International business is a hot topic today. After an unsuccessful attempt six year ago, Coke is even making another stab at an acquisition in China, this time a maker of juices with interesting flavors like walnut, red bean, and oats. But making and selling a product or providing services in a market outside the U.S. can be especially challenging. For example, if you produce your product abroad, it will be harder to control its quality, inventory and price than it would be for a domestically made item that is exported. In any case you’ll have to beware of the ever-present problem of local pirating of your intellectual property. Except for the U.S., the E.U. and Japan, intellectual property and trade secret protections are not very strong, and enforcement is less predictable, takes longer and is more expensive. You will also need to master the less exotic requirements of customs and shipping and security. It’s all important.
What can go wrong? Here’s an example: Our company was building and operating utility scale solar plants in Italy, and doing quite well at it. The regulatory regime was favorable, the government was supportive, financing was difficult but not impossible to arrange. Since there were no Italian-made panels, we were importing panels from the U.S., but buying the frames and cable and electrical mechanisms locally. We had a long term contract with our manufacturer which required us to take a certain amount of panels every month. This was fine as storage wasn’t expensive and we didn’t want to find ourselves stopping construction because we had run out of panels. They were all stored in a bonded warehouse in Bari, a large town in southern Italy near our projects.
One day we got a call from the manufacturer, who was confused. “We just got a warranty inquiry from someone in Germany, but the serial numbers that he cited were from your panels. Did you sell some to a German company?” No, we had not, and we were not operating in Germany.
A quick check of the warehouse revealed that approximately 21,500 panels, each valued at $75 per panel, had disappeared. Note that solar panels are large, bulky and heavy–not something you stick under your shirt. Besides, this was $1.6 million worth of panels, and would have required a fork lift and five flatbed trucks to load up the 100 pallets that were stolen. And no theft had ever been reported. Could it have been an inside job?
We recovered the value from the warehouse operator, but redoubled security and took a physical inventory twice as often as before. It had never occurred to us that someone would steal this large a quantity of a serial numbered item with a very specialized purpose.
Here are some general tips that should help you be more successful abroad, derived from my experience in more than thirty countries, and in every continent but Antarctica.
1. International business will be more expensive than you project, take longer, and be less rewarding. It’s the “business plan” curse all over again. If you’ve never done something before, how do you really know what it costs and how long it takes? You don’t, but you make estimates to convince your management or your board or yourself that “going international,” even at a small size, is a good bet. It may be or it may not be, but it will surely be costlier than you estimate. The plane flights and the hotels alone will be pricey; international flights just are, even if you’re sitting in tourist class. Gathering the necessary information to even know what your market is and who your customers are is disorganized by its very nature. Understanding the customs requirements, or the local manufacturing or local content restrictions, takes legal help. But first you have to find the right lawyers. Convincing potential customers to either buy a new item unlike one they are already using, or to substitute your widget for the widgets they already use and rely on, takes a long sales cycle. It also requires, I am willing to bet, travelling outside the capital city into smaller venues with less certain accommodations and more uncertain cuisine. If it were comfortable and easy, then there would already be hundreds of people like you meeting this market need.
2. Some places are just too awful to even contemplate a business approach. Besides the four horsemen of the international business apocalypse – time, money, discomfort and bureaucracy – there is also the giant bugbear of corruption. Transparency International presents an annual index of corruption perceptions which ranks 175 countries, with North Korea and Somalia tied for last. And the problem with corruption, besides the rather ominous fact that it’s against U.S. law to bribe government officials to get business, is that there really is no way to tell conclusively if your business or area of the target country has a serious problem or not. If you just look at the map referred to above and want to play it safe, you’ll go to Scandinavia and Australia, and that’s about it.
Add to this risks to your physical safety, and seeking business in North Korea or Somalia or Iraq or Afghanistan is not high on most people’s lists. I spent two expensive years making numerous trips to Moscow and waiting for the government to begin its already long announced and promised sell-off of its government owned power plants. We were frequently approached by “consultants” who would promise us to advance our case and get unnamed government officials to give us deals outside the system. We even had one of the real oligarchs decide, a bit imperiously, that we should be his “partner” since we knew something about electric utilities and he didn’t. His reputation of throwing people out of helicopters to settle business disputes convinced us that we needed to find a better country in which to operate.
