Which of the following is a common pitfall that novice exporters come across?

After you have read this chapter you should be able to:

1 Explain the promises and risks associated with exporting.

2 Identify the steps managers can take to improve their firm’s export performance. 3 Identify information sources and government programs that exist to help exporters. 4 Recognize the basic steps involved in export financing.

5 Describe how countertrade can be used to facilitate exporting. LE A

R N

IN G

O B

J E

C T

IV E

S

part 5 Competing in a Global Marketplace

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opening case

V ellus Products was founded in 1991 in Columbus, Ohio, by Sharon Doherty to sell shampoo for pets. Doherty’s original insight was that shampoos for people don’t work well on pets because the skin of most animals is more sensitive than that of humans and becomes easily irritated. Because of her experience showing dogs, she knew that most existing pet shampoo left dog hair unmanageable and lacking the glamour needed for a dog show. Working with her nephew, who had a Ph.D. in chemistry, Doherty developed salon-type formulas specially suited to dogs (shampoo for horses was added later). Doherty booked Vellus’s first export sales in 1993 when a Taiwanese businessman, who had bought the shampoo in the United States, ordered $25,000 worth of product, which he wanted to sell at dog shows in Taiwan. Before long, Doherty was getting calls from people around the world, most of whom heard about Vellus’s products in dog shows, and a thriving export busi- ness was born. As the volume of inquiries built up, Doherty realized she needed to gain a better under- standing of foreign markets, export potential, and financing options, so she contacted the U.S. Department of Commerce’s Commercial Service offices in Columbus. “As business has grown, I have gone from ordering country profiles to requesting customized exporting and financing strategies tailored to maximize export potential,” she says. Today Vellus exports to 28 nations, although the bulk of the firm’s international business operates through distributors in Sweden, Finland, Britain, France, Germany, Australia, New Zealand, Canada, and Iceland, where the products are marketed at pet shows and exhibitions. The company has registered its trademark in 15 European countries, and international sales account for more than half the firm’s total. “I credit the Commercial Service for helping me to expand my exports, as it would have been much more difficult on my own,” Doherty says.

Vellus Products

Exporting, Importing, and Countertrade

13 c h a p t e r

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444 Part Five Competing in a Global Marketplace

Reflecting on her international success, Doherty has some advice for others who might want to go down the same road. First, she says, know whom you are dealing with. Relationships are important to successful exporting. Doherty says she gives advice and guidance to her distributors, sharing her knowledge and helping them to be successful. Second, having being duped by a man who falsely claimed he knew the pet market, she advocates doing background checks on potential business partners. “Gather as much information as you can,” she says. “Don’t make any assumptions; the wrong choice can cost your business valuable time and money.” Third, Doherty believes it is important to learn the local culture. Vellus products are adapted to best suit different groom- ing techniques in different countries, something she believes has helped to make the company more successful. Finally, Doherty says, enjoy the ride! “I love exporting because it has enabled me to meet so many people from other cultures. Exporting has made me more broad-minded, and I have developed a great appreciation for other cultures and the way others live their lives.” • Sources: U.S. Department of Commerce Web site, “Vellus Products Inc.,” www.export.gov, accessed March 16, 2010; C. K. Cultice, “Best in Show: Vellus Products,” World Trade , January 2007, pp. 70–73; and C. K. Cultice, “Lathering up World Markets,” Business America , July 1997, p. 33.

Introduction In the previous chapter, we reviewed exporting from a strategic perspective. We consid- ered exporting as just one of a range of strategic options for profiting from international expansion. This chapter is more concerned with the nuts and bolts of exporting (and importing). Here we look at how to export. As the opening case makes clear, exporting is not just for large enterprises; many small entrepreneurial firms such as Vellus Products have benefited significantly from the money-making opportunities of exporting.

