Growing Business by Going Global
The People's Republic of China is the world's third-largest economy. U.S. companies have invested some $6 billion in more than 2,000 Chinese projects. How hard is it to break into this huge market? (below)
Barely a month old, NovaSoft Systems was down to its last $250. The founders agreed their best marketing opportunities were overseas. They embarked on an unusual launch, introducing their software systems abroad before testing U.S. waters. (page 3)
On the Road
Ensure that your computer is equipped to use any phone system. (page 5)
The Global Perspective
"There will be over 2 billion teenagers in the world in the year 2001. That's five hundred times the number of teenagers in America in the peak years of the baby boom. All of these future teenagers are already born. Most of them live in Asia and Latin America; a smaller but still sizable and rapidly growing percentage live in Africa. In Europe, North America, and Australia, meanwhile, there will also be a mini-baby boom, but...[that group's] percentage of the global teenager population will be minuscule....[The complete group is being called] the "Global Teenager" -- not just because this new baby boom is worldwide, but because its members will be far more interconnected....The global teenager will have his greatest impact as...a new form of consumer."
-- Peter Schwartz, The Art of the Long View (Currency/Doubleday, 1991)
"Companies, not nations, are on the front line of international competition."
-- Michael Porter, The Competitive Advantage of Nations (Free Press, 1990)
"Young man, there is America -- which at this day serves for little more than to amuse you with stories of savage men, and uncouth manners; yet shall, before you taste of death, show itself equal to the whole of that commerce which now attracts the envy of the world."
-- Edmund Burke, British statesman, in a speech on conciliation with America, March 22, 1775
"A map says to you, 'Read me carefully, follow me closely, doubt me not.' It says, 'I am the earth in the palm of your hand. Without me, you are alone and lost.'...Here is your map. Unfold it, follow it, then throw it away, if you will. It is only paper. It is only paper and ink, but if you think a little, if you pause a moment, you will see that these two things have seldom joined to make a document so modest and yet so full with histories of hope or sagas of conquest."
-- Beryl Markham, aviator, West with the Night (North Point Press, 1987; first published in 1942)
IN THE CHINA SHOP
By Hal Plotkin
How big must a company be before it considers setting up operations abroad? Not very. Tiny Conveyant Systems Inc. has gobbled a 3% slice of the enormous Chinese domestic market for digital private-branch-exchange (PBX) products, thanks to its 60% ownership position in Tianchi Telecommunications Corp., in Tianjin, China. With only 16 employees, Conveyant Systems, based in Irvine, Calif., seems an unlikely match for China's burgeoning market. Nonetheless, the small distributor of PC-based telecommunications gear is stealing some thunder from its larger, better-known competitors, such as Northern Telecom, Alcatel, Siemens, and AT&T.
Conveyant Systems' Joe Leonardi says his willingness to cut a generous deal over licensing rights, back in 1986, was the key to nosing out the big guys. The 53-year-old founder and president stitched together a complicated joint venture with Tianjin's local municipal government, the state-owned postal and telecommunications authority, and a local economic-development group. For fiscal year 1993, the venture's 90 Chinese employees will produce about $10 million worth of PBX equipment in a 22,000-square-foot factory located in Tianjin. And China's businesses, starving for communications equipment, eagerly devour 90% of that output.
The news wasn't always so good, though. In its first year, Tianchi Telecommunications' sales fell far short of targets. But Leonardi fought back with a truly revolutionary idea. He proposed a commission structure for the Chinese sales force. Responding to his Communist partners' demands for recognition of every employee's contribution to a shared goal, he agreed to provide incentives to the factory workers as well, and sales of PBXs took off. Now the company's 12 sales offices stretch from the Heilongjiang province in the northeast to the Guangdong province in the south.
From Joint Venture to Controlling Interest
As part of its economic-reform program, China recently began permitting wholly foreign-owned enterprises -- an approach that has grown in popularity. The number of such concerns swelled from just 18 in 1986 to more than 1,800 in 1990. Still, a joint venture is helpful and often necessary. Like Leonardi, most foreign entrepreneurs do business in China through joint ventures by providing capital, technology, or global-marketing savvy. Leonardi credits his business's smooth operation to his well-placed Chinese partners. "The power never goes off, we always have running water, and we always have fuel to heat our building," he notes.
