Going Global

Mexico and Offshore Operations -- An Alternative Worth Considering

I was at a conference recently where a number of business people spoke about their decisions to move some of their manufacturing offshore in order to stay competitive in their manufacturing costs and be able to retain the business of customers who were weighing alternative sources of supply from abroad.  Admittedly the focus of the conference was India and China (see my earlier post on this), but in follow up conversations it became clear that those had really been the only two alternatives that were seriously examined.  In all the understandable hype about the hot markets of these booming Asian economies, no one seriously analyzed whether there was an option closer to home -- namely the United States' second largest trading partner, Mexico.

While all three countries have advantages and disadvantages and a final decision where to invest capital requires a careful analysis unique to the particular company and business situation, there are two key reasons why Mexico should at least make the list of countries to look at --

1. With the rapid economic growth in India and China, the wage differential is narrowing.  As noted elsewhere in this blog, there is a strong feeling among many business leaders that while low hourly wages may be a reason to set up shop halfway around the world, in the long run, it shouldn't be the only reason; and
2. Low wage rates are only one factor and, in some industries, may not even be the primary driver of total manufacturing costs.

As I see it, there are at least three major components that need to be analyzed.

• Base manufacturing costs;
• Expanded manufacturing costs; and
• Remote management costs.

Base manufacturing costs begins with hourly wage rates.   Although higher than China or India, at an average hourly manufacturing wage of $2.50 / hour, Mexico is certainly attractive.   A second key, however, is productivity.   Are there government requirements or cultural elements that dictate the number of workers that must be hired to run a particular machine or production line?   Are the  workers familiar with and comfortable working in a 5S or lean manufacturing environment?   How good is the inherent commitment to quality and consistency and how does that affect waste and rejects?   My own experience is that all of these questions is likely to get a more positive answer in Mexico than in most operations in China or India.  I don't know if it really translates from making hamburgers to base manufacturing, but one interesting study of international advantages and disadvantages which included a productivity measure is the "Big Mac" index study performed by the University of Chicago -- India ranked lowest in productivity (Big Macs per hour of work produced at otherwise similar McDonald's restaurants) out of the 27 countries included in the study. 

In calculating expanded manufacturing costs, one must look not only at the in-plant cost of production, but also at costs such as sourcing raw materials and re-importing finished product.  Where are the raw materials coming from?   What are the transportation options and how well developed is the infrastructure necessary to get them from the source to the plant?   Similarly, what are the logistics for shipping the finished product to the final market?   Are there any free trade agreements which affect the cost of importing raw materials to the plant site and re-importing the finished product?   Again, with a closer proximity to the home base, a relatively well developed infrastructure, and membership in NAFTA, Mexico offers some intrinsic advantages.  (For another perapective on the continued competitiveness of Maquiladoras plants in the current global environment, follow this link to an article from the University of Texas).

Finally, any foreign operation is going to have remote management costs which are all too often underestimated in the business plan.  The foreign operation will have to be visited with some regularity to train the production supervisors on what is required, and, as importantly, to assure acculturation and compliance with the outsourcing company's expectations for quality.  And of course there is problem management, because there will always be unforeseen fires to put out.   As I told one colleague, I always slept sounder over operations in Mexico than ones in Asia if only because I knew that if the yogurt hit the fan, I could be there in a matter of hours and operate in the same time zone instead of having to take a couple of days to travel half a world away.

Staying Ahead of the Earth's Curve -- The Importance of Global Trend Watching

In the world of gonzo marketing, the perfect process is to discern a hot new trend, find the exploding market which it is driving, and then come up with a product to sell.   Of course like most great marketing ideas, this one is less useful in the real world -- that is the world that most of our businesses operate in where we make a product or offer a service because that's just what we do.    You'd like to grow sales and profits by expanding into new markets, but you will always have a product in search of the right market instead of having a market in search of a product.

Another challenge faced by small businesses particularly is that top management is usually fairly deep into the weeds of the business and doesn't often afford themselves the luxury of trend watching -- even though in today's fast changing world, it's not a luxury at all, but often the key to survival.

Even if you are a nuts and bolt business with an established product base, keeping abreast of product and market trends is particularly critical if you are Going Global for a number of reasons including:

• determining which global markets might be open to your product or service;
• determining what modifications might need to be made to gain market acceptance for your existing product in a new geographic market
• discerning competing technologies that you don't encounter in your home market.