The volume of export activity in the world economy has increased as exporting has become easier. The gradual decline in trade barriers under the umbrella of GATT and now the WTO (see Chapter 6) along with regional economic agree- ments such as the European Union and the North American Free Trade Agreement (see Chapter 8) have significantly increased export opportunities. At the same time, modern communication and transportation technologies have alleviated the lo- gistical problems associated with exporting. Firms are increasingly using the World Wide Web, toll- free phone numbers, and international air express services to reduce the costs of exporting. Conse- quently, it is no longer unusual to find small com- panies that are thriving as exporters.

Another Per spect i ve

Autarky: Not in the Vocabulary of Globalization! The word autarky refers to the belief that a country should be self-sufficient and avoid trade with other nations. Most econ- omists regard autarky as an idealistic, but impractical, goal. Throughout history, countries have tried to achieve autarky, but soon discovered they could not produce the wide range of goods their population wants and make those goods avail- able at competitive prices. In fact, those countries found themselves worse off economically than nations that engage in international trade. Word to the wise: Unless your country can efficiently produce everything it needs, it needs to trade. (“Economics A-Z,” www.economist.com)

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Chapter Thirteen Exporting, Importing, and Countertrade 445

Nevertheless, exporting remains a challenge for many firms. Smaller enterprises can find the process intimidating. The firm wishing to export must identify foreign market opportunities, avoid a host of unanticipated problems that are often associated with doing business in a foreign market, familiarize itself with the mechanics of export and import financing, learn where to find financing and export credit insurance, and learn how it should deal with foreign exchange risk. The process can be made more problematic by currencies that are not freely convertible. Arranging payment for ex- ports to countries with weak currencies can be a problem. This brings us to the topic of countertrade, by which payment for exports is received in goods and services rather than money. In this chapter, we will discuss all these issues with the exception of for- eign exchange risk, which was covered in Chapter 10. We open the chapter by consid- ering the promise and pitfalls of exporting.

The Promise and Pitfalls of Exporting The great promise of exporting is that large revenue and profit opportunities are to be found in foreign markets for most firms in most industries. This was true for the com- pany profiled in the opening case. The international market is normally so much larger than the firm’s domestic market that exporting is nearly always a way to increase the company’s revenue and profit base. By expanding the size of the market, exporting can enable a firm to achieve economies of scale, thereby lowering its unit costs. Firms that do not export often lose out on significant opportunities for growth and cost reduction. 1 Studies have shown that while many large firms tend to be proactive about seeking opportunities for profitable exporting, systematically scanning foreign markets to find ways to leverage their technology, products, and marketing skills in foreign countries, many medium-sized and small firms are very reactive. 2 Typically, such reactive firms do not even consider exporting until their domestic market is saturated and the emergence of excess productive capacity at home forces them to look for growth opportunities in foreign markets. Also, many small and medium-sized firms tend to wait for the world to come to them, rather than going out into the world to seek opportunities. Even when the world does come to them, they may not respond. An example is MMO Music Group, which makes sing-along tapes for karaoke machines. Foreign sales accounted for about 15 percent of MMO’s revenues of $8 million, but the firm’s CEO admits that this figure would probably have been much higher had he paid attention to building international sales. Unanswered faxes and phone messages from Asia and Europe often piled up while he was trying to manage the burgeoning domestic side of the business. By the time MMO did turn its attention to foreign markets, other competitors had stepped into the breach and MMO found it tough going to build export volume. 3 MMO’s experience is common, and it suggests a need for firms to become more proactive about seeking export opportunities. One reason more firms are not proac- tive is that they are unfamiliar with foreign market opportunities; they simply do not know how big the opportunities actually are or where they might lie. Simple igno- rance of the potential opportunities is a huge barrier to exporting. 4 Also, many would- be exporters, particularly smaller firms, are often intimidated by the complexities and mechanics of exporting to countries where business practices, language, culture, legal systems, and currency are very different from the home market. 5 This combination of unfamiliarity and intimidation probably explains why exporters still account for only a tiny percentage of U.S. firms, less than 5 percent of firms with fewer than 500 employees, according to the Small Business Administration. 6 To make matters worse, many neophyte exporters run into significant problems when first trying to do business abroad, and this sours them on future exporting ventures. Common pitfalls include poor market analysis, a poor understanding of competitive

LEARNING OBJECTIVE 1 Explain the promises and

risks associated with exporting.

