If we have learned anything over the last decade it is the global nature of business. Goods and services can and are both bought and sold internationally.
Because the U.S. market is so large and diverse, many foreign producers wish to market their products here, and as a result our balance of payments continues to worsen over time. Unfortunately, I have had to oversee the demise or downsizing of several textile and apparel manufacturing companies whose production costs were too high in comparison to companies in China and Indonesia. In fact, it is estimated that over 200 apparel manufacturers have closed in the United States over the last 20 years with the attendant loss of over one million jobs. In this chapter I will discuss both sourcing from abroad and selling goods and services worldwide.
Because most companies will die and turn to ash long before the U.S. Government will impose protective tariffs on items competitive with U.S. goods, companies must take self-defensive measures to ensure survival. This means that finding the lowest-cost production alternative may require outsourcing.
There are certain industries that out of necessity have learned how to outsource very well and profitably. As I stated, the textile industry was one of the first to go offshore, primarily to China and now to other third-world countries. As one might imagine there is a limit to which one can drive productivity in facilities in order to lower costs and still not offset the rock-bottom wages and benefits paid in certain areas of the world. Let’s discuss the advantages and disadvantages of offshore product sourcing.
Advantages
Cost. In extremely low labor-rate areas, it is possible to cut the costs of certain products with a large labor content to 25 to 50 percent of American labor costs. Even with ocean freight, the cost is still lower than U.S.-manufactured goods.
Quality. This can be both an advantage and a disadvantage. Quality on imported goods can be very good; however, if good monitoring systems and standards are not in place, this area can quickly become a disadvantage.
Disadvantages
Distance. Usually there is a significant distance between the source of goods and the user, for example, China and the United States. This then translates into longer shipment time and delivery risk.
Cash Flow. International transactions are usually done on letters of credit (L/Cs), with payment made as the goods are loaded on the ship. This requires committing cash or borrowing capacity to the producer well before you sell the goods.
Commitment. Once the goods are ordered and the L/C is placed, you have made a firm commitment for goods and there is no flexibility as to delivery or quantity.
Quality. Unless quality is monitored well, there is a possibility of shipment of off-quality goods.
Litigation. If a problem arises, it is very difficult to adjudicate differences in foreign courts. Even in developed countries such as Italy or France, it is almost impossible to obtain a timely resolution of issues or to collect judgments.
Intellectual Property. Many countries do not honor U.S. patent protections even when protections have been applied for and received in a foreign country. Again, the ability to adjudicate differences varies greatly from country to country.
Fraud. Another disadvantage of dealing with other countries is fraud in a number of ways. This includes substitution of components that are cheaper, copying of the product, and sale in countries other than the United States.
Now that I’ve scared you out of your wits, I need to say that despite all these disadvantages, taking 12 precautionary measures can reduce importation risks to minimal levels.
Determine who the best players (sources) are in a given country. This can be done through recommendations from the U.S. Department of Commerce, various trade agencies of the country in which you plan on doing business, and lenders (banks) with correspondent banks in the country in question.
Check out the recommended partner you plan on doing business with by obtaining references and visiting it. Also visit its bank and get any available financial data you can on the company. Talk to people in the United States who have done business with the company.
Determine if the company’s capacity meets your needs in both the short and long term.
Determine the level of quality of product you can expect and be prepared to establish a liaison and inspection office in the country from which you will be importing. It is most important that you have a person on-site whom you pay to represent your interests.
In your agreement, determine what the economics of your deal will be, including cost of the item or service, cost of liaison and visits, and costs of shipping and insurance so that the real cost of outsourcing is truly understood. Understand the potential risks and allow for them in your economic calculations; for example, allow for one or two extra shipments a year to cover late shipments or delays.
Explore more than one vendor in the country that you plan to source from, and have possible alternate sources outside the target country in case of political instability.
In your agreement, have safeguards as to delivery, quality, and cost, and have your letters of credit incorporate these items in order to allow you to withhold payment if conditions are not met.
Ensure that any L/Cs are on a U.S. bank with which you have a good relationship in the event of problems.
Use the best freight forwarder you can find and get it to help you negotiate shipping rates.
Check on incoming tariffs and duties as part of your economics calculation. In some instances, it is better to import components and conduct final assembly in the United States to avoid excessive duties on finished product.
Be very cognizant of local laws and customs regarding employment of individuals and the cost of changing or terminating a relationship. For example, the cost of terminating an employee in France is very onerous compared with that in many other countries.
Be sure that the lead times for ordering product are consistent with your customers’ needs and that having an offshore production facility does not hamper your sales. Long lead times may cause you to hold inventory in the United States, adding another set of costs to the economics of importation.
Despite any disadvantages and corollary precautions, outsourcing can be very lucrative and allow a company to compete very effectively in its marketplace.
It has only been in the last two decades that U.S. companies have begun to export in earnest. There are a few multinational companies, such as Coca-Cola®, that were well known for their exporting expertise, but for the most part U.S. companies have been content to sell primarily to the vast U.S. markets and haven’t focused on their ability to sell goods and services abroad. Today the Internet allows one to do business with the world at large. However, you must do several things to enhance your ability to sell products and services outside the United States. The following seven tips can help when considering exporting a product or service:
Each country has a unique culture and language, and these have to be considered when thinking about sales.