This last point is especially important.  Don't assume that because you are exporting from the world's most highly developed economy that your product is ahead of the global curve.   If you are in any business related to building methods or interior design, whether its furniture, bathroom fixtures,or window casements, they're already using technologies and products in Europe that will be the hot new thing here in a few years.  If you're in a business related to consumer electronics, get thee to Japan.

So how do you find these trends -- who do you talk to.  If you're looking for megatrends, you could try and gain an audience with someone like Faith Popcorn -- you can e-mail her at www.faithpopcorn.com.   You can find some of her key predictions for 2006 in report in the Arizona Reporter.

But while that's great for people looking for a market so they can come up with a product, if you already have the product, I suggest getting on an airplane and visiting one of the major trade shows in your industry in the part of the world where your industry is most cutting edge.   It seems like many business people only get around to the trade show circuit after they've decided to export to a particular market and they're trying to make contact with potential customers.   I would argue that you owe it to yourself to investigate where the hot trade shows are and use them for advance intelligence and industry trend spotting as a key part of your market and product due diligence.

If you're in an industry dependent on construction methods, make a trip to the Dach und Wand (Roof and Wall) Show held each year in Germany.  If you're connected to consumer electronics. the CEATEC show in Japan is where the global action takes place.   You can find many other upcoming trade shows in other industries at sites such as ExpoServices.

You will greatly increase your chances of success and profitability in Going Global if you do the homework first, and spotting the upcoming trends in your industry at international trade shows should be a part of your planning process.

(Note:  I need to give credit for the "Global Brain" image to a post on Laurel Delaney's GlobeTrade.com blog -- she had a post with a link to a very interesting site on trend spotting called Trendwatching.com.  My hope was to provide that link here as well, but it appears that the site is under new ownership and is being redeveloped.  So I can't give you that link, but be sure to visit Laurel's excellent site.   Craig)

India or China -- Round 2

India and China are obviously hot markets -- and handicapping the horse race between the two (although I think this is a race without any loser) is apparently a hot topic in itself.   For those of you interested in the earlier post on the comparative pros and cons of doing business in India vs. China, I commend to you the post by Dan Harris at his law firm's China Law Blog entitled  "The Better Investment?  China or India" which picks up this same theme.   

Dan's firm, Harris and Moure pllc located in Seattle, specializes in international law with a particular focus on China.  The firm is small, but seems to have some pretty impressive international talent.

How Big is the "Real" Market in China? -- Weigh in with Your Estimate

A good business plan requires reasonably reliable data.   When it comes to China, it seems as if many businesses start salivating at the notion that China has 1.3 billion people.   The problem is, of course, that the real consumer market in China, although growing rapidly, is much smaller than that.   But how large is it?   This is a particularly elusive question in a country where a great deal of available economic information is controlled by a government that doesn't yet trust the free flow of information.

Given the important but elusive nature of this key piece of information, I thought it might be useful to solicit input from as many business people as possible who may have a reasoned perspective -- sort of like a contest, but unfortunately with no prize -- except that we may all benefit from our collective insights.

Just to give some common starting point, here's a few pieces of data that may be relevant to the issue:

1. On an exchange rate basis, China had a GDP in 2005 of approximately $1.79 trillion, or less than half of the total economic productivity turned out by Japan's 125 million people.  On a purchasing power parity basis (as estimated by U.S. intelligence sources), China's 2005 GDP was closer to $8.18 trillion, or roughly twice that of Japan. (See CIA World Factbook for China / for Japan).
2. According to the China Daily News, there are approximately 240 million cell phone users in China.   This is over 2.5 times Japan's 90 million, but given the relatively undeveloped land-line communications infrastructure in much of China, as in many other developing economies,  this may be less an indicator of a middle class demand for discretionary consumer goods as much as a still under-utilized necessity -- you make the call.
3. As a measure of more expensive durable goods, the People's Daily reports that there are approximately 1 million cars sold in China per year as of 2005.  Compare that to the 16.9 million bought in the U.S. last year.

In addition to your comment on the size of the market, it would be great if you would share any other key data points which you see as benchmarks for this kind of analysis.   Post your comments below -- and please share a link to your website as well.  It should be interesting to see if there is a consensus around this issue or if there is a significant margin of error that needs to be accounted for in a China business strategy.

Think about Japan -- the United States in Asia?

The last post focused on the developing "hot" markets of India and China.   It seems like when most U.S. business people think about Going Global in Asia these days, India and China are at the top of their list (and too often their entire list).   Who can resist the growth curve?

