Business Beyond the Reef

• Turkey has a new export promotion program that I find kind of interesting.  Turkish companies can apply for a 50% reimbursement for up to three years for their membership fees on electronic commerce websites.  The stated intent is to help sell Turkish products in foreign markets.
• China is trying once again to join the WTO Agreement on Government Procurement.  This was a requirement of China’s accession agreement upon joining the WTO, but in 2007 the existing signatories of the procurement agreement said China’s offer wasn’t good enough.  The new offer from Beijing is better and answers many of the 2007 questions, but insiders say that it still may not be sufficient (meaning that China isn’t offering enough open access to its own government purchases to justify the other members letting China into their procurements).  One of the big sticking points will be that China’s offer doesn’t include their many thousands of state-owned companies.  But it’s a negotiation, and this is only a starting position.
• Asia Times had an article up this week about how the new trade agreement between China and Taiwan is changing how Japanese and South Korea companies do business in China.  Korean firms are pressing Seoul to launch FTA negotiations with China to minimize expected competition from Taiwan firms in the China market.  The Japanese, however, are doubling efforts to do manufacturing joint ventures in Taiwan so that the resulting products will qualify as Taiwanese and enter China under the new agreement.  Interesting to see the Japanese adopt a strategy that many U.S. companies have pursued for years.

I’m back in Hawaii and my thoughts turn to our local comfort food.  Let’s see, there’s kalua pig, pipikaula, chicken long rice, chicken or pork katsu, spam musubi, chili rice, huli huli chicken …  It’s all good.  And our local-style foods are being exported!

Hawaii food goes international

L&L Hawaiian Barbecue announced yesterday that it has opened its first franchise in Japan.  Sure, there have been many “Hawaiian” restaurants in Japan for years, some of them reasonably authentic, but others merely exploiting Hawaii’s name and image.  L&L, however, is authentic and is a genuine Hawaii company that is on a fast track to franchise expansion. The company was founded in 1976 and began franchising in 1988.  The business is based on the Hawaiian plate lunch, usually consisting of a main course (say, teriyaki beef), a scoop of macaroni salad and two scoops of rice (all the basic Hawaiian food groups!).  L&L started exporting its stores in 1999 when it opened in California.  There are now 180 L&L stores in the United States, including one in American Samoa.  The company started its international expansion in 2008 when a franchise opened in Auckland, New Zealand.

Like any good exporter, L&L is modifying its menu for its first Japanese store (located in Shibuya in Tokyo).  Some dishes need no changes, such as the loco mocos that are heavily in demand in Japan.  Others will depend on local Japanese ingredients, so the flavors will be somewhat localized.  L&L’s signature chicken katsu will undergo a name change, sold simply as a chicken cutlet, because there are so many katsu shops all over Japan.  And L&L is bringing Hawaii’s Spam musubi to Japan.  Ono!

Hawaii papayas

Rainbow papayas, that is.  Hawaii produces some wonderful papayas and my wife and I consume at least one or two each week.  Good healthy product, so you wouldn’t think there would be much trouble exporting them.  You would be wrong.

The Honolulu Advertiser reports that Hawaii’s papaya exports have plummeted.  Hawaii really has only four export markets for papaya, if you don’t count the U.S. mainland: Japan, China, Canada and Hong Kong.  The sales drops in Canada and Hong Kong were likely simply the impact of the recession.  Our Chinese market is growing nicely.  Japan has been the problem.  Here are the numbers:

Source: Foreign Trade Zone #9, Honolulu, Hawaii (click for larger version)

So what’s the story with Japan?  It is an old and sad tale that begins with something called ring spot virus, a scourge of the papaya industry.  Papaya producers everywhere have fought this virus forever, it seems, and have tried all sorts of sprays, steam treatments and even irradiation.  The first two do unattractive things to the fruit, and irradiation raises “Frankenfruit” fears in consumers.  So the creative folks at the University of Hawaii decided to develop a genetically-modified papaya resistant to ring spot virus.  Thus was born the genetically-modified Rainbow papaya.  Tastes great, looks great, no virus.  We eat ‘em all the time.  The Advertiser article says that 75% of Hawaii’s production has shifted to the new Rainbow.

