Exporting can be a less costly experience when you investigate foreign markets thoroughly.
Exporting can be a less costly experience when you investigate foreign markets thoroughly.
If you're thinking about exporting, it pays to think ahead
Ruth Stafford was raring to go. A Mexican company had approached Stafford, the executive vice-president and co-owner (with her husband, Ron) of Kiva Container Corp., in Phoenix, about buying plastic containers from Kiva. She mailed off product samples and price lists, hosted her Mexican visitors in her Phoenix office, and made three trips to the Mazatlán region. But talks, which began five years ago, just kept on dragging.
"They didn't seem to be capable of making a decision," says Stafford. "Then we started coming up with our own problems with tariffs and payment terms." Finally, three years later, a deal worth less than $50,000 went through, only to collapse after the first shipment, when the Mexican company started asking for price cuts and payments under the table.
But by the time the deal unraveled, Stafford had taught herself everything she needed to know about how to -- and how not to -- do an export deal. "I look at that early period as the equivalent of a college education," she laughs.
It paid off. Today exporting represents about 10% of the company's $5 million to $10 million in sales, a share that Stafford expects to grow to 25% within the next five years.
Exporting offers entrepreneurial companies fantastic potential for boosting sales and perhaps even profit margins. But it offers enormous risks as well. "I've seen a lot of companies sink vast sums of money into exporting plans in the hope of an eventual payoff three or five years down the road," says Stafford with a shrug. "Or they get sucked into hiring expensive consultants who don't really understand the nature of their companies and their products."
Stafford took a more cautious route. She formulated and stuck to a conservative growth plan; utilized her business and government contacts; carefully researched new countries and customers; and, throughout, controlled Kiva's costs. Above all else, she looked for ways that Kiva's prospective exports could complement, rather than detract from, the domestic sales base the company had grown over the past 32 years. And although Stafford is the first to admit there have been some mistakes along the way, her commonsense approach should work well for any growing company wanting to get into exporting.
* The growth plan. Kiva's corrugated plastic containers come in many sizes and shapes -- among them tote boxes, coolers, portable voting booths, and a dome-shaped plastic tent. "The only limit is our imagination," says Stafford. Unfortunately, U.S. companies prefer cardboard containers, which cost one-tenth or less the price of plastic. So Stafford looked abroad for customers.
Her initial goals were modest: to do about $100,000 of exports the first year; $250,000 by year two; and $500,000 by the third year. "I didn't want to overload our production plant and find out that we were taking orders we weren't able to fill," she says. Kiva actually outperformed those goals, but by a small enough rate that exports never strained domestic capabilities.
Stafford built the same profit margins into her export prices that she aimed for from U.S. sales: "It's a fantasy for most companies to think they're going to earn much better profits overseas. After all, you're competing against foreign companies, which often have much lower labor costs and government incentives to help them keep prices low. All of Kiva's production is done in either Phoenix or California."
Conservative by nature, Stafford and her husband financed all their increased production and research costs out of cash flow so that all the benefits from their new export program would trickle straight down to the bottom line.
* Utilizing contacts. To get started, Stafford approached Don Fry, the director of Phoenix's district office of the Department of Commerce (DOC). "I told him what we were interested in doing, and about the problems we were having with the first Mexican deal." Fry responded by giving her a list of recommended reading.
By their second meeting, over a three-hour lunch, Stafford was "incredibly excited" but full of questions. "I wanted to know all the real stuff. How do you prioritize a plan? How do you get started? How do you protect your hindside?" Fry recommended that Kiva's staffers start by attending trade shows and DOC conventions where they could make contact with foreign brokers and end-users. District DOC offices usually coordinate four to six general sessions per year, while the national DOC office hosts another series in Washington, D.C., usually organized around 8 to 10 countries.
To generate new business prospects, Stafford decided to make contact with some export-management companies or freight-forwarding agents. (For fees of 2% to 5% of sales, agents cut through custom hassles, handle paperwork, pay tariffs, and so on; export-management companies actually put together sales deals as well.) Stafford relied on DOC district offices, which have, in her view, "a very fine list" of some 300 contacts.
Fry urged Stafford to establish a relationship with a bank that had a strong international department. Fortunately, Kiva's bank, Citibank, had one, and Stafford made wise use of it. She negotiated for a credit line that would protect the company against any export delivery delays or payment glitches. She had already been warned that some foreign customers would want to release payment funds as long as a week or more after accepting delivery. As Kiva's export program has expanded, so has its credit line. "We soon realized that it was important to be able to cover the worth of any ongoing deals," Stafford says.
* Researching the market. Stafford started attending trade shows for packaging and graphics companies, and the response was immediate. "We had international agents and end-users from Mexico, South America, Japan, Hong Kong, and Britain coming up to our booths, asking for samples and price lists," she recalls. "Our name got around very quickly as a company that wanted to do exports."
After an electronics company from Hong Kong approached her about buying some antistatic plastic containers, she had her banker check its financial references to make certain that it could afford to pay its bills and was proposing a payment and delivery plan that made sense for both sides. Stafford still does this with any new prospective deal -- which she believes is one reason she's never had any real payment problems.
* Controlling costs. To protect her profit margins and still be able to price export products competitively, Stafford had to keep transport costs, returns, and other expenses down to a minimum. One way she does this is through a simple but highly specific sales contract that leaves little room for long-distance confusion. It spells out the duration of the contract; the price and the terms for price changes; a written description of goods sold, accompanied by a sketch or picture; and payment terms.
To protect herself against tax liability in foreign countries, Stafford insists on FOB (free on board) terms, which transfer ownership at the point at which goods are loaded for transport overseas. Freight insurance could prove costly, so Stafford prefers to do her deals through agents. Since they assume ownership at the docks, there's no reason for her to insure transport.
Now that she's gotten started, Stafford is on an export roll. A Japanese company is financing the research and development of super-resilient containers for shipping fish. "That could wind up being a $1-million-a-year product by the time we're through," she says. Although she's excited about recent approaches from Russian and Hungarian brokers, and particularly interested in widening her Western European customer base, she remains determined to stay out of Latin American and other high-inflation markets. "You price your product one way, and by the time research and production are done, it could be priced out of the market -- that's not worth the risk," she says.
Foreign lessons can be costly. For Kiva Container, the rewards have far outweighed the costs.
Before closing a deal
Interested in moving into exporting? Here's how:
* Tap free resources. The nearest Department of Commerce office can suggest local nonprofit organizations that can give you some support and guidance.
* Price accordingly. If your product won't sell at a price high enough to cover your own costs as well as either the agent's fee or the tariff and other export costs, stay home.
* Check credentials and bank references of any company, agent, and export-management firm you're considering dealing with.
* Rely on your instincts. If a prospective export deal worries you because of local inflation rates, bureaucracies, or hints of graft, move on. As Ruth Stafford says, "There's always another deal."
Read, read, read
Ruth Stafford recommends:
A Basic Guide to Exporting ($8, U.S. Department of Commerce), a comprehensive how-to on pricing, contracts, and other key topics.
Directory of Leading U.S. Export Management Companies ($49.50, third edition due fall 1990; Bergano Book Co., P.O. Box 190, Fairfield, CT 06430) lists export-management companies.
The 1990 Official Export Guide ($479, North American Publishing Co., 401 North Broad St., Philadelphia PA 19108).