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446 Part Five Competing in a Global Marketplace

conditions in the foreign market, a failure to customize the product offering to the needs of foreign customers, lack of an effective distribution program, a poorly executed pro- motional campaign, and problems securing financing. 7 Novice exporters tend to under- estimate the time and expertise needed to cultivate business in foreign countries. 8 Few realize the amount of management resources that have to be dedicated to this activity. Many foreign customers require face-to-face negotiations on their home turf. An ex- porter may have to spend months learning about a country’s trade regulations, business practices, and more before a deal can be closed. The accompanying Management Focus, which documents the experience of FCX Systems in China, suggests that it may take years before foreigners are comfortable enough to purchase in significant quantities. Exporters often face voluminous paperwork, complex formalities, and many poten- tial delays and errors. According to a UN report on trade and development, a typical international trade transaction may involve 30 parties, 60 original documents, and

Management FOCUS

FCX Systems’ Success Story

Founded with the help of a $20,000 loan from the Small Business Administration, FCX Systems is an exporting success story. FCX makes power converters for the aero- space industry. These devices convert common electric utility frequencies into the higher frequencies used in air- craft systems and are primarily used to provide power to aircraft while they are on the ground. Today the West Virginia enterprise generates over half of its $20 million in annual sales from exports to more than 50 countries. FCX’s prowess in opening foreign markets has earned the company several awards for export excellence, including a presidential award for achieving extraordinary growth in export sales. FCX initially got into exporting because it found that for- eigners were often more receptive to the company’s prod- ucts than potential American customers. According to Don Gallion, president of FCX, “In the overseas market, they were looking for a good technical product, preferably made in the U.S., but they weren’t asking questions about ‘How long have you been in business? Are you still going to be here tomorrow?’ They were just anxious to get the product.” In 1989, soon after FCX’s founding, the company signed on with an international distribution company to help with exporting, but Gallion became disillusioned with that com- pany, and in 1994 FCX started to handle the exporting pro- cess on its own. At the time, exports represented 12 percent of sales, but by 1997 they had jumped to more than 50 percent of the total, where they have stayed since. In explaining the company’s export success, Gallion cites a number of factors. One was the extensive assistance that FCX has received over the years from a number of federal and state agencies, including the U.S. Department of Commerce and the Development Office of West Virginia.

These agencies demystified the process of exporting and provided good contacts for FCX. Finding a good local repre- sentative to help work through local regulations and cus- toms is another critical factor, according to Gallion, who says, “A good rep will keep you out of trouble when it comes to customs and what you should and shouldn’t do.” Persis- tence is also very important, says Gallion, particularly when trying to break into markets where personal relationships are crucial, such as China. China has been an interesting story for FCX. Recently the company has been booking $2 million to $3 million in sales to China, but it took years to get to this point. China had been on Gallion’s radar screen since the early 1990s, pri- marily because of the country’s rapid modernization and its plans to build or remodel some 179 airports between 1998 and 2008. This constituted a potentially large market for FCX, particularly compared with the United States where perhaps only three new airports would be built dur- ing the same period. Despite the scale of the opportunity, progress was very slow. The company had to identify airports and airline projects, government agencies, cus- tomers, and decision makers, as well as work through different languages—and make friends. According to Gallion, “Only after they consider you a friend will they buy a product. They believe a friend would never cheat you.” To make friends in China, Gallion estimates he had to make more than 100 trips to China since the early 1990s, but now that the network has been established, it is starting to pay dividends.

Sources: J. Sparshott, “Businesses Must Export to Compete,” The Washington Times, September 1, 2004, p. C8; “Entrepreneur of the Year 2001: Donald Gallion, FCX Systems,” The State Journal, June 18, 2001, p. S10; and T. Pierro, “Exporting Powers Growth of FCX Systems,” The State Journal, April 6, 1998, p. 1.

