International Trade

Table of Contents

Each day the world continues to grow smaller. Without even knowing it, we are using more and more products and services that have overseas origins, parts or connections. Our clothes are made overseas, our electronic equipment contains components and parts produced overseas, and the products and services we make are exported to various customers around the world. Each of these adds a thread to the fabric that ties the world together.

Because of this �globalization,� overseas markets are increasingly important to Oregon businesses. Some have argued that Oregon businesses can no longer succeed without succeeding globally. Personally, I believe that this is fast becoming an unavoidable reality. To borrow the famous line from Star Trek, resistance is futile.

Fortunately, our Oregon businesses are increasingly looking overseas for markets for our products and services. The volume of Oregon exports continues to grow dramatically, and at a rate that well exceeds the national average. Perched as we are on the Pacific Rim, most of our exports are Asia-bound, but Oregon businesses are selling products and services throughout the world, including Canada, Europe and Latin America.

Understanding the need to �go global� and actually pulling it off are two different things. International business is very complicated and difficult, with different cultures, languages, business approaches and laws. With all the promise of success overseas, handling international business in the wrong way can bring catastrophe. In short, international business can be a gold mine or a quagmire, depending on whether it is done right.

At Taylor & Parrilli Global Law Office, we are focused exclusively on international business matters, including helping US companies succeed overseas. We are dedicated to helping companies in our communities succeed overseas. We believe this will strengthen our communities in general, in addition to our own business.

The purpose of this article is to provide some basic guidelines, based on our collective years of experience, for succeeding in international markets. From our experience, we see that companies that succeed international generally follow the following five steps.

Like most good things, success overseas takes effort. Sadly, our experience shows that many Oregon companies think they can haphazardly and almost lackadaisically �stumble� into success overseas. For companies that take this approach, most overseas ventures end in failure. The only way to succeed overseas is to start with real preparation. Good preparation starts with a real commitment to the process. Realize from the beginning that success overseas is going to require

a great deal of effort, time and money. If you can�t make this commitment, you should dramatically lower your expectations, if not give up the idea altogether.

From there, the next important piece of the preparation puzzle is to organize your company internally so that you have the necessary resources to devote to your new commitment. You are probably fooling yourself if you think that you can simply assign international development responsibilities to an existing employee, at least in the long run. The better approach is to hire someone with both the time and expertise to do this job well.

The next step is to put together a strategic plan for going global. The most common mistake we see with our clients is entry into an overseas market by fluke. Most overseas business is done through independent distributors or sales representatives, especially for smaller and medium-sized companies. All too often we see companies getting into business relationships with someone from a foreign country who has just magically appeared on their doorstep one day. Some companies following this approach are lucky and get hooked up with a good partner, but more often these relationships end with disappointment on both sides (after a large expenditure of time, effort and money). Similarly, companies who start the globalization process with a strategic plan but then bail out midway are rarely successful. You have to �go the distance,� even if things get difficult. Remember the commitment part?

For smaller companies, it may seem daunting to commit scarce resources to international business, but again our experience shows that in most cases the benefits to be reaped from success overseas significantly outweighs both the costs involved and the risk of failure. You can be successful if you fully prepare yourself and then continue with the steps listed below.

With your new-found commitment, you are now ready to implement a strategic approach to globalization. This starts with a careful and thorough analysis of where your products and services can be successfully marketed and sold. Don�t assume that your products will be accepted anywhere and everywhere. And even if your products carry worldwide appeal, it is important to prioritize overseas markets, unless you are fortunate enough to be working with unlimited financial resources.

Assessing overseas markets requires careful analysis of a wide variety of factors. Companies must look at economic situations into which they will be selling. With its huge population, selling products to China would seem to be a great idea � and it may be � but the economic and political situation in China will certainly impact your business. Countries with internal economic turmoil may be difficult to access too. Consumers will generally have less disposable income during economic crises, and the dollar often soars in value against the local currency, making imports from the US too expensive.

The laws and regulatory environment in a foreign country will also have a significant impact on your ability to succeed in that country. Applicable laws range from regulations that require governmental approval for your product to laws that make it difficult for you to protect your intellectual property or to terminate bad relationships with distributors or sales representatives.

Of course, tax considerations are also very important. Competent tax advice should be sought before engaging in any international business.

There are also many cultural issues that must be considered overseas. A local newspaper recently published a cartoon that showed a McDonald�s restaurant in India with a large sign out front � �Sacred Cows for Lunch.� Ignoring cultural differences could leave you trying to sell ice to the Eskimos, as the saying goes. A good sales person may be able to pull it off, but you would obviously be much better off in a more receptive culture.

