Taking Your Company Overseas
With trade barriers failing and the domestic economy slowing, there is no better time than now to think about exporting. Even the smallest family businesses can benefit.
As recently as 10 years ago, Bill Fleming says, exporting accounted for 35 percent of sales at the Fleming Manufacturing Co. in Cuba, Missouri. Fleming neglected his overseas business as the domestic economy boomed in the late eighties, and exports fell to 15 percent of the company's $4 million in sales last year.
But now, with the economy in retreat, Fleming wants to boost exports to maintain a steady demand for his line of machines that produce concrete blocks, patio stones, and other building materials. 'We're trying to pick it up again," Fleming says of his overseas trade.
Fleming knows that selling overseas can be profitable for his family business, which was started by his grandfather in 1943. There was the time he received a call from a buyer in Barbados wanting information on the company's products. Within weeks, he had placed a $150,000 order right out of the brochure. 'That was really unusual," Fleming admits.
For many family businesses, a lot about exporting is really unusual. And unsettling, too. Although many companies could find a strong market overseas for their product or service, few try. Exchange rates, foreign languages, letters of credit-a litany of unfamiliar business and cultural practices-deter small companies from exporting.
But companies that ignore the sweeping moves toward a global economy, with its cross-the-border marriages of suppliers and customers, do so at great peril. While one small company stands pat, its competitors may be expanding sales overseas, thereby broadening their customer base, spreading fixed costs, and picking up new ideas.
There isn't a better time than now to think about exporting. With the virtual elimination of trade barriers with Canada, plans for a united European market in 1992, and the opening of the Soviet bloc, opportunities abound. Add to this the lower value of the dollar and the slowing of the U.S. economy, and exporting makes even more sense.
Exporting sounds like a good idea. How do I get started?
There's no question that doing business abroad is more difficult than selling domestically. But it need not be particularly risky or expensive. And there are plenty of places to go for help, notably the U.S. Department of Commerce, the U.S. Small Business Administration, and international trade offices in each state.
Which office is the best for you?
"I think you use all of them," says Glenn Ford, director of the International Trade Division for the Oregon Economic Development Department. Each has its strengths and they often work together.
The Commerce Department has 67 district offices that work with potential exporters. The department compiles statistics on the kinds of products that foreign consumers are buying. It can also supply leads on buyers and distributors in target countries, evaluate the reliability of potential buyers, and provide opportunities to advertise a product overseas.
The Small Business Administration, with more than 100 offices nationwide, guarantees financing for many small firms seeking to export, provides export development advice, and will even arrange an initial consultation with an international trade attorney.
Many state international trade offices also help with financing. But perhaps their biggest selling point is service. Glenn Ford's office in Oregon has four international divisions, with 22 staff members in his unit alone. Staffers travel to companies interested in exporting and even accompany potential exporters overseas.
Other sources of useful information include the international departments of commercial banks, trading companies, chambers of commerce, the Department of Agriculture, and foreign trade consultants.
How can I find out if there is a market for my product?
Many companies begin exporting only after receiving an unsolicited order from abroad. A market clearly exists, but it still may be much larger than a single sale. In other situations a company has a particular product or service it wants to sell but must find a receptive market. Such a company may have geographic priorities, but needs to know the best countries to enter.
Statistics compiled by the Commerce Department can help identify the overseas markets for a product, and the leading competitors. Commerce also maintains lists of foreign companies that are looking for specific kinds of U.S. products, and will match potential buyers and sellers. Some of these services carry a small fee.
Once a company has identified a country or region where it hopes to do business, a trip there may be in order. A trade show is a good place to introduce your product, and state trade offices will help you find out about such shows. International trade consultants can be useful at this stage as well, although they can be expensive. Talking to successful exporters of similar products may yield the same information for no more than the cost of lunch.
Another way of identifying a market is to advertise in international trade magazines. Most will translate your ad into the local language at no additional cost. Commercial News U.S.A., a Commerce Department publication distributed around the world, will carry a 60-word advertisement and a photograph for $250, according to Nancy Hesser, the paper's managing editor. "It's a way of getting your feet wet," says Hesser. "You might be surprised at how many responses you get." To advertise, a company's product must be at least 51 percent made in the United States.
