Business Beyond the Reef

Honolulu has a business problem that afflicts many cities of similar size around the world.  Local trade shows are really rinky-dink.  And few local businesses have a clue about what a truly great trade show is.

Customer Base

I am reminded of that this week as Germany’s huge CeBIT computer and telecom show gets underway.  Located in Hannover, a city in north central Germany with a population a little over half a million, CeBIT is the world’s largest trade show.  Trade shows are the major local industry and the Hannover fairgrounds has two dozen halls, each larger than the New York Colosseum. And Hannover hosts several such shows each year in other industries.  So do the other great German fairgrounds, like Frankfurt, Munich, Cologne and more.  CeBIT is smaller than it used to be, but still attracts more than 700,000 visitors, most of them real business prospects, to a middling town that doesn’t have the hotel rooms to hold them.  The show is also shorter, 5 days when it used to run for nine.  When I worked CeBIT in the 1990s, you made sure to wear comfortable shoes.

If you were in business, you also made sure to take your order book.  One year, the American exhibitors alone did more than $1.5 billion in sales – off the floor of the show!  That doesn’t include the orders that came in after the show closed.  We’re talking real money here.

CeBIT isn’t the only great show out there.  There are wonderful shows in Hong Kong, Singapore, Tokyo, Paris, London, Milan, Las Vegas, New York.  You get the picture.  Whatever industry you are in, there is probably a great trade show.  So is your company going to be there?  Why not?  Is your show experience with smaller, local or regional shows?  No wonder.

In Honolulu (or Denver, for that matter) a big show has maybe 200 exhibitors.  Exhibitors grumble that few business visitors come to the show, and they end up selling retail to customers they can get to in other ways.  Turns out most exhibitors are there because their local competition is there and questions would be raised if they don’t show up.  No wonder they get turned off by shows.

Don’t let the rinky-dink shows put your company off using trade fairs.  If you get the chance, stop in at a truly major trade show.  You won’t believe it.  They can even be fun.  (Nothing’s better than the Nuremburg Toy Show!) But watch out, the international food shows can be bad for your waistline.

How to do Business at International Trade Shows

If you want to learn to use the big shows for your business, take a look at my friend Doug Barry’s series of videos done at Hannover.

As an aside, I once had a conversation with John Dvorak, the tech columnist, about the COMDEX show in Las Vegas.  Most of the U.S. high tech industry thought COMDEX was huge and couldn’t be topped.  Dvorak said COMDEX was too big to do business.  I pointed out to him that CeBIT was twice the size of COMDEX and did more than twice the business.  CeBIT is still the place to be.  COMDEX is history.

Yesterday, I saw an article by Tony Daltorio at Investment U Research about how Google forgot Rule #1 of international marketing: know your market.  Seems obvious, but it often catches companies out when they make a run at a new market.  They don’t stop to think about the market, or they haven’t done the research to get to know a market.

Daltorio’s article points out that Google strode into China with all the hubris of a Greek tragedy.  They knew little about the local competition, like Baidu, which might have enabled Google to pick up on what was driving Baidu’s market share in China – free music downloads, which are not a core expertise for Google.  Google also assumed that their U.S.-style model would automatically work for China, as it had worked in so many other places, but they built no good way to cope with Chinese character searches.  Chinese users want to minimize typing, but do want to be able to merely click on buttons to conduct a search.  (Would a Yahoo-style search by categories work better in China?)  Daltorio says that Chinese internet users are more likely than the rest of us to use the Internet for entertainment, not for the business searches that reign supreme in other markets.  And, says Daltorio, Chinese tend to use blogs more than company websites, preferring to trust word-of-mouth recommendations, which puts a premium on putting blogs high up in search results.  Now, that is not to say that Google didn’t run into all sorts of official and unofficial blockages in China.  Most companies do.

The article got me to thinking about companies I have worked with that did a good job of learning the market – and those that didn’t.  We did some market research in Germany for a firm (that should remain nameless) that wanted to introduce an American consumer product.  Our findings were very negative; in fact, we told the company they would lose their shirts in Germany and probably in much of Europe.  I was a U.S. commercial officer at the time and the company was so angry they complained all the way up to the U.S. Secretary of Commerce.  We stuck by our research.  The company then went to a neighboring European market with their original approach – and promptly lost their shirts.  Never ignore negative market research. It can be the most valuable research you will ever see.  (BTW, the company never apologized.)

