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One of the common misperceptions is that a business needs to be test launched in the US market before it can go global. Many companies start transacting internationally only when they receive inquiries via their websites and most advisors consider international expansion a second-level priority. The problem is that critical parts of the business (website, marketing, finance, IP protection and even mundane issues like product size and packaging) are set up for the US market and have to be redone to work internationally.
My experience in working with start-up and early stage companies over the past decade is that it never too early to start building an international business. In today’s global economy, as soon as you put up a website, you are involved with global commerce, even if you don’t import or export anything at that time.
The key to all of this is planning for international business from day one of operations. It means identifying a team of international trade experts (finance, legal, logistics, marketing etc.) that you can call on as needed (and not spend weeks or months trying to find the right answers) .Here are seven tips that I would recommend to every entrepreneur with a potential for international business:
- You need to define yourself as a global company. Take a look at your organization chart – it shouldn’t list international operations as a side box. Your company should have a global purpose with strategies for selling into specific markets.
- Your market development efforts should be global. That starts off with expert market research – the US government website www.export.gov is a treasure trove of reliable information. Your website should welcome international inquiries. If you are targeting specific areas, think about having selected webpage professionally translated into other languages. (Google translations are still embarrassingly bad).
- Your manufacturing and packaging processes should be acceptable outside the US. The simplest issue is using metric measurements, instead of English. Do you need international standards – for example ISO or CE? You might want to design packaging or labels to allow for a sticker to comply with local regulations.
- You should identify one or more logistics companies that can help you with the paperwork and shipping. All of them can advise you on potential issues (paperwork, certificates of origin, tariff levels etc. A good logistics partner can prevent disasters.
- You should have reliable and knowledgeable international finance and insurance partners. There are many government or private sector options so the customer really is in the driver’s seat. Just remember that it is frequently easier to get financing for an international shipment than a domestic order. Properly sequenced, there can be less risk in shipping to a remote third world country than shipping to the next town. Good banking, finance and insurance partners will be able to guide you along the right path, even startups.
- You similarly need a good legal team to support you. Notice I said having a team – not just one attorney. A good contract attorney will help prevent or easily settle disputes. On the other hand, if you have intellectual property issues (patents, trademarks or industrial secrets), you will need to find an IP lawyer specialized in international practice and ideally with experience in the markets in which you want to operate.
- You need to build international into your company processes. That means everything from manufacturing to invoicing. Management should reinforce the message to all employees that the company perspective is global. Your employees need to be trained to think globally and to be sensitive to how business is done is other cultures. The best way to achieve that is to build a staff with multi-cultural backgrounds.
CiViC 180, in partnership with K5 Launch (a business accelerator founded by members of the Tech Coast Angels), has started the International Business Accelerator (IBA) which works with startup and early stage companies to guide them through the growth process. The IBA has two physical locations: Long Beach and LAX. Applications are currently being accepted for the LAX location until June 27.
Orange County is expected to export nearly $25 billion in 2014, led by $7 billion from the tech sector alone. So how does a new company enter the complicated global market while at the same time facing all of the other challenges of starting a business? Enovant Foundation, the Community Vitalization Council and the Small Business Administration (SBA) have teamed up in support the launch of the International Business Accelerator (IBA). The IBA is the first program of its kind program in the US to combine the techniques of early-stage business acceleration with the tools to develop global markets. The three organizations signed a Strategic Alliance Memorandum on August 29 in Irvine to launch the initiative.
In its current pilot phase, IBA is working with two start ups. The IBA plans to enter full operations in early 2015 and looks to replicate its program at other locations across the US. International business is frequently thought of as a second step in the launch process, but research has shown that a successful launch requires that international business be thoroughly integrated into business processes from the beginning.
The IBA is a joint venture of Enovant (Foundation for Everyday Innovation) and the Community Vitalization Council (CiViC 180), and supported by K5Launch, a Southern California accelerator. The IBA will work with companies to identify appropriate international markets, find distributors or customers and to access financing to support the launch and international shipments.
SBA is an independent agency of the federal government whose mission is to help Americans start, build, and grow businesses. Among the agency’s programs are several aimed at providing assistance to exporting small businesses. “The IBA is an exciting concept and one that fits well with the export-oriented economy in Southern California,” remarked J. Adalberto Quijada, Director of SBA’s Santa Ana District Office. “We view it as essential that every manufacturing and service company think in global terms.”
