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STRATEGY

Foreign Affairs
 

Profile of start-ups doing business internationally.
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Start-ups such as National Gyp-Chipper are proving that, when you move from doing business next door to doing business around the world, the same basic rules still apply

* * *

It would be a stretch to call Pflugerville, Tex., a hub of international commerce. It doesn't look the part -- it's small and sleepy, served by banks gone belly-up and now run by the government -- and it doesn't boast any big companies that you'd typically think of as global rollers.

But in a warren of tidy offices on a dusty side street, a manufacturing start-up is doing global deals: Shipping product to Britain. Taking calls from Dutch distributors. Soliciting financing from Israelis. Entertaining Japanese businesspeople over barbecued ribs.

Admittedly, the company isn't likely to turn the town into an international nerve center anytime soon. National Gyp-Chipper Inc., after all, sells machines that shred excess gypsum board -- not computer peripherals or running shoes or any other product likely to take the mass market by storm.

Besides, the company is painfully typical of a start-up: sparsely funded and thinly staffed, with little obvious incentive to pursue markets eight time zones away and certainly no experience in doing deals that require wrangling through barriers of language, export law, culture, and currency.

But that's the point. With just five managers, seven plant workers, and a little more than two years' manufacturing experience, National Gyp-Chipper has entered the domain most people think is reserved for savvy, seasoned, well-networked, and well-established companies: the world of international commerce.

Many perfectly capable companies shy away from selling outside U.S. borders, just because they think they're too small or too unfamiliar with trade practices or lacking the right in-house personnel. But when young companies like National Gyp-Chipper do go abroad, most find they don't run into the vexing headaches that seemed imminent. Instead, the fundamental challenges apply: figuring out reasonable contracts, getting good patents -- and above all, finding the right people to work with.

And many growing companies are meeting those challenges. In a 1988 INC./Price Waterhouse survey of manufacturing and service companies with revenues between $1 million and $100 million, one out of every five respondents that did have international activities claimed that more than 25% of their sales came from overseas. More than 60% of the respondents said that their foreign operations had become profitable in less than one year.

Even more surprisingly, many companies cultivating foreign customers and partners are, like National Gyp-Chipper, start-ups in their first few years of sales. Indeed, instead of asking, Why go global? a whole generation of new businesses are entering the marketplace and asking, Why not?

* * *

Benny Turner is driving a tan Silverado from Austin to Pflugerville, a town about 10 miles north, pointing out two kinds of landmarks along the highway. First are empty offices and shopping centers that line the main thoroughfares, the unmistakable signs of Austin's fall from economic grace. "See those dead buildings?" Turner says, nodding toward a mall complex where half the stores sport For Rent signs. "That's what our economy looks like."

The other landmarks are buildings on which Turner worked as a drywall contractor and distributor over the past 30 years. He estimates that he helped put up gypsum board in 20,000 apartments and 400 stories of high-rise buildings. It was through industry contacts that Turner and partner Jack Mallory first heard about the Gyp Chipper machine. About the size of two trash barrels, the $10,000 Gyp Chipper pulverizes scrap gypsum board and turns it into easily transportable and potentially recyclable powder. Invented by a fellow in Minnesota, the machine was just being brought to market when Turner first saw it -- and it was, he says, the answer to one of a contractor's biggest headaches: getting rid of the junk that piles up at a construction site. Turner saw its appeal immediately, and in 1987 he and Mallory acquired the marketing rights to the new machine. Two slow sales years later, they and a third partner bought the manufacturing rights so they could fix problems they saw in the machine's design and production.

In the past year National Gyp-Chipper has sold 102 machines, for total sales of $528,000 and profits between $50,000 and $100,000. It's begun a new venture, called White Gold, to build plants that will turn the powder into soil additive and other products. A feasibility study for the first plant is now under way in Vermont. In the past year the company -- barely off the ground domestically -- decided to look into marketing the product outside the United States.

* * *

Why Go Global?
Benny Turner can understand skepticism about doing business abroad -- he was skeptical himself not too long ago. "I thought, What is the need for us to mess with a foreign country, anyway?"

He wasn't an inexperienced businessman: in addition to running the $500,000 Best DryWall in the early 1960s, Turner, now 49, also owned a $1-million equipment-supply distributorship and a thoroughbred-horse-breeding operation. But none of those businesses operated outside the United States. Mallory, whose background is in sales, and third partner Steve Lott, who owned a construction and fencing business, had no history of international dealings, either.