Japan wouldn’t let the modified Rainbows in because of regulations against genetically-modified organisms.  Hawaii’s non-GMO papayas are sought after by Japanese consumers, though they are looking for perfect fruit with no ring spot blemishes.  They garner up to $10 per fruit in Tokyo if perfect, but the risk of ring spot virus destroying a crop’s value has driven most growers to the GMO Rainbow.

The story has a happy ending.  Though the Advertiser wasn’t aware of it at the time they ran their article (April 25), it was announced just days before that Japan has decided to let the Rainbows in.  I haven’t seen the details yet, but I expect that boxes of Rainbows will soon be flying across the Pacific.  That doesn’t end the problems, as GMO foods must be clearly labeled as such in Japan and it may prove very tough to convince Japanese consumers to try a GMO product.

Creative labeling may prove the key to the Japanese market.  Since the Rainbow avoids considerable chemical spraying, one could argue that it is more beneficial to the environment than non-GMO papayas.  Perhaps they could be marketed as “Reduced Environmental Impact” (REI) papayas.  (See my post on a study that showed greater consumer acceptance for otherwise identical REI fruits than for GMO fruits.)

• Must read op-ed piece in the Wall Street Journal yesterday entitled “World Tariff Wars”.  They hit the nail on the head.  Our politicians in Washington, many unions and a few terminal industries drive much of America’s trade policy – leading to protectionist policies while crying that other countries are “unfair”.  Grow up, folks.  Brazil and Mexico are giving us what we deserve.
• Commerce has published its annual Top U.S. Export Markets report.  This is a great reference containing 2-page summaries on each of the top 50 markets for U.S. goods, plus similar analyses of the impact of America’s 14 current and pending free trade agreements.  Good stuff.
• An article caught my eye in the South China Morning Post about electronic trade across the Sea of Japan.  Yahoo! Japan and China’s Taobao are negotiating a deal that could potentially boost on-line sales between Japan and China.  Yahoo! Japan, of course, is a joint venture between Yahoo! and Softbank, while Taobao, owned by Alibaba, is China’s top Internet shopping portal.  This follows a similar tie-up between Baidu, China’s leading search engine, and Rakuten, Japan’s top Internet shopping mall.  Not only do these ventures help online sellers with their marketing, but they also ease the problems of physical delivery of the goods.  Perhaps the model can be expanded to other markets.
• Selling things that go boom in the night!  The law firm of Covington & Burling has issued a paper about prospects for U.S. military sales to India.  India’s $30 billion defense budget is a huge increase, reflecting the need to replace outmoded Soviet-era gear.  C&B say that India will spend upwards of $100 billion over the next decade.  A possible purchase of 145 American howitzers has already been announced, and India plans to buy ten cargo transports from Boeing.  Lockheed Martin and Boeing are both competing for an international tender for 126 jet fighters, and further competitions are expected for tanks, more fighters, warships, anything a modern military needs.
• There is a huge competition to build high-speed rail lines in California.  The New York Times had an article this week about Chinese attempts to win the bid.  California plans to spend $43 billion on high-speed rail between San Francisco and Los Angeles, a number that is attracting bidders from China, Japan, Germany, South Korea, Spain, France and Italy.  U.S. suppliers are likely working with all the major bidders, because this project is tied up with stimulus money and associated Buy America rules.  Gonna be interesting.
• Sugar prices in the United States are high and rising, contributing to inflation in the grocery store.  Part of the reason is that America has long had strict quotas on how much sugar can be imported, quotas designed to protect U.S. farmers from low world prices.  That’s no longer the case.  World sugar prices are pretty high, too, right now.  So, the National Foreign Trade Council is pushing the Obama Administration to increase the quotas (allowing more foreign sugar to come in) to help increase supply in the United States.

'nuff said

Hawaii exported beef to Japan.  We had a small slaughter house and feed lot operation right here on Oahu that supplied the local Honolulu market and sometimes shipped choice cuts to Japan.  The cattle came from all the islands, but mostly from the Big Island of Hawaii.  Most of you probably don’t think of Hawaii in terms of cattle ranching, but the Big Island has one of the biggest privately-owned spreads in the United States, the Parker Ranch, and several smaller cattle ranches.  We have a long and proud history of cowboy culture out here in the Pacific, and our “paniolos” began winning rodeos in the U.S. West early in the 1900s.  The paniolos and the cattle ranches are still here, but now they mostly ship their livestock to the mainland United States and Canada for slaughter.

