They WILL be asking you to pay bribes. What will you do?

Several years ago, I had to travel unexpectedly to Kiev from Moscow, while not having secured an entry visa in advance. My Ukrainian clients had petitioned the Ministry of Foreign Affairs and had arranged for a visa to be processed at the airport upon my arrival. Once my plane landed, I was met at the gate by an airline representative and escorted to a Consul’s desk for visa processing. It took about 15 minutes to complete the necessary paperwork under the watchful eye of the immigration officer on duty.

As I handed him the completed application, he asked me for the $157 visa fee.  I handed him $160 in eight twenty-dollar bills. He carefully looked at the money, looked at me in a meaningful manner, stamped my passport, and said, “I won’t hold you up.”  It took me a few moments to grasp the meaning of his words, but as I realized that he made no attempt to get me my change, it hit me.  He gracefully was trying to shake me down for three! dollars.

Back home if someone tried this kind of stunt, I would have had a fit and would not allow anyone to get away with anything like this. Yet, sometimes things abroad are not that simple.  It is all about the upside vs. the downside. My upside was three dollars, and the fact that I would momentarily prevail in a good against evil struggle.  My downside was that the official and his cronies could have made my life miserable at the airport. From performing exhaustive luggage and personal searches, to finding fault with my paperwork and making me wait for hours while making me late for my meeting, to denying me entry altogether.  These were the things that could have awaited me had I started an argument over this tiny amount of money.

Thus I took my passport, gave the official the best look of disdain I could muster, and walked away.  Sometimes it is really necessary to lose the battle, to try to win the war.

As I was walking through the airport that day, my mind wandered to another situation, 10-years earlier, where on a class trip to Hong Kong with my graduate school class we were scheduled to go to China for a day to visit several factories and businesses.  At the border, our class was detained since the last name of one of my classmates of Irish heritage was misspelled on the visa paperwork:  McAndrews instead of MacAndrews*.  The Chinese border guard explicitly requested a $20 bribe to overlook the situation and let us through.  Our chaperone, as the representative of a fine educational institution had politely but firmly refused.  Well, that refusal, which incidentally was the right stance to take, cost the entire class two and a half hours at the border crossing waiting as the border officials took their sweet time processing all other entrants and ignoring us until we threatened to cause an international incident.   Once through the border, we of course were completely off schedule and had to drop several stops on our planned itinerary.  We ended up missing two very valuable appointments and only got to see a bicycle factory, an event in itself not worthy a special trip to China.

Sometimes wars may be lost, even though we win the battles along the way.

*Name has been changed

They WILL be asking you to pay bribes.  What will you do?  The legally and politically correct answer: DON’T DO IT.  The real answer is IT DEPENDS. And before all the conscientious readers jump on me, and all the Federal law Enforcement agencies begin breaking down my doors, here is what I mean:

There are three kinds of corruption: petty bribes, upfront bribes, and success fee bribes.  Petty bribes are like the ones described in the stories above. You can either take a righteous stand to have your life made miserable by an official over a few dollars, or you can go along with it and chuck it off to the cost of doing business. It may not be the right thing to do, but this is real life, not a movie.

The second kind of bribe is the worst kind. Some government official or private company employee will ask you for money, either directly or through an intermediary, telling you that payment is necessary to get your project done, or your contract signed off.  DON’T DO IT. Not only is it illegal, but also it is not smart, as you have absolutely zero recourse if your project does not happen, and you stand to lose all your money.  This kind of bribe uses the same strategy as extortion.  If people are trying to extort your business, paying them will not ensure peace; it will only invite more extortion.

The third kind of bribe is called the success fee bribe, and it is the most complicated of the lot.  Here the government official, or private individual, who is helping you to circumvent the system, will want to pre-negotiate a split of the profits on the backend for helping to successfully complete a deal.  According to the Foreign Corrupt Practices Act (FCPA) even offering or discussing what looks like a bribe to a government official is illegal for any U.S. citizen, or business entity with ties to the U.S. Further this type of arrangement requires people who are accepting the bribe to have superb trust in the person giving it. As the officials not only have their jobs at stake, but also are usually waiting to receive rather large payments after the deals are completed.