On the face of it, there is enough opportunity stateside to keep National Gyp-Chipper busy. There are at least 40,000 sizable contracting companies in the States and perhaps another 50,000 smaller operations as well.

Every contractor has an incentive to make site cleanups easier, and every contractor has a motivation to find an alternative use for excess gypsum, which some trash dumps are threatening to stop accepting. As much as 300 million pounds of scrap drywall is hauled off to dumps every month in the United States, and gypsum board is barred at a number of sites because it can create hydrogen sulfide when mixed with garbage.

Despite the vast domestic market, Turner and his team suspect that European and Asian markets will take to the product faster than the U.S. market will. Part of that suspicion is calculated. "Recycling has much more appeal overseas," Mallory says. "The international market accepts innovations much better than the U.S. market. Their pollution and trash problems are magnified because of limited land space." Part of that suspicion is documented: National Gyp-Chipper's machines received a solid reception early on in foreign markets. Demand was generated by trade shows, stories and advertising in industry journals, and a report on Cable News Network. "We didn't realize how strong the market would be overseas until we started getting all the calls," says Turner.

As foreign demand began to bubble up, the company began to fear it would get ripped off if it wasn't the first to export. "Someone can buy a Gyp Chipper in California and ship it to Japan, and I can't control that," says Turner. "Therefore, I had better protect myself today -- get in front of the wagon and pull it, rather than try to catch on to it later."

True, the people at National Gyp-Chipper would have preferred to wait a little longer -- even six months -- but they felt an urgency when evaluating the options. "They're forcing us to do it," Turner says of buyers abroad. "When they spend their money to fly out here from Japan or England to meet us, that means they want our product. We knew we never could turn the business down. There's a need for what we are doing." And it's a need, he's convinced, that someone else will meet if National Gyp-Chipper doesn't.

Now What?
"At night I'd walk up and down the streets and say, Well, what do I do?" reflects Turner. "It's serious. There's many an hour of thinking about it, wondering, How do you protect yourself? Are you sure you're going the right way? And who do you ask?"

That's the big one. With a number -- though certainly not all -- of those sleepless nights behind him, Turner sits today in a high-backed swivel chair behind a desk covered with purchase orders, message slips, and company brochures, and emphasizes those words slowly, one by one: "Who . . . do . . . you . . . ask?"

Government offices, he says, were no help. Better sources were other manufacturers doing business overseas already and local acquaintances whom he pumped for information about what they looked for in a good patent, how they found distributors, and who the best lawyers in town were.

One option for National Gyp-Chipper was to seek out a much larger associate that would sell the product on its behalf. The company kind of fell into that type of relationship with Domtar Gypsum, an Ann Arbor, Mich., subsidiary of Domtar Inc., a $2.5-billion Canadian paper and construction-materials manufacturer. Through a longtime contact in the industry -- Domtar's director of technical services, Jim Houser -- the partners at National Gyp-Chipper put together a deal that turned exclusive marketing rights for North America over to Domtar in return for a prepaid order for 50 machines. That gave National Gyp-Chipper a much-needed $238,000 to acquire the manufacturing rights to the machine. Up to that point, the company had been solely a marketer of the new product.

Unfortunately, the relationship didn't work the way the folks at National Gyp-Chipper had hoped, either domestically or internationally. Sales were slower than anticipated because Domtar's sales staff wasn't used to having to push something new to its customers; moreover, says Turner, some of Domtar's salespeople wouldn't sell to one of its Canadian competitors that was pressuring him for the product. National Gyp-Chipper eventually bought its way out of the exclusive contract, trading back $60,000 for unsold merchandise.

As all that was going on, another strategy for pursuing global markets was presenting itself to the company. It was, perhaps, the most obvious method of expansion: one of its domestic distributors wanted to sell Gyp Chippers abroad. Executives from Straeker Construction Ltd., a $35-million construction company in London, saw a Gyp Chipper during a visit to Chicago; they then called one of the distributors, Nelson King, and asked to purchase some machines.

"The disposal costs for construction waste are extremely high in the United Kingdom because landfills are so far away from the city," says King. "With the Gyp Chipper they can condense the material by 60% -- and they can sell the powder to gypsum mills in the city." National Gyp-Chipper agreed to let King buy rights to distribute the machine in Britain, for an up-front, prepaid order -- this time for 20 machines for about $100,000.

The relationship hasn't proved complicated for National Gyp-Chipper. All its British negotiations have been through King, although it does drop-ship the product directly to Straeker. Straeker, meanwhile, recently signed on to help market the product in Britain and has already sold several machines to other companies there. National Gyp-Chipper will have a Straeker technician visit its Cedar Park, Tex., assembly shop or will send a technician to Britain to make sure the London company will be able to service machines on that side of the Atlantic.