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Chapter Thirteen Exporting, Importing, and Countertrade 447

360 document copies, all of which have to be checked, transmitted, reentered into various information systems, processed, and filed. The United Nations has calculated that the time involved in preparing documentation, along with the costs of common errors in paperwork, often amounts to 10 percent of the final value of goods exported. 9

Improving Export Performance Inexperienced exporters have a number of ways to gain information about foreign mar- ket opportunities and avoid common pitfalls that tend to discourage and frustrate novice exporters. 10 In this section, we look at information sources for exporters to increase their knowledge of foreign market opportunities, we consider the pros and cons of using ex- port management companies (EMCs) to assist in the export process, and we review various exporting strategies that can increase the probability of successful exporting. We begin, however, with a look at how several nations try to help domestic firms export.

AN INTERNATIONAL COMPARISON One big impediment to exporting is the simple lack of knowledge of the opportunities available. Often there are many mar- kets for a firm’s product, but because they are in countries separated from the firm’s home base by culture, language, distance, and time, the firm does not know of them. Identifying export opportunities is made even more complex because more than 200 countries with widely differing cultures compose the world of potential opportunities. Faced with such complexity and diversity, firms sometimes hesitate to seek export opportunities. The way to overcome ignorance is to collect information. In Germany, one of the world’s most successful exporting nations, trade associations, government agencies, and commercial banks gather information, helping small firms identify export opportuni- ties. A similar function is provided by the Japanese Ministry of International Trade and Industry (MITI), which is always on the lookout for export opportunities. In addition, many Japanese firms are affiliated in some way with the sogo shosha, Japan’s great trad- ing houses. The sogo shosha have offices all over the world, and they proactively, con- tinuously seek export opportunities for their affiliated companies large and small. 11 German and Japanese firms can draw on the large reservoirs of experience, skills, in- formation, and other resources of their respective export-oriented institutions. Unlike their German and Japanese competitors, many U.S. firms are relatively blind when they seek export opportunities; they are information disadvantaged. In part, this reflects historical differences. Both Germany and Japan have long made their living as trading nations, whereas until recently the United States has been a relatively self-contained conti- nental economy in which international trade played a minor role. This is changing; both imports and exports now play a greater role in the U.S. econ- omy than they did 20 years ago. However, the United States has not yet evolved an institutional structure for promoting exports similar to that of either Germany or Japan.

INFORMATION SOURCES Despite institutional disadvantages, U.S. firms can increase their awareness of export opportunities. The most comprehensive source of information is the U.S. Department of Commerce and its

LEARNING OBJECTIVE 2 Identify the steps managers

can take to improve their firm’s export performance.

Another Per spect i ve

Product Safety: An Exporting Pitfall Manufacturers in China have experienced a string of re- calls from products they exported in recent years. Among the unsafe items were toys containing lead paint; pet food contaminated with melamine; packaged dumplings found to have traces of insecticide; and high levels of toxic cad- mium in children’s jewelry. The U.S. Consumer Products Safety Commission and the Department of Housing and Urban Development advised homeowners in several states to replace certain types of Chinese-made drywall. Used widely by contractors after hurricanes swept through the South, the drywall has been linked to respiratory and elec- trical problems because of unsafe levels of hydrogen sulfide. (Javier C. Hernandez, “U.S. Urges Homeowners to Remove Chinese Drywall,” The New York Times, April 2, 2010, www.nytimes.com)

LEARNING OBJECTIVE 3 Identify information sources

and government programs that exist to help exporters.

Sogo Shosha Japan’s great trading houses.