Currently, 3,000 Chinese businesses are authorized to deal with foreigners, and the Chinese government has also designated more than 300 "open cities," in which residents are free to conduct business with foreign traders and investors.
Resources: The National Technical Information Service of the U.S. Department of Commerce (800-553-6847) offers more than 40 modestly priced reports on doing business in China, including the 1993 edition of Country Marketing Plan: China ($19.50). The National Trade Databank (800-USA-TRADE) provides information on how to use the Commerce Department's free database, which includes up-to-date commercial reports from U.S. embassies in China.
There's a long-cherished fantasy that you could easily make an enormous fortune if you could sell just one pair of shoes to every man, woman, and child in China. But that dream remains on hold. Protectionist measures make tapping into China's domestic consumer market an elusive goal for most foreigners. But there are opportunities to participate in a variety of government-driven economic-development plans designed to build up China's domestic infrastructure. "Understanding the customer is the key," says Leonardi. Combing through turgid government plans to identify real and ready markets is worth the effort. "Just counting feet is pretty nave," Leonardi says.
Resources: The Office of China, Hong Kong and Mongolia of the U.S. Department of Commerce (202-482-3583) offers free advice. The nonprofit U.S.-China Business Council (202-429-0340) offers an excellent for-members-only list of market opportunities. A year's limited-services membership is $700 for companies with sales of up to $10 million. Larger companies pay a membership fee that ranges from $2,000 to $12,000 a year.
Buying Chinese currency can be easier than selling it, but it all depends on market fluctuations. China's government discourages the repatriation of profits, in part, by limiting the amount of hard currency available through the currency-swap exchanges. Currently, sellers of renminbi (RMB, "People's Currency") recoup roughly half their original hard-currency cost. But businesses like Leonardi's joint venture require a pool of hard currency to buy computer chips and other parts and equipment from outside China. So the company's Chinese customers are obliged to pay for 25% of their purchases in hard currency. Not long ago, Chinese authorities indicated that there is a long-term objective to scrap the swap meets and make the RMB freely convertible, but the government hasn't announced a timetable for the implementation of such a plan. "Businesses would be wise to make contingency plans to balance their foreign exchanges," advises Richard Brecher, director of business-advisory services at the U.S.-China Business Council. He says it may take as long as seven years before the anticipated reforms are enacted.
Resources: The Bank of China (212-935-3101) provides a daily update on currency-exchange rates.
Now in its 38th year, the biannual Guangzhou Trade Fair is China's biggest foreign-trade event. Last spring's fair hosted 2,700 Chinese businesses interested in foreign trade and generated nearly $6 billion in joint-venture contracts, mostly for the export of Chinese goods. Don't ignore the hundreds of smaller, regional, industry-specific trade fairs. Joe Leonardi personally trundles his company's booth from province to province. "What you get in China depends on who you are and who you know," he says. He brings his own interpreter to these events to ensure that he both understands and is understood. "There is simply no substitute for the personal touch," he says.
Resources: China Council for the Promotion of International Trade/China Chamber of International Commerce (202-244-3244) provides a list of trade-promotion offices in the United States and China.
Hal Plotkin is a writer based in Palo Alto, Calif., who specializes in international business.
Is it proper for U.S. entrepreneurs to do business in China?
The fourth anniversary of the Tiananmen Square uprising -- this past June 4th -- was marked by demonstrations at Beijing University, and there were reports of disturbances elsewhere in China. Earlier this year, Levi Strauss & Co. severed its relationships with 30 contract sewing and finishing houses in China owing to what the company termed "pervasive violations of basic human rights." (Still, the company continues to purchase fabric from Chinese suppliers.) And U.S. customs officials have seized Chinese imports upon learning that the goods had been produced by Chinese prison laborers. Here are two opinions to consider:
Joe Leonardi, founder and president, Conveyant Systems Inc.:
"The best way to improve the human-rights situation in China is through increased business ties. There is now a much wider bandwidth of information available in China, and information is what leads to change. It's impossible for the state to censor what comes across a fax machine."
Ignatius Ding, chairman, Communications Committee, Silicon Valley for Democracy in China (408-446-2011):
"Simply doing business in China is not enough. U.S. companies must press the Chinese government for meaningful political reforms, including the protection of basic human rights. Without such protection, U.S. companies will continue to endure chaotic conditions and will suffer financially from the unresolved human-rights issues that will likely cost China its most-favored-nation status after July 1994."
