How to keep your foreign distributor from becoming your competitor.
Your competitors are undoubtedly an honorable bunch. Just the same, though, would you want to depend on any of them to distribute your product -- the one with the proprietary technology? Of course not. But that's exactly the situation you can find yourself in when you start trying to sell your products overseas.
In such large, complex markets as Japan, China, and Europe -- the last especially after it unifies in 1992 -- it's wisest to sign on with a local distributor who understands how business is done and can customize your product. But in Japan, for example, many distributors are primarily manufacturers who became distributors to provide service to their customers. That means they could easily become your competitors. As a result, "you need to be trusting, but you also need to protect yourself," says James Logan, president of MicroTouch Systems Inc. "You don't want your distributor coming back to haunt you as a competitor."
Logan, whose company sold $7.5 million worth of touch-sensitive computer screens and other input devices last year, spent more than a year negotiating a simple but unusual contract with Nissha Printing Co., its Japanese distributor. The contract contains about a half-dozen provisions designed to discourage Nissha from taking any steps toward walking away with MicroTouch's market or technology.
Like many small companies, MicroTouch stumbled upon its foreign opportunities. In 1986 Logan discovered through an inquiry to Dun & Bradstreet that of the 80 companies that had asked about MicroTouch in the past year, 30 were Japanese. "It was an interesting tidbit that I stored in the back of my mind," he says.
It moved to front and center that spring when he got a letter from Nissha, a giant Japanese printer. As the letter explained, the company was shipping a piece of printing machinery with a touch-screen component to the United States. Does this machinery infringe on your patents? Nissha asked. No doubt the Japanese company was concerned about the legal issues, but there were probably other motives behind the missive. Perhaps Nissha, which already made simpler touch screens, was investigating what U.S. patents already existed, just as Canon once scrutinized Xerox's patents on copiers. Or the letter may simply have been a pretext for contacting MicroTouch. That was fine with Logan, who used the opportunity to ask Nissha about its touch screen and to send off some literature.
During 1986 Nissha bought about a half-dozen screens from MicroTouch and began doing some informal market research with its customers. In December, impressed with what it was finding, Nissha sent three representatives to meet with Logan at company headquarters outside Boston. They wanted to strike a distribution deal.
The Nissha executives -- much to Logan's surprise -- came bearing cameras and rattling off detailed questions. Nervous, Logan asked that they not take pictures inside the factory. "We didn't get into real technical conversations about how the product works," he says.
But they did start talking about a distribution agreement. In March 1987 Nissha and MicroTouch signed a one-year deal, essentially a trial run. Logan knew that Nissha wanted more -- a longer-term contract and exclusive distribution rights covering the whole Far East, not just Japan. He started a more thorough investigation of his new partner.
Sound backward? It should. Logan should have investigated Nissha before reaching any agreement. A contract with a Japanese company is serious business, no matter what the terms. If, for any reason, Logan had wanted to sever his ties with Nissha, he'd have had a rough time finding a new distributor. Japanese companies place a high value on loyalty, so other distributors would likely have shunned MicroTouch.
Fortunately, Logan didn't find any evidence that Nissha was in the habit of appropriating technology. "But," he adds, "we wanted to think of long-term safeguards."
After visiting Nissha in May 1988, Logan spent the next several months hammering out the mechanics of the deal. To help tear down the language barrier, he hired Jack Plimpton, who is fluent in Japanese, as director of marketing. In December 1988, some seven months after Logan's visit, they sat down to sign the contract.
During those months, Logan and his advisers came up with a few ingenious ideas to, as he puts it, "tie Nissha down in as many ways as possible." First off, Nissha would become a stockholder. Logan felt that if Nissha invested $500,000 in return for a small percentage of equity, it would be likely to devote more attention to Micro-Touch. He settled on $500,000 because he felt it was enough money so that Nissha would feel it, but not enough equity to dilute existing shareholders. Nissha didn't raise any objections since such investments have become commonplace. "The Japanese favor them," says Plimpton. "They view them as a healthy mingling of blood."
The Japanese partners were a little surprised, though, at a twist that MicroTouch added to the standard equity agreement. It worked like this: Nissha would pay $500,000 for its shares, but if MicroTouch deemed the contract broken, it could buy them out for one penny per share. Isn't that rather low? the Japanese asked Logan after he proposed it. When they recognized it for what it was -- not an investment, but a sign of commitment -- they were more than willing to agree. To Trevor Nagel, the attorney representing MicroTouch, the buyback agreement was crucial since the Japanese government does not have a reputation for enforcing noncompete clauses very vigorously. "If Nissha started competing with us in Japan," says Nagel, "we couldn't rely on the courts to make remedies."
Logan also required Nissha to provide marketing information, keeping MicroTouch informed of who its major customers were, the different applications, and where the competition was heading. "If we don't understand anything about the market, we become subservient subcontractors to them," says Logan. Though not all that uncommon, this could have been a sensitive negotiating point for Nissha. What was to prevent MicroTouch, after all, from learning as much as it could about its Japanese customers and then cutting Nissha out of the deal?