Strategic market research is necessary to determine the best places to go with your product. This is especially important because of the initial cost of establishing markets in various countries.
Just as in importing, political stability and local economic conditions affect the size and viability of a market and the ability of the locals to purchase your product or service.
Different duties and restrictive barriers to commerce exist in various countries, and these local conditions often act as economic barriers to exporting product.
Freight costs may play a part in determining pricing and the economics of selling abroad.
The cost of collecting receivables from foreign purchasers can be problematic if one is not careful. As I stated in the outsourcing section of this chapter, if you are attempting to collect from delinquent accounts in foreign courts, know that these courts are generally not friendly to U.S. companies that don’t normally play on their turf.
Exchange rates add a level of complexity to pricing and gross margin that one does not face in domestic sales.
Given all this, the global opportunities are virtually limitless if one plans carefully. Think of the huge markets in China and Eastern Europe, where there is demand for products and services that have not developed there. For example, fast-food companies such as McDonald’s and KFC recognized many years ago that there was a demand for economically priced convenient food in countries other than the United States, and they began to export the concept. I once ran a company that did 60 percent of its business outside the United States, and some of our most profitable items were products designed for the European and Asian markets.
There are huge mistakes that companies can make when they fail to take cultural differences into account. For instance, I once tried to export electric wheelchairs into Japan. I thought they would be a slam dunk because Japan was a high-population-density country with great regard for its elderly and infirm. In addition, Japanese consumers could afford what I wanted to export. But I discovered after several rather expensive visits that the Japanese want to take care of the infirm—at home. They don’t want them zipping around the streets in motorized conveyances. Illness or infirmity is considered a private problem, and I was attempting to put the lame and infirm out on the street for all to see, violating cultural taboos. Oops! Things may have changed in Japan in the ensuing years, but I really don’t think so.
So how do you get into the export business, and even better, make money at it? Here are 11 tips:
First, pick your markets. Just as you analyzed strategic markets in Chapter 3, you must pick the markets where there is demand for your goods or services. Alternatively, companies can create demand where there is minimal or unsophisticated competition.
Study the barriers to entry, such as tariffs and government regulations. In certain countries where there is a national policy to develop, for example, steel production, there may be huge tariffs and volume restrictions on imported steel (actually the United States did this until recently).
For example, I once tried to export an electronic beverage-dispensing device to Japan. There was nothing like it being made in Japan at the time and I thought we would have smooth sailing. However, when it came to getting approval from the Ministry of Industry and Trade (MITI), we were informed that we needed to install a rather expensive ground-fault detector on our device so that people using it would not get electrocuted. We protested because the ground-fault detector was going to cost as much as the product and would make it too expensive to sell. Because of the low voltages involved, the probablility of electrocution was virtually nil.
The MITI officials told us that if we were to “team up” with a Japanese company, they would waive the need for this device. I then asked how “teaming up” reduced the probability of electrocution and was told that because a Japanese company would now stand behind this product the government would be confident that no one would get hurt. It was a very obvious nontariff barrier that was being placed in our path. We eventually signed a joint agreement with a Japanese company that was agreeable to all, including MITI.
Obtain reputable sales representatives in the country of choice. Or open your own sales office and hire locals to operate it. For some period of time have someone from your home office present to supervise and train the personnel. This is especially important if the local language is not English.
Prepare your sales documents and product literature in the language of the country that your market is in. This seems obvious, but one of the biggest failings of U.S. companies is to recognize that providing instructions in English to non-English-speaking countries is not only silly but an open insult. The suppliers of computer and other electronic equipment have learned this lesson and have prepared almost all their documentation in multiple language formats.
If you are just starting to export product and are uncomfortable with the expense of multilanguage literature and the preparation needed for certain countries, then start out only in English-speaking countries such as Australia, England, Scotland, and Ireland. Remember that these countries have some cultural diversity as well.
Be prepared to deal with time differences in servicing accounts in different parts of the world. People don’t care that the United States may be 6 or even 12 hours behind. They need help in their workday, not yours.
Adjust your method of receivables collection to reflect the added risk associated with foreign sales. For example, use letters of credit where you can (use accredited banks). Back sales or credit up with personal guarantees where possible.
Ensure that trademarks and patents are filed in the countries in which you plan to do business. I have heard horror stories about trade names being stolen in countries where the exporter failed to register a name.
Capitalize on employer-friendly countries. Establish offices and warehouses in countries where the employment laws do not unduly penalize you if you wish to change personnel or move an office.
Treat the foreign offices as “part of the team,” communicate with them, and visit them regularly. As I mentioned, telecommunications is at the point where regular videoconferences are inexpensive. Watch their spending and resultant sales just as you would any U.S. office.
Set pricing of the product in the currency of the country or the region. Some of my worst fights with foreign distributors were over the change in the value of the U.S. dollar compared with the euro and what it did to affect our pricing. Adjust pricing every three to six months, but use the local currency.
Watch your back. Obtain adequate risk insurance for the operation of these foreign operations.
Again, all this sounds tough, but international sales can be rewarding and a lot of fun.