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Special Report: Small Business


Special Report

SPECIAL REPORT: SMALL BUSINESS

For 102 years, Bicknell Manufacturing Co. has made industrial drill bits for construction equipment at its modest plant in Rockland, Me. For most of that time, the family-owned concern thrived, with growth of about 8% a year in the late 1980s. Then came the 1990 recession. The construction market withered--and with it demand for Bicknell's products. As sales stalled, the company scrambled for new business. "We had to change course," says John E. Purcell, Bicknell's general manager.

With little likelihood of a quick turnaround at home, Bicknell set its sights on markets abroad. "There was much trepidation, with a capital T," says Purcell, 38, recalling that none of the 65 employees at the $4 million company had had any foreign experience. Still, with construction booms in Brazil, Colombia, and Mexico, the foreign market was beckoning. After Purcell found a distributor while visiting Mexico on a trade mission sponsored by the Small Business Administration, Bicknell began exporting to Latin America two years ago. And Purcell couldn't be more delighted with the results. He has just signed a deal to begin selling in China and Vietnam. This year, Purcell expects international sales to grow 20%, for 15% to 20% of the company's total revenue. "We're starting to see it pay off," he says.

Purcell's enthusiasm is just one case of a new global fever to hit U.S. business. This time, instead of afflicting the goliaths of Corporate America, it's sweeping through the ranks of U.S. entrepreneurs. Whether they're seeking to escape sluggish markets at home or build on their successes, more small companies are looking beyond the local and regional markets that have long nurtured and sustained them.

A survey of almost 750 companies by Arthur Andersen & Co. and National Small Business United, a trade group, found that 20% of companies with fewer than 500 employees exported products and services last year. That's up from 16% in 1993 and 11% in 1992, the first year the survey was conducted. And many experts expect that the trend will continue as more and more small businesses plumb the potential of foreign markets. "It presents a huge growth opportunity," says David L. Birch, president of economic researcher Cognetics Inc.

The push abroad by a whole new stratum of U.S. companies is having a profound impact on the trade front. True, the $200,000 in foreign sales that Bicknell chalked up last year is nothing compared with Boeing Co.'s $11.4 billion in exports. But together, small companies are helping fuel an export explosion that has more than doubled total overseas sales since 1986, to $696 billion last year. While service sector exports are difficult to measure, DRI/McGraw-Hill figures that small businesses could account for 50.8% of the $548 billion worth of manufactured goods that the U.S. will likely export this year, up from 45.5% a decade ago.

Entrepreneurial success overseas is bound to produce other economic benefits. Bountiful markets abroad could insulate small companies from periodic downturns at home. And as it carves out more foreign business, small business could enhance its reputation as the job generator of the 1990s. "A lot of small businesses adding five or six people may not sound like much," says Donald T. Hilty, senior fellow at the Economic Strategy Institute in Washington. "But when you add it all up, there's real potential for job creation."

Tiny Lucerne Farms in Fort Fairfield, Me., is certainly doing its part on the job front. Thanks to the dollar's precipitous drop against major currencies in recent months, George A. James, president of the $350,000 horse-feed company, says his products are 25% cheaper in yen terms compared with a year ago. That drew an inquiry from a Japanese distributor. Now, orders from Japan could double his total revenue this year. To keep up with the flood of business, James is planning to take on five new employees on top of his current eight-person team. "Without this international business, we could never expect to grow as rapidly and add these jobs," he says. "This is a real shot in the arm."

High-profile pacts such as the North American Free Trade Agreement and the General Agreement on Tariffs & Trade have also accelerated the march by small business into the global arena. Both agreements have gone a long way toward lowering barriers to imports in foreign countries, while alerting entrepreneurs to opportunities abroad.

Jeff A. Victor, for one, credits NAFTA for his surging export volume. The general manager of $6 million Treatment Products Ltd., which makes car cleaners and waxes, had been trying to expand his small presence in Mexico since 1990. But stiff Mexican tariffs that ran as high as 20% made that impossible for the Chicago-based company. Six months after NAFTA went into effect in January, 1993, and tariffs started gradually dropping, Victor says he landed contracts with almost every major retail chain in Mexico, including Futurama, Gigante, and Soriana. His shipments to Mexico have tripled, to roughly $300,000, about 20% of the company's total exports. Victor concedes that Mexico's financial meltdown has hurt. One retailer has put a big order on hold. But he's sticking it out. To make his car wax more affordable to Mexican consumers, he's considering selling it in smaller bottles. "After selling in Mexico for five years, I'm not going to pack my bags and leave," he vows.

RISKY SHORES. The threat of a Mexican-style calamity in other countries isn't the only thing that makes venturing abroad so risky and complicated. Lining up customers and distributors--tough enough at home--becomes an enormous challenge when a market is a continent away. And then there's financing. Lenders are already leery of small companies. But the thought of a pint-size outfit venturing into uncharted markets is enough to give some bankers the vapors.

