Trading Places: How a Dentist Invented the Export Trading Company
Although Dr. Josepb Blaes considered himself reasonably imaginative, he never dreamed that his design for a more efficient dental clinic would have global significance.
In 1973 Blaes and his partner, Richard J. Haffner introduced the "carousel" to their Sunset Hills Dental Group in St. Louis. The carousel is a group of 18 chairs, each separated by partitions and arranged in a circle. While patient traffic flows around the outside, the dentists and their assistants, whom the dentists call para-professionals," fill cavities, clean teeth, and perform other dental procedures on the inside of the circle. The arrangement, claims Blaes, is efficient and allows the dentists to keep a close eye on their assistants.
Four years ago, the dentists received a visitor from Saudi Arabia who had heard about the carousel clinic from a U.S. dentist practicing in his country. The philanthropic Saudi, says Blaes, was interested in bringing "world-class dentistry" to his country, where rapid growth -- and increased consumption of sugar and junk foods -- has been accompanied by an epidemic of tooth decay. After several months, the Saudi signed a contract with the dentists to draw up a plan for a clinic in the city of Jedda.
When bidding on the $20-million construction project takes place this fall, one of the bidders will be Universal Trading Group Ltd., a St. Louis-based export trading company (ETC) formed early this year. UTG's investors include a lawyer, an architect, an insurance executive, an international marketing executive, and dentists Haffner and Blaes. UTC, says Blaes, will offer a "turn-key contract covering construction management, equipment and supplies, and even the recruitment of dentists and paraprofessionals."
That a small trading company like UTG can stand a chance competing against large foreign cartels for a major construction project is in part the result of the Export Trading Company Act of 1982, which was signed into law in October of that year. In a significant departure from U.S. antitrust laws, Congress voted to give its blessing to "certified" trading companies that bring together competitive suppliers of goods and services to improve foreign bidding chances. Certification, which is voluntary, is granted by the Departments of Commerce and Justice once they determine that the export activities won't unreasonably affect U.S. price levels or other domestic exporters. Once certified -- a process that takes about 90 days -- competitors can exchange information on their export activities, fix prices, and divide up foreign markets. Previously, such activity would have been a flagrant violation of U.S.law.
But Congress was ready to take a radical step to try to reduce its growing trade deficit, which was expected to hover around $65 billion this year. Contributing to the country's eroding trade position, the act's drafters believed, was an adversarial relationship between government and business that put the United States at a disadvantage when competing in overseas markets.
"We are the only country that has been almost completely unorganized to compete," says Charles Allen, vice-chairman of Boles World Trade Corp., a $60-million trading company headquartered in Washington, D.C. By contrast, other countries have developed tremendous cooperation between business and government. For example, Japan's Ministry of International Trade and Industry works closely with the private sector to facilitate export activities through tax deductions and credits, subsidies, and low-interest loans. Japanese businesses can count on the country's financial institutions and trading companies to offer a broad range of export financing and services.
U.S. companies have found it increasingly difficult to go head-to-head with such organized competitors. "I don't have a government that will allow me to use its financial muscle," says Michael Henderson, president of Universal Trading Group. He remembers bidding against a representative from a Japanese trading company on a foreign government -- sponsored construction project. Accompanying the rep was a Japanese government official, who offered to purchase raw materials from the country in exchange for the construction contract.
Even for big U.S. companies with the capital to absorb losses associated with developing foreign markets, competing overseas has grown increasingly difficult. For undercapitalized and understaffed small companies, it has been even more difficult: Inadequate financing, fluctuating currencies, protectionist barriers, differences in language and business customs, and government red tape are just some of the hurdles.
"The more legislation that went on the books," says Henderson, "the worse the environment became for international trade." Many businesspeople complain that the Foreign Corrupt Practices Act, designed to prevent U.S. companies from bribing foreign government officials, causes Americans to lose precious time by forcing them to report and document legitimate payments to foreign customs officials. Foreign competitors, unencumbered by such regulations, can move much more swiftly.
The purpose of the Export Trading Company Act is to reduce some of the inhibiting rules and regulations. Besides relaxing antitrust laws for exporters, the act permits banks, through parent holding companies, to wholly own or invest in ETCs -- commercial ventures formerly off limits to banking institutions. Imposed in the 1930s, the separation policy stemmed from a fear that depositors' money would be at risk if banks engaged in commercial ventures.
In order to appreciate the significance of protection from antitrust violations, says Tom Johnson, a partner in the Chicago law firm of Baker & McKenzie, a company must understand the potential damages that could result from violating present antitrust regulations. "Many small companies are under the false impression that these laws apply only to big companies," he notes. But if, for example, two small companies agree to divide up markets or appoint the same distributor, they can violate U.S. law, a felony that carries a recommended minimum jail sentence of 18 months. Or, if a domestic company terminates its foreign distributor, that distributor can sue in U.S. court if it can show that the American company consulted with another distributor or applied pressure to control prices. Finally, a small company in a narrow market can be as guilty of monopolization as a large company. "And it doesn't matter if your sales are $100 or $100 million," says Johnson.