The People's Republic of China
Population: 1.2 billion. Ninety-five cities have more than 1 million people. Five cities (Beijing, Shanghai, Tianjin, Shenyang, and Wuhan) have more than 4 million people
Official language: Mandarin is the common written language throughout China, but there are many mutually unintelligible spoken dialects
Education: Compulsory through 6th grade. More than 4 million people are university graduates
Unemployment: 2.3% in 1992, according to official Chinese government figures
Gross domestic product: The International Monetary Fund estimates China's GDP at $1.66 trillion, making it the world's third-largest economy
Inflation: Nationwide, soared to 14.1% in the first quarter of 1993 (15.7% in major cities)
Joint ventures with U.S. and other foreign companies*: U.S. companies have invested in more than 2,000 projects in China, with a combined contract value in excess of $6 billion. The United States is the third-largest foreign investor in China, behind Hong Kong and Taiwan, and just ahead of Japan. In 1992 a total of 48,764 new foreign direct-investment projects, worth $58 billion, were initiated in China
Total merchandise imports (U.S. included)*: $80.6 billion in 1992, up 26.4% from 1991
Currency: The Foreign Exchange Certificate (FEC), a convertible scrip, was introduced in 1980 to control foreign-currency transactions. Recent market reforms now permit foreigners to use RMB, the nonconvertible local currency, for approved business transactions. Last July the U.S. dollar was trading officially for around 5.7 FEC and for RMB 8 to RMB 9
*All figures are estimates, in U.S. dollars.
Hottest U.S. Exports
In 1992 the United States sold $7.5 billion worth of goods to China, up 19% from 1991.
Aircraft and parts:
Imports from the U.S., 1992 $2.1 billion
Projected expenditures, 1993-2013 $40 billion
Computers & power-generation equipment:
Imports from the U.S., 1992 $1.2 billion
for computers, 1993-1996 $4.3 billion
for power generation, 1993-2018 $40 billion
to $100 billion
Telecommunications and electric machinery:
Imports from the U.S., 1992 $464 million
Projected expenditures, 1993-1998 $29.7 billion
*Source: Statistics from the U.S.-China Business Council, based on data from the U.S. and Foreign Commercial Ser-vice; China's State Statistical Bureau and Ministry of Foreign Economic Relations and Trade; and the Aerospace Industries Association
NOT SO INNOCENT ABROAD
By Robert A. Mamis
With the homes they'd pledged for seed capital on the line and the seed running thin, Sureyya "Ray" Ciliv and Robin Hillyard, engineer-founders of a software start-up outside Boston, planned to test a business basic: Sales generate cash. However, another business basic intervened: a stock-market crash. Infant NovaSoft Systems Inc. (nÉe NovaCad) was down to its last $250 when the panic of 1987 hit, reducing its chances of attracting risk capital to nil.
CEO Ciliv and chief technical officer Hillyard didn't dare begin marketing from scratch here without resources. So they decided to begin marketing from scratch overseas without resources. Novice owners of a nearly broke company, they nonetheless had an asset nobody abroad did -- the latest technology in computer-based engineering-document-management systems. They would prove their product could sell and then ride that momentum back to the United States.
"When you market in the United States," Ciliv notes, "you have to advertise and do PR and attend large trade shows -- all of which costs money. Then you have to build a sales organization, but salespeople don't become 100% productive for maybe nine months, and that's also a cost. The usual routine is to make an investment, then wait for a return. But if you don't have the cash to make that investment, obviously, you don't have a choice." Accordingly, he invested what remained in NovaSoft's treasury in a ticket to Europe.
The strategy called for the establishment of distributorship agreements with, Ciliv says, "solid, well-staffed companies that already had sales forces and support organizations in place and were dealing with the kind of companies that would be our target customers." Ciliv began in Rome. "Italians would be open-minded and spontaneous," the Turkish-born Ciliv had theorized.
His instincts were right. In July 1988, hardly two months after NovaSoft had begun operations, he closed a deal with Italcad, a large Italian distributor of computer-aided-design and computer-aided-manufacturing equipment. It wasn't a hard sell, Ciliv says. The company even gave him a quick $100,000 up front. "It was supplying other products and could anticipate the appeal of ours within its customer base. Any kind of agreement -- even a royalty advance -- represented little risk to it; essentially, it had already done the market research." Within weeks, Italcad had placed NovaSoft systems with Fiat.