They have reason to be worried, because plenty of small companies are innocents abroad. Many entrepreneurs get their first taste of global markets by filling stray foreign orders that come their way. Often generated by referrals or chance meetings at domestic trade shows, these orders are quick and painless to fill--and can give the false impression that exporting isn't so tough. "A lot of small businesses export opportunistically," says Abby K. Shapiro, chairman of International Strategies Inc., a trade consulting firm. "The problem is not enough of them do it thoughtfully."

Lack of proper preparation can lead to costly mistakes. John P. Woolley, general manager of PC Industries, recalls how he shipped a $10,000 replacement computer component to a French customer six months ago and was stunned when he was billed $2,500 for value-added tax. Woolley's company had to absorb the unexpected bill. He says such expensive lessons are causing his $3 million Glenview (Ill.) company to rethink its overseas commitment. "The jury is still out on how strongly we'll pursue it," he says.

For small companies that decide to persevere with their export strategies, identifying suitable markets is generally the first step. Many turn to federal and state agencies for market information (page 101). The U.S. Commerce Dept., for instance, has a trade database available through its 73 field offices and public libraries. The database has research reports on 117 industries in 228 countries.

It's a good starting point for figuring out what's hot and what's not. Right now, environmental companies--those specializing in everything from waste-water treatment gear to landfill management--are finding opportunities in the newly industrialized markets of South Korea, Indonesia, Malaysia, and Taiwan. And in Latin America, a growing middle class is fueling a new wave of health consciousness. Companies making cholesterol-testing equipment, for instance, may find eager customers in Brazil and Mexico.

Some entrepreneurs display a lot of ingenuity when scoping out markets. Harden H. Wiedemann, chairman of Assurance Medical Inc., a $2 million Dallas company that sells alcohol- and drug-testing services, uses the Internet. He says he has found voluminous online information on the growing concern with alcohol-related problems in Argentina. "Some of the best information we found we just stumbled on as we were surfing around," he says.

FARTHER AFIELD. Not surprisingly, most first-time exporters head north of the border. With few language barriers, a similar business culture, and now NAFTA, Canada is the most appealing market for small companies. But entrepreneurs, emboldened by past trade triumphs or tempted by flourishing markets, are setting their sights on more distant climes. Fully 12% of those responding to the Arthur Andersen/Small Business United survey say they exported to Western Europe in 1994, while 11% targeted fast-growing markets in the Asia-Pacific region.

Heather Stone has certainly expanded her horizons. Last year, she began selling her invention--a scooter for people with leg or foot injuries--to a distributor in Canada. Then last fall, Stone was invited by the Japan External Trade Organization to display her product, called Roller-Aid, at a Japanese trade show. She now expects her company, StoneHeart Inc. in Cheney, Wash., to start shipping to Japan this summer. She figures exports will generate about 20% of her company's $500,000 in sales this year. "This international business just kind of fell in my lap," she says with a smile. "For me, it wasn't as difficult as I expected."

Chasing emerging markets requires something many entrepreneurs already have: a stomach for risk. Like his counterparts at much bigger companies, Robert A. Giese of RGdata Inc. was quick to set his sights on untapped markets in the then-Soviet Union--as early as 1989. The Rochester (N.Y.) computer-networking company that he founded in 1974 hadn't done any serious exporting. But he felt the opportunities in Russia and nearby countries were overwhelming. True, shipping was a nightmare, and phone communication was in the dark ages. But he says waiting until a market is stable makes no sense: "By then, everyone already has a dance partner." In 1989, he teamed up with three other small companies to pay for a $25,000 booth at a Commerce Dept.-sponsored trade show in Moscow. Last year, 20% of his $19 million in business came from former Soviet countries.

Some entrepreneurs have turned themselves into globe-trotting promoters to drum up business. Katherine Allen, who with her mother runs Allen Filters Inc., figures she spends almost a third of her time abroad, schmoozing with potential customers for her oil-cleanup products and services. Allen reckons that, of her yearly $4 million in sales, half comes from exports, thanks to her network of contacts from Singapore to So Paulo. And now--two years and numerous cocktail parties after her first visit to Beijing--she has potential customers in China. Allen Filters may not have the marquee value of big U.S. exporters, but Allen says her journeys have convinced her that a small company can make it if it understands markets and customers. "If they have a good foundation, I think the world is open to most small businesses," she says.

For the typical small company, however, a foreign partner or distributor is the only access to a new market. It's a crucial relationship. Lazy distributors won't do much for business, while inept or unsavory ones can ruin a small company's reputation in a new market. Two years ago, computer maker WIN Laboratories Ltd. in Manassas, Va., pulled out of a joint venture in Chile, blaming its Chilean partner for customs delays and weak sales. "It hasn't soured the outlook on exporting here," says Mark H. Magnussen, WIN's director of business development, who is considering joint ventures in Brazil and Mexico. "But in the future, we'll do a lot more legwork."

FISH STORY. Such research doesn't have to mean frequent trips to far-flung ports of call. One gold mine of information: U.S. companies that sell related products. Fred Hansen, vice-president for marketing at Mardel Laboratories Inc. in Glendale Heights, Ill., which makes water conditioners and other supplies for tropical-fish aquariums, hired a distributor in Hong Kong after contacting Penn Plax Plastics Inc., a Garden City (N.Y.) company that sells plastic underwater plants. The company didn't compete with Mardel, but it knew both the distributor and the industry well.