Amir Banifatemi, managing partner at K5 Ventures business accelerator (www.k5launch.com) and past President of the Tech Coast Angels (Orange County), notes that “We know that the process of business acceleration works. Working intensively over a period of months to prepare companies for launch has a high success rate and we have worked with more than 120 such start ups for which we have accelerated about 45 and we can note the difference in their performance and market readiness. What we have found is that companies that have the ability to go international need to think global from the initial phases of their product and service design, even if they first implement in the US.”
Christopher Lynch, President of CiViC 180 (www.civic180.org) and adjunct professor of International Business at Golden Gate University, adds “The entrepreneur needs to understand how international trade works and we teach them that. In today’s global marketplace, you can’t have a main company and an international appendage. We work with the start ups to integrate the global business approach into the DNA of the company.”
For further information on the IBA and its services, please visit www.iba.io
As discussed in previous blog posts, exporters face risks with fixed or floating exchange rates. In fact, even if you denominate all trade in dollars, the exchange rate can still play a major role in determining demand for your product or service. So, the bottom line is that you can mitigate, not eliminate, exchange rate risk. Here are some strategies to consider:
- You should do a sensitivity analysis for all of your major markets when you are doing your business forecasts. First, look at the range of the exchange rate fluctuations over the previous years, and then decide a reasonable plus or minus range around the current exchange rate. Recalculate your bottom line for each market using the high and low calculation. This will give you an indication of your company’s exposure to exchange rate changes in a given market. If there is a major impact on your bottom line, you may want to consider one of the following hedging strategies. For major currencies, the organized currency markets can provide a variety of responses.
- You can purchase currency on the futures market to align with your expected collection date. With this you can be assured of the price, but at a cost.
- You can also purchase an option to buy at a certain price if the exchange rate exceeds a certain level. This is similar to a “put” in the stock market and is less expensive than a forward contract. It does, however, expose you to market fluctuations until you reach the strike price.
- For currencies that are not freely traded, you can request the payment in dollars (or at the local currency equivalent on the spot market on the day the contract closes). This may minimize your risk but it also shifts the risk to your buyer. This could cost you sales if your competitors do have a similar requirement. A dollar denominated sales strategy does lessen risk, but it also limits your opportunities to expand markets.
- If there is a significant market risk, you may also want to keep the pipeline short to minimize your exposure in a particular market. If you have a local operation (warehouse or subsidiary), you can keep inventory to the bare minimum. You can also limit the term of your price quotes (for example, instead of 90 days, you could quote the day of the sale and require pre-payment).
As an exporter, there is an implicit exchange rate risk with every transaction. Most risks are small and you can build in the margin to cover those risks. (If you can’t build in the margin, you might want to reconsider the sale.) The trick is identifying when there are larger risks and taking the appropriate steps to protect your business.
Managed currencies, those where governments set or maintain a currency level, present opportunities and challenges for exporters. Exporters need to understand the type of exchange rate regime that a country has and the risks that a country may not be able to maintain that regime.
Many developing countries have fixed exchange rates. The government (usually the central bank) manages all foreign trade transactions and dictates the exchange rate against a currency (if it is the dollar, you may hear it referred to as “pegged” against the dollar).
The fixed exchange rate regime works in theory if it reflects a level that the clears the market (supply = demand). In reality, that is usually hard to manage and maintain on a long term basis. If there is a current account deficit, the central bank has to draw down on international currency reserves. If there is a surplus (as has happened in China), the extra money enters the domestic money supply, creating inflationary pressures. If there is a parallel currency black market (which there almost always is), there will be a divergence between the official and black market rate. Inevitably, market pressures will force a change in currency peg.
Recognizing these market forces, many central banks adopt tools to gradually manage the exchange rate. There is a tool called a crawling peg in which the central bank changes the exchange rate along a pre-announced path. Another tool is a managed float. The Central Bank announces a desired exchange rate with a band around the rate (for example +/- 2%). If the market results in an exchange rate that is above or below the band, the Central Bank intervenes.
So what does a managed currency mean to an exporter? Remember as I noted in last month’s column, you don’t have to be selling goods or services in the currency for an exchange rate change to affect your competitiveness in the market.
- A fixed rate may give some short term certainty to the exporter. As you look into the future, there is increasing risk that a change (devaluation or revaluation) will occur.
- A float or crawling peg may result in short-term fluctuations in the currency. My experience is that generally the countries can adapt more readily to changing market conditions with a managed float.
- In the event of a major political or economic event, the exchange rate can shift suddenly and radically, with major impacts for the exporter.