The good news for you is that unless you are a well-known and trusted supplier or service provider, such arrangements won’t even be discussed.  When and if someone approaches, do not even engage in the discussion, as it is fraught with peril.

Will you lose business? Absolutely.  How can you mitigate, if not eliminate this risk?

Bring something of value to the table; something that will make your offer compelling enough to the buyer to make them consider your offering over the competition.  One example may me bundled financing (longer term and/or a lower rate). This often works in emerging markets where local financing is either quite expensive, or often not available.  Some other examples of value added, which could be used are: speed of delivery, open credit terms (which can be extended with the use of Export Credit Insurance) and of course unique product or service offerings.

In supplying goods and services into the public sector bidding always remember that the local interests usually do not need outsiders to set up schemes for spending tendering government contracts and organizing kickbacks.  This means that outsiders are often used as pricing patsies and their chances of winning are slim to none. Direct participation in government tenders  also increases risks of being drawn into corruption schemes. Thus it is advisable to stay away from tendered government contracts all together.

Make you anti-corruption stand known and firm. If you deliver a consistent message to your counterparties, you will earn respect down the road, as even most corrupt politicians and businesspeople oftentimes respect principle and conviction.

Take, and have all your relevant employees participate in a workshop and study Foreign Corrupt Practices Act (FCPA). Create an internal FCPA compliance policy and distribute to all employees, vendors and insert it as part of every bid and tender your company submits.

Build your business in compliance of FCPA and you will assure yourself sound good night sleep.

This post is an excerpt from my  book “Fluent In Foreign Business™”  published in May by the Princeton Council on World Affairs (www.princetoncouncil.org) and available on http://www.amazon.com/FLUENT-IN-FOREIGN-Business-Expanding/dp/1462862780  and at other major book sellers in hard cover and soft cover editions, as well as eBook http://tiny.cc/oimha  © 2011 all rights reserved

USTR.gov Headlines March 25th

Ambassador Kirk Encourages TC Williams Students to Out-Educate and Out-Compete Global Competition 3/21

Today, Ambassador Kirk met with students of T.C. Williams High School in Alexandria, Virginia to discuss how America can win the future through education. During his visit, Ambassador Kirk spoke with Mr. Andrew Orzel’s AP Government and AP Economic classes.

Weekly Trade Spotlight: Trade in Georgia 3/21

This week, Ambassador Kirk will travel to Atlanta and meet with small business leaders about President Obama’s plan to win the future for Georgia families, workers, and businesses of all sizes.

Many Georgia companies of all sizes are selling abroad and hiring local workers. Last year, Georgia exported almost $29 billion worth of goods, nearly double the amount exported ten years ago. Georgia’s small businesses are responsible for 30 percent of the state’s total exports of merchandise (2008). In fact, goods exports in 2008 supported more than 194,000 jobs in Georgia, and many of those jobs were with one of the 8,812 small- and medium-sized Georgia businesses who proudly sell their Peach State products overseas.

Ambassador Kirk Hosts Trade Roundtable in Rio de Janeiro 3/21

On Sunday, Ambassador Kirk hosted a roundtable discussion about U.S. exports and jobs. The conversation was held at City Hall in Rio de Janiero, Brazil with 50 participants from the U.S. Chamber of Commerce’s Business Council Investment Conference.

President Obama’s Weekly Address on Latin America 3/21

This weekend, President Obama and Ambassador Kirk traveled to Brasilia, Brazil, to kick-off the President’s trip to Latin America.  In his weekly address, President Obama discussed his trip to Latin America and the importance of strengthening our economic partnership with the region to create good jobs at home.

USTR.gov Headlines – March 19th

Seizing Opportunities to Support American Jobs, American Values in Trade
03/18/2011

Ambassador Kirk wrote a guest blog post on WhiteHouse.gov earlier today. Check it out below.