Buoyed by that debut, Ciliv convinced a big-name computer manufacturer at a large trade exhibition that running his software would show off the manufacturer's hardware to good advantage. While Ciliv was thus presenting a NovaSoft program at a Hewlett-Packard booth in Germany, international conglomerate Siemens, based in Munich, happened by. The company arranged to send a representative to NovaSoft's U.S. facilities to evaluate the technology. "That," Ciliv recalls, "was unnerving. We were just a handful of people working out of a dinky office in the back of a warehouse. I was afraid the guy would turn back, but he came in and announced, 'I don't care about your size -- extraordinary technology comes out of ordinary offices."
The cost of signing with Siemens was rock-bottom: the price of a hotel room during the convention week. And, revels Ciliv, who devoted the following four weeks to carving out the deal's fundamentals, "we didn't have to surrender a thing. Siemens wasn't our only option. We told them we could go to Philips or some other big company just as easily." In fact, NovaSoft still can: though Siemens is obliged to purchase a minimum dollar amount of software for resale each year, the German license isn't exclusive, and NovaSoft is entitled to offer its products to anyone else in the country. But it's not likely to, inasmuch as the contract also calls for NovaSoft to supply products for Siemens to sell under Siemens's own label. In another low-budget appearance, NovaSoft's document- and work-flow-management software so impressed a Venezuelan oil corporation that the sprawling refinery bought a $145,000 system on the spot, and when Ciliv later sought a Venezuelan distributor, his leverage was bolstered by being able to deliver a ready-made customer.
Within two years NovaSoft had established distributor relations in Italy, Belgium, and Germany. Each deal provided for an advance against sales. "Initial agreements in strategic relationships are extremely important," Ciliv contends. "You have to be careful not to give away your future for the sake of the present." Advance royalties are indicated because such royalties prove that your proposed partner is taking you seriously. If a company doesn't commit cash, it risks nothing and could simultaneously agree to distribute products from 100 sellers without the other 99 knowing. "By the time you discover they haven't bothered with yours," Ciliv cautions, "it's a year later, and you've lost."
Next, on to the Pacific. But where? Having no idea whom to seek for a strategic partner in Japan, Ciliv phoned the Japanese consulate in Boston, asked for a list of companies serving the engineering market, and wrote to the president of the one that seemed most promising. "If you have a good product and can communicate its potential," he reckoned, "a sound businessperson anywhere in the world has to answer." Sure enough, one did. The cold-callee, Mutoh-Kogyo, a Tokyo-based company, said it would be pleased to send a strategy-planning unit directly to Boston.
The business protocol that followed, however, wasn't so direct. "Whereas other countries respond to a product's technical features, in Japan that's not the principal issue for the end-user," Ciliv discovered. "The relationship with the vendor is more important. Japanese customers are very conservative. They like to purchase from people they've been doing business with for a long time." His recommendation: "Don't even think of opening your own sales office there."
If NovaSoft's experience is any gauge, you won't have to. In a three-year contract, the Japanese distributor guaranteed NovaSoft minimum sales of $300,000 the first year, as an advance against royalties; the guarantee rises past $1.2 million in year three. Reflecting Japan's commercial tradition, an addendum to the boilerplate allows the distributor to set up its own subchannels. And reflecting NovaSoft's capital tradition, the company arranged for Mutoh-Kogyo to modify the products for the Japanese market at its own expense, a charge NovaSoft couldn't have afforded.
By contrast, NovaSoft's Israeli partner, which signed on the same year, was a tough negotiator that "tried to do business with as little cash outlay as possible," a posture Ciliv could comprehend. Twisting his own rule of thumb, he accepted a deal wherein the partner doesn't pay advance royalties but must meet a schedule of quotas instead. If established sales goals aren't attained, NovaSoft can assign a new distributor; if the distributor hits all targets, NovaSoft extends the contract -- and expands the quotas.
Ciliv didn't return home for three years, an absence during which NovaSoft's treasury was filled exclusively with foreign revenues. NovaSoft didn't roll out a product in the States until 1991, and in the last quarter of 1992 domestic sales outpaced overseas sales. By then NovaSoft had forged strategic alliances in 15 countries, on four continents. With those partners acting as NovaSoft's sales and support arms, and NovaSoft acting as its partners' engineering and production arms, NovaSoft has seen its annual revenues double; for fiscal 1993, they'll be close to $10 million.