Part of the reason for that is Japan’s hard-nosed attitude towards imported beef.  U.S. Secretary of Agriculture Tom Vilsack was in Tokyo yesterday, again asking the Japanese to loosen up their import restrictions that were implemented in 2003 as a result of a single instance of mad cow disease in a U.S. herd (and that cow, you might recall, was a recent import from Canada).  Tokyo supposedly loosened things again in 2006 (they had an outright ban on U.S. beef for three years) by letting in beef from cattle that were 20 months old or younger.  Japan argues that young cattle haven’t developed mad cow disease, while U.S. and European scientists say that is hogwash.  Whatever, the result is that U.S. exports of beef to Japan have never recovered to more than 15% of their pre-2003 sales.  All that for a single cow, now long dead.  Something doesn’t add up.

But Hawaii’s beef sales to Japan died long before 2003.  They were killed because of a Tokyo-manufactured tiff in which Japan insisted that U.S. slaughter houses couldn’t meet Japanese safety standards.  The only alternative was to ship live cattle to Japan, which the feed lot owner tried several times.  Apparently it was OK to send the beef in as long as it could walk off the ship by itself.  The true killer, however, was Tokyo’s insistence that Japanese stomachs simply were not designed to tolerate foreign beef.  No bull.

Kahua Ranch

If you travel to Hawaii, I recommend you go to the Big Island and take one of the tours offered by the renowned Merriman’s Restaurant in Kamuela.  They take you out to see some of the local suppliers to the restaurant, often including Kahua Ranch where Peter Merriman gets his beef.  Then you go back to the restaurant for a great gourmet meal featuring the suppliers you just saw.  Good fun.  No bull.

Neophytes in international business are often dismayed when they realize that their product, or how they sell their product, often needs to be changed to enter a new market.  This can be anything from physical changes to meet another country’s product standards, to altering labels to meet legal requirements or cultural mores, to the mix of products you offer.

Get yours with Peking duck

Costco has gone through this in learning how to operate in Taiwan, according to the Wall Street Journal.  Their stores in Taiwan look much the same as their U.S. warehouse stores.  They sell many of the same products, but they have localized what’s on offer by adding many Taiwanese and other Asian products to their mix.  “What we’ve done here is reflective of what we do in all of our international markets,” said Richard Chang, Costco’s Taiwan chief.  “We want to make it as authentic as possible, but we also want to localize. It’s proven to be a successful combination.“  Indeed. Costco’s store in the Neihu district of Taipei is now the second most profitable Costco in the world (topped only by a Costco in Korea that has followed the same strategy).  The six Costco stores in Taiwan are helped because they have no direct competition, with no other warehouse store chains having entered the market.  But it is the mix of merchandise that makes the real difference.

Costco is seen as a U.S. store, so they bring in about 40% of their offerings from the United States.  They even bring dough all the way from New York to make their bagels, selling 54,000 bagels every week in the Neihu store.  But they also “localize” their American offerings.  Steaks are thinly sliced, so that the beef is wok-ready.  Fish are sold whole, not filleted, and Costco’s ready-made pizzas may have Peking Duck topping.  Half liter milk cartons weren’t accepted in the market, but Costco discovered that they could sell milk if it was in giant 3.6 liter containers.

I saw K-Mart go part way in this direction with their stores in Singapore and Bratislava in the 1990s, but they didn’t go far enough and eventually sold out.

Japanese food product exporters are learning the localization lesson, too, according to the New York Times.  Companies such as Yakult Honsha, Ezaki Glico and Ajinomoto are attacking foreign markets by altering their products to local tastes.  These are lessons that were learned decades ago by Kraft or Nestlé or Procter & Gamble, but they are always being learned somewhere.  If you have been to Japan or elsewhere in Asia, you have seen the ubiquitous “Pocky” chocolate-dipped cookies.  But Ezaki Glico discovered that the cookies did better in Europe when they were re-branded as “Mikado” cookies.  Simple fix, good sales.  I got used to Yakult yogurt products when I lived in Asia, but the company found that sales rose in Mexico if they used a new “Sofyl” brand.  Different name, same yogurt.  Other Japanese food product companies are seeking to capitalize on Japan’s strengths with soy-based products, modifying products such as tofu to meet the tastes of other markets.  And they are also making use of the world’s current infatuation with cute Japanese animal designs in their labeling.

It all goes to demonstrate that you can export your product, maintaining its identity while still localizing it to maximize sales.  Go for it!

