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By David E. Gumpert A Closer Look at "Unfair" Imports Travel broadens the mind, and a Honduras trip has certainly expanded mine. Now, gripes about cheap offshore labor aren't so convincing To some, Wal-Mart (WMT ) has come to symbolize the curse of cheap, foreign-made goods flooding the U.S. at the expense of American manufacturing jobs. Along with many Americans, I assumed that the retail chain's amazingly low prices were the result of businesses exploiting cheap labor in faraway places. How else could they sell everything from sneakers or to lush house plants for $5 or less? Then I had the opportunity to meet Julio Garcia, and had my head entirely turned around about the economic dynamics of the Wal-Mart phenomenon. I learned from Julio that while foreign producers may have an advantage in their labor costs, they face all kinds of other disadvantages that we in the U.S. conveniently overlook when we try to make sense of the competition from afar. BLOSSOMING BUSINESS. Julio produces some of those amazingly cheap houseplants for Wal-Mart and other American retailers from deep within Honduras, an impoverished country in Central America. I met Julio last week at a special conference devoted to encouraging entrepreneurship among Honduran college students. It was held at Zamorano University, a highly-esteemed agricultural school just outside the capital city of Tegucigalpa, where I was invited to speak, and Julio preceded me on the podium. A Zamorano graduate, he described how he and wife Lucia built their business, Tukan Agro Products. Over the past 10 years, the couple has taken it from a half-acre of dirt and $50,000 in first-year revenue to an enterprise with more than 40 acres and anticipated 2003 revenues of around $4 million -- an average annual growth rate of around 50%. As Julio discussed the reasons for his success before 180 students and business leaders, he made no reference to cheap labor. In fact, labor was one of his initial challenges, he recalled, since houseplants were not widely produced in Honduras, so he had to train his employees from scratch in the intricacies of cultivating and harvesting. Instead, he focused on how he overcame three disadvantages that many small, foreign businesses face as they try to penetrate the American market. What follows are his main points -- none of which has anything to do with cheap labor: Distance from the market. Not being right on the scene is a huge disadvantage at a time when markets and tastes change as swiftly as they do. Yet how does a smaller company based thousands of miles from its market put itself on the scene? Julio has accomplished this difficult task by dedicating part of his expansion to establishing American-based enterprises that are further up the food chain than his Honduran plant farms, launching a transport business, a wholesale company, and a plant-finishing service. These are nascent operations, with a total of seven employees, but they keep Julio more involved in the industry and alert him to changes in customer tastes and practices. As he explains it: "I could sell everything by phone, but I like to meet people and listen to problems." High transportation costs. It's easy to ignore the disadvantage foreigners face in simply getting their products to the U.S. Until three years ago, Julio shipped 90% of his plants by air because of their perishability. As a result, transportation costs comprised 37% of his price. Then he got the idea of using seaborne containers to reduce costs. The notion of shipping live plants via slow cargo containers was a novel one, but Julio's patience and persistence in persuading reluctant shippers to work with his company won out. Shipping costs have declined to 8% of the price. Moreover, because of the temperature and packaging controls the containers make possible, spoilage rates are lower than for air shipments. Production obstacles. To meet U.S. Agriculture Dept. regulations, the roots of imported plants must arrive free of soil or other nutrients, meaning replanting must occur within the U.S. After much experimentation and application of his Zamorano-acquired agricultural skills, Julio came up with a proprietary technique that complies with the rules, but avoids the replanting. Using such innovation, Julio is increasingly able to avoid significant further treatment of the plants after they arrive in the U.S. Not that there haven't been bumps in the road. Hurricane Mitch in 1998 brought the Garcias' business to a complete halt for several months, and obliged Julio and Lucia to stop drawing a salary for a time. Still, they didn't lay off any of their workers, sending them out instead to help deliver food and supplies to Hondurans who had lost even more than they did. The September 11 attacks also brought business to a halt for a time. In the aftermath, the couple correctly anticipated that their company would be required to innovate further so as to be positioned for a more competitive market. When Wal-Mart leaned on its suppliers earlier this year for lower prices so that it could reduce retail prices of certain house plants from $6.99 to $4.99, Julio was ready. UNVARNISHED TRUTHS. Through all of this, Julio has learned a valuable lesson: "We thought if we worked hard, we could not fail. We thought if we produced the best products, we could not fail. We were wrong. The key is to be highly competitive." The problem of foreign competitors takes on a different feel after hearing the Garcias' story. This isn't to say that much manufacturing hasn't been shifted to Asia, Mexico, and Central America because of cheaper labor costs. The Garcias' story suggests that equating the entire challenge of low-priced imports with cheap labor may be misleading. In some cases, at least, it's a matter of smart entrepreneurs using innovative management techniques to compete effectively, and to do so fair and square. That answer may be less satisfying than some of the excuses many of us would prefer to hear.  David E. Gumpert is the author of Burn Your Business Plan: What Investors Really Want from Entrepreneurs and How to Really Start Your Own Business. Readers can e-mail him at david@davidgumpert.com
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