I have a product that I know will sell overseas. How do I hire someone to represent me abroad?
0nce you have identified a market for your product, the next step is to find buyers. And that means personal contacts. "You can't just sit behind your desk with a fax machine," says Shawn Reynolds, a trade specialist. Jack Abbate, president of Regency Service Carts Inc., a Brooklyn, New York, family company that sells kitchen, restaurant, and hotel supplies, says, "If you want international sales you have to go out and push ... You have to knock on the doors." Abbate, who sells mostly to international hotel chains, said his business in Europe dried up during the early eighties as currency fluctuations made his product too expensive. But he kept in touch with buyers and says, "We recently got back into the European market because of the devaluation of the dollar. We just did two hotels in Oslo and Stockholm for a Swedish company."
Perhaps the trickiest decision for any company going overseas is determining who will represent it abroad. A company can hire its own international sales force, if it can afford it, or use any of avariety of third parties. Each has advantages. A third party may know the country better than an American employee. But having an employee doing the canvassing generally helps ensure a stronger sales presentation. In general, service-oriented companies or those whose products require a great deal of training or maintenance benefit from having their own sales team.
J.W. Kisling, chief executive of family-owned Multiplex Co. Inc. in St. Louis, says he decided to set up a permanent presence overseas from the start. Kisling sells refrigerated beverage dispensing equipment to the restaurant industry in the United States and 56 other countries. "The equipment is very complex and has a long life expectancy, so we have to provide a lot of after-sale support," says Kisling. He has a dozen of his own employees based in Germany to provide that service for Europe alone.
Most family businesses cannot afford to put a full-time employee in place overseas, at least not right away. Instead, they rely on a variety of middlemen. The most promising options include:
- Commissioned agents or brokers. They set up deals between U.S. sellers and international buyers for a fee. There is usually a small staff with specific market expertise for a certain region or product. 9 Export management companies. This type of firm provides a higher level of service than a broker, generally acting as the export department for several makers of noncompetitive products. It solicits and transacts business on behalf of a company and will often arrange the details of financing and shipping.
- Export trading companies. Similar to an export management company but offering a lot less tender loving care, an export trading company serves as more of a trade intermediary. These firms actually take title to a product and pay the exporter directly. They may handle products from a large number of firms.
- Export agents, merchants, or remarketers. These people purchase a product directly from a manufacturer, ship it overseas, and sell it through their own contacts. The U.S. firm relinquishes control over foreign marketing.
- Piggyback marketing. One company often distributes another firm's product or service. The most common example is when a U.S. company has a contract to provide a wide range of products, some of which it does not manufacture. The company must buy these products from other sources, allowing those sources to "piggyback" on the initial firm's marketing success.
- Licensing agreements. Licensing is one of the quickest and easiest routes abroad because you leave everything to a licensor who's a native of your target country.
- Direct sales from the United States. By advertising in foreign trade publications or U.S. export publications, a company can successfully make overseas sales directly.
- Sales representatives and agents. These people are under contract to sell your product in a particular country or territory. They usually work on a commission basis and use the company's brochures and samples to present the product to buyers.
- Foreign distributors. They purchase merchandise directly from a U.S. exporter (often at a substantial discount) and resell it at a profit. They provide some support and service for the product, maintaining an adequate supply of spare parts and personnel. Many companies begin a relationship with a distributor on a trial basis and then establish terms and length of association.
- Foreign retailers. Generally limited to companies that make consumer goods, this option relies mainly on traveling sales representatives, who may officially work out of the home office.
- Direct sales to end-users. A company may send a representative to solicit foreign governments or institutions. Trade shows can be a good way to reach them.
- Strategic alliances. These can range from franchise agreements to joint ventures to an overseas merger or acquisition. "It's good to have an ally in a foreign country," says Jane SarasohnKahn, director of Action Center Europe at Laventhol & Horwath. An alliance with a reputable foreign firm can provide a knowledge of the market that would take years for an American company to gain on its own.