One real life example: I was loaned out to Caterpillar Financial Services for one year and I helped them set up operations in Mexico just following the entry into force of the NAFTA. Mexico had a fixed exchange rate regime at the time and the Mexican government swore that it would not devalue, despite a growing current account deficit. Those of you who are familiar with Mexican history know that there is six year boom-bust cycle associated with the presidential elections. In this case, Salinas was leaving office as Zedillo took over. I asked Caterpillar’s advisers on Wall Street who believed that there would be no devaluation. I went to Mexico and asked wealthy businessmen what they were doing with their money. All said they were sending their money to the US until after the devaluation. I told Caterpillar to wait until after the devaluation. The devaluation came after the inauguration but was much larger than expected. As a result, Caterpillar was able to set up a subsidiary for less than half of the amount that was originally planned.
by Christopher Lynch
“If I could only sell one light bulb to every consumer in China…” I heard a Westinghouse executive tell me that in the early 1980’s before China opened to trade and while there still was a Westinghouse. We all dream about the Grand Slam homerun in the big market. But you have to be careful what you wish for. How much money will you spend to get to the market? If you have to advertise, can you afford the costs of a national exposure campaign? Could you supply the potential orders?
For small exporters, I’ve always been the fan of small markets. In those economies, personal connections are more important, making market research and entry easier. I’ve found that there is frequently less competition because the mega-multinationals are focused on the big markets.
Here are a few examples to illustrate the point:
Central American countries (+ the Dominican Republic) have a Free Trade Agreement (CAFTA/DR) with the US. That gives US exporters duty free access plus a level playing field. The US exports more than $20 billion annually to the region, but that fact rarely shows up in the press. One US electronics reseller has a warehouse in El Salvador that then reships to the Central American region, which has no internal trade barriers. Internet commerce works well in Central America and this provides the electronics reseller a profitable base of operations.
Persian Gulf Coast (GCC) countries represent a small but highly profitable market. With high per-capita incomes, this region is a favorite with Southern California nutritional and herbal supplement exporters. I met one nutritional supplement company that exporting to the region with an internet based strategy.
Central Asian countries are growing rapidly as world commodity prices, especially oil, have remained high. One Southern California exporter is representing various pharmaceutical and medical products in the region – the cost for the major companies is too great to justify a local presence. For the exporter, this is a lucrative market that is the backbone of his company.
Pacific Islands are a natural for Southern California with many residents having family ties to the region. Transportation is a major cost but that keeps out the larger companies. The bonus is that once you get in this market, there is tremendous personal and brand loyalty.
So think “small markets.” There is a lot to be said about being the big fish in the small pond. Think about these and other smaller markets when you are making your expansion plans.
by Christopher Lynch
Exporters have to be customer centric. But, in addition to customers, exporters need to be aware of economic, political or social trends that could affect demand for the products or services. A change in the exchange rate from political decisions by a populist government can wipe out a market. A decision to begin negotiations on a free trade agreement can signal new market opportunities.
The exporter doesn’t have time to be the political analyst or economist – but there are some great online resources that I recommend for their accuracy and timeliness:
- The Economist Intelligence Unit: The EIU, a subsidiary of The Economist magazine, compiles economic and political data on every country around the globe. Because it is data driven, it is able to produce up-to-date analyses of what is going on in a market – macroeconomic data, key demographic and social trends and political outlook. I usually refer to the monthly reports for the best information, although the annual ones cover the country in much greater detail. I met regularly with the EIU country analysts when I was an international economist at various US Embassies and the analysts are competent and highly professional. My only caveat is that, being based in London, they view the world through British eyes. There is a fairly hefty annual fee to subscribe to the EIU – if you have a significant international operation, it is worth it. However, if you are a small or occasional exporter, your local public or university/community college library will let you have access at no cost.
- Country Commercial Guide: The Country Commercial Guide is produced by the US Commercial Service and is available at no cost to the public through www.export.gov. Updated annually, the Guides give an overview of the political and economic environment, tips on doing business in the country, trade regulations and investment climate in more than 150 countries and areas. The sections on trade regulations and investment climate can alert you to any impending changes in rules of commerce. Produced at US embassies and consulates around the world, the CCG also draws on the knowledge of the local employees of the Embassy, so the tips on doing business are generally right on. You should download and keep in your online library a PDF copy of the most recent CCG for every country that you to which you are currently or planning to ship.
- Country Fact Sheets: The US Department of State produces and regularly updates a Fact Sheet on each country. It outlines the positives (and sometimes the negatives) on every country or area around the world. Want to know what the official line is – check it out at www.state.gov.