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448 Part Five Competing in a Global Marketplace

One of the biggest challenges for U.S. businesses trying to go global is finding the right information. The U.S. government provides assistance and links to other helpful sources on its www.export.gov Web site.

district offices all over the country (as noted in the opening case, Vellus Products used these services and credits them with the company’s international successes). Within that department are two organizations dedicated to providing businesses with intelligence and assistance for attacking foreign markets: the International Trade Administration and the United States and Foreign Commercial Service. These agencies provide the potential exporter with a “best prospects” list, which gives the names and addresses of potential distributors in foreign markets along with businesses they are in, the products they handle, and their contact person. In addition, the Department of Commerce has assembled a “comparison shopping service” for 14 countries that are major markets for U.S. exports. For a small fee, a firm can receive a customized market research survey on a product of its choice. This survey provides information on marketability, the competition, comparative prices, distribution chan- nels, and names of potential sales representatives. Each study is conducted on-site by an officer of the Department of Commerce. The Department of Commerce also organizes trade events that help potential exporters make foreign contacts and explore export opportunities. The department

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Chapter Thirteen Exporting, Importing, and Countertrade 449

organizes exhibitions at international trade fairs, which are held regularly in major cit- ies worldwide. The department also has a matchmaker program, in which department representatives accompany groups of U.S. businesspeople abroad to meet with quali- fied agents, distributors, and customers. Another government organization, the Small Business Administration (SBA), can help potential exporters (see the accompanying Management Focus for examples of the SBA’s work). The SBA employs 76 district international trade officers and 10 regional interna- tional trade officers throughout the United States as well as a 10-person international trade staff in Washington, D.C. Through its Service Corps of Retired Executives (SCORE) program, the SBA also oversees some 850 volunteers with international trade experience to provide one-on-one counseling to active and new-to-export businesses.

Management FOCUS

Exporting with a Little Government Help

Exporting can seem like a daunting prospect, but the reality is that in the United States, as in many other countries, many small enterprises have built profitable export busi- nesses. For example, Landmark Systems of Virginia had virtually no domestic sales before it entered the European market. Landmark had developed a software program for IBM mainframe computers and located an independent distributor in Europe to represent its product. In the first year, 80 percent of sales were attributed to exporting. In the second year, sales jumped from $100,000 to $1.4 million— with 70 percent attributable to exports. Landmark is not alone; government data suggest that in the United States by 2007, nearly 97 percent of the 240,000 firms that exported were small or medium-sized businesses that employed fewer than 500 people. Their share of total U.S. exports grew steadily over the last decade and reached 29 percent by the mid-2000s. To help jump-start the exporting process, many small companies have drawn on the expertise of government agencies, financial institutions, and export management companies. Consider the case of Novi, Inc., a California- based business. Company President Michael Stoff tells how he utilized the services of the U.S. Small Business Administration (SBA) Office of International Trade to start exporting: “When I began my business venture, Novi, Inc., I knew that my Tune-Tote (a stereo system for bicycles) had the potential to be successful in international markets. Although I had no prior experience in this area, I began researching and collecting information on international markets. I was willing to learn, and by targeting key sources for information and guidance, I was able to pene- trate international markets in a short period of time. One vital source I used from the beginning was the SBA.

Through the SBA I was directed to a program that dealt specifically with business development—the Service Corps of Retired Executives (SCORE). I was assigned an adviser who had run his own import/export business for 30 years. The services of SCORE are provided on a continual basis and are free. “As I began to pursue exporting, my first step was a thor- ough marketing evaluation. I targeted trade shows with a good presence of international buyers. I also went to DOC (Department of Commerce) for counseling and information about the rules and regulations of exporting. I advertised my product in ‘Commercial News USA,’ distributed through U.S. embassies to buyers worldwide. I utilized DOC’s World Traders Data Reports to get background information on po- tential foreign buyers. As a result, I received 60 to 70 inqui- ries about Tune-Tote from around the world. Once I completed my research and evaluation of potential buyers, I decided which ones would be most suitable to market my product internationally. Then I decided to grant exclusive distributorship. In order to effectively communicate with my international customers, I invested in a fax. I chose a U.S. bank to handle international transactions. The bank also provided guidance on methods of payment and how best to receive and transmit money. This is essential know-how for anyone wanting to be successful in foreign markets.” In just one year of exporting, export sales at Novi topped $1 million and increased 40 percent in the second year of operations. Today, Novi, Inc., is a large distributor of wireless intercom systems that exports to more than 10 countries.