I saw KMart fall on its face in Singapore.  They came into the market in a rush and opened up what appeared a magnificent store in downtown Singapore.  What they didn’t realize was that Singapore already had plenty of cheap goods, that they are sold through small stores in the many housing estates on the island, and that – once the flash of the new was over – few Singaporeans would make the trip downtown to buy such things. Why wait for a Blue Light Special when you can get the same thing cheaper from the guy down the street?  (The expat community, which didn’t live in public housing estates, worshiped KMart.  They had that part right.)

Some firms do get it right.  I have worked over the years with a Honolulu architecture firm, Wimberley Allison Tong & Goo, that makes a fetish of getting cultural things right.  When they begin work on a project, say a resort or hotel, they send architects to the site for months or even a year to study the local culture, mores and architecture before they begin to design the project.  The goal is to please the customer, make sure the resort fits with the local culture, and please the visitors to these hotels who want an experience that can’t be replicated in a chain hotel.  WATG has been so successful at this, and has won so many international awards for their work, that now they need to do very little marketing.  International customers come to them.

Doesn't Sell in Germany

Germany was the site of one of the most egregious cases of ignorance of the market I have experienced.  We were helping U.S. companies at a trade fair for costume jewelry in Stuttgart when we found a California company setting up to sell their biker jewelry.  Bikers seem to love old SS-style symbols, swastikas and especially the SS deaths heads.  But Germany, for good historical reasons, has outlawed display of such stuff.  The U.S. company had not thought to ask about selling Nazi paraphernalia in the country that invented it.  We got the deaths heads under cover just before the police arrived.  Phew!

• W. Michael Cox, former chief economist with the Federal Reserve Bank of Dallas, published an op-ed piece in the New York Times Wednesday about the vast importance of services in U.S. export trade.  Drawing attention to President Obama’s gaffe of not mentioning services in his proposal for a National Export Initiative, Cox argues that the only way the United States can double exports in five years is by increasing exports of services.
• Fred Bergsten and Jeffrey Schott have released a paper giving strong support to the idea of the United States joining the Trans Pacific Partnership.
• ASEAN’s tariff cuts DO have an impact! Indonesia’s Sampoerna, a company that makes clove cigarettes, announced that it is closing a plant in Kuala Lumpur because the drop in duties makes it feasible to export their cigarettes directly from Indonesia to Malaysia.
• An Australian site, appropriately titled Import Export Made Easy, has a nice glossary of trade terms.
• I have posted several times about the lack of will, knowledge and interest in the Obama Administration and the U.S. Congress about the three already-negotiated free trade agreements with South Korea, Colombia and Panama.   These FTAs mean thousands of jobs for Americans – and yet they are ignored by politicians who say they want to create jobs.  Go figure.  Read the op-ed piece published in Friday’s Wall Street Journal touting the U.S.-Korea FTA.
• I’m happy to give credit to the Obama Administration for its new initiative to encourage U.S. clothing brands and apparel retailers to buy at least 1% of their total apparel requirements from Haiti.  Companies like Hanes and Gap are already on board.
• Enough of this serious stuff.  The New York Times tells you where to find a good brew in Vietnam.  It’s not just 888 anymore.

Andy Xie published an analysis last week on Caixin Online about how the Obama Administration’s new export policy may heighten tensions with China.  Worth reading for his entire train of thought, I thought I would focus on the options Xie sees for increasing American exports.  In his State of the Union address, President Obama set a goal of doubling U.S. exports within five years.  Many pundits, including this one, have been skeptical, asking if such a feat is possible.  Xie lays out the options:

1. 

   Will U.S. Exports Bounce?

   Devaluation of the U.S. dollar.  Not highly likely.  The Fed has to begin tightening soon, which will put upward pressure on the dollar.  The dollar bottomed in May 2009, and has been steady or slightly rising since.

2. Exchange Rate Policy.  Xie argues that Obama will have to get more aggressive on China’s exchange rate, given the near unanimity of agreement that the yuan’s ties to the dollar have to be loosened, if not abandoned.  The assumption is that a rising yuan will make it easier to export U.S. goods and services, equivalent to a fall in the dollar.
3. Aggressive Trade Policy.  Obama has gotten a taste of the populist attractions of seeming to be tough on imports from China.  It started with tires, and has progressed to steel pipes, electric blankets and more.  More protectionist action will prove irresistible, especially since it can also be used to say the Administration is doing something about unemployment.

Like most macro thinkers, Xie ignores the less spectacular micro approaches of helping companies directly, educating and holding the hands of would-be exporters, taking firms that now sell to only one or a few foreign customers into new markets, introducing companies to international trade shows, and similar approaches.  The micro approaches won’t double exports in five years either, but they lay the groundwork for a permanent expansion of American exports.  Not just allowing exports to respond to exchange rate changes.