“Seizing Opportunities to Support American Jobs, American Values in Trade”
President Obama has set an ambitious goal of doubling U.S. exports by 2015, supporting at least two million additional American jobs. As the President departs for Latin America to promote U.S. exports and U.S. jobs, we at the Office of the United States Trade Representative are continuing to work on three pending free trade agreements – with Korea, Panama, and Colombia – that can support these National Export Initiative goals.

More

Watch Ambassador Miriam Sapiro’s Testimony before the House Ways and Means Subcommittee on Trade
03/17/2011

Today Ambassador Miriam Sapiro is testifying before the House Ways and Means Subcommittee on Trade. You can find a link to the live feed of the hearing on the Committee’s website here starting at 10:00 a.m. EST.

DAUSTR for Korea Affairs Bryant Trick Talks Trade and Education with Wisconsin Student Dani Kaiser
03/15/2011

Last week, Deputy Assistant United States Trade Representative for Korea Affairs Bryant Trick sat down with Dani Kaiser, a student from Parker High School of Janesville, Wisconsin. Dani was in Washington, D.C. as a 2011 Washington Seminar scholar for the program’s 39th Annual Field Study. The program is sponsored by local hometown supporters, including the School District of Janesville and the Janesville Education Association, and directed by the Advanced Placement Government teacher, Joe Van Rooy. During the meeting, Dani discussed with Bryant her interest in the U.S.-Korea trade agreement and the U.S. strategic relationship with Korea.

Made in America: Small Businesses Buck the Offshoring Trend

My Colleague Rob Levin, of NY Enterprise Report, brought to my attention the article posted below.  It very eloquently highlights trends, which position U.S. manufacturers to recapture some of the ground ceded to China and other low-cost offshore markets. Trends such as: rising prices of Chinese labor, rising shipping costs, advances in high tech automation and the need to be closer to the client, ability  to react quickly with design updates or small batch production runs, all combine to provide fertile soil for U.S. producers to bring production of numerous product categories back home.
In discussing this subject, I very much would like to avoid many political issues, which surround offshoring: loss of labor, trade sanctions and many others.  I am looking at the subject strictly through a business prism and believe that Mr. Koerner of Wired makes a very compelling case for U.S. producers, who have been offshoring their production, to take a long and hard look at bringing their manufacturing operations back home and at the same time shape their business going forward to be more competitive in today’s global and fast changing environment.
Quilt illustration: MWM GraphicsMade in the USA— fast, flexible, 100% automated, and best of all no outsourcing required.
Quilt illustration: MWM Graphics
Photo: Garry McLeod 

In early 2010, somewhere high above the northern hemisphere, Mark Krywko decided he’d had enough. The CEO of Sleek Audio, a purveyor of high-end earphones, Krywko was flying home to Florida after yet another frustrating visit to Dongguan, China, where a contract factory assembled the majority of his company’s products. He and his son, Jason, Sleek Audio’s cofounder, made the long trip every few months to troubleshoot quality flaws. Every time the Krywkos visited Dongguan, their Chinese partners assured them everything was under control. Those promises almost always proved empty.

As he whiled away the airborne hours, Krywko made a mental list of all the manufacturing glitches that had nearly wrecked his company. There was the entire shipment of 10,000 earphones that Sleek Audio had to discard because they were improperly welded, a mistake that cost the company millions. Then there were the delivery delays caused by the factory’s lackadaisical approach to deadlines, which forced the Krywkos to spend a fortune air-freighting products to the US. Even when orders were produced on schedule, Krywko wasn’t too pleased with the situation: The company always had precious cash tied up in inventory that took months to arrive after the prototypes had been approved.

One reason for abandoning China is quality: Some products are too flawed to sell.

The headaches had finally become too exasperating to bear. And so, on that flight, he turned to Jason and said that he was done with Dongguan. “I can’t do it anymore,” he said. “Let’s bring it home.”

Jason had been thinking the same thing.

When the Krywkos returned to the US, they searched for a manufacturing partner with the tools and expertise to producetheir earphones. They found one just a few miles away from their Palmetto, Florida, headquarters: Dynamic Innovations, a maker of ruggedized computers and other equipment. Sleek Audio quickly signed up.