Japan, by contrast, has been a sleepy story steeped in deflation in more ways than one over the past decade.  Unless it's talking about a hot new sushi bar stateside, I don't see American business people getting excited about Japan as a potential market.   So lest we overlook a real opportunity, let's take a minute and think about Japan -- focus on these simple facts to begin with.

1. Japan is a unified market of 125 million relatively affluent middle class consumers (I would argue that this is roughly the size of the real consumer economies in China and India today since most of their populations remain in poverty isolated from the economic boom);
2. Japan is a market with a single currency and single language (I make this point in comparison to the EU which, although it has a single currency, still has many languages which drives up exporting, marketing and sales representation costs; even China and India can seem like many different smaller markets when one wades into regional dialects and cultures separated by a large geography with a poor transportation network);
3. Japan is connected internally by world class transportation infrastructure in terms of highway networks, railroads and airports and connected to the rest of the globe by world class air and shipping ports (this is in stark contrast to India and China, although China at least is making massive investments in an effort to upgrade its infrastructure).
4. It has a well established system of commercial laws and a stable democratic / parliamentary political system (certainly an advantage over China).

These four simple facts alone should make Japan worth a look for an American company in search of a market in Asia -- but here's the real kicker: consumers in Japan already share the same technological preferences as consumers in the U.S..   Whether its high tech electronics or something as "rust belt" as industrial equipment, for all our complex cultural differences, as a consumer economy, we are very much alike.   

When I was running  a business exporting industrial and commercial roofing materials from the U.S., Japan was the one market in the world that most mirrored the U.S. in terms of the production techniques and technological preferences that determine product selection.   I can tell you that Apple has found Japan to be a good export market -- for all the Japanese electronics that come our way, when I was in Japan this past fall, every person under the age of 30 had white ear-buds in.   This is why I call Japan the United States of Asia.

Frequently the biggest objection to Going Global in Japan is a perception that the "group-think" that characterizes the cultural cohesion in Japan have led to a quasi-protectionist  economic culture which makes markets hard to penetrate -- and there is certainly some truth to this perception.  But let me show you the other side of that coin -- once you have taken the time and made the effort to get into the Japanese market, that same group mentality can create the most loyal group of customers you'll have anywhere in the world and can become your best marketing tool.

So is Japan the market for everyone?   No!  Won't China and India be bigger market opportunities in the long run?   There is certainly a good chance of that if things don't change (which of course they frequently do).   But if you have a product which is successful in the United States, and one of the reasons it is successful is that your value proposition appeals to the tastes and preferences inherent in an already developed market environment, Japan might just be your next best market away from home.   It's at least worth some serious analysis.

China or India -- Pros and Cons of doing business in one or the other

I had the opportunity to attend the annual World Trade Day conference here in Denver, this year focused on China and India.  Perhaps the highlight was a keynote by John Rice, Vice Chair of GE, who gave an impassioned defense of the global benefits of international trade -- I'm glad I made my post "Profits and World Peace" yesterday before attending the conference or I might be accused of cribbing his ideas -- particularly the positive impact that the development of plants to U.S. standards has on work safety and heath and environmental conditions in developing countries.

Most importantly, I was struck by the similarities in experience through all the presentations by other business people who also have been on the ground in these countries.  For today, rather than a  narrative analysis of the pros and cons of India and China as places to do business, I thought it would be more useful to share some bullet points that capture the consensus voiced at the conference and certainly consistent with my own experience.

India -- Pros:

• Established system of commercial laws based on British common law (same as U.S.)
• Well established recognition and protection of intellectual property rights
• More innate commitment to product quality control and consistency in manufacturing sector
• Manufacturing facilities adopting 5S and lean manufacturing principles
• Accessibility of current market reform oriented national government
• Universal ability to speak English among professional class

India -- Cons:

• Extremely underdeveloped infrastructure in transportation and energy production and distribution (increased logistics costs can offset some of the benefit of low employment costs)
• High turnover rates among skilled employee base (again, training and retention costs, coupled with rapidly escalating wage rates can offset low base employment cost)
• Bureaucracy, bureaucracy, bureaucracy!
• Not a member of WTO -- protectionist tariffs and prohibitions still inhibit many industries such as multi-brand retailers

China -- Pros:

• Increasingly well developed infrastructure around major metropolitan areas (although advantage declines rapidly across rural expanses)
• Accessibility of markets increasing since WTO membership
• Deeply ingrained capitalistic / entrepreneurial spirit (how this can coexist with a communist political regime may be a good subject for a more in depth later post)

China -- Cons:

• Lax protection of IP rights (indeed in some sectors it seems as if official government policy is to encourage co-option of foreign technology)
• Commercial law still a work in progress
• Inconsistent commitment to quality control in manufacturing and tendency to fabricate quality compliance data -- 5S and lean a long way off
• Increased difficulty in obtaining visas to U.S. to support training of personnel and customer support

Some draws:

• Rapidly expanding consumer class projected to grow to over 200 million people in a few years, reaching 500 million in 10 years (Pro)
• Regionalization in terms of geography (Logistics and ability to access markets) and culture -- more than one market to analyze and service within each country (Con)
• Corruption below the highest levels is a constant and continuing problem (Con)
• Remote management is difficult, particularly given cultural differences -- need to develop reliable local management structure (Not so much pro or con -- just the way it is)

A final observation shared by several of the presenters that I think is critical to understand and factor into any market development plan focused on these two markets -- as the economies develop further, the low cost of labor which currently attracts investment in off shore facilities will disappear as the demand for more consumer goods drives wages higher.   One speaker in the technology sector reported experiencing year over year wage increases in excess of 30% in India in an environment where high skill employees were more than ready to jump ship if a better offer presented itself, which is frequently.

If Going Global for your company means going to China or India, while low wage costs may be an attractor in the near term, as underscored by John Rice in his keynote remarks at the conference, for the long haul you'd better have some other reasons driving your business strategy.

Profits and World Peace

I'm not going to suggest that a company that stays in business for the long haul ever acts out of strictly altruistic motives.   As business people, if you aren't going to make a profit, what's the point.  But that doesn't mean that business does not have a positive impact on society, even if only as its unintended consequence.   This is true in spades when it comes to international business.

This post may seem like its more about international politics or political economics than international business, but let me draw the practical connection for the business person about to wade into the fray of Going Global. When your company becomes a strand in the vast web of global business, you will undoubtedly at some point come face to face with someone from the anti-globalization forces who somehow became true believers that multi-national companies are out to undermine the economy at home while trashing the world beyond.  Perhaps it will come up in the context of one of your own employees who fears that the follow up act to exporting product is exporting jobs.   Perhaps it will come up in the context of a mis-informed state legislator seeking to pass a restriction on state contracts that could adversely impact your position as an international company.  Or maybe it will just be the sorry sot at the backyard barbecue who demands to know why making things in America for Americans isn't enough.   Whatever the context, I've found it helpful to have a more thoughtful response than "get lost".

With respect to environmental impact and human living conditions, it has been my universal experience that when American companies develop plants abroad (and here I'm focusing particularly on developing countries like China or those in Latin America), they are not content to have the plant meet only the local (i.e. usually non-existent) environmental and work health and safety requirements.   Instead, it is critical that the plants meet the corporate standard -- which are much higher, conditioned by the requirements here in the U.S. as embedded in the company's corporate culture   Now again this is not for altruistic reasons.   It's because the company recognizes that operations are more cost efficient and product quality is higher and more consistent (both key ingredients of sustained profitability) if the manufacturing environment is clean and safe.  At first the local competitors may see this investment of capital in improved working conditions and environmental containment as a foolish waste of money by too wealthy Americans, but they eventually come to understand that the U.S. owned plant has higher productivity, lower total costs when one accounts for the costs of workplace injuries and absenteeism, and produces a product which is in higher demand in the market place.   As that realization begins to sink in, the locals begin to upgrade their operations to meet the American standards -- usually long before the local governments get around to policing such things.  I've seen this scenario play out time and again in numerous countries.   The fact is, there is no greater positive impact on environmental and working conditions in developing countries than when an American company acquires or opens a new plant.   

So that's nice, but the phenomenon may still be localized or restricted to the particular industry in which the economics have been altered by the U.S. company's presence.   But World Peace? -- c'mon!  Keep in mind two things -- "economic interdependence" and "cultural awareness and accommodation".

Look at the billions and billions of dollars of goods sold into foreign markets.  In 2005, the U.S. exported $42 billion of goods to China alone, and China exported $243 billion in goods to the U.S.  (See foreign trade statistics provided by the U.S. Census Bureau).  Even a sparsely populated land locked state like Colorado exported $765 million of good to China last year.  And these numbers don't include the vast array of services being exported, particularly U.S. engineering and environmental expertise.   Further, the numbers are growing at an annual clip in excess of 20%.   The fact is, China has a huge stake in the health of the U.S. economy and the U.S. has a growing stake in China.   Is it really in a country's best interests to wage war on one of its largest customers.