Some of Xie’s remedies are intriguing.  He advises China to open its capital markets to U.S. firms, taking some air out of China’s credit bubble and putting some into strained U.S. financial markets.  Allow big U.S. companies with China business to list on the Shanghai Stock Exchange.  Lower tariffs on U.S.-made goods to defuse opposition from American labor unions.  And open China’s agricultural markets to appease the politically-powerful American farm lobby.  Interesting stuff.

President Obama proposed a new National Export Initiative in his State of the Union address, but left it to Secretary of Commerce Gary Locke to give the details, which he did Thursday to the National Press Club in Washington.  The speech is worth a read if you are an American exporter or an American SME thinking about giving foreign markets a try.  Locke’s rhetoric is good, but there are some actual dollars here, too, that can do a world of good for U.S. exports.

Try the Gold Key

Let’s look at the money first.  The President’s budget proposal for fiscal 2011 contains an additional $78 million that will go to Locke’s Commerce Department for expanded export promotion.  That’s good – as far as it goes.  Commerce’s main tool for export promotion is the U.S. Commercial Service (my old employer), which has been budgetarily challenged ever since the Reagan Administration.   Secretary Locke says the budget increase, which is a significant 20% increase, could let the CS hire as many as 328 people worldwide.  That’s great, but it only begins the recovery from the number of positions left unfilled or people let go during the past decade of budget cuts.

The increase won’t even get the Commercial Service back to where it was ten years ago.  That, of course, assumes that the Service receives all the money, which it won’t.  First, the President’s request has to wend its way through Congress, where anything can happen.  The amount could be increased or decreased.  Once the money finds the front entrance to the Commerce Department, it then has to avoid the talons of other parts of the Department that will claim they need export promotion funds, too.  The money still isn’t out of danger once it arrives at the Commercial Service.  The Department of State has been especially avaricious about raising the “rent” they charge other agencies for using space at American Embassies, particularly if they know that the agency has just gotten a decent budget.  The Commercial Service will be in State’s sights.  But some of it will get spent to help exporters, and that is great news.

The Department of Agriculture (primarily the Foreign Agricultural Service) stands to receive an increase of $54 million, though they face much the same hurdles as the Commercial Service in getting it.  So, out of a total increase of $132 million in the nation’s export promotion budget, Agriculture is slated to get 41%.  No offense to my friends at FAS, but they are a far smaller agency than the Commercial Service, and Agriculture has historically received more export promotion funds than has Commerce, reflecting the strength of the farm lobby in Washington.  Agriculture accounts for only 9% of American exports.  The agency responsible for helping the other 91% only gets 59% of the new money.  Go figure.

Don’t get me wrong.  The added funding is great, but it is not as great as it first appears.  We’re talking less than the 2009 price for a single F-22 fighter.  Locke’s plans for applying this paltry sum are sound.  I can’t argue against export education for companies, lobbying to help them make export sales, or connecting them with new customers.  Locke highlighted the Commercial Service’s Gold Key Program, which puts U.S. companies into meetings with potential buyers overseas, eliminating the need to make cold calls in a foreign market.  A wonderfully effective service.  Locke said the right words about increasing credit availability for SMEs through the Export-Import Bank.  Can’t argue with that.

I am skeptical about the new Export Promotion Cabinet.  While I would certainly like to see exports regularly addressed at the Cabinet level, I suspect that the first meetings will maximize the press hoopla – and then we will never hear about it again.  I hope I am wrong.  While Secretary Locke says that the already existing Trade Promotion Coordinating Committee has been “revitalized”, raising from the dead might be more appropriate.  The TPCC has been around since 1993, chaired by the Secretary of Commerce and composed of the same agencies that will now be in the Export Promotion Cabinet.  It was always hard to notice that the TPCC actually did anything, but its participants were sub-cabinet and the new outfit is supposed to be at the Cabinet level.  We’ll see if they fare any better.  I’m keeping my fingers crossed.

I was pleased to hear President Obama bring up exports in his State of the Union address Wednesday night.  Let’s take a look at what he had to say:

Asking For Exports (Official White House Photo by Pete Souza)

“… we need to export more of our goods.  (Applause.)  Because the more products we make and sell to other countries, the more jobs we support right here in America.  (Applause.)  So tonight, we set a new goal:  We will double our exports over the next five years, an increase that will support two million jobs in America.  (Applause.)  To help meet this goal, we’re launching a National Export Initiative that will help farmers and small businesses increase their exports, and reform export controls consistent with national security.  (Applause.)