Doesn't Guzzle, Says Tokyo

Perhaps it’s something in the exhaust.  You have seen the press coverage in the New York Times, the Wall Street Journal and elsewhere about Japan’s declaration that the Hummer H3 is “fuel efficient”.  Let’s take a look at the back story on this one, for it shows trade policy at work in strange and wondrous ways.

It starts a short while back when Tokyo created its own version of a “cash for clunkers” program.  Unlike similar programs in other countries, Japan excluded virtually all non-Japanese vehicles as eligible replacement vehicles.  The U.S. program, I’m happy to say, was wide open and Japanese carmakers benefited tremendously from it.  The Japanese program, as first announced, was a travesty of home-grown preference – a Buy Japanese law in disguise.  No American-made vehicles were included, while 90% of Japanese cars were covered as eligible purchases.  Hey, Detroit may have been down on its luck, but not all U.S.-made vehicles are gas-guzzlers.  Pretty blatant.

Tokyo argues that American cars just aren’t clean enough at low speeds, which is where Japanese pollution standards focus.  Washington didn’t buy this, so now Tokyo has opened things up to allow more foreign cars into their program.  All well and good, until you look at the bizarre list they came up with.  Apparently, Japan’s emissions standards are skewed to favor higher weight vehicles, so they have now approved the Hummer H3, the Chrysler Voyager, the Cadillac CTS and the Ford Escape XLT Limited – all of which seem to spend a lot of money at my local gas station.  One has to wonder if Tokyo is setting things up to allow the vehicles that the average Japanese is least likely to buy.

Japanese trade officials have a long record of thinking outside the box when it comes to import restrictions.  They have told American negotiators that U.S. rice and beef weren’t good for Japanese tummies, and the Europeans were told that same about Italian pasta.  My favorite was when Tokyo told Brussels that European skis wouldn’t work well on Japanese snow.  One has to wonder.

Things you might find interesting, but I haven’t had the time or inclination to blog about:

• Interesting that Google’s threat to withdraw from the Chinese market received very little coverage in China while it made headlines elsewhere.  The only comments I have seen out of China come from people who appear to have found ways around the Great Firewall.  In fact, the New York Times has a good article up about the world market for software that gets around government censorship.

• The January 2010 edition of National Geographic is a must read.  The article on Asia’s illicit wildlife trade reveals the arrogance of the traders and the apparent complicity of some governments.  The story is an indictment of Malaysia’s government in particular.  This is the sort of thing that gives all business a bad name.
• The same issue of the National Geographic gives an update on how Singapore works.  Should be of interest to anybody thinking about doing business in S.E. Asia.
• I have been skeptical about the China-ASEAN free trade agreement that went into effect January 1 -  and some businesses in the ASEAN countries are in open opposition, fearing Chinese competition in their home markets.  On Tuesday, the Wall Street Journal reported that Indonesia has asked for a delay in going to zero duties for Chinese textiles, steel and chemicals. Some are lobbying in Jakarta to get an exemption for clothing, toys and electronic goods.  I imagine Indonesian smugglers, and those they pay off, fear for their business.
• Hawaii is a small business state, so I was struck by European Union data on the percentage of privately-owned firms that have less than 250 employees.  They show the United States at only 49%, compared to the EU at 70% and Japan with 67%.  I recall being told once by a Brussels Eurocrat that small business is a disease, and that the EU would be the doctor to cure it.  Hmmm … the vaccine must still be in the lab.
• Luxury car sales are picking up in India according to Time Magazine.  I was intrigued that BMW had to change its marketing in India.  Instead of emphasizing their vehicles’ driving prowess, they stress how comfortable the backseats are.  Rich car owners in India don’t drive, but hire others to do that for them.
• Mainstream media, most bloggers and populist politicians all love to denigrate big business – and the condemnations are too often deserved.  So give them credit when they do things right.  Take a look at the Huffington Post‘s list of the contributions by major corporations for Haitian relief.  Many of the companies we love to vilify are stepping up to the plate.  By my count, they have pumped in more than $18 million and that is growing hourly.  Have you stepped up?