National Gyp-Chipper's most enthusiastic and aggressive commitment to a global strategy, however, came when it entered into an agreement with The WestBank Co., an international marketing company. Formed by a commercial banker, Gene Finley, and an international marketer in Austin, Virgil Simmons, WestBank was a known quantity to National Gyp-Chipper: Turner had known Simmons for years.

WestBank was another partner that put a big chunk of money into the company at a time when it was desperately seeking cash. The infusion of a little less than $100,000 was bankrolled by a private Israeli investor who had been seeking U.S. investment opportunities through WestBank. In exchange WestBank got a specific cash amount on each machine sold and foreign marketing rights -- which amounts to another cut on machines sold abroad through its contacts.

Unlike its relationships with Domtar and Nelson King, National Gyp-Chipper is not relying on WestBank to make individual sales; instead, WestBank has become a consultant for finding, evaluating, and negotiating with foreign distributors.

"There are several ways of hiring," says Turner. "If we had to come in here and hire those people [from WestBank] at $75,000 to $100,000 a year, we couldn't afford it. To hire them the way we did, on commission per year sales, with first right of refusal for sales in other parts of the world, both of us are getting a good deal. In my estimation, that's the only way to go for us."

Turner, Mallory, and Lott all figure that the marketers at WestBank and their own lawyers advising them on patents, copyrights, and trademarks will keep the company covered. Not that they've abdicated control completely. "WestBank handles the shipping, the funding, that side of it," says Turner, "but they're not calling the shots at all. Basically, they're a broker."

National Gyp-Chipper works with WestBank on reviewing standard due diligence on potential foreign distributors: they look at financial statements of companies for the past two or three years and talk to references who have worked with the distributors before. "They have a certain set of rules they have to play by," says Turner. "But the major decisions -- if it's going to be three years or four years, or 200 machines or 500 machines -- we'll still make."

In each of its partnerships, National Gyp-Chipper has followed the simple strategy of contracting out for the expertise it did not have. "I'm just a little old country boy who goes out and gets someone else to help me," says Mallory, only somewhat facetiously. What that approach absolutely requires, however, is partnerships with people who are known and trusted -- both at home and overseas.

WestBank's Virgil Simmons, who spent 16 years at the large public corporation Tracor Inc., selling defense and electronics equipment internationally, puts it this way: "Doing business in the international market is no different from doing business here. People choose to do business with their friends and with people with whom they feel secure. It's that simple."

* * *

What Are the Risks?
What the folks in Pflugerville are most anxious about is having their ideas stolen. While that would be a risk even if they didn't go abroad, ask them their primary concern about heading overseas and they respond, Patent, patent, patent.

"Would you consider trying to send something to Japan without a lot of protection?" asks Turner, leaning forward. "The scary side of it is, Will they copy it? Will they try to bring it back into the United States? Will they make it cheaper?" Mallory echoes, "You face a threat everywhere." The advice they're buying from three lawyers, they hope, will do the job. "The only way to know if we've done it right is to gamble," says Turner. "But compared with what other people we've talked to have done, we're about as good as you can get."

An obvious risk is that outside distributors might fail to sell enough machines to justify the relationship. National Gyp-Chipper's solution to that is simple: the distributors in both Britain and Japan have to sell a minimum number of machines annually (50 in Britain, 50 to 100 in Japan) in order to keep their exclusive rights.

Still another concern is one of those wouldn't-it-be-terrible-ifs: demand outpacing production capacity. According to Allen Williams, a former race-car mechanic who heads up National Gyp-Chipper's garagelike assembly shop, it takes 34 hours to build each machine, and the plant is equipped to build one a day. However, there already are plans to subcontract out more work, cutting the time spent to build each machine by a third. Williams is confident he could triple production by using outside contractors.

Ultimately, and maybe sooner than expected, National Gyp-Chipper will have to consider overseas manufacturing. The company has already been approached about setting up foreign plants, but "it's down the road from being any sort of necessity," Mallory says.

What's the downside to National Gyp-Chipper's already-growing preoccupation with global sales? The time and energy they divert from domestic business. Turner, for instance, recently had to end a trip to Vermont early, cutting back his work on developing the first White Gold plant site to return to Texas and review papers for a possible German distribution deal. But Mallory and Turner feel strongly that at this point in their company's development, it's the foreign business that won't wait. "We've had two years to prepare ourselves for what we feel certain is coming," Mallory says. "All this hasn't just happened."