Volvo is a Swedish car company, except that it's owned by Ford.  Is a Chrysler Sebring an American car or a German car now that the company is owned by Daimler-Benz?   What could be more American than one of the best selling cars in America made by American workers at a plant in Georgetown, Kentucky? -- except that it's a Toyota.   Cynics (probably not unrealistically) would say that foreign policy isn't based on the espoused altruistic values of spreading democracy or protecting freedoms or spearheading the vanguard of the international worker's movement or even protecting one's borders against aggression, rather it's based on furthering our economic interests -- access to shipping lanes, supplies of natural resources and markets.   And the flatter the world becomes (to use Thomas Friedman's theme) and the more intricately intertwined the web of global commerce, the more blurred the lines become between "us" and "them".   We won't all be sitting around singing "Kumbayah" -- there will be plenty of conflict and fiercely competing interests.  But instead of conflict between governments and their militaries, hopefully it might more apt to be conflict between combustion engine based auto manufacturers and alternative fuel developers, or between Windows based systems and Linux based systems.   And as ugly as that could get, it seems very much preferable to the historical model of war among the nation states.

To further bolster all this economic interdependence, the globalization of commerce also is creating a more common cultural mutuality.  You can rue our fast food nation as a lame cultural legacy, but there is something oddly warm and fuzzy about being in a very foreign land and standing in line at a Starbucks while the locals listen to American rock music through their ubiquitous white earbuds.   And on the other side of the coin, I find it equally wonderful to be able to sit on the floor and eat authentic Moroccan food with my hand without leaving Denver, Colorado.  The phenomenom is everywhere and accelerating.   It's manifested in the clothes we wear, the food we eat, the music we listen to, the foreign words and phrases we incorporate into our own native languages (and by "we" here, I mean all of us as global citizens).

Invariably I find that when business people sit down to do business around the world, whether its putting a deal together in a conference room, grabbing a quick lunch between plant tours, wooing a potential new customer over dinner, or any other context in which we are known to gather, we find that for all our differences which need to be understood and appreciated, we're not so different.  It is this experience that gives me the greatest hope that international trade and business may well provide the common bond such that while we pursue our profits, we create a modicum of world peace while we're at it -- a peace that hopefully will endure the folly of the political rhetoric that our respective governments seem so intent on making the focus of international relations.    

Going Global

Doing business internationally is a learning experience -- based on experience.   And while it is literally a world of opportunities, there are also many unfamiliar hazards and gaping money pits awaiting those who don't have the experience, take the time to gain the experience, or hire the expertise necessary to successfully navigate the trans-oceanic waters of global business. 

My searches in cyberspace lead me to believe that there is still an unmet need for on-line perspective on international business.   Many of the existing websites have a brain-dump full of information, but its only useful if you already know what questions you should be asking.   Conversely, many sites are narrowly focused on a particular country or market and are only useful if you've already successfully answered the fundamental questions of where in the world should we go and which of our products or product attributes should we be focusing on.  Also, although English is the international language of business, there appear to be more sites on international trade and marketing in other languages -- perhaps another sign that when it comes to inter-national perspective, the rest of the world is frequently ahead of those of us in the U.S.

Whenever I'm engaged in an international forum, whether its a World Trade Association gathering, or speaking at a foreign trade seminar, or just meeting with other people involved in global business, I am struck by the passion that is shared for things international.   So it strikes me that the international business community is well suited to an interactive web presence such as a blog focused on international business issues such as export market entry and development and launching and managing foreign operations.

For all of these reasons, it made sense to me to undertake this blog.   My plan is to regularly post insights and explore issues faced in international business.  Some days they may be on a general problem faced in the global marketplace, and other days they may focus on particular issues in a given country or with a particular industry.   We'll certainly share resources.   I've begun posting a list of useful links and books.   I invite comments from anyone who has a perspective to share or a problem that they would like to see explored (although I have reserved the right to approve or edit comments to keep things clean and professional).  If you have any particularly useful web-links or know of any good books on a particular topic, by all means, please share.

There are many good reasons for Going Global, and armed with the right perspective, we can endeavor to make it a profitable trip in more ways than one.