Choosing among the variety of export options is a complicated task. Fees and services vary greatly, and different companies will have different needs. Work closely with trade officials in your state, the Small Business Administration, or the Commerce Department to determine which options are best.
Jack Abbate, of Regency Service Carts, says he always spends time getting to know his foreign agents and was recently contacted by an export agency in Hong Kong that wanted to sell his products. Abbate went to Hong Kong to meet with the agent and spent a day watching him at work. "I could tell he knew the food service business and had been around," Abbate says.
Since his visit to Hong Kong, the sale has been made and the agent has come to New York to visit Abbate's showroom. "Me few people that we have representing us are like family," says Abbate. "I think that's very important." Such a relationship helps ensure the accurate marketing of your product, Abbate says.
Virginia Weaver, international sales coordinator for Weaver Industries Inc. of Marysville, Washington, says her company must juggle its desire to expand its foreign sales, the need to choose distributors carefully, and its limited resources. "We're willing to work with anybody who wants to push the product," says Weaver, whose company sells a marine hardware device called a snap davit that was invented by her husband. "But you need somebody who's enthusiastic and wants to run with it."
When Weaver received an offer from a British firm to sell the family firm's davits in Europe, she says it was not possible for the company, which has sales of $500,000 a year, to send someone to England to meet the distributor. After the sale, she checked with colleagues in the boating industry. "The marine trade has a grapevine like any industry," Weaver says.
Will I have to change anything about my product to sell to a foreign market?
Different customs and buying habits abroad may require you to redesign packaging and possibly modify the product or service itself.
Nancy Hesser, of Commercial News U.S.A., tells of a woman who advertised washable body decals and received an inquiry from an Arab country. The potential buyer liked the product but not the packaging, which featured a small decal on a woman's thigh. Such displays of female flesh just wouldn't do in that market.
Tom Strauss, of the Commerce Department, recalls a company that exported golf balls to Japan in packages of four. "Four is an unlucky number in Japan and the balls weren't selling well," he says. The company changed to packages of three and sales picked up.
Any American going overseas needs to be aware of the role that cultural differences play in business. One of your best sources of information on that score is the Economist Business Traveler's Guides, published by Prentice Hall. If your plane is about to land in Tokyo, you'll want to know that one-on-one business meetings are rare; as many as a dozen of your hosts may turn up, and you should consider adding the suffix "-san" to their names, to convey respect. If Italy is your destination, a conservative, well-cut suit of somber color is in order; avoid dazzling shirts or ties. For the ladies, the word is to dress in quiet, but expensive, elegance; clothes are the badge of success for women in Italy.
"Quite frankly, most American behavior overseas is not the optimal to get business done," says Gary Lloyd, director of the Business Council for International Understanding Institute at American University in Washington, D.C. Cultural mistakes can sour a deal. "Bad taste is not something you can get away with," Lloyd warns.
Robert Kaiser, vice-president and small-business officer at the Export-Import Bank in Washington, D.C., says many companies fall into a trap of not taking overseas sales as seriously as domestic sales and may make mistakes that could be easily avoided. "A lot of U.S. companies see these orders as inventory clearing," he says.
I run a service business. Are the prospects for exporting services bright?
Services make up nearly one-quarter of overall world trade today. More strikingly, the world market for services has grown at about 16 percent annually over the last decade, compared with just 7 percent a year for merchandise trade. "Services are becoming increasingly important in the U.S. economy and we are encouraging them for export as well," says Strauss. The Commerce Department has identified several service industries with high export potential. They include construction, design, and engineering; banking and financial management; insurance underwriting and risk evaluation; legal and accounting assistance; computer operations and data manipulation; and management consulting.
Exporting a service poses some special challenges. It generally isn't possible to export services without direct contact overseas. Even the creation of a franchise for a service business requires lots of hands-on attention. In addition, financing is often more difficult to obtain because banks prefer to put their money behind deals that generate specific products and collateral.
"Nevertheless", says Sarasohn-Kahn of Laventhol & Horwath, "business services present a tremendous opportunity for potential exporters. There's a whole new generation of Europeans, for example, who have new needs," she says. These needs include immediate copy services, overnight deliveries, and all the other elements required to do business in a world marketplace.