3. You have to be there. In almost every case where you will be making a significant business commitment to a country, it is critical to have an official company person on the ground, living and working not just in the country, but in the province and the city where your major business interest lies. The information flow will suddenly be much better, but more important, you will demonstrate your commitment to the project in that particular location. You will also demonstrate that you have enough capital to afford a local person, and an assistant and a translator and an office and computers and data lines and probably a car and a driver and expat housing. See “expensive” above. Local and national government officials, and local and national suppliers and service providers, will now take you more seriously. Recruiting and compensating the right company person to do this is tricky, but not impossible. If you make taking such an assignment a requirement for advancement in your firm, and it you honor this rule when your explorers return to the home base, then you’ll have takers. Creating personal relationships is a requirement for success in business in every country. No matter how charming you are, you can’t close the deal by flying in once a month.
4. You don’t need a “Local Partner.” It is widely taught in business school that the very first thing you do upon arriving in a foreign country is to find a “Local Partner.” And this is someone who will have an equity interest in your business, at least the local version of it, so that he or she is motivated correctly. This partner should know your business well, and yet not have any conflicts of interest. The partner will of course be well connected politically, have the highest ethical standards, and be completely devoted to you and your enterprise’s success. And you’re supposed to link up with this somewhat magical person the minute you step off the plane. This advice is similar to “you should have a perfect wife.” Of course! And where do you get one? And if this “partner” is so perfect, why exactly does he need you?
Having a local partner can even get you in trouble, especially on the touchy issue of business practices, such as bribing government officials. Maybe this is in fact local practice, but it is not consistent with the requirements of the U.S. Foreign Corrupt Practices Act, and equivalent E.U. and U.K. statutes. Besides, it’s wrong and stupid. You do need local advisers, and local counsel, and so on, but not a “partner.” The truly good partner is very hard to find, they’re an unnecessary crutch, and they’re hard to get rid of should your opinion of them change later.
5. Currency and language are, respectively, more and less of a problem than you would think. Let’s take language first. Fortunately for Americans, English is increasingly the language of business, for better (for us) or worse (for everyone who doesn’t speak it.) When I first went to China in 1990, it was impossible to find anyone who spoke English–not the government officials, not the cab drivers, not the hotel clerks, nobody. I had to travel with an interpreter pasted to my side. Today anyone in China who doesn’t speak a little English is probably studying it. It remains a good idea to learn some phrases so you don’t seem like a completely thoughtless gringo, but you can get by remarkably well with English about anywhere. And if you find that you cannot, perhaps you should reevaluate your choice of country or of business associates.
Currency is another matter. Let us assume that you’re not General Electric or Apple and hold billions of dollars overseas to avoid paying U.S. taxes. Further assume that you actually make some money in country X, after lots of effort, and now want to have it come home to see you. If you have not given this some thought ahead of time, you will get tripped up by the impact on your balance sheet and income statement. You will have the possibility of non-cash losses that you’ll have to explain tediously, or of non-cash gains that you’ll have to convince everyone to ignore since they were related entirely to currency fluctuations you cannot control. Worse, the real money coming across the border will be either more or less than you forecast, depending again on just exactly when you choose to exchange it for good old dollars. And while it’s easy to say “currency hedging” and it’s sometimes appropriate, most understandable hedges depend on correctly forecasting for your business the exact date and the exact amount of the currency to be hedged. Can you really tell three months or a year ahead how much the business will generate, or how much cash you’ll have and need to bring home, or move abroad to invest or pay salaries? I never could. As far as I know, there is not a good solution to this problem, and I asked every investment bank I could find. The best I was ever able to do was have good explanations.
All the tips above may seem discouraging, but that’s not the intent. If you persevere, and if you have the right product or the right idea, and if you’re in the right market, the rewards can be generous. Besides, you will learn an enormous amount quickly (or you won’t survive.) And you’ll have terrific stories to tell your friends and colleagues. As the world continues to move to be more and better connected, being a part of that “globalization” is probably inevitable. Those who do best will be those who get ahead of the curve.
RF Hemphill is a former CEO of a multi-billion dollar global electric power and distribution company and is the author of Dust Tea, Dingoes & Dragons: Adventures in Culture, Cuisine & Commerce from a Globe-Trekking Executive.