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STRATEGY

Growing Your Business by Going Global

Lessons from a company that leapt unwarily into foreign-distribution, plus intelligence on Saudi Arabian markets.
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JANUARY
This Month
Market Intelligence
The Saudi Arabian markets are extremely receptive to American goods and services, but you need to learn to play by an unfamiliar set of rules. (below)

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Company Profile
In its early days Acme Corp. (not its real name), now a $100-million public company, leapt unwarily into unprofitable foreign-distribution agreements -- twice. (page 3)

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On the Road
Your appearance at trade shows can help you establish your company internationally -- if you come well prepared. (page 5)

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THE GLOBAL PERSPECTIVE
"For the past 50 years the U.S. has taken the lead in the reduction of world-wide barriers to international trade. That policy contributed to our own prosperity. But the expectation of that was not the sole or indeed the major reason for our policy. The economic benefits for us were always indirect and difficult for any individual to foresee, whereas the dislocations involved for particular sectors were easy to dramatize. What carried the day for liberal trade policy was the case beyond the addition of some tenths of a percent to the national income of the U.S. It was the recognition that, in addition to serving our economic interests, liberal trade policy was an application of American principles, an expression of American concern for the well-being of others, and above all that it made a contribution to the stability of the world we live in."

-- Herbert Stein, "No Need to Be Scared of Nafta," the Wall Street Journal, September 28, 1993. A former chairman of the Council of Economic Advisers, Stein is an American Enterprise Institute fellow

* * *

"Science is the search for truth -- it is not a game in which one tries to beat his opponent, to do harm to others. We need to have the spirit of science in international affairs, to make the conduct of international affairs the effort to find the right solution, the just solution of international problems, not the effort by each nation to get the better of other nations, to do harm to them when it is possible."

-- Linus Carl Pauling, No More War! (Dodd Mead, 1958)

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"No nation was ever ruined by trade."

-- Benjamin Franklin

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"Most people think of giant companies when they hear the word 'transnational.' But increasingly middle-sized and even small businesses operate in the world economy rather than in one or two countries. It is actually easier for the middle-sized and even for the small company to operate without much regard for national boundaries. Unlike large companies they are politically barely visible."

-- Peter Drucker, The New Realities (Harper & Row, 1989)

* * *

"The Department of Commerce is really helpful in terms of filling out the forms and getting everything straight. For the vast majority of products, you don't need any special export license. Years ago it used to be more onerous. Now it's in the best interests of the United States to help people export. The Commerce Department is not a bureaucracy interfering with your work. It's actually helping to some degree, and certainly not hurting. It's making it as simple as possible for small companies to export."

-- Ron Seide, director of marketing, Kingston Technology


SAUDI ARABIA: VEILED OPPORTUNITIES

By Donna Fenn

In January 1991 Larry Ethridge had a Saudi visa in his passport, a plane ticket to Riyadh, and a letter of intent from a prominent Saudi engineering company. Though war was imminent, the president of then $12-million Topro Inc., based in Denver, was determined to keep his appointment with Prince Abdulaziz bin Ahmed, an influential board member of National Engineering Service & Marketing Ltd. (NESMA). Several months earlier Ethridge had met a representative of NESMA at a U.S. Department of Commerce -- sponsored trade show in Denver. Shortly thereafter, the rep sent a letter of intent and indicated NESMA's commitment to sponsor Ethridge's entry into Saudi Arabia. Ethridge wasn't about to let that visa expire. His flight landed in Saudi Arabia a scant eight hours before the first U.S. air strikes on Baghdad, and for the next 10 days, as retaliatory Iraqi Scuds exploded over Riyadh, he conducted business. Topro won a $1.5-million contract -- a coup Ethridge attributes at least in part to wartime camaraderie and his meeting with Prince Abdulaziz.

Most Saudi ventures develop more peacefully, but persistence, patience, and personal contacts are always required. Few nations are as secretive and as restrictive, but few can match Saudi Arabia's enthusiasm for U.S. goods and services. More than 60 years of political and economic ties have made Saudi Arabia our 16th-largest export market. And despite its current economic difficulties -- the country has drawn down its vast reserves and posted budget deficits for the past decade -- a strong balance sheet and ambitious development plans make it a still-lucrative market.

Resources: Flash Facts, an automated fax-delivery service from the Department of Commerce (202-482-1064), offers 17 reports on doing business in Saudi Arabia.