There are also many product-specific concerns that need to be carefully analyzed. For example, selling software products in Japan can be a very difficult thing. First, unlike the US, each hardware manufacturer in Japan has traditionally used its own proprietary operating system. This is changing today, but is still an issue that needs thought. Second, localizing a software product into the Japanese language can be a daunting task, usually requiring a separate front-end processor. Outside of high tech, our auto manufacturers tried for years to sell large, American-style cars with steering wheels on the left side into the Japanese market. And our lumber producers tried for years to sell lumber cut to American sizes and standards in Japan. For obvious reasons, neither of these industries have been all that successful in Japan (although progress has been made in recent years).

How are you going to effectively assess the viability of overseas markets for your products and services? Well, unless you have extensive experience yourself overseas, you are going to need help. There are many avenues for conducting market research in foreign countries. Most countries have excellent market researchers who will assist you, for a cost. There are also some free services provided by various government agencies that are very effective.

Once you have found the markets you want to be in � and remembering all the while your commitment to international business � the next step is to find the right partner. While each of these five steps is important, this may very well be the most important.

It is important to realize that even if you are wildly successful marketing your product here in the US, you probably do not know enough about your overseas markets to be successful marketing your products there. You are going to need help from someone who knows what they are doing. Again, don�t just jump into a deal with the first person who comes along offering to help you overseas. Take your time to explore the options and find the very best person, or group of people. This may take more time and cost more money, but we promise that you will be happy in the end.

What kind of person are you looking for? This is a relatively easy question because you can apply basically the same values you use when looking for partners in the US. You are looking for someone with whom you can work closely and develop a strong, trusting relationship, and someone who knows his or her business. It�s that simple.

The difficult part is finding the person. Fortunately, there are many resources available to help you in this sometimes daunting quest. Some resources will cost money, others are free. But even the free ones will require you to spend your time and energy to use them.

One of the best resources is right at your fingertips � you and your business colleagues. Over the years, you have probably had contact with various people and companies from other countries. While we are definitely NOT recommending that you use one of your existing contacts as your partner without further investigation, we DO recommend that you talk with all of your contacts to find out as much as you can about the players in your industry in your chosen foreign markets. In our experience, most companies are able to find the best partner options simply by using their own industry network.

In addition to your own resources, we recommend that you use other resources for locating potential partners. Again, many government agencies have services to help you in this regard.

You should also seriously consider government agencies, industry associations and the like that exist in your targeted foreign markets. It is surprising how much information can be obtained from these contact points. In Japan, for example, there is an association for almost every industry and business you can imagine. These associations are often very good sources for information about your industry in Japan. (One must be careful, though, not to disclose too much information to potential competitors.)

Finally, there are excellent consulting companies that, for a fee, can provide you with information about the players and potential partners in your industry. Depending on how much information you are able to obtain from �free� sources, you may want to hire one of these research companies � maybe even the same one you used to do your initial market resource in step two.

Based on our experience, after you gather your initial information about potential partners, we recommend that you narrow your list to three or four potential partners and then make plans to visit these partners in their offices overseas. No amount of letters, faxes, e-mail messages, and telephone calls will alleviate the need to make a trip overseas to meet face-to-face with your potential partners. And don�t expect them to make the trip here. Even if they are willing to come visit you here, a trip to their offices will almost always be needed.

Be careful in introducing yourself and setting up an initial meeting. Different business cultures require different protocols in this area. In many cultures, you will be received much better if you are �introduced� to the company through some third party. Your international advisers should be able to help you in this regard. Often, government officials are very good in this role.

Once you have narrowed your list of potential partners to one, you are ready for the next step � negotiating and structuring a business relationship. This step also requires a great deal of effort to be successful.

Many companies have a preconceived notion of what type of relationship is best for them overseas. Unfortunately, these ideas are usually based on experience in the US and don�t take into account differences overseas. In our experience, the best approach in international markets is flexibility. The relationship you will want to structure will depend to a large extent on the identity and nature of your partner. You will need to come up with a business structure that caters to your partner�s strengths and supplements its weaknesses. Here are several structures that you might wish to consider:

As mentioned above, perhaps the easiest and most common approach is to set up a network of independent distributors. A distributor purchases product from your company and then resells the product to customers in its territory. Typically, the distributor assumes responsibility for all marketing and sales in the territory, with some supervision from you. The advantage of this approach is that it turns over most of the responsibility for success in the foreign market to the foreign partner. If you have selected your partner based on their understanding of their market, this is exactly what you want. The disadvantage is that you will have little control over your business overseas. There are legal precautions that should be put in place, but your success will depend in very large part on your distributor�s efforts and abilities.