We all know exporting is profitable – you can keep it so by keeping abreast of that latest in your overseas markets with a fifteen-minute read of these online resources!
Yes, I know this is the age of the digital book. But there is still room to have a few essential books within reach. Besides the pleasure of having a physical book with an index page that you can scan with one glance, there is the other recognition that Mr. Google doesn’t always give you the right answers. So, I recommend that professionals in international business keep these three books on their shelves behind their desks:
Kiss Bow or Shake Hands by Terri Morrison and Wayne Conaway (Adams Media 2005).
This is the bible for anyone in international business. The book lists business etiquette for more than 60 countries. A typical chapter includes information on history, politics, business culture, protocol and negotiating styles. This will help you understand where your business partner is coming from and why they do the “crazy” things they do. More importantly, it will help avoid making major gaffes. I remember the instructor I had in protocol when I joined the US State Department saying “A good diplomat is never unintentionally rude.” The same is true for a businessperson – you should always be the welcoming and correct partner.
Is this foolproof? No, there are always subtleties to another culture that just can’t be summarized in a book. But I’ve read closely the countries where I have lived or work and the information is pretty much right on.
Dictionary of International Trade by Edward G. Hinkelman, (World Trade Press 2010)
This is another essential book to have around. It not only defines commonly used INCO terms, it has information on topics like:
• Shipping information (air and sea)
• Documentation requirements
• International standards (ISO’s)
• Security requirements by country
• Key terms and words in eight languages
• Resources for shippers, and
• Much more
The Dictionary should be in every shipping office of every company.
The Little Red Book of China Business by Sheila Melvin, 2007, (Sourcebooks, Inc.).
As the Chinese market continues to open up in the West, the opportunities for you and your business are endless. But so are the opportunities for making the wrong move, saying the wrong thing and unknowingly jeopardizing your business in this market. I recommend The Little Red Book of China Business because it provides a unique approach to understanding the Chinese business culture by unlocking an essential key: The current generation of Chinese businesspeople grew up with the lessons and teaching of Mao’s Little Red Book, and these lessons guide their action in business and culture. If you don’t understand Mao and the Little Red Book, you don’t understand China business.
Sheila Melvin walks you through the key lessons of the Little Red Book, unlocking business and strategy secrets along the way. There are a number of books on doing business in China, but this one is unique in making the complex world view of the Chinese businessperson understandable to us in America.
— Chris Lynch
Trade shows take on a much larger importance in international business. Not only can you meet prospects but it is the one place where you can meet customers from around the world. Here’s my recent article in the February 2013 edition Export Magazine from the Riverside County Office of Foreign Trade (see pages 10-11)
John W was seething behind his booth at the US pavilion at the massive CEBIT expo in Hannover. “No one is coming by my booth. Coming here has been a complete waste of my time and money.”
I was the US Consul General in Hamburg and John was directing his complaints at me as an American official. “I’m not getting the leads I was promised.” Now I knew that the US Commercial Service never promised him specific leads when he signed up for the booth but I listened to his story. He had shown up the day before the event, his marketing collateral was tied up in customs and he was behind the booth all day waiting for customers. He was so tired that he skipped all the evening networking events.
John made many common mistakes that led to his poor results. Here are five tips to avoid those pitfalls and get the most out of a trade show:
1. Set Your Goals. You should think about your ideal customers and identify the best shows to reach them. www.export.gov, the US government website to help exporters, has a list of trade shows and resources and your local Commercial Service office can also advise you.
2. Assess Your Participation Level. You have many options – go to the show as an attendee, participate in the US pavilion or have your own space. You can also sponsor events or have special advertising in the catalog or the show website.
3. Make Sure You Have the Appropriate Look. The show will have specifications on display size and content but make sure your follow the guidelines, particularly for shipping. (Hint: use a professional freight forwarder for trade booths – it is worth the extra cost.) Also bring along LOTS of business cards!
4. Map Out Your Strategy. Don’t spend your time behind the booth. and don’t wait for visitors to come to you. Figure out a strategy to visit all of the relevant booths (particularly in the mega-shows like CEBIT with dozens of pavilions). Set up appointments in advance.
5. Build Relationships. Don’t be a wall flower – attend the evening social events, even if you are bone tired. Also be a respectful visitor – learn phrases for welcome, please and thank you. (Resource tip: “Kiss, Bow or Shake Hands” by Terri Morrison has business etiquette for more than 60 countries.)
So don’t be like John and lose out on an important market development opportunity. Do attend those trade shows but plan ahead of time to reach the right customers!
by Chris Lynch