Sponsorship
Don't expect it to be easy to penetrate the Saudi Arabian market. The government requires every foreign business to have a Saudi sponsor. Depending on your business, a sponsor might be your distributor, your customer, or your partner in a joint venture.

Richard E. Jones, president and CEO of Cascade Medical Inc., knew that Saudi Arabia, with 700,000 diabetics, was a promising market for his company's blood-glucose home monitoring system. But Jones tempered his enthusiasm with caution as he searched for a Saudi distributor. When Riyadh-based Fuad al-Fadhli Trading Establishment asked to be considered, Chris Doman, Cascade's director of international sales, called two of the company's U.S. clients and questioned them about the distributor's reputation, its manner of doing business, and its connections with the Saudi Ministry of Health. "We satisfied ourselves that the company had a reputation as a first-rate health-care dealer," Jones says. Now Cascade competes with three other foreign health-care companies -- all giants -- and has snapped up 20% of Saudi Arabia's home-glucose-monitoring market.

Resources: The U.S. and Foreign Commercial Service (800-872-8723) offers information about Saudi sponsors. The Jidda, Riyadh, and Dhahran posts (800-USA-TRADE) do market research and briefings and set up appointments with potential partners.

Trade Shows and Delegations
Saudi Arabia hosts annual trade expositions in a broad range of industries. The U.S. Department of Commerce can sponsor you at most official trade shows, but strict Islamic rules make women's participation problematic. The religious police, the ubiquitous Muttawa, do frequent those shows to ensure that women don't attend. (See "Four Things You Should Know Before You Decide to Do Business in Saudi Arabia," next page) But foreign women accompanied by men have participated in "matchmaker" delegations organized by the Department of Commerce. Those groups of approximately 20 U.S. companies travel to Saudi Arabia to meet potential partners. The cost, $2,200 to $2,800 a person, does not include airfare or hotel. Moreover, like Larry Ethridge, you might meet your sponsor here in the States: Saudi businessmen seeking business partners often attend U.S. trade shows.

Resources: The National U.S.-Arab Chamber of Commerce (202-331-8010) schedules trade shows in the Middle East. Call the U.S. Department of Commerce's Trade Information Center (800-USA-TRADE) for its Export Promotion Calendar. Judy Riendeau (202-482-3119) can provide information on the Matchmaker Trade Delegations Program.

Joint Ventures
Saudi Arabia aims to lessen its dependence on oil revenues by diversifying through joint ventures with foreign companies willing to share technology.

Larry Ethridge, who is setting up a joint venture with a NESMA subsidiary, believes that the country's development plans and emphasis on cost cutting will benefit Topro, his industrial-control-systems business. "Part of the way you make things more efficient is by putting in better control systems," says Ethridge. "You don't really need a company like Bechtel to do that." Topro will own 49% of the new company, a stake Ethridge can live with, since, he says, he doesn't "feel comfortable having the controlling interest being so far away."

And because of the Saudi majority ownership, the venture benefits from Saudi incentives, such as preferential treatment in government procurement. Furthermore, agricultural and industrial businesses that are at least 25% Saudi-owned get a 10-year tax holiday; the respite for nonindustrial projects is 5 years. All joint ventures have access to cut-rate government financing; training subsidies; low-cost rent and utilities; and duty exemptions on imported machinery and equipment. Twelve commercial banks provide financing to joint ventures.

Resources: The National Technical Information Service (800-553-6847) sells the booklet A Guide to Establishing Joint Ventures in Saudi Arabia for $17.50.

Tapping Market Niches
Bill Aossey, president of Midamar Corp., based in Cedar Rapids, Iowa, has been exporting industrial and food-processing equipment and food products to Saudi Arabia for 20 years. Saudi sales represent 20% of revenues, which are less than $20 million. Aossey travels to Saudi Arabia three to four times a year to "get a pulse on changing market conditions," and reports that "consumer demand continues -- people still have money to spend." He has done business successfully with several Saudi companies, an achievement he attributes to his hard-earned status as a reputable business partner and his having chosen the right markets. Saudi Arabia's regulations require that food products list in Arabic all ingredients and dates of production and expiration. Midamar translates and prints labels for about 70 major American food exporters. "Once you find a niche for your product," Aossey says, "if you service your importer and your customers, you'll have a continuous market."