Turner agrees. "If it means sacrificing a little more time here and doing things a little bit differently," he says with a shrug, "then it's just going to have to be done.

* * *

What Are the Payoffs?
In a nutshell: money, protection, and trade. And they're all particularly crucial for National Gyp-Chipper as a start-up. Indeed, Turner and company argue that those payoffs are more important at this stage than they would be later.

First, there's money. Cold cash. The stuff that Texas banks just don't seem to have for anybody, let alone green start-ups. WestBank's Gene Finley says banks are so dry that even a state program specifically designed to help Texas companies making products for international export is of no use: the program guarantees 85% of each loan, but banks still won't spit out the money -- even, he says, when companies will put up cash collateral against the other 15%. "I know 250 bankers in the state of Texas," he says with frustration, "and I can't find one who'll do it. There's no capital, in the traditional sense of the word, available in this state today."

Distributors, then, have provided a kind of poor man's financing for National Gyp-Chipper, in the same way Domtar and WestBank have. Cash down payments in return for exclusive territories have helped fuel production. Faster growth, wherever it comes from -- domestic sales or international sales -- will allow the company to produce in volume and cut its costs. National Gyp-Chipper's controller, Joe Cavness, says the company will be able to slash 40% off the cost of goods sold when it can start ordering parts in lots of 100. Already the margins are hefty: Gyp Chippers cost about $3,000 to make and are sold by the final distributor for $7,800 to $11,000.

Another payoff? The company is being forced to seek more product protection, which might not seem pivotal if it weren't going abroad. Under a U.S. patent, National Gyp-Chipper is protected against U.S. manufacturers making and selling a copy of its machine here. But it's not protected against an Asian company, for instance, making a copy and selling it elsewhere. By getting foreign patents, which are still pending worldwide, the company hopes to forestall some competition.

Turner is concerned primarily with Asian protection; he says he's heard a lot of stories about other manufacturers' products being imitated there. He's also, however, taking his cue from his new Japanese distributor. Kenji Inc. spent $200,000 promoting another U.S. product it carries and insists that the Gyp Chipper must be well protected from imitation before it will spend that kind of money to push the machine. The company offered help with negotiating Japanese patent law, but National Gyp-Chipper chose to use its own stateside lawyers to do the work.

Finally, Turner hopes that foreign exports will open up a product exchange. Already Kenji is loading its models with Japanese-manufactured motors that conform to the country's electrical system. The way Turner figures it, that arrangement has the potential not only to cut his costs further but also to help prevent competition. "The manufacturer," he surmises, "will have his motor on our machine, so it's going to be real dangerous to go and put it on something else. That makes a pretty good marriage pretty quick."

* * *

What's It Really Like
Mostly, it's like business as usual. You meet. You get to know each other. You make deals.

When Kenji sent representatives over from Japan to visit the Pflugerville office and poke around the Cedar Park assembly shop, Turner "felt very comfortable with them," he says. "They're very cordial and very concerned," concurs Jack Mallory. "They looked at the Gyp Chipper as a piece of equipment to meet a need. The meeting was more the mechanics of business. The cultural differences really didn't come into play."

Turner and Mallory say it's not even much of an ego trip to be entertaining foreign guests at their little Texas garage. "Not ego so much as necessity," says Turner. He feels pulled by market demand to expand faster than he had first wanted, he says. The appetite of foreign customers must be fed by somebody. "I see very little ego involved. If I had my druthers, I'd rather wait two years, but we've got the necessity of protecting ourselves today."

Mallory adds: "I got over the ego part a long time ago. There's a big risk involved here. You can lose it all, just making one wrong decision. It's just that we're willing to take the risk. Most people are not.


WHEN YOUR CUSTOMERS GO GLOBAL, FOLLOW THEM

"The companies we're working with are global, and they can't get away with one product for the world," says Tom David, president of one-year-old Polymer Solutions, which aims to work with manufacturers as a kind of outside research lab that designs new products and figures out how to manufacture them. "They need to identify what people need in each marketplace, and we help make the designs for each country. There's a comfort level for them in working with the same firm for all their projects -- that's why we need to be global."

As a joint venture between GE Plastics, a manufacturer of engineered plastics, and Fitch Richardson Smith, an international product-design company, Polymer Solutions pulls teams together from the two companies on a project-by-project basis. The Worthington, Ohio, venture represents what could be the wave of the future for smart start-ups: joining forces with an international company to capitalize on people, offices, equipment, and contacts that are already in place.