Small companies with bigger budgets can participate in trade shows sponsored by state and federal agencies. The Commerce Dept.'s Gold Key program, for example, can arrange for a small-business executive to meet with pre-screened potential partners in a foreign country. Jim DeCarlo, president of Phenix Technologies, based in Accident, Md., met his Spanish distributor on such a jaunt. He spent three days in Madrid in 1993, meeting with potential partners at the U.S. embassy. The trip cost the company, which makes electrical testing equipment, roughly $3,500--a wise investment, says DeCarlo. "I wouldn't have known where to start" to look for a partner, he concedes.

Like their bigger brethren, some small businesses are establishing overseas arms. Eli E. Hertz, founder of Hertz Computer Corp. in New York, bought a small distributor in Israel in 1990 to sell his equipment. He says being nearby to handle his clients' servicing needs gives him an edge over rival exporters. Today, Israeli customers account for 25% of his $10 million in sales. "Being there is a huge advantage," Hertz says. His customers agree. "When they get a call, they're here in four hours," says Shlomo Stern, the head of systems operations for OFEK Securities & Investments Ltd.

Whatever their strategy for penetrating foreign markets, small companies inevitably find that lining up trade financing to pay for manufacturing or to extend credit to customers is the stiffest challenge of all. Many U.S. banks abandoned trade financing in the 1980s after the Latin American loan debacle. Even banks thought to be entrepreneur-friendly shy away from tiny, complex, labor-intensive trade finance deals. Jeanne A. Hulit, vice-president for international banking at Key Bank of Maine, a unit of KeyCorp, says one recent small trade loan--less than $100,000--took so much time and energy that she might require an up-front fee from exporters in the future. "It was way too much work for a small loan," says Hulit.

Some small companies have benefited from trade finance programs sponsored by government agencies. Phenix Technologies' DeCarlo recently lined up a $400,000 revolving credit for his export business with the help of a guarantee from the Maryland Industrial Development Financing Authority. But such programs are poorly funded. Though the the Small Business Administration and the Export-Import Bank have doubled the size of their financing programs since 1991, together they guaranteed only $253 million in export-related lending for small businesses in 1994.

And entrepreneurs still complain about excessive paperwork. Last fall, Thomas Parks, chairman of $23 million Quickway Industries, applied for a line of credit backed by the ExIm Bank to boost his company's auto machine-tool exports. The bank wanted to see audited financial statements for the past three years from Parks's customers. When Quickway asked six big foreign customers for such documents, all but one flatly refused, Parks says. "They said: `It's just too complicated dealing with you guys,"' he recalls. In the end, Parks continued to draw on his company's own limited cash flow to finance his export expansion. But he says he hasn't grown nearly as fast as he had hoped.

Unfortunately for small companies, there's plenty more red tape awaiting them overseas. Foreign governments impose standards for imported goods that are often intended as barriers to imports. The Commerce Dept. figures that for the typical U.S. machine manufacturer, the cost of additional paperwork and certification can add up to $100,000 a year. That's a big bite for any company and potentially crushing for a small one. On top of that, importers often insist that suppliers meet guidelines set by the International Organization for Standardization. The group, representing 91 countries, sets quality measures on manufacturing procedures, design, and servicing. Many small companies find the certification too costly and time-consuming.

Of course, no one said that exploring exotic markets would be easy. It never has been--neither for caravan drivers plying the Silk Road nor for sailors seeking the Spice Islands. But like them, today's entrepreneurs know that playing it safe by staying at home may be the riskiest strategy of all.

GLOBAL GUIDELINES FOR SMALL BUSINESS

LOOK TO EXISTING CUSTOMERS Many companies can penetrate foreign markets by selling products or services to their domestic customers' units overseas.

MAKE A COMMITMENT Exporting is not a part-time effort. It requires extensive research. Foreign business should be run by seasoned managers.

SEEK ADVICE Universities often have MBA students who work as consultants on exporting. Some consulting firms, such as Arthur Andersen, provide a free first-time consultation.

USE TRADE SHOWS Trade promotions sponsored by U.S. and state agencies abroad draw big crowds. Cost-conscious companies can send a product without attending.

PICK MARKETS CAREFULLY While potentially lucrative, fast-growing markets can tank unexpectedly. Consider customer quality, not just nationality.

MANAGE GROWTH It takes time to line up financing and expand an organization to handle exports. Many small exporters are overwhelmed by big orders.

USE LETTERS OF CREDIT Some first-time exporters ship a product and hope they get paid. A letter of credit protects against default by a weak or shady buyer.

BE PATIENT Many foreign customers do business based on relationships. Small companies must spend time cultivating contacts before racking up export orders.

CHOOSE PARTNERS CAREFULLY An experienced freight forwarder at home is crucial for handling customs paperwork. An inept distributor abroad can ruin a company's reputation.By Amy Barrett in Washington


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