Today, a year since Krywko’s decision to go against the offshoring tide, Sleek Audio has a full-scale manufacturing operation that can be reached via a 15-minute car ride rather than a 24-hour flight. Each earphone costs roughly 50 percent more to produce in Florida than in China. But Krywko is more than happy to pay the premium to know that botched orders and shipping delays won’t ruin his company. And so far, the gambit appears to be paying off: Based on enthusiastic customer response, Sleek Audio is now projecting 2011 to be its most profitable year ever.

For US firms, the decision to manufacture overseas has long seemed a no-brainer. Labor costs in China and other developing nations have been so cheap that as recently as two or three years ago, anyone who refused to offshore was viewed as a dinosaur, certain to go extinct as bolder companies built the future in Asia. But stamping out products in Guangdong Province is no longer the bargain it once was, and US manufacturing is no longer as expensive. As the labor equation has balanced out, companies—particularly the small to medium-size businesses that make up the innovative guts of America’s technology industry—are taking a long, hard look at the downsides of extending their supply chains to the other side of the planet.

“Companies are looking to base their decisions on more than just costs,” says Simon Ellis, head of supply-chain strategies practice at IDC Manufacturing Insights, a market research firm. “They’re looking to shorten lead times, to reduce the inventory they have to carry.” When accounting giant KPMG International recently asked 196 senior executives to list their top concerns for 2011 and 2012, labor costs ranked below product quality and fluctuations in shipping rates and currency values. And 19 percent of the companies that responded to an October survey by MFG.com, an online sourcing marketplace, said they had recently brought all or part of their manufacturing back to North America from overseas, up from 12 percent in the first quarter of 2010. This is one reason US factories managed to add 136,000 jobs last year—the first increase in manufacturing employment since 1997.

The US certainly isn’t on the verge of recapturing its past industrial glory, nor can every business benefit by fleeing China. But those that actually build tangible goods should no longer assume that “Made in the USA” is an unaffordable luxury. Unless a company is hell-bent on selling the cheapest goods possible, manufacturing at home makes more sense than it has in a generation.

China’s big manufacturing advantage has been cheap labor, but wages—while still low compared with those in the US—have risen sharply in recent years.

Think of offshoring as a technology. Like any relatively young and successful innovation, it enjoyed a honeymoon period during which everyone scrambled to adopt it, lest they miss out on the gold rush. But now many companies are starting to grapple with this new technology’s limitations.

The core component of offshoring, of course, is cheap labor. In 2000, when Congress was preparing to vote on normalizing trade relations with China, political opponents of the bill gave their colleagues satchels containing three pennies—supposedly the average hourly wage for Chinese workers. That figure was exaggerated, but the spirit of the stunt rang true: US manufacturers couldn’t possibly compete with China’s blend of rock-bottom wages and rising technical savvy. Once the bill passed, the offshoring trickle that started in the 1980s became an unbridled flood.

Rising Cost of
Chinese Labor

China’s big manufacturing advantage has been cheap labor, but wages—while still low compared with those in the US—have risen sharply in recent years.

Source: US Bureau of Labor Statistics

Chinese factories deftly took advantage of this situation by making it easy for even the smallest US startups to find manufacturing partners. Factories polished their English-language outreach and established ties with professional middlemen. Soon anyone with a blueprint and modest capital could hire a Chinese factory to stamp out 20,000 units of a video tripod, an ergonomic joystick, or an espresso machine.

But the system has started to overheat. Manufacturing wages more than doubled in China between 2002 and 2008, and the value of the nation’s currency has risen steadily. It’s now under tremendous international pressure to let the yuan appreciate even more, and the country must cope with worrisome inflation at home (food prices rose by nearly 12 percent last year). And though Chinese workers still earn a fraction of what their American counterparts do, the rising costs of labor there are prompting companies to reevaluate their production strategies.

Once they do, these businesses often realize something profound: China isn’t the great deal they expected. A January 2010 survey by the consulting firm Grant Thornton found that 44 percent of responders felt they got no benefit from going overseas, while another 7 percent believed that offshoring had actually caused them harm.