Johnson calls certificates of review a "cheap form of insurance" against these potential legal problems. Once XYZ Co., for example, is certified for its export activities, it cannot be sued for violation of antitrust laws by any federal or state agency or by a foreign company. Furthermore, a U.S. company that sues XYZ on the grounds that its business has been injured by the certified activities can sue only for the amount of the damages -- not triple the amount. "This is a significant change, because most antitrust lawsuits are initiated by people wbo are lured by the prospect of receiving a share of the treble damages," says Johnson. The act also states that a successful defendant must be reimbursed for its legal expenses by the plaintiff. Formerly, winning a case was a Pyrrhic victory for a defendant crippled by exorbitant legal costs.
One of the first applicants for a certificate of review under the new legislation was the U.S. Farm Raised Fish Trading Co., headquartered in Jackson, Miss., a consortium of catfish farmers and processors that are interested in developing foreign markets for their product. Although The New York Times food critic, Craig Claiborne, calls farm-raised catfish "the finest freshwater fish in America," a lot of folks fail to realize the distinction between farm catfish, raised on a high-protein diet of soybean meal, wheat, and corn, and its country cousin, which feeds along the bottom of southern rivers.
Inroads have been made in promoting the fish domestically (U.S. sales for the $150-million industry are growing at a rate of about 50% to 60% a year), but overseas sales remain "zilch," says Mark Freeman, executive vice-president of Catfish Farmers of America. By pooling their resources through a trading company, the catfish farmers and processors look forward to developing foreign markets for such items as fried catfish with hush puppies, catfish sushi, and catfish a la Russe.
The consortium's initial goal -- to evaluate the potential catfish market in Japan -- is modest, but, further along, the group plans to divide up foreign business, assign exclusive territories, and fix prices, once these activities are properly certified. "Free enterprise is fine for the U.S.," says Freeman, "but it isn t practiced that way in the rest of the world. The ETC Act legalizes a cartel and puts us on even footing" with foreign competitors.
Michael Henderson of UTG agrees that the certificate is worth applying for. In June, UTG's notice of application appeared in the Federal Register, requesting certification for designing and constructing hospitals; staffing and operating health-care facilities; selling health-care products; and providing data-processing services and medical-insurance plans. The company even asked to supply foodstuffs and tires. (Any commercial or financial information that UTG discloses to the government is not available to competitors, since the act exempts applicants from the Freedom of Information Act.)
If UTG receives approval -- which was expected at the end of September -- it plans to bring together suppliers of dental chairs, cabinetry, tires, and other goods. Suppliers can decide how they want to divide up the business and discuss creative financing and pricing. In effect, UTG acts as a packager, organizing the suppliers of goods and services. "That's attractive to the foreign customer who wants to deal with one group with a complete package of goods," says Tom Johnson.
Skeptics of the act's antitrust provision ask if it is realistic to expect a group of competitors, accustomed to fighting it out domestically, to sit in the same room discussing sensitive price issues. "The more competitors involved, usually the greater the conflicts," notes Richard V. L. Cooper, a partner in the Washington accounting office of Coopers & Lybrand, who has worked with several groups trying to form ETCs. He believes that the most successful joint ventures will be struck among companies dealing in complementary, rather than competitive, products. He also recommends to clients that, initially, only two or three companies join up to set the terms, then invite other investors to join under those guidelines.
Whether the new antitrust and banking legislation has any serious effect on the U.S. trade deficit -- or on the fortunes of smaller companies -- remains to be seen. By last August, only 18 companies had applied for antitrust certificatton, and 10 had announced their intention to form trading companies. These included Security Pacific Corp., Citicorp, and Walter Heller International.
The biggest problems for the banks are emotional rather than financial, says Ronald Guerriero, president of World Trade Group, a subsidiary of Bank of Boston, which offers market research and management services to exporters and importers. Most bankers, he says, don't have the constitution for trading. "They don't have a stomach for inventory risk, in spite of the fact that they do a lot of asset-based financing." Asks Guerriero, "What banker has ever had the visceral experience of sitting at a desk in a company with a warehouse full of jujubes and not knowing where he is going to sell them?"
But Guerriero believes that, if customers apply enough pressure, banks will become increasingly involved in foreign trade. "Even if a bank has no inclination for trade," he says, "if 10 of its customers get together and each put up $10,000, their $100,000 deposit would be a very erogenous zone for the bank." Adds Johnson of Baker & McKenzie, "Up until now, the banks have acted as if they are in the driver's seat. If small and medium-size companies get together, they can shop the banks." Johnson says comapanies can try to get the bank involved as an equity partner in exchange for their export financing business. Or the companies can form their own export trading company, then look for a bank to supply the financing and working-capital loans.
Congress hopes that government loan guarantees will provide a carrot for cautious bankers. The Export Trading Company Act directs the Export-Import Bank of the United States (Eximbank) to establish a program to help ETCs and other exporters in their working capital needs by providing short-term, pre-export loan guarantees. In the past, guarantees and financing were available only to cover specific export transactions and not for working-capital purposes.