WHEN THERE'S A CHANCE TO JOIN FORCES,TAKE IT

Howard Rosen, manager of U.S. business development for two-year-old GenPharm International, says that by going overseas his company has become greater than the sum of its parts. With 20 people working in Mountain View, Calif., 25 working in Leiden, the Netherlands, and $10.7 million in U.S. and European venture capital, GenPharm has a competitive edge over others in the young field of transgenic animal technology.

The company was started after venture capitalist Kevin Kinsella at Avalon Ventures gathered an advisory board of scientists in the field. The board's task was to develop a strategy for commercializing a technology that enables the genetic altering of animals for the purpose of safe scientific experimentation. When the board heard about a similar venture in the Netherlands, the two operations merged.

In addition to sharing lab techniques, equipment, and access to research, GenPharm has tapped into the European investment community early, paving the way for further financing.

The company has gained its competitive edge by cultivating international contacts with researchers, Rosen says. "It's definitely an advantage having equal access to the research communities in both places. You find out what's new and learn the latest techniques before they're widely available." And if there's an opportunity to license an idea the researchers generate, GenPharm may get first crack at it.


WHEN DOMESTIC MARKETS ARE DOWN, LOOK ABROAD

When Yu Zheng, a 29-year-old graduate of The Art Center College of Design in Pasadena, Calif., devised a foldable fabric-and-metal shade for car windshields, he chose to manufacture and distribute it himself rather than license his idea to another company.

The typical demands of a start-up could have been challenge enough: since it began operations in 1989, Posit Plus, in South El Monte, Calif., has subcontracted manufacturing in its home state, then Taiwan, and then China, where Yu has family. The company is self-financed, and Yu and his sales manager, Dave Herman, had to make cold calls to line up accounts with the likes of Target discount stores and the Sharper Image catalog.

So why did Posit Plus go into Europe, Japan, and Australia? Why did it pile the additional pressures of international marketing on top of all that?

"The more we move the product, even with different margin percentages, the more possibilities and recognition we'll get because it's still young and new," says Yu.

Moreover, foreign markets can pick up the slack when markets slow down here -- for instance, when it's winter in the States, it's summer in Australia. That means the summer buying cycle by retailers will be repeated twice: from October to March in the United States, and from June to August (in time for the Christmas rush) in Australia. The payoff? Yu expects sales for 1990 to top $10 million, with $5 million coming from overseas accounts.

(continued)


WHEN NEW MARKETS SEEK YOU OUT, CAPITALIZE ON THEM

Why set up a second factory in Luxembourg when you can set one up in Louisiana?

For Interlink Electronics, a Santa Barbara, Calif., R&D contractor and manufacturer of touch-sensitive control pads, establishing a base in the tiny country just north of France was part of a strategy for tapping into strong European demand and a welcome source of capital.

The company, founded in 1985, now receives some 20% of its R&D work from European companies. And when Interlink decided it wanted to establish a second manufacturing site, Grace Venture, which had provided some of its seed money, linked the company up with the Luxembourg government, which was eager to sponsor a U.S. high-tech venture.

The result is a 50-50 deal between Interlink and InvestAR -- itself a partnership between the Luxembourg government and $7-billion Arbed Steel -- in which Interlink received a $2-million technology-transfer fee and a $2-million factory investment. The California company's 70,000-square-foot factory with 30 employees is slated to be up and running by the end of the year.


WHEN IN DOUBT, DON'T

While spotting and taking advantage of global opportunities is a straightforward prospect, smart companies don't forge ahead when common sense tells them not to. That's why The Starting Right Co., a Seattle baby-food maker, has stayed out of the European market so far.

Linda Dootson and Cameon Ivarsson founded Starting Right on a European concept: all-natural, balanced meals, frozen for microwaving at home. In the United States, where most parents feed their babies packaged food, Starting Right offers a more healthful alternative. In Europe, where many parents cook fresh food for their infants every day, marketing Starting Right as a convenient alternative would seem to be a logical next step.

"But since they're already making their own," says Dootson, "maybe they don't want ours." That's partly what's holding the cofounders back, at least until market research gives them a better sense of what customers want. Dootson and Ivarsson are also leery of the financial pressures that rapid growth would put on their fledgling venture. "We're just becoming a regional company," says Dootson. "We need to concentrate our capital."

While Ivarsson oversees quality control and Dootson cares for a new baby along with her new company, they're still sneaking peeks at the foreign arena, waiting for the right moment.

Last updated: Nov 1, 1990




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