Sources: Small Business Administration Office of International Trade, “Guide to Exporting,” www.sba.gov/oit/info/Guide-ToExporting/index.html; U.S. Department of Commerce, “A Profile of U.S. Exporting Companies, 2000–2001,” February 2003, report available at www.census.gov/foreign- trade/aip/index.html#profile; and The 2007 National Exporting Strategy (Washington, DC: U.S. International Trade Commission, 2007).

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450 Part Five Competing in a Global Marketplace

The SBA also coordinates the Export Legal Assistance Network (ELAN), a nationwide group of international trade attorneys who provide free initial consultations to small busi- nesses on export-related matters. In addition to the Department of Commerce and SBA, nearly every state and many large cities maintain active trade commissions whose purpose is to promote exports. Most of these provide business counseling, information gathering, technical assistance, and financing. Unfortunately, many have fallen victim to budget cuts or to turf battles for political and financial support with other export agencies. A number of private organizations are also beginning to provide more assistance to would-be exporters. Commercial banks and major accounting firms are more willing to assist small firms in starting export operations than they were a decade ago. In addition, large multinationals that have been successful in the global arena are typically willing to discuss opportunities overseas with the owners or managers of small firms. 12

UTILIZING EXPORT MANAGEMENT COMPANIES One way for first-time exporters to identify the opportunities associated with exporting and to avoid many of the associated pitfalls is to hire an export management company (EMC). EMCs are export specialists who act as the export marketing department or international department for their client firms. EMCs normally accept two types of export assignments. They start exporting operations for a firm with the under- standing that the firm will take over operations after they are well established. In another type, start-up services are performed with the understanding that the EMC will have continuing responsibility for selling the firm’s products. Many EMCs specialize in serving firms in particular industries and in particular areas of the world. Thus, one EMC may specialize in selling agricultural products in the Asian market, while another may focus on exporting electronics products to East- ern Europe. MD International, for example, focuses on selling medical equipment to Latin America. In theory, the advantage of EMCs is that they are experienced specialists who can help the neophyte exporter identify opportunities and avoid common pitfalls. A good EMC will have a network of contacts in potential markets, have multilingual employees, have a good knowledge of different business mores, and be fully conver- sant with the ins and outs of the exporting process and with local business regula- tions. However, the quality of EMCs varies. 13 While some perform their functions very well, others appear to add little value to the exporting company. Therefore, an exporter should review carefully a number of EMCs and check references. One drawback of relying on EMCs is that the company can fail to develop its own exporting capabilities.

EXPORT STRATEGY In addition to using EMCs, a firm can reduce the risks associated with exporting if it is careful about its choice of export strategy. 14 A few guidelines can help firms improve their odds of success. For example, one of the most successful exporting firms in the world, the Minnesota Mining and Manufacturing Co. (3M), has built its export success on three main principles—enter on a small scale to reduce risks, add additional product lines once the exporting operations start to become successful, and hire locals to promote the firm’s products (3M’s export strat- egy is profiled in the accompanying Management Focus). Another successful ex- porter, Red Spot Paint & Varnish, emphasizes the importance of cultivating personal relationships when trying to build an export business (see the Management Focus at the end of this section).

LEARNING OBJECTIVE 2 Identify the steps managers can take to improve their firm’s export performance.

LEARNING OBJECTIVE 2 Identify the steps managers can take to improve their firm’s export performance.

Export Management

Company Export specialists who

act as the export marketing department for

client firms.

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Chapter Thirteen Exporting, Importing, and Countertrade 451