Donna Fenn, a writer based in Pelham, N.Y., worked in Saudi Arabia for four years.

Four Things You Should Know Before You Decide to Do Business in Saudi Arabia

1. Islam's predominance. Muslims pray five times a day; virtually close up shop during Hajj, the month of pilgrimage, and Ramadan, the month of fasting; and have strict regulations regarding alcohol and drugs, pornography, and separation of the sexes.

2. Potential for instability. Some Middle East analysts fear Saudi Arabia's budget crunch will force the government to cut its extensive social-welfare programs, which could lead to public unrest.

3. The Arab boycott. Saudi Arabia officially observes the Arab boycott and won't deal with companies that have ties to Israel. But experts predict relaxation as the peace process continues.

4. Restrictions for women. Social and religious customs make it difficult for women to do business, but don't let preconceived notions get in your way. Enlightened Saudi businessmen will accord a woman's idea or product the consideration it merits.

The Kingdom of Saudi Arabia

Population: 17 million, concentrated in Riyadh (the capital), Jidda, and Dhahran; approximately 4 million are guest workers. The indigenous population is growing by 3.4% annually

Official language: Arabic, although English is widely spoken

Political system: Monarchy headed by King Fahd bin Abdulaziz. The 21-member Council of Ministers is appointed by the king, and a "Consultative Council" is in the works

Religion: Islam. Fundamentalism is on the rise but is currently being kept in check by the government

Education: Not compulsory, but highly encouraged by the government, which pays for all education up to the Ph.D. level

Gross domestic product: $114.2 billion in l992; $108.7 billion in 1991; 3.5% average projected growth through 1994

Per capita income: $15,000

Inflation: 3% in 1991

Joint ventures with the United States: 187 projects, two-thirds of which are nonindustrial. Total U.S. capital invested is about $1.8 billion

Currency: The Saudi Riyal, roughly pegged to the dollar, has remained stable for more than seven years. SR 3.75 equals $1. There are no restrictions on repatriation of profits or capital. Regulations prohibit payments to or from Israel and South Africa

Hottest U.S. Exports

Last year U.S. businesses sold to Saudi Arabia $7.2 billion worth of goods and services, representing 20% of total Saudi imports. Total exports for 1991 and 1990 were $6.6 billion and $4 billion, respectively.

Oil- and gas-field machinery and services:

Imports from the U.S., 1992 $2.3 billion

Estimated average growth rate of market, 1993-1995 8% to 9%

Aircraft and parts:

Imports from the U.S., 1992 $750 million

Estimated average growth rate of market, 1993-1995 50%

Telecommunications equipment:

Imports from the U.S., 1992 $92 million

Estimated average growth rate of market, 1993-1995 25%

*Source: U.S. Department of Commerce, International Trade Administration, Office of the Near East.


YOU HAD TO BE THERE

By Robert A. Mamis

This is a cautionary tale describing the consequences of a young company's jumping headlong into global waters. Its CEO wants his story told lest others act on similarly nave -- and similarly expensive -- presumptions. But because the threat of litigation still looms, Inc. has changed the players' names.

Acme Corp. was barely four years old in 1987, and founder Ian Greene was barely 30, when the company got the call that was to propel it into the global marketplace. On the line was a reseller in Japan called SofTouch. "We think you're the kind of people we want to work with," urged its enthusiastic principal, Ken Ahara. "We'd like you to come over so we can move forward with a deal." The flattered Greene took off for Japan, where he found that Ahara already had translated Acme's promotional literature into Japanese and had lined up potential clients like Mitsubishi and Matsushita. "His marketing was way beyond anything I'd done in this country!" Greene marvels now. Ahara romanced him further, asking if he could distribute Acme's product.

Now that Acme is a leading vendor of specialty software and is ensconced in slick Silicon Valley headquarters, Greene feels a little less foolish for saying yes so fast. "I look back and wonder how I could have done such idiotic things. But going international is something you learn by doing," he rationalizes. "So you might as well do it when you're small and mistakes are less costly."

Actually, Acme's mistakes were far from cheap. A debacle in Japan, followed by a fiasco in France, drained some $2 million from the corporate till. Like many emerging companies, when Acme was considering the Japanese venture, it faced a risk-now-or-risk-later dilemma: (1) go overseas early to establish markets while you're still vulnerable, or (2) hold off until your staying power proves itself and risk losing customers to competitors. Chancing the former, Greene opted for an exclusive distributorship arrangement, rather than a joint venture, with SofTouch, on the money-saving grounds that (1) nobody from here had to be sent over there, and (2) you can always get rid of a distributor.