Frank Binswanger III, whose family operates The Binswanger Company in Philadelphia, says the key to success in taking a service company overseas is the same as in this country-offer better service than everybody else. His family real estate business sold property worth $641 million last year, much of it to foreign companies buying property in the United States. The family's advantage is a huge computer database of available property. "In five minutes I can tell a client of every available building in the United States over 50,000 square feet," says Binswanger.
Building credibility for a service business is another issue. The Binswangers drew upon relationships with bankers and politicians to help make introductions to large overseas banks and government officials. "We studied each market to see what was the best way to enter," says Binswanger, whose grandfather still heads the family business.
"In Germany we learned that we bad to get into Deutschebank to gain credibility," he says. In entering the company ap Japanese market, the company proached Senator Arlen Specter (R-Pa.) to introduce them to the Japanese ambassador. In most European countries, the Binswangers have set up joint venture agreements with respected local real estate firms to further enhance their credibility. While all these options might not be available to every family business, the point is clear: Exploit every possible advantage. When the Binswangers entered the Japanese market three years ago, they exploited their status as a family business. "Me way we broke into Japan was by having honorable grandfather there," says Binswanger. "It made a big difference."
You've convinced me that exporting is something I pursue. Now what about the financing?
In a 1988 survey conducted by the Naional Foreign Trade Council, 68 percent of the bankers polled said export finance is not a part of their core business. The problem is even more acute for smaller businesses, since the profit potential for a bank does not justify the amount of time needed to put together a small export deal.
"There's a whole litany of things banks will tell a small company other than 'yes,"' when they seek export financing, says Bob Kaiser of the ExportImport Bank.
'The typical problem is that small companies tend to be rather heavily leveraged," says Kaiser. Often they have no acceptable assets left to offer a bank as collateral. To help, the Export-Import Bank guarantees 90 percent of many export loans made by banks.
Applications to this program can be made through a commercial bank or directly to the Export-Import Bank. The bank's staff will usually help complete the process. Because many banks act slowly, small companies often seek additional help at their state international development office.
The advantage of using the ExportImport Bank is that it is generally more liberal in its lending practices. "We accept things as collateral that a com- mercial bank won't, like fixed assets," says Kaiser, noting that banks tend to accept only finished goods.
The Export-Import Bank also places a high priority on its evaluation of the business owners. "What we're really looking for is how knowledgeable or skillful the principals are," says Kaiser. There are drawbacks, however. "We almost always require the guarantees of the principals," he says.
Small export banks such as Bristol International Ltd., in Dallas, Texas, are another option for an exporter, but there are few of them out there. These banks are willing to take a risk by financing deals without collateral or for a company that is already highly leveraged, but they generally command a much higher fee than commercial banks.
When evaluating a potential exporter, Fred Waldkoetter, managing director of Bristol International Ltd. says the most important question is, "Can he or she bring a sale to the table and deliver on that sale? We want somebody who knows something. They must know an industry, a product, or a market."
One of the biggest stumbling blocks for exporters is the proper use of letters of credit, which are common in overseas deals. These letters are posted by the bank of a foreign buyer to guarantee payment if an order is delivered according to the terms of the deal. But many companies need to borrow money to manufacture the product. It is this short-term financing that often poses a problem, and Waldkoetter says there is good reason for financiers to be wary.
"Exporters don't know how to use letters of credit," he says. "A lot of Americans end up getting screwed." The letter of credit specifies delivery date, but often companies get the products to their buyers late. Sometimes they underestimate shipping time, and on other occasions they just get backed up in production. Foreign banks are not obliged to honor the letters of credit if any of the terms are not met, so this can stall payment. Another common problem comes with the sometimes complicated documents that accompany an order. If they are not completely filled out correctly, a foreign bank will balk at releasing money.
Your bank should help with documentation and advise you on shipping times and terms. But the smaller the company, the more persistent it needs to be in asking for help.
What legal and regulatory issues should I worry about?