We have to seek new markets aggressively, just as our competitors are.  If America sits on the sidelines while other nations sign trade deals, we will lose the chance to create jobs on our shores.  (Applause.)  But realizing those benefits also means enforcing those agreements so our trading partners play by the rules.  (Applause.)  And that’s why we’ll continue to shape a Doha trade agreement that opens global markets, and why we will strengthen our trade relations in Asia and with key partners like South Korea and Panama and Colombia.  (Applause.)”

It is encouraging that the President (or his speechwriters) understand that exports and jobs are positively correlated.  And his goal of doubling U.S. exports within five years is certainly something to aim for, though I fail to see how Obama can deliver it.  State of the Union addresses are always short on details, so we will have to wait to see what is in the National Export Initiative.  Obama’s mention of reforming export controls is consistent with Secretary of Commerce Gary Locke’s proposals that I reported on a couple months back.

So how is President Obama going to increase exports by small business and farmers?  Traditionally, farm exports have been prodded by subsidies (disguised or otherwise) and assisted by the promotion efforts of the Foreign Agricultural Service.  Similarly, the chief export promotion agency for non-agricultural products has been the U.S. Commercial Service, always afflicted with inadequate budgets and too few staff.  Introducing new subsidies has no future, and adequate resources for the export promotion agencies seem ruled out by the President’s proposal to put a three-year moratorium on increasing discretionary spending.  Neither Service is strong enough within their own Departments (Agriculture and Commerce) to increase their resources in the face of a zero-sum budget game.

So, again, how is he going to increase exports?  Perhaps he has negotiations in mind, since he mentioned the Doha Round.  But even if poor Doha should become a magnificent success, that won’t double exports in five years.  Passing the free trade agreements in the pipeline would help, but would they double exports?  No.  Perhaps Obama anticipates talking the dollar down, or even a devaluation.  I don’t think so.  A massive loosening of credit for export sales?  That raises the subsidy issue again.  Export education?  Absolutely necessary, but that won’t double sales in five years.  That pretty much leaves jawboning and we know how effective that is.

Obama played the export enforcement card in his second paragraph.  Always popular with members of Congress who think that other countries are nefarious and that America does no wrong on trade.  Sorry to disillusion them, but the United States is just as vulnerable if other countries want to step up their enforcement of trade agreements.  That is a ticket to trade war unless we restrict ourselves to using the dispute settlement mechanisms in the World Trade Organization.  The WTO, which populists love to villify, has a good record of solving trade disputes – and is a far better option than doing it the old-fashioned way.

My pulse quickened when the President said he wants to strengthen trade relations with South Korea, Colombia and Panama.  I thought he was about to ask Congress to implement the long-stillborn free trade agreements with those countries.  But he stopped short.   These FTAs could mean hundreds of thousands of jobs for Americans, and could – with other future agreements – help meet the five-year goal.  But no, he stayed on the fence – and Congress is not likely to act unless Obama clearly says he wants them to do so.  Disappointing.

But the unthinking Democratic applause for every sentence was amusing.

Myanmar - How Risky Is It?

Last week I posted about why I don’t think small exporters should start out trying to conquer China.  Now, a British risk assessment outfit called Maplecroft has issued an index of countries not to do business in.  More accurately, the Maplecroft Global Risks Index ranks 175 countries according to 26 non-financial risks faced by international business.  These  include political risk, legal shortcomings, likelihood of disease, war risk or terrorism, climate change, natural disasters and more.  In short, anything that might adversely impact an investment, a major project, long-term contracts, or logistics.

Of 24 countries that Maplecroft assesses as extremely risky, 17 are in Africa.  It’s no great surprise that Somalia, Democratic Republic of the Congo, Zimbabwe and Sudan take the four riskiest positions.  Others in the worst two dozen include Myanmar, Afghanistan, Nigeria, Iraq, Bangladesh, Pakistan and Yemen.  None of these are high on my list of favorites, either.

More companies will be interested in the slightly better “high risk” category, which includes such hot destinations as the Philippines, Indonesia, India, Russia and Thailand.  China, Brazil and Mexico are all medium risk.  I assume you have to pay big money to get the complete list and associated analysis, but Maplecroft does show a world map with countries color-coded by their classification: extreme, high, medium and low risk.

I don’t see – squinting at the map – any real surprises, but the index is a good confirmation for what seems common sense.

Yes. The U.S. International Trade Commission has a new report about the export performance of small and medium-sized U.S. businesses.  The report examines exports by SMEs (i.e., firms having fewer than 500 employees) between 1997 and 2007.  So, what’s the verdict?