One big reason for this growing dissatisfaction is quality. Like Sleek Audio, countless US firms have received long-awaited shipments only to discover that the products are too flawed to sell. This problem is due largely to China’s success: Factories are so overbooked that they have no choice but to favor their biggest clients. The smaller customers can end up facing long delays or hastily assembled products (or both).

“If you’re a huge company like Apple, you can get the whole factory to work for you,” says Paul King, founder of Hercules Networks, a New York company that makes charging kiosks for mobile devices. “You can put your own process in place, you can have your own quality control. But without that kind of power, you’re just another customer, and they don’t really care.” King cycled through three Chinese factories from 2008 to 2010 before giving up on offshoring due to persistent manufacturing errors—LCDs that winked out after six months, lights that broke when tapped even gently. The quality woes have disappeared now that Hercules is making its kiosks in the US, King says, and the company is thriving.

To deal with their production backlogs, many Chinese factories have started subcontracting work to facilities located in the center and western areas of the country, where labor costs are cheaper than on the industrialized coasts. But this usually makes the problems even worse. “They’ll subcontract your work without providing the subcontractor with the same training that you provided to them,” says George T. Haley, a professor of industrial and international marketing at the University of New Haven who specializes in Chinese business. “Then all of a sudden, your quality assurance goes all to hell.”

In addition to quality issues, subcontracting also exacerbates a second major problem with Chinese manufacturing: the lack of safeguards on intellectual property. The more subcontractors that get their hands on a design, the greater the odds of IP theft. Peerless Industries, an Illinois company that makes flatscreen and projector mounts, learned that lesson the hard way. “Knockoffs of our products started showing up in markets here in our own backyard,” says Michael Campagna, Peerless Industries’ chief operating officer. “It wasn’t necessarily our supplier doing it—it was our supplier’s supplier.”

Rising Shipping
Costs

The expense of moving goods overseas dropped during the recent financial crisis but is once again climbing fast, adding to the cost of offshore manufacturing.

Source: Harper Petersen & Company

Finally, sheer distance remains an intractable problem. Shipping costs nose-dived in the wake of the 2008 financial crisis but have since crept up as oil prices drift back toward $90 a barrel. And then there’s simply the time it takes to get goods from China. With credit hard to come by these days, companies are reluctant to tie up cash in inventory that takes three to six months to manufacture, ship, and clear customs.

When you include all the various drawbacks and costs that don’t appear in a factory’s price quote, manufacturing certain high tech goods in China can end up being surprisingly expensive. In 2008, three McKinsey consultants analyzed the production of midrange servers, taking into account everything from shipping to quality to exchange rates. They concluded that fabricating such devices in China made sense in 2003, when the required labor was 60 percent cheaper there than in the US. At that time, they estimated, the per-unit savings ran about $64. But this advantage, McKinsey concluded, had vanished by 2008: “After factoring in the higher labor and freight costs, we find that the former offshore savings have turned negative—a burden of an extra $16.”

When Mark and Jason Krywko started looking into how they could return Sleek Audio’s manufacturing to the US, they quickly realized there was only one way to make the move feasible: Minimize the role of humans on the assembly line. And that meant redesigning products to take advantage of automated tools. After all, Chinese labor may be cheap—but a robot works for less.

Sleek Audio’s SA6-R earphones featured plastic side panels that the Chinese factory had to weld into place by hand. The company decided to automate the process, replacing human labor with robots. The Krywkos redesigned the entire product around a solid aluminum center that the speaker gets fitted into; assembly requires neither welding nor human hands. “Two or three years ago, there was no way we could have afforded to do that,” Mark Krywko says. But robots have become markedly more skilled and less expensive.

This has become a common strategy among businesses that elect to manufacture in the US: Redesign with labor costs in mind. In essence, the companies are innovating around cheap labor. “We’ve redesigned products five or six times, trying to reduce the number of connectors, the number of screws, anything that would require additional labor,” says Albert VanLeeuwen, chief financial officer of QSI Corporation, a Salt Lake City manufacturer of rugged data terminals that has resisted the siren call of Asia. “With some of the products we’re introducing this year, we’ve decreased the labor content 40 percent.”