A similar approach that gives you a bit more responsibility and control is to set your partner up as an independent sales representative in the territory. Typically, an independent sales rep is responsible for marketing your product, but a sales rep does not purchase and resell your products. Instead, the sales rep essentially turns the customer over to you for the sale, providing whatever assistance is needed. A sales rep is usually paid on a commission basis. While this approach gives you more control, that isn�t always good � especially in an international market where you should rely more on your partner�s abilities. Plus, it can be difficult to be very involved in actual sales if they are with customers in foreign countries � different time zones, languages, customs, etc.

Depending on their partner and other factors, some companies may wish to skip independent companies and �go direct.� Usually this is a substantially larger undertaking but it can make sense in many situations. If you �go direct,� you will likely need to set up either a branch office or a separate company in the foreign country. Obviously, this is a very serious matter and requires careful compliance with local laws in that country. In addition, you will need to carefully consider the tax implications of such a move. Except in special situations, we generally do not recommend taking this direct approach unless: (1) you have a very strong individual in that country who can run your business there; (2) you have the resources � financial and otherwise � to get the business off the ground; and (3) you are very committed to the idea. However, once your business is up and running, going direct is often an excellent step to take at a later point.

There are many other arrangements that can be made to facilitate your business overseas, including all kinds of �joint ventures.� Again, flexibility is the key. It all depends on your situation.

Whatever structure you establish, it is very important that it be well documented in some sort of contract. The piece of paper will not make your venture successful � it is your personal

relationship and effort that is most important � but the piece of paper does perform a couple of very important functions. First, it helps to ensure that both parties have the same understanding of your relationship right from the first. This can be more difficult than one might think in international business where different languages and cultures are involved. Second, if there is ever a dispute between you and your partner, the piece of paper will go a long ways in getting it resolved. Lawyers are often criticized for focusing on the negative rather than the positive aspects of a business relationship, but this is because we have seen so many problems where the difficult issues weren�t addressed up front. Believe us, it isn�t good for anyone.

Pick your lawyer carefully here. A good lawyer, especially in international deals, will be able to protect your interests without killing the deal through �over-lawyering.� International business documents should be as short, simple and direct as possible. They should not contain page after page of �legalese.� They should be written in a fair way taking the needs to both sides into account, or they run the risk of offending the other party and ruining the relationship. It is possible to do all of this and still get the necessary protections in place for your company.

Well, you committed, you analyzed the market, you found the right partner and negotiated the right structure. Now all that�s left to do is to make the thing work � to actually sell your products or services overseas. As you can guess, this is the hardest step.

The starting point for success in this step five is to go back to step one. You are going to have to remain very committed to your international business and implement a solid plan. It is going to take, on an on-going basis, a tremendous amount of effort, time and (yes) money to get the business off the ground and make it successful. With the right partner, you have a great head start, but you are still going to have to be very involved to make it work.

Communications will be critical. You will need to listen very carefully to your partner. With static from different languages and cultures, this won�t be easy to do. Make sure that your partner sends people to your home office on a regular basis. At the same time, plan on periodic trips to your foreign markets to lend support and encouragement. Don�t just leave your distributors and sales reps to succeed or fail on their own. It has to remain a partnership, regardless of the title of your contract.

Flexibility will remain critical too. The actual business may deviate from what you and your partner originally thought. That�s OK. Keeping in mind that any significant changes will need to be documents in a contract addendum, it is OK to change your approach as you go along. In fact, in our experience, the best businesses change quite a bit.

Sometimes the changes are big. If your distributor or sales rep is extremely successful, that may lead you to a direct approach earlier than what you anticipated. On the other hand, if your distributor or sales rep doesn�t do well, you may need to think about trying something different. Sometimes this requires ending a business relationship, though this is never easy or fun. This must always be done very carefully, as most countries have laws that will come into play.

Our lawyers and staff are here for one purpose � to help your business succeed overseas. We have a lot of experience and a lot of expertise available for your use. We have handled international distribution matters for Oregon companies in all sorts of industries, from agriculture to high technology. We also work with excellent lawyers in many countries around the world, from Australia to Zimbabwe. (Well, OK, maybe not Zimbabwe, but at least to Vietnam.) We work closely with the Oregon state and US federal government offices specializing in international business development. Most importantly, we know how to work with companies to facilitate rather than impede their business. We look forward to hearing from you.