As NovaSoft was adding partners overseas, its credibility was growing here; in late 1992 venture capitalists began calling NovaSoft. And the founders, finally able to afford it, have hired a seasoned marketer, Walter Elliot, to establish a U.S. sales corps. "Usually, companies go at it the other way around -- sell in their backyard first, develop that market, and go international much later," he says. "But our overseas distributors financed us with advance purchases at a time when, with a tiny staff of four, there was no likelihood we'd qualify as a vendor in the States."
Now, backed by venture money and a corporate staff of 60, NovaSoft's 25-person sales, marketing, and support staff is parlaying worldwide distribution into backyard direct sales. "We can sell to anyone," Elliot boasts. "People figure if you can support markets overseas, there's no question you can support one in the United States."
Don't give anything away
In the fall of 1987, NovaSoft founders Sureyya "Ray" Ciliv and Robin Hillyard sought venture financing to set up a direct sales force in the United States. The plan was to roll out their product in the United States first and go global later. But when the October 1987 crash shut down risk-capital sources, CEO Ciliv took off overseas, where marketing networks were reputed to be less costly to develop. NovaSoft now boasts sales partners in 16 countries, from South America and Australia to the Far, Middle, and Near East.
Each partner -- a quantity purchaser (at 40% to 50% discount) and distributor of NovaSoft's software line -- is required also to provide technical support for the complex software. Early this year 16 technicians speaking five languages attended a week-long training session at NovaSoft's Burlington, Mass., headquarters. Did their now-solvent host pick up the check? Hardly. True to form, NovaSoft bills all support-related items and training.
As a condition of acquiring distribution rights, for instance, in addition to the expected $250,000 in first-year sales, NovaSoft's partner in Kuwait shelled out $26,000 for a demo, just to get started. "We're a small business and can't afford to give anything away," says executive vice-president Walter Elliot.
ON THE ROAD
Linking up with your U.S. office when you're overseas can present a slew of technical challenges, but a couple of key gadgets break the barriers.
"I do all my business with faxes and phones," says David Blohm, CEO of MathSoft, a software company in Cambridge, Mass. "But one of the tough things I've found is that lots of European phones don't have touch tones to trigger our voice-mail system when I call in for messages."
Blohm's indispensable geegaw is a pocket tone dialer from Radio Shack. Smaller than an audiocassette and retailing for about $20, it mimics touch tones. A user holds it to the phone's mouthpiece and punches numbers on the device as if he or she were punching numbers on the phone's keypad itself. The tones prompt the usual responses. You can program the dialer to store up to 33 phone or credit-card numbers.
People who can't get by with just phones and faxes and need to travel with portable computers have two concerns: that they bring the appropriate power transformer for their equipment's wattage (so that stronger foreign power sources don't fry their computers), and that they have the right adapter plug for each country they'll visit.
By far the trickiest task is hooking a portable computer into another country's telephone lines in order to send files, pick up electronic mail, or transmit a fax from a portable machine. The checklist of necessary equipment starts with the basic modem and communications software. Many new computers, ready to work internationally, come loaded with both. If the features are purchased as add-ons, the costs range from around $75 to $300. High-speed modems at both the sending and receiving ends make up for their cost by holding lines better and keeping overseas phone bills smaller.
You'll also need adapters for foreign telephone jacks or -- in the event the phone's jack is not a plug-in and you're appropriately dissuaded from taking the handset apart and sticking alligator clips into its guts -- an acoustic coupler. The coupler cradles the telephone receiver to transmit the signals over speakers instead of through wires. It's old-fashioned for use here but still suitable when you're calling from abroad. TeleAdapt (fax 408-370-5110) sells couplers and jack con-verters for 36 different international telephone plugs.
One note of caution: many countries have telecommunications regulations that restrict or prohibit use of modems not specifically designed for use in their particular countries. If you take the leap and use generally applicable international equipment, you're likely to be breaking some archaic rules, although it's unlikely you'll be caught. You might consider checking with your modem's manufacturer for advice on the product's use in the countries you'll be visiting. -- Leslie Brokaw