One of the most important cost-cutting innovations has been the development of less labor-intensive methods for making the printed circuit boards that are essential to all electronics. Fabrication used to require numerous workers, who would place the parts on each board by hand. “Now we put the board in one side of a 160-foot-long chain of machines, and it comes out the other side finished—all the thousands of connections soldered perfectly,” says Dana Morey, executive vice president of the Morey Corporation, a Chicago-area electronics manufacturer.

Another way to limit production cost is to swap in less expensive though equally resilient materials. When Hercules Networks’ King severed ties with China, he had an engineering firm analyze his charging kiosks. It found that the Chinese factories had been using an unnecessarily heavy metal that could be replaced easily with an aluminum composite. King estimates that this and other design tweaks have enabled him to make his kiosks in the US for barely 5 percent more per unit than in China—and he thinks that soon there won’t be any premium.

Even if a company gets stuck paying a little extra, though, it’s often a wise trade-off, especially for companies that need to be nimble enough to make changes on the fly. For example, many businesses look to bigger players to determine the price of parts. If a Goliath decides to order millions of a certain component, the Davids can benefit by incorporating the suddenly cheap widget into their products as well—but only if they do it quickly, while loads of that part are being made. Executing such rapid changes is difficult when the factory is 8,000 miles away.

When time is of the essence, a short supply chain is an obvious advantage.

This is a major reason why Networkfleet, a San Diego wireless vehicle-management company, decided to keep its manufacturing in the US after flirting with China two years ago. “In my industry, the guys who drive costs are the guys who make, say, the individual components for OnStar modules,” says Diego Borrego, Networkfleet’s founder and vice president of product engineering. “Those are high-volume pieces, so we need to be able to adapt our devices to take advantage of that hardware. To stay cost-competitive, I need to be able to make those changes fast.” Networkfleet concluded that it couldn’t make speedy alterations if it partnered with a contract factory in Shenzhen.

Large companies don’t only determine parts for their smaller brethren; they also create demand for innovative products that complement their own. (Think, for instance, of the enormous accessories industry that’s sprung up to support mobile phones and audio players.) The best way for companies to capitalize on new demand generated by something like the iPad is to act quickly, getting their wireless keyboard or speaker system on the market before the competition. When time is of the essence, there are obvious advantages to having a supply chain that’s thousands of miles shorter than your rivals’.

“Our sales team had a meeting in October and found out there was no articulating wall mount available for the Samsung 9000 TV,” says Campagna of Peerless Industries, which is now manufacturing in Aurora, Illinois. “Within four weeks, we’d designed a new mount and had it on the market. No way could we have done that in China. It probably would have taken us eight to 12 weeks.”

True, Peerless probably could have made those mounts in China for a bit less. But the company would have entered a market already flooded with competitors instead of leading the way.

Cheaper Robots

For US manufacturing to make sense, factories must make extensive use of automation. That’s getting easier, given that the cost of robots with comparable capabilities has decreased precipitously in the past two decades.

Source: International Federation of Robotics

A company that sells tens of thousands of units a year may no longer see the wisdom of sending its manufacturing to China. But what if that company wants to scale up and sell millions? Big customers get more than just the best price quotes and most prompt service from Asian factories; they also frequently receive massive government subsidies and perks. When a nation offers to pay hundreds of salaries and throw in free land to boot, an ambitious company can find it hard to say no.

But there is evidence that large corporations are no longer automatically swayed by these goodies. In October 2009, NCR decided to stop manufacturing its North American-market ATMs at facilities in China and India and make them instead in Columbus, Georgia. Last October, General Electric elected to invest $432 million in four new US manufacturing facilities that will build environmentally friendly refrigerators and water heaters. These are precisely the sort of companies that stand to benefit the most by heading overseas. But they determined that the smarter long-term play was to narrow the physical distance between R&D and production. “By colocating all the people who are involved in bringing a product to life, we increase collaboration and problem-solving and shorten development time,” says Kevin Nolan, GE Appliances’ vice president of technology.