Last May, Delta Brands Inc., a $15-million manufacturer of metal-cutting machines in Irving, Tex., received from the Marine Midland Bank a loan of $749,700, 90% of which was guaranteed by Eximbank. Delta obtained the funds to help build a steel-cutting machine ordered by China National Macbinery Import and Export Corp. in Beijing, Cbina. The benefit of the loan guarantee is a lower interest rate and access to funds required to manufacture the $1-million machine, explains Al Goldstein, vice-president of Crown International Trading Corp. in Melville, N.Y., which administers Delta's export financing.
Besides the guarantee program for working-capital loans, Eximbank recently announced that interest rates will be reduced 1% on its Medium-Term Credit Program and its Small Manufacturers' Discount Loan Program (for manufacturers with annual sales of less than $25 million). Both programs allow U.S. banks to extend fixed-rate export loans to foreign purchasers, with the assurance that Eximbank will cover the loans. Eximbank offers a standby commitment that, if the cost of money or interest rates rise, the U.S. bank can borrow from Eximbank at a discount rate. Another potential boost is legislation now before Congress that requires Eximbank to set aside 5% of its resources in 1984, and 10% in 1985, for small businesses.
Some critics complain that the Export Trading Company Act fell short and that U.S. companies need more financial incentives for exporting. "Certain people wanted handouts," notes Johnson. "Others wanted tax breaks. Neither was realistic." First, he explains, Congress wanted private industry to take the initiative and was against providing "programs and gifts." And second, tax benefits for exporters violate the General Agreement on Tariffs and Trade, a code of conduct for international trade.
While critics air complaints, a small but growing number of businesses, banks, trade associations, state governments, and even municipal port authorities are taking interesting steps to develop exporting:
* The State of Tennessee recently enacted legislation forming Tennessee Competitive Export Corp. (TCEC), which will help the state's small businesses take advantage of federal export finance programs offered by Eximbank, the Federal Credit Insurance Association, and the Small Business Administration. "Many companies either do not know about these programs or cannot face the monumental task of completing the applications in time," says John Walker, director of the Tennessee Export Office. TCEC has a nine-member board made up of business and government representatives. TCEC's first step will be to send people to Washington, D.C. to study government financing programs. Upon returning, they can identify good prospects and help companies prepare applications before visiting the bank.
* A regional bank holding company, State Street Boston Corp., has notified the Federal Reserve Board of its intention to form an ETC. If no action against the proposal is taken by the Federal Reserve for 60 days, State Street Trade Development Co. plans to offer export assistance to small and medium-size companies with sales of $10 million to $100 million -- "the same companies we want as our banking customers," notes Alfred S. Woodworth Jr., senior vice-president and chief financial officer of the new group. State Street's new subsidiary will work with companies to identify appropriate international distribution networks and will assist in their management.
* In Iowa, seven companies -- Ruan, Agri Industries, Iowa Beef Processors, Maytag, Townsend Engineering, Pioneer Hi-Bred International, and Winnebago Industries -- have formed lowa Export-Import Trading Co. Spearheaded by John Ruan, one of the state's most prominent businessmen, with interests in banking, insurance, and transportation, the trading company is designed to pool the exporting experience of its founders in serving small and medium-size companies in Iowa. While the seven founders enhance their public images by investing in a good cause for the state economy, small businesses see tangible, bottom-line results.
Prince Manufacturing Corp., in Sioux City, has exported hydraulic cylinders, pumps, and valves for over 20 years, but exports represented less than 2% of sales.
We just didn't have the manpower" to go after orders or work closely with foreign sales agents, confesses Roland D. Junck, president of the $25-million company. Last Spring, Junck signed an agreement to export through lowa Export-Import Trading Co. Now all inquiries and quotes art sent directly to the trading company. Prince's first order: 10 pumps to South Africa for an agricultural project.
* An increasing number of multinational companies, including Sears, Roebuck & Co. and General Electric Co., are forming their own trading companies. Although they are just getting rolling, these subsidiaries will look for products and services produced by small and medium-size businesses to expand their lines.
Last summer, when Sears World Trade offered its trading arm to Paybauler Corp., a recently incorporated manufacturer of off-road trucks, the company agreed to accept the deal. Like Prince Manufacturing, Payhauler had exported, but there were problems, "not the least of which was the complexity of domestic requirements and bureaucracy," says E. A. Domes, vice-president of technology for the Batavia, Ill., company. "We saw the opportunity of using Sears as a conduit to make things happen." Ronald Guerriero agrees that piggybacking with multinationals will be profitable at first, although he predicts that once the volume increases, companies will strike out on their own.
"All this activity is healthy and yeasty," says Charles Allen of Boles & Co., who predicts a "goldrush" in trading, particularly as more banks become involved in ETCs. In the wings, he says, stands a service industry of lawyers, accountants, and consultants ready to spring for a share of the business. At recent Department of Commerce conferences to promote export trading companies, more than half the audience consisted of a hodge-podge of bankers, lawyers, accountants, and consultants. Says Guerriero, "There was a lot of hustling going on during the coffee breaks."