It was a near-fatal miscalculation.

At first SofTouch contributed significant revenues. Then sales growth flattened. Early buyers would purchase a unit for evaluation but wouldn't commit to more; Ahara insisted the situation would improve only if Acme established a presence in Japan. He proposed a corporate joint venture called Acme Corp. Kabushiki Kaishun (ACKK) -- 51% of which SofTouch would own.

"No way," said Greene. "I won't put a company in Japan with exclusive rights to our software that I don't control." Well, Ahara countered, then how about an entity no one controls? SofTouch would own 45%; Acme, 35%. Two big corporations -- Magna Power and Kabuki Communications -- were interested in becoming codistributors. For a 10% share each, they'd put up the capital and advance Acme an extra $150,000 for that privilege. "We made money just by setting it up," Greene says. "It seemed like a win-win situation."

It wasn't. ACKK's charter granted each party veto rights, paralyzing the organization. Although the charter was in Acme's name, Acme could make no decisions. And, accountable to no one, Ahara had installed himself as president of both ACKK and SofTouch. "There was SofTouch, this flaky little company of about 30 people," Greene says, "and there were two very large companies, Kabuki and Magna; yet, strangely, most of the sales were coming from SofTouch." Indeed, SofTouch accounted for 70% of Japanese revenues and 30% of Acme's total revenues, which in 1991 amounted to $8 million. (Greene later determined that Ahara had saddled Kabuki and Magna with big up-front guarantees and out-of-date versions of the product.) "We need control of our operations, of our accounting methods, of our vision," Greene advised Ahara. "Without it, we're doomed." Ahara agreed to realign ACKK, granting Acme 51% and keeping 39% for SofTouch. The other two partners were reduced to 5% each.

Even with control, you can't gain insight from the United States into what's going on in Japan, Greene realized. "You're dependent on the people you've got there to find and fix problems." Trying to manipulate events from California "was like trying to nail Jell-O to a tree." And after four years Greene couldn't install someone senior to Ahara: "If we had set it up that way to begin with," he now says with regret, "it would have been not only acceptable but expected; the Japanese don't set up an office in the States without having a Japanese person present to get it going."

Greene sent over his first American, not to run the place but to implant a sense of California culture and to "give us a set of eyes and ears to help us understand things a little better." The unmistakable conclusion: SofTouch was in fiscal distress. Greene called Ahara onto the well-worn carpet. "If SofTouch is in trouble, we're in trouble! What's happening?" "Nothing," Ahara reassured him.

Greene was therefore startled shortly thereafter by a phone query from another small Japanese high-tech reseller, Modern Technologies. We're considering acquiring the assets of SofTouch, the caller said, but SofTouch seems to have lots of debts and probably can't pay them. What are your plans? The shocked Greene decided the plan suddenly was to collect $900,000 in accumulated revenues that SofTouch owed ACKK. "We were stuck with two choices -- sue SofTouch immediately or hope for the takeover," Greene says. "We didn't want to be the blundering Americans going in and screwing everything up, so we decided on hope." While Greene hoped, the deal collapsed: Modern Technologies' due diligence disclosed that SofTouch was further gone than suspected. Sure enough, in April 1992 SofTouch notified ACKK that it was unable to meet its obligations. Greene's lawyers drummed SofTouch out of ACKK.

In Japan a corporation can't write off a bad debt for tax purposes unless it can prove the debt really is bad. The accepted evidence is if the debtor goes bankrupt -- which SofTouch did not. Not only did Acme have to pay Japanese taxes on the $900,000 receivable; it never even got that $900,000. The double whammy cost Acme $1 million, plus some $200,000 in legal fees to clean up the mess.

But all's mostly well that ends mostly well. In July 1992 Modern Technologies joined ACKK as a 10% partner, along with Kabuki and Magna. Acme's share was boosted to 70%. Modern Technologies bought $4 million worth of product from Acme, enough to last well into fiscal 1994, even though it didn't need that much. Why? For one thing, the infusion helped Acme meet its plan for fiscal 1993. And maybe Modern Technologies felt a little guilty: it was that company's rigorous audit that had exposed SofTouch's rickety underpinnings to anxious creditors.

d√Čj√ vu all over again. Acme corp. was barely six years old in 1989, when Greene received the call that was to propel him into European markets. It was from a small company in France, offering to represent Acme on the Continent. Go ahead, Greene replied (again), cutting a familiar deal for exclusive distribution. But this time Greene knew better. He created a wholly owned subsidiary, Acme Corp. E.C. (ACEC), organized as a corporation operating under a general manager -- a common structure in France.