Things you might find interesting, but I haven’t had the time or inclination to blog about:

• My protectionism alerts go off loudly when U.S. auto companies complain to Washington, but this time they have a point.  Japan has created a “cash for clunkers” program that, like the U.S. program last year, links the payment for the old car to purchase of a new one.  The difference is that Japan’s rules favor Japanese-made vehicles over imports – a pretty blatant violation of the national treatment principle.  For the record, the U.S. “cash for clunkers” program was wide open and non-discriminatory.  The top ten models purchased were: Toyota Corolla, Honda Civic, Ford Focus, Toyota Camry, Hyundai Elantra, Toyota Prius, NissanVersa, Ford Escape FWD, Honda Fit and Honda CR-V AWD.  Anybody see a pattern here?  Washington, Seoul and Brussels should take Tokyo on over this one.
• The European Union and the United States have joined together to challenge China’s export controls on bauxite, coke, silicon metals, magnesium and other raw materials.  China has export quotas on these products, ostensibly for environmental reasons, but Brussels and Washington are making the case in the WTO that the quotas are meant to reduce costs for Chinese exporters while raising input prices for their overseas competitors.
• In other WTO action, China has asked for a review of the egregious (at least in my opinion) Obama Administration action against tires from China.
• New Year’s Day marked the advent of the new ASEAN/China free trade area, which will follow the European Union and NAFTA as the third largest free trade area in the world.  Business between the ASEAN countries and China is growing quickly and most observers see the new free trade area as an unalloyed good thing.  Undoubtedly, it will be of net benefit, but there are some in ASEAN who worry about rampant Chinese competition in their home markets.  Take a look at a good summary of their views in the New York Times.

I’m still traveling, currently in Colorado, but will try to post as often as I can this coming week.

Things you might find interesting, but I haven’t had the time or inclination to blog about:

• On November 30 I posted about the Global Economic Crime Survey published by PriceWaterhouseCoopers, so it’s a bit soon to do another full post on corruption.  But you should glance at the 2009 Corruption Perceptions Index released by Transparency International.  It shows New Zealand, Denmark and Singapore as the world’s least corrupt.  Somalia, Afghanistan and Myanmar fill the bottom slots.  No surprises there.
• Not all of us fully understand rising or falling exchange rates, so I was glad to see a wonderful graphical presentation in the N.Y. Times that shows just who benefits and who gets hurt when the U.S. dollar falls.  Good stuff.
• This is for those of you in the luxury goods business.  The South China Morning Post carried an article about super-rich Chinese in London.  Some interesting nuggets: Asia has 14,300 ultra rich (defined as a net worth of more than $30 million), compared to Europe’s 18,000.  China now has a higher population of the merely wealthy (more than $1 million in investible assets) than does the U.K.
• Asia Times put out an article on China’s growing African population.  Who knew that some 20,000 African traders and their families are living in Guangzhou?  The majority are Nigerians, buying cheap Chinese goods for resale in their home markets.  These are not your stereotypical rich expats, but lower income types who are clustered in one neighborhood of Guangzhou, sensitively known to the Chinese as “Chocolate City“.
• Hawaii loves Vegas.  It’s not for nothing that Las Vegas is popularly known here as the 9th Island.  If you stop by the hotels and casinos in downtown Vegas, you’ll find them filled with customers from Hawaii.  There are even enough Hawaii expats living in Vegas to support an Hawaiian Festival each November – at which my canoe team paddles.  So, imagine my consternation when I discovered that Macau is now the world’s largest gaming market.  It’s a combination of a recession-hit Vegas with restricted supply in Macau.  Macau now has 33 casinos, but construction stopped in 2008, boosting demand for each of those gaming palaces.
• It’s not often that progress can be reported in the Doha Round, but we seem to have some.  No details yet, but it appears negotiators have moved forward on a new dispute settlement mechanism that would limit the inappropriate use of health and safety standards to hinder trade.  The new mechanism was proposed jointly by the European Union and India.  It appears the United States initially opposed, but has reversed itself to use the proposed mechanism as a basis for negotiation.  Since health and safety standards can include restrictions for environmental reasons, we may have a breakthrough coming to reconcile trade and environmental concerns.  Keep your fingers crossed (or thumbs tucked if you are in central Europe).
• Yesterday’s announcement of Wendy’s withdrawal from Japan is ominous.  And they are doing it quickly.  In the Japanese market since 1980, Wendy’s is closing all of its 71 stores – mostly around Tokyo – by the end of this month.  There was a disagreement with their Japanese franchisee, but I can’t tell if this is a one-off problem or something broader for franchises in Japan.  Watch out.