The probability of exporting successfully can be increased dramatically by taking a handful of simple strategic steps. First, particularly for the novice exporter, it helps to hire an EMC or at least an experienced export consultant to help identify opportunities and navigate the paperwork and regulations so often involved in exporting. Second, it often makes sense to initially focus on one market or a handful of markets. Learn what is required to succeed in those markets before moving on to other markets. The firm that enters many markets at once runs the risk of spreading its limited management resources too thin. The result of such a shotgun approach to exporting may be a failure to become established in any one market. Third, as with 3M, it often makes sense to enter a foreign market on a small scale to reduce the costs of any subsequent failure. Most importantly, entering on a small scale provides the time and opportunity to learn about the foreign country before making significant capital commitments to that mar- ket. Fourth, the exporter needs to recognize the time and managerial commitment in- volved in building export sales and should hire additional personnel to oversee this activity. Fifth, in many countries, it is important to devote a lot of attention to building strong and enduring relationships with local distributors and/or customers (see the Management Focus on Red Spot Paint for an example). Sixth, as 3M often does, it is important to hire local personnel to help the firm establish itself in a foreign market. Local people are likely to have a much greater sense of how to do business in a given

Management FOCUS

Export Strategy at 3M

The Minnesota Mining and Manufacturing Co. (3M), which makes more than 40,000 products including tape, sandpa- per, medical products, and the ever-present Post-it Notes, is one of the world’s great multinational operations. Today over 60 percent of the firm’s revenues are generated out- side the United States. Although the bulk of these revenues came from foreign-based operations, 3M remains a major exporter with over $2 billion in exports. The company often uses its exports to establish an initial presence in a foreign market, only building foreign production facilities once sales volume rises to a level that justifies local production. The export strategy is built around simple principles. One is known as “FIDO,” which stands for First In (to a new market) Defeats Others. The essence of FIDO is to gain an advantage over other exporters by getting into a market first and learning about that country and how to sell there before others do. A second principle is “make a little, sell a little,” which is the idea of entering on a small scale with a very modest investment and pushing one basic product, such as reflective sheeting for traffic signs in Russia or scouring pads in Hungary. Once 3M believes it has learned enough about the market to reduce the risk of failure to reasonable levels, it adds additional products. A third principle at 3M is to hire local employees to sell the firm’s products. The company normally sets up a local sales subsidiary to handle its export activities in a country. It then

staffs this subsidiary with local hires because it believes they are likely to have a much better idea of how to sell in their own country than American expatriates. Because of the implementation of this principle, less than 200 of 3M’s 40,000-plus foreign employees are U.S. expatriates. Another common practice at 3M is to formulate global strategic plans for the export and eventual overseas pro- duction of its products. Within the context of these plans, 3M gives local managers considerable autonomy to find the best way to sell the product within their country. Thus, when 3M first exported its Post-it Notes, it planned to “sample the daylights” out of the product, but it also told local managers to find the best way of doing this. Local managers hired office cleaning crews to pass out samples in Great Britain and Germany; in Italy, office products dis- tributors were used to pass out free samples; while in Malaysia, local managers employed young women to go from office to office handing out samples of the product. In typical 3M fashion, when the volume of Post-it Notes was sufficient to justify it, exports from the United States were replaced by local production. Thus, after several years 3M found it worthwhile to set up production facilities in France to produce Post-it Notes for the European market.

Sources: R. L. Rose, “Success Abroad,” The Wall Street Journal, March 29, 1991, p. A1; T. Eiben, “US Exporters Keep On Rolling,” Fortune, June 14, 1994, pp. 128–31; 3M Company, A Century on Innovation, 3M, 2002; and 2005 10K form archived at 3M’s Web site at www.mmm.com.

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452 Part Five Competing in a Global Marketplace

country than a manager from an exporting firm who has previously never set foot in that country. Seventh, several studies have suggested the firm needs to be proactive about seeking export opportunities. 15 Armchair exporting does not work! The world will not normally beat a pathway to your door. Finally, it is important for the exporter to retain the option of local production. Once exports reach a sufficient volume to justify cost-efficient local production, the exporting firm should consider establishing production facilities in the foreign market. Such localization helps foster good relations with the foreign country and can lead to greater market acceptance. Exporting is often not an end in itself, but merely a step on the road toward establishment of foreign production (again, 3M provides an example of this philosophy).

