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Manufacturing

Beyond borders

By Lincoln Brunner

Anyone who’s read a spy novel knows that even the best operative needs a little help from his friends.

He can have all the skills to do his job. He can know the language and how to adjust on the fly. But succeeding in his mission requires the guidance of key contacts inside the country. Without them, he’s as good as dead as soon as he hits the ground.

Like those intrepid, fictional heroes, companies looking to capitalize on opportunities on foreign soil have many imperatives. It doesn’t matter what hot emerging market you’re looking at--India, China, Russia, the Middle East, Eastern Europe--the first order of business is simple: Work with someone who knows the turf.

People on the inside
"Anybody who thinks they can just walk into someone else’s country and start selling things is at a huge disadvantage," says Dianne Devereaux-Michael, sales representative for Ophir Optics Inc., North Andover, Mass., a manufacturer of laser and infrared optics with a plant in Israel. "It’s not just a courtesy factor. It’s that they know the people, know the players, know the culture and know what’s acceptable. So the game becomes finding the right people to represent your products. That’s the most important thing you can do."

It’s especially true when venturing into territory that most people would consider too dangerous for a North American or Western European company.

Take, for example, Kauhava, Finland-based Finn-Power International Inc.’s recent foray into Colombia. Although other companies in the punching and cutting business have kept their distance, Finn-Power took a chance, found a distributor it liked and signed it on as a representative. The key is to make that first move, says Ron Palick, vice president of sales and marketing, South America, Mexico, and western United States for Finn-Power.

"It’s really blossomed for us in the past year," Palick says. "Obviously, it comes down to people, but No. 1, you’ve got to get out of your comfort zone. And I’m not saying to take all kinds of risks. But you can stay in the main cities like Bogota and be smart about it."

Devereaux-Michael adds that, as a vendor, your job is always to keep customers in their comfort zones. That’s a job for people who know the local customs, and the onus is on the vendor to find one. "Sometimes you’ve got to kiss a lot of frogs before you find a prince, and I don’t think it’s any different in the industry," she says. "Some of it’s luck, some of it’s just knowing somebody else. It’s a matter of making the right contacts."

The Lincoln Electric Co., Cleveland, learned the truth of that the hard way. About 20 years ago, when Lincoln first tried to break into the Japanese welding market, the company flew solo. Who needs copilots when you’re an ace, right? Fine idea if you’re in Toledo--Tokyo, not so much.

"It was a complete failure," says Richard Seif, senior vice president of global marketing for Lincoln. "You have to go in with some type of partnership with people that understand the way of doing business--the culture, the language--and build from there."

Take time to learn
That cultural knowledge plays big in emerging markets such as the Middle East, where gushing oil wealth has sparked a residential construction boom that Flow International Corp., Kent, Wash., has targeted as a key growth opportunity. As a worldwide leader in abrasive waterjet cutting, and because much of the new construction involves stonecutting, Flow enjoys an advantage in the Middle East market over thermal cutting technologies. However, learning the nuances of doing business in the Middle East as a viable vendor required time and homework.

"In the Middle East, they have a saying, ‘Inshallah’--if God wills it," says Mike Ruppenthal, vice president of marketing and product management at Flow. "That’s just the beginning of the negotiation. It takes a while to become familiar with how they do business there.

"You have to find a person you trust who’s knowledgeable; who you can train on your products, technology and way of doing business; and who’s not going to turn around and start his own version of your company," he says.

That’s another key, Seif says. Establishing your nameplate in a new market requires time--a waiting game to which American companies are not accustomed. Lincoln’s foray into its favorite emerging market, China, however, proves the value of waiting.

Lincoln has been active in China for the past 20 years, but it’s only been in the past five years that all that patient work has resulted in the kind of expanding presence a company dreams of when it first comes to town.

For example, in learning from its Japan debacle, Lincoln broke into China by way of joint ventures from the start. The company also leveraged its existing relationship with Caterpillar Inc. to provide welding supplies and machinery for the construction equipment giant’s exploding Chinese operations. Caterpillar recorded sales and revenues from machinery and engines in its Asia-Pacific region of $2.159 billion in the second quarter of 2008, a 52.4 percent leap over the second quarter of 2007.

Lincoln’s relationship with Caterpillar has expanded into a supply agreement for consumables and machinery at Caterpillar’s new wheel loader facility in the Jiangsu province. It also has served as a learning experience for a burgeoning cooperative relationship between Lincoln and GE-Fanuc Robotics in China. Meanwhile, all those joint ventures have transformed themselves into several wholly owned plants in China, in addition to a headquarters facility in Shanghai that the company moved from Singapore. "It just takes a commitment that you’re going to be there for the long haul," Seif says. "We’re there, we have some market share and we’re making a profit, but I’d say it’s a 10-year type of thing before you can really get where you want to be."

A caveat to waiting for in-country partnerships to bear fruit is that in the year or two it takes to find a reliable partner and structure an agreement, a company could send in a salesperson or a service technician, have gone to a trade show and have sold some machinery already, Ruppenthal says. "It’s more advantageous and faster to do it alone sometimes," he says.

Potential makes the target
So what makes a particular emerging market more attractive than other possibilities? For one, proximity. Markets where Stefan Berggren of Ursviken Inc., Ursviken,?Sweden, a manufacturer of press brakes, shears and other plate fabrication equipment, sees economic and political stability improvements include Russia, Kazakhstan and Ukraine.