SMEs accounted for about 30% of U.S. merchandise exports in 2007 (that’s roughly $306 billion), a comeback from a low of about 26% in 2003.  And they weren’t selling the t-shirts and kitsch that many people associate with small business.  The bulk of SME exports were computers and other high tech equipment (roughly $47 billion), machinery (about $37 billion), chemicals ($35 billion) and transportation equipment ($29 billion).  Pretty substantial stuff.

Where was it going? Canada and Mexico (about $45 billion and $35 billion, respectively) were the top destinations, naturally, given proximity and NAFTA.  Next up were the big Asian markets, led by China ($22 billion) and Japan ($18 billion).  Germany was the largest European market, buying about $12 billion from America’s SMEs.

Ambassador Bridge: Taking Small Exporters to Canada

That’s the overall picture on the merchandise side, but we need to get into the details.  SME exports of the big ticket items (high tech, chemicals and machinery) overwhelmingly went to Canada and Mexico, and then often to only a single customer.  Given that, it isn’t surprising that most of the growth in SME exports came from new entrants, firms that had never exported before, but starting out with a single customer, usually in Canada or Mexico.  This may tell us how important NAFTA is to small business development in the United States, something that populist politicians need to know before they re-open trade agreements.

Intriguingly, buyers in Hong Kong, Switzerland and Israel seem the most relaxed about dealing with smaller suppliers, since these were the markets for which SMEs recorded the highest percentage of U.S. exports.

Exports of services by small companies show a different pattern. Their largest markets are Canada (no surprise) and the United Kingdom.  The ITC speculates that sales to overseas affiliates of larger U.S. companies may play a role, hinting that SMEs may be piggy-backing on existing domestic business with these companies.  Services exports are concentrated on professional services, such as architecture and engineering services.

$35 billion in export sales. That’s how much we are hurting ourselves.

Seems Like There's Business

The U.S.-Korea Free Trade Agreement is still waiting for implementation by the Obama Administration and the Congress, a refusal to act that I have posted about several times.  Trade Partnership Worldwide has released a study for the U.S. Chamber of Commerce that quantifies how much Washington’s inaction hurts the United States when faced with competition from Korea’s new FTA with the European Union and the prospect that there will soon be a Korea-Canada FTA.  The study was done by Laura Baughman of Trade Partnership and Joseph Francois of the University of Linz.

The bottom line, say Baughman and Francois, is that America’s failure to implement the U.S.-Korea FTA will cost the United States $35.1 billion in exports, which will reduce GDP by $40.4 billion and cause a net reduction in the welfare of U.S. citizens of $25.2 billion.  What’s that mean in jobs?  More than 345,000 jobs lost.  Any way you look at it, we are losing big money.

For an administration and a Congress that claim they are concerned about jobs, failure to put this agreement in place reveals a curious lack of interest in putting Americans to work.  It must be more important to put Europeans and Canadians to work.  Am I missing something here?

Google’s threatened withdrawal from China has re-opened debates on whether or not the Chinese market is worth the effort.  I don’t think it is.

The Chinese Are Manning Her Now

China has always been a tough market to enter, witness the lengths the British and others went to in the early 1800s.  I began working in the China trade in the 1980s and rapidly lost my enchantment – with the market, not the culture and history.  Many large, otherwise “akamai” (that’s smart, clever, intelligent in Hawaii) companies foundered on the Chinese reefs.  A profit-making venture was the exception.  Many companies found back then that China would do virtually anything to obtain foreign know-how.  And the Chinese were always quick to mount the warhorse of protecting their “internal sovereignty”.

China’s entry into the WTO brought to the fore the battle between protecting “sovereignty” and building an export economy, on the one hand, and creating the openness of national treatment and non-discrimination on the other.  All countries face this issue, but few so starkly as China.  Google’s great sin is that they have now gone against the norms of doing business in China. Google has dared criticize the Chinese Government and Beijing really can’t do anything about it because Google has relatively little invested.  Other companies would have difficulty in withdrawing from the market, but Google has got them thinking.  Already, I see more courageous bleats from businesspeople about how tough it is to go up against China’s preferences (legal or otherwise) for local companies, restrictions on distribution, effective subsidies for Chinese exporters, rampant corruption and piracy, and so much more.

If your company is not in China, you don’t have to expose yourself to this battle.  Small exporters do not belong in China – though I will post tomorrow about one, somewhat safer way to do it.  So often, when working for government or in my consulting practice, I have seen small companies (many of which have never exported anywhere) want to go to China because it is in the headlines.  Don’t do it until you have substantial experience elsewhere (and I don’t just mean a U.S. company selling a hundred miles across the border in Canada).  Get pragmatic experience dealing in Chinese societies and cultures by going to Hong Kong, Singapore or even Taiwan first.  No would-be contender starts out with the big boys.