Export and Import Financing Mechanisms for financing exports and imports have evolved over the centuries in re- sponse to a problem that can be particularly acute in international trade: the lack of trust that exists when one must put faith in a stranger. In this section, we examine the financial devices that have evolved to cope with this problem in the context of international

Management FOCUS

Red Spot Paint & Varnish

Established in 1903 and based in Evansville, Indiana, Red Spot Paint & Varnish Company is in many ways typical of the companies that can be found in the small towns of America’s heartland. The closely held company, whose CEO, Charles Storms, is the great-grandson of the founder, has 500 employees and annual sales of close to $90 million. The company’s main product is paint for plastic compo- nents used in the automobile industry. Red Spot products are seen on automobile bumpers, wheel covers, grilles, headlights, instrument panels, door inserts, radio buttons, and other components. Unlike many other companies of a similar size and location, however, Red Spot has a thriving international business. International sales (which include exports and local production by licensees) now account for between 15 percent and 25 percent of revenue in any one year, and Red Spot does business in about 15 countries. Red Spot has long had some international sales and once won an export award. To further its international business, Red Spot hired a Central Michigan University professor, Bryan Williams. Williams, who was hired because of his foreign-language skills (he speaks German, Japanese, and some Chinese), was the first employee at Red Spot whose exclusive focus was international marketing and sales. His first challenge was the lack of staff skilled in the business of exporting. He found that it was difficult to build an inter- national business without in-house expertise in the basic mechanics of exporting. According to Williams, Red Spot needed people who understood the nuts and bolts of

exporting—letters of credit, payment terms, bills of lading, and so on. As might be expected for a business based in the heartland of America, no ready supply of such individu- als was in the vicinity. It took Williams several years to solve this problem. Now Red Spot has a full-time staff of two who have been trained in the principles of exporting and international operations. A second problem that Williams encountered was the clash between the quarter-to-quarter mentality that fre- quently pervades management practice in the United States and the long-term perspective that is often neces- sary to build a successful international business. Williams has found that building long-term personal relationships with potential foreign customers is often the key to get- ting business. When foreign customers visit Evansville, Williams often invites them home for dinner. His young chil- dren started calling one visitor from Hong Kong “Uncle.” Even with such efforts, however, the business may not come quickly. Meeting with potential foreign customers yields no direct business 90 percent of the time, although Williams points out that it often yields benefits in terms of competitive information and relationship building. He has found that perseverance pays. For example, Williams and Storms called on a major German automobile parts manu- facturer for seven years before finally landing some busi- ness from the company.

Sources: R. L. Rose and C. Quintanilla, “More Small U.S. Firms Take Up Exporting with Much Success,” The Wall Street Journal, December 20, 1996, p. A1, A10; and interview with Bryan Williams of Red Spot Paint.

LEARNING OBJECTIVE 4 Recognize the basic steps involved in export financing.

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Chapter Thirteen Exporting, Importing, and Countertrade 453

trade: the letter of credit, the draft (or bill of exchange), and the bill of lading. Then we will trace the 14 steps of a typical export–import transaction. 16

LACK OF TRUST Firms engaged in international trade have to trust someone they may have never seen, who lives in a different country, who speaks a different lan- guage, who abides by (or does not abide by) a different legal system, and who could be very difficult to track down if he or she defaults on an obligation. Consider a U.S. firm exporting to a distributor in France. The U.S. businessman might be concerned that if he ships the products to France before he receives payment from the French business- woman, she might take delivery of the products and not pay him. Conversely, the French importer might worry that if she pays for the products before they are shipped, the U.S. firm might keep the money and never ship the products or might ship defec- tive products. Neither party to the exchange completely trusts the other. This lack of trust is exacerbated by the distance between the two parties—in space, language, and culture—and by the problems of using an underdeveloped international legal system to enforce contractual obligations. Due to the (quite reasonable) lack of trust between the two parties, each has his or her own preferences as to how the transaction should be configured. To make sure he is paid, the manager of the U.S. firm would prefer the French distributor to pay for the products before he ships them (see Figure 13.1). Alternatively, to ensure she receives the products, the French distributor would prefer not to pay for them until they arrive (see Figure 13.2). Thus, each party has a different set of preferences. Unless there is some way of establishing trust between the parties, the transaction might never occur.