"Over the last few years, we’ve seen a steady increase in the inquiry levels, and by having an install base, while small, it could be incrementally developed," says Berggren. "Its relatively close proximity to our manufacturing facilities in Finland and Sweden, as compared to other distant markets, warrants our activities in these markets.”

Looking at China and India, in particular, Seif says the answer to eligibility is nothing more complicated than tremendous potential.

"When you talk about China, with more than one billion people, or India, with another billion, just because of the mass of humanity and the infrastructure they want to build, the standard of living that they want to improve upon, it creates great potential for our products," Seif says. "The basic needs of developing an economy, primarily infrastructure--roads and bridges and power plants all demanding our type of product--when that’s required, that’s just tremendous potential."

A company also should ask itself, "Do they need what I’m selling?"

"Short-run, precision sheet metal fabrication is one of Trumpf’s strengths, and an emerging market is one that’s in the early stages of requiring this [type of equipment]," says Burke Doar, Trumpf Inc.’s vice president of sales and marketing.

Ruppenthal says an economy that’s growing in excess of 4 percent a year, with a recent increase in manufacturing activity and a lower level of industrialization than is typical for the United States or Western Europe, and where there’s not a waterjet on every block, qualifies as an emerging market worth looking at. For Flow International, that makes the top targets India, Southeast Asia, the Middle East and Russia.

"We’re certainly seeing pretty explosive sales growth in Russia," says Ruppenthal, who recently served as managing director for Flow Europe and Flow Asia. "Russia is a booming economy. Eastern Europe and Russia--a lot of Europe is outsourcing manufacturing to that part of the world. We’re going where the work is going."

"I think when you look at a market, there has to be a return on it," Palick says. "There are some markets in South America, like Paraguay, that aren’t on our radar. Peru is the same. Is there some manufacturing? Yes, there is, but is it enough to sustain new business? We’ll handle a [customer from] Peru from Argentina or Brazil."

The barriers
Speaking of Argentina, economic instability should raise a red flag for anyone looking to do business there, in particular if a credit crunch vaporizes available capital for big-ticket purchases.

"I consider Argentina to be an emerging market because they’re just coming out of a six- or seven-year funk," Palick says. "Things are gradually getting better. We just recently had a nice sale down there, but that’s just one of a few in the last number of years because of financing."

Ruppenthal has found the same to be true in South America. "Banks don’t give loans on machines very often, so customers have to have all the money up front," he says. "That obviously limits the amount of machines you sell. If there’s not a modern, developed financial system in the market we’re targeting, it’s a cautionary flag. It means we have to get pretty creative, setting up in-house financing or a partnership with people who are willing to provide financing."

Another barrier to building a solid business is having the field stacked against you. In China, for instance, state-owned companies that are in business to employ people, but not necessarily make a profit, present a formidable challenge.

"So competing with them, when you’re used to healthy margins to reinvest in your business--you struggle with that concept there," Seif says. "It’ll come, but you have to be patient. The competition is brutal. None of these areas are for the faint of heart."

Having no factory in-country can also present huge competitive challenges to companies when taxes and duties come into play. This is especially true for machine tool companies, such as Flow, that still produce a large percentage of their machinery in the United States.

"We pay a goodly amount of taxes to have our equipment brought in," Ruppenthal says. "Flow needs to have its own salespeople, its own service people, its own demo facility. You can replicate it through distribution channels sometimes, but that’s not always as successful as you’d like it to be."

Another potential sore spot is general infrastructure: Can your delivery truck make it from your plant to the customer’s shop? It depends where you are.

"At least in China, you can put stuff on a truck and get it to places; in India, that’s not the case," says Seif. Lincoln is building a new factory in Chennai, a coastal city east of Bangalore.

A company unversed in a certain emerging market should also examine the country’s accepted business ethics. Do machine buyers expect kickbacks? Do people honor the rule of law, if any such thing exists? Is your technology going to get ripped off the minute after your first sale?

"If you aren’t going to honor international rules or general agreements, then I don’t care if you have $1 million in your pocket," Palick says. "If you’re going to ship a machine based on a down payment or get a configuration done and then assume that the person is going to pay on shipment...you have to have a certain level of trust. They’re going to have to recognize that the rule of law is going to be in the mix."

Of course, that also depends on whose laws you’re talking about. The U.S. Foreign Corrupt Practices Act, which forbids U.S.-based companies from paying personal kickbacks to company machine buyers, doesn’t apply to European-based companies. That can put a U.S. company at a disadvantage in certain quarters.

"That’s a challenge every American company faces," Ruppenthal says. "You can end up in prison. It’s something you need to be aware of."

Then, of course, there are intellectual property laws, routinely litigated in the United States and routinely flouted in places such as China, where a reported 90 percent of all personal computers run on pirated software. "As soon as you’re there, you’re immediately copied," Seif says of China. "That’s a struggle."

No matter what market a company wants to pursue in the new globalized economy, it has to do the homework. Whether it’s researching on the Web, connecting to people from that country through a trade association or going there yourself, businesses have to get savvy to a place before they get successful.

"What it comes down to is playing the game right," Devereaux-Michael says. "It would be nice if it was the good old days. We have to work a little harder now. We have to learn a little bit more about whom we’re doing business with and we have to get outside our comfort zone." FFJ

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