No matter how carefully a company has approached exporting, legal and regulatory issues can pose additional obstacles. These range from government restrictions on technology exports to copyright protection in certain countries, particularly in Asia.
All overseas trade requires an export license. In most cases this is a simple matter if a product is already in a category that has been granted a general license. For example, if a general license already exists for the export of toasters, companies seeking to sell toasters abroad need not apply for an export license. They must simply note the presence of an existing general license along with normal export documentation.
Sometimes, particularly with technology or defense-related products, a validated license is needed. Applications for licenses must be made through the Commerce Department. For information contact Commerce's Exporter Assistance Division in Washington, D.C. The Food and Drug Administration and Environmental Protection Agency may also restrict certain exports.
Copyright protection is a touchy issue for many exporters. Just ask Townsend Thorndike. His family business, Annalee Mobilitee Dolls Inc. of Meredith, New Hampshire, was in Japan for a trade show, and some large potential buyers were asking for a lower price on the company's soft sculpture dolls. Finally the buyers threatened that if the ice was not lowered they would sim- make the dolls in Japan.
Thorndike approached U.S. officials, and the matter was eventually pursued by then-Ambassador Mike Mansfield. The buyers were reproached and Annalee Mobilitee entered the Japanese market. "The power of the copyright is incredible," Thorndike says today, while admitting, "It took the ambassador to Japan to remind them."
It's not always simple to guard against copyright infringement. Glenn Ford in Oregon tells of a small manufacturer who sold a piece of equipment to a Taiwanese firm, "and lo and behold they were competing with him with a similar machine," says Ford, noting, "There's not much he can do," given the possible costs of any legal action.
Although vigilance is required, there are still many reasons to export. Bill Fleming says that foreign buyers tend to be more loyal than Americans after the first sale, and that being a family business has a distinct advantage. "It's a more personal relationship," he says. "Generally they're a family business too."
Frank Binswanger adds, "To be able to demonstrate a lot of experience over generations is a big advantage for family firms."
Stephen J. Simurda wrote about trade with the Soviets in our October issue.
Trade Offices: The U.S. Commerce Department
|Delaware||Served by Philadelphia||215-962-4980|
|District of Columbia||Washington, D.C.||202-377-3181|
|Montana||Served by Boise||208-334-3857|
|New Hampshire||Served by Boston||617-565-8563|
|New Mexico||Santa Fe||505-827-0264|
|New York||New York||212-264-0634|
|North Dakota||Served by Omaha||402-221-3664|
|Puerto Rico||San Juan||809-766-5555|
|South Dakota||Served by Omaha||402-221-3664|
|Utah||Salt Lake City||801-524-5116|
|Vermont||Served by Boston||617-565-8563|
Trade Offices: The States
*The amount, type, and availability of financial assistance varies. Contact the state office listed for more information. If the office listed for you state does not provide financial assistance it may be able to provide you with information about other sources. For local help in Washington, D.C., call 202-727-1576.
Trade Offices: SBA
|New York, NY||212-264-1450|
|King of Prussia, PA||215-962-3700|
|Kansas City, MO||816-426-2989|
|San Franscisco, CA||415-556-7487|
Ten reasons to export
- Increase sales and profits.
- Spread out fixed costs.
- Use excess production capacity.
- Compensate for cyclical fluctuations in domestic sales.
- Locate new markets for products with declining U.S. sales.
- Exploit existing advantages in untapped markets.
- Tap into high-volume foreign purchases.
- Learn about technical methods used abroad.
- Follow domestic competitors who are selling overseas.
- Gather information about international competition.
Company: Fleming Manufacturing Go.
Sales: $4 Million
Product: Machines that make building materials
Destination: Europe, Latin America
Company: Regency Service Carts Inc.
Sales: $10 million
Product: Kitchen, restaurant, and hotel supplies
Destination: Europe, Asia
FRANK BINSWANGER AND FRANK BINSWANGER III
Company: The Binswanger Go.
Product: Real estate brokering
Destination: Europe, Asia
TOWNSEND THORNDIKE AND ANNALEE THORNDIKE
Company: Annalee Mobilitee Dolls Inc.
Destination: Asia, Canada, Mexico, Europe