merritt's sales have fallen 17%--the result of a persistently strong U.S. dollar and a host of tough new rivals in Europe. Deals that would once have been easy are unraveling, including a $400,000 contract for surgical tables from a Brazilian hospital and a $200,000 order for diagnostic equipment from the Mexican government, both of which went to a supplier in Germany. In all, Merritt, 42, figures he has lost $15 million in new business in the last 18 months, which has forced him to dismiss a dozen workers and close a division. "This is the worst I've ever seen," he told Small Biz in August.
That was before Sept. 11, when business across the globe ground to a halt after the attacks on New York and Washington. Merritt's employees were stranded as far away as Peru. He figures he lost $220,000 in sales on the first day, when executives at a trade show were too distraught to conduct business. A long-anticipated sales trip to Europe had to be canceled, and several hundred thousand dollars worth of cargo remained locked in warehouses. "We were already in a weakened situation," says Merritt. "This will require us to tighten up even more."
It's a far cry from the gilded days of global trade in the 1990s, when thousands of small-business owners struck gold by targeting growing demand in foreign markets (chart). Indeed, the world has seldom seemed less hospitable to U.S. exporters. The strong dollar--up 30% against the euro since January, 1999--has meant that U.S. goods and services are priced out of many foreign markets, and a global economic slowdown has eroded demand even further. Meanwhile, competition is tougher than ever, especially from the European Union, which has inked 25 free-trade deals with countries all over the world, particularly in Latin America, a key market for U.S.-based exporters. The U.S., by contrast, has signed only two of the world's 134 free-trade agreements.
Then came last month's terror attacks. For a week, it was nearly impossible for traders to send or receive goods. Even with traffic flowing again, the fallout from the attacks provides a chilling reminder of just how risky venturing abroad can be. "Globalization has just seen a major interruption," says Robert Duncan, president of Leawood Export Finance Inc., a capital-goods exporter in Overland Park, Kan., who has been doing business overseas since 1995. "The impact will be huge."
Much of that impact may be felt by entrepreneurs. Small business now makes up 88% of America's exporters, and accounts for a fifth of the value of U.S. exports, according to the Commerce Dept. Business was already suffering this year, with the dollar value of all U.S. exports falling to $83.7 billion in July--the lowest monthly level since January, 2000.
That drop is causing untold headaches for small-biz execs such as Duncan, whose 18-person operation sells and finances deals for construction machinery and manufacturing equipment. Exports to Mexico now account for 75% of Duncan's $7.5 million in sales. For much of the 1990s, that was a good thing. But the Mexican economy has contracted for three quarters in a row, sending Duncan's sales down nearly 30%. The company looked elsewhere, but the strong dollar has priced it out of the African market, and demand in Asia is weak. To cope, Duncan, 58, has dismissed eight employees. Now he fears the Sept. 11 attacks will only make things tougher. "Markets abroad are going to be very, very cautious," he says.
ALMIGHTY DOLLAR. As a result, all eyes are on the global financial markets. If the appetite for U.S. investments declines as a result of the terrorist attacks, the dollar could weaken. This could give small exporters a tiny break, making their goods more affordable at a time when demand is falling. But that's far from a sure thing. Meanwhile, the combination of a strong dollar and weak sales puts tremendous pressure on margins for small exporters, who often can't hedge currencies like big corporations. "The dollar's been high for some time," says James Morrison, president of the Small Business Exporters Assn., a Washington trade group. "If it remains expensive now, small exporters will definitely be hurt."
To be sure, some exporters are still managing to thrive. Ann King, president of Heartland Packaging Inc., a 14-person plastic-packaging manufacturer in Pinckneyville, Ill., stumbled into international commerce last year, when she filled an order of gel packs for a Canadian customer. She's since been referred to three more Canadian clients, who now account for about 20% of her $700,000 in sales. The strong dollar has made things tough, but she's coped by keeping costs under tight control and pricing her product slightly below the competition. While the terrorist attacks have forced King to cancel business trips to Canada and Europe, where she hopes to find new customers, she's continuing to negotiate with companies in Russia and Mexico and still expects about about a third of her sales to come from exports within the next three years. "I have a huge amount of pride that I've expanded this far. It's not exactly common in this rural town of 3,500 people," says King, 45. "I am not going to stop now."
That kind of persistence is crucial if small businesses are to succeed abroad--whether or not the world is in a recession, says Laurel J. Delaney, president of Global TradeSource Ltd., an international-trade consulting firm in Chicago. The most common reason entrepreneurs fail in their global adventures, she says, is lack of patience. "They encounter a couple of obstacles along the way, and they stop dead in the water," says Delaney.
Charles E. Tharp, president of Environmental Dynamics Inc., knows firsthand the importance of sticking it out. Tharp, 62, founded the Columbia (Mo.) distributor of waste-water treatment plants in 1975. He has been steadily building his offshore clientele ever since, aggressively courting overseas distributors and attending four major international trade shows a year. Today, the 60-person company makes 40% of its $11 million in revenues from exports to 40 countries. Despite the difficulties exporters are facing, Tharp has tripled his overseas business over the past three years. Exporting, Tharp says, "is a long-term investment, and we played it that way."
GLOBAL JITTERS. Tharp was smart to diversify. Small exporters, Delaney says, should aim to get about a third of their revenues from a diversified export base. More than that, and entrepreneurs could find themselves overexposed to any number of global risks, such as currency fluctuations or political instability. In the meantime, small-business exporters need to constantly hunt for new markets and look for sales at home, too.
Of course, in an unstable political situation, finding new markets is likely to get even tougher. Some small companies may have little choice but to stay home. Securing export financing has long been a major problem for entrepreneurs, even in good times, as risk-averse banks generally avoid such deals. The terrorist attacks could foster even more caution. "The small exporter now wonders how he's going to get anything out of the country in these circumstances," says John Robson, chairman of the Export-Import Bank of the United States, which provides working capital to small exporters through a network of 120 participating banks. (The EX-IM bank, which authorized $517 million worth of working-capital finance to small exporters last year, guarantees 90% of the loan. They also sell export credit insurance--at the cost of 65 cents to $1.13 per $100 of shipment--to cover the risk of nonpayment by foreign buyers.)
It doesn't help that the U.S. trails Europe in efforts to set up free-trade pacts. But then, fretting about trade politics is a luxury few small traders can afford right now. Even Al Merritt, who has long lobbied for the U.S. to move more quickly on free-trade issues, has too much on his plate. His next few weeks will be spent reassuring frazzled employees and clients, negotiating new product lines with manufacturers, and charting the next steps for his company. That's tough enough to accomplish in normal times. It's a small miracle in an age when violence has become one of the world's leading exports.
By Naween A. Mangi