A general manager, or g√Črant, Greene was to learn, "can do pretty much what he wants." As a company's agent, the g -- rant has certain functions that are delimited on hiring, but if he or she exceeds the bounds of the agreement -- entering, say, into a contract his or her employer doesn't like -- the employer's only recourse is to sue the individual. The contract itself is unassailable.

ACEC's g√Črant ramped up the new company, hiring 30 employees. Rather than reducing the staff, as Greene demanded from California, the g√Črant contracted with the government to build ACEC a free, tax-advantaged research-and-development facility in remote Brittany. As a quid pro quo, ACEC would employ 125 people. That chafed Greene. "What are we going to do with 125 people and a building in the middle of nowhere?" When he tried to negotiate his way out, the issue became a cause c√Čl√ąbre: a local mayoral candidate ran on a "Keep Acme in Town" platform -- and won. So the ACEC R&D building remains open, though Greene has cut the work force down to only three employees.

In March 1993 Greene finally dispatched his first American to Europe, with an assignment to redesign ACEC's clearly faulty transatlantic-communication chains. Now the financial person in Paris reports to Acme's chief financial officer in California; similarly, the French sales manager, technical-support chief, and so on also report to California counterparts. "It was a great move," Greene exults. "At last we built relationships. The people there know the people here."


ON THE ROAD

By Phaedra Hise

I've seen Americans at overseas trade shows who can't find their products, who've lost their equipment, and whose people were held up at customs," says Keith Kiel, vice-president of MacAcademy, a videotape distributor in Ormond Beach, Fla. Preparing for overseas trade shows is a whole different ball game from getting ready for a Stateside show, says Kiel. He's an old hand at foreign trade shows from Australia to Mexico, which he considers promotional investments. "Don't expect to make a big profit the first time you go. Your first few shows are an introduction, like a live ad." In other words, they are an exercise in making friends. Leave the "hurry up, let's close the deal" mentality back in the States.

And pack your kit carefully, says Kiel, or risk being one of those dazed and confused first-timers with nothing to show for the trip. Here's what Kiel takes to every foreign show, no matter where it is:

A. Copies of all documents. Long before he leaves home, Kiel contacts the trade-show organizer and keeps in touch, exchanging faxes on a daily basis. He stuffs all the information he gets from the organizer into a manila envelope and carries it onto the plane. "If you have to, you can prove you were promised specific pieces of audiovisual or other types of presentation equipment," he says.

B. A carnet. This detailed customs document listing all the valuables you take out of the States isn't required, but it can save you endless paperwork coming and going. If you skip it, you risk having goods turned back, or being taxed on your own computer, Rolex, or tennis racket when leaving other countries. "Carry it like a passport," suggests Kiel. Carnet forms are available from the U.S. Council for International Business, at 212-354-4480, which charges processing fees ranging from $120 to $250.

C. Half as much product and twice as many brochures as he thinks he needs. "Bite your lip and just do it," says Kiel. Most overseas customers respond better to a soft sell. They want a nice brochure to take home and study, which means fewer products sold at the show but more phone calls afterward.

D. A 220 transformer kit. Buy a 1,600-watt transformer at Radio Shack for $19.99, advises Kiel. "We blew up a $700 overhead projector in Australia by plugging it into what looked like a regular socket."

E. A suit and tie. Leave the logoed polo shirts at home. At some shows exhibitors are required to wear a suit. But even if suits aren't mandated, says Kiel, wear one anyway. Most everyone else will.

F. No equipment. Kiel rents everything, including computers and overhead projectors. Usually, it's cheaper to rent equipment overseas, and he avoids possible customs taxes. He contacts manufacturers for the names of their foreign distributors who can rent the equipment he knows he'll need. If there's no rental option, he always ships via the trade show's recommended carrier, even if there is a less expensive alternative. It's worth it, he's found, because trade-show carriers typically use seasoned brokers to usher equipment through customs, saving time and preventing hassles at the airport.




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