To be sure, the age of offshoring is far from over. The largest companies will continue to manufacture overseas more often than not—the raw economics still demand it. Once a company gets big enough, it can afford to hire full-time staff in Asia or build its own factories outside Shenzhen, taking advantage of cheap labor without incurring many of the headaches that haunt smaller players. And even if dozens of little companies decide to stay in the US, they can never create as many manufacturing jobs as a Fortune 500 behemoth—especially if the smaller companies are using robots.

It’s also a safe bet that Asia will fight to win back those smaller companies. It will likely do this not by lowering prices but by ironing out the procedural kinks that have made offshoring an increasingly dicey proposition. Factories in the Chinese interior will try to prove their reliability, aided by government programs designed to improve the nation’s infrastructure. Quality-control regimes will be revamped to decrease the number of lemons that slip onto container ships.

Meanwhile, other countries will continue to offer an alternative to either staying in China or coming home. Vietnam, for example, is trying to position itself as a viable option for Western tech companies, a sales pitch strengthened by the fact that Intel recently opened a 500,000-square-foot factory in Ho Chi Minh City.

But distance will continue to matter, for one simple reason: In dynamic systems such as supply chains, the tighter the connection between nodes, the lower the risk of something going haywire. That risk can be tolerated when the benefits of stretching the connections are too great to ignore. But when those benefits diminish, it’s time to consider building a system that is stable by design. And once America’s formidable innovation muscle is focused on keeping manufacturing nearby, new and inventive systems for reducing labor costs—without going overseas—will be developed quickly.

After all, it’s one thing to gamble on a new design, quite another to entrust your company’s fortunes to the whims of a Dongguan factory owner.

The Emerging Markets

Although the article below deals exclusively with Emerging Markets investment opportunities via listed securities, it lays out a strong case, which could easily be extrapolated into a decision-making framework for those involved in the tangible areas of international business – exports and foreign direct investment (FDI).  Although the latter two areas of participation require more diligence and risk mitigation, and some of the decision analysis is counterintuitive to that of investment money manager.

The main difference between investors in listed securities and direct investors, of course is liquidity and ability to divest one’s holdings rapidly.  Listed investors will be well served to diligently study the markets and to follow the path recommended in the article below. Direct investors, in addition to the analysis presented in the article,  would also look at risk mitigation through political risk insurance, which covers expropriation, political violence, currency inconvertibility and loss of income.  They would consider putting in place contingency procedures for evacuation of personnel and their families, adequate security and various business exit scenarios.  Thus by definition, taking on this type of risk would dictate selection of  only those investment opportunities, which adequately compensate those contemplating such an investment. Sounds simple?  Well, it isn’t.  Headlines, crowd euphoria, and lack of in-depth understanding of target countries’ risk profile often skew direct investment decision-making and prevent companies from taking advantage of solid, financially rewarding direct investment opportunities.

For those wishing to export, the country buy/sell analysis below offers a good starting point to see most attractive markets, yet it should be viewed from a different angle.  For instance, India is marked as a Sell country for investment, since as the net energy importer it will be negatively affected by the high oil prices.  Yet for the U.S. exporters of alternative energy goods and services, this represents a terrific opportunity to serve already rapidly growing Indian alternative energy industry. Thus for the exporters analysis of the Sell markets in general has to be performed in the Judo fashion of using the negative economic factors to one’s advantage.  Remember, every negative event, has numerous positive implications and brings with it export opportunities.

I fully agree and have written extensively, that despite the challenging landscape, Emerging Markets represent one of the most attractive investment and trade opportunities available today.  To participate one has to be well informed, risk averse, nimble and FluentInForeign™.

Despite the Gloomy Headlines, Opportunities Are Cropping Up in Unexpected Places

By BEN LEVISOHN as seen in The Wall Street Journal, Saturday March 12, 2011

DANGER SIGNALS are flashing all over the emerging markets. Growth is slowing. Inflation is heating up. And political instability is upending governments in the Middle East and North Africa and could spread further.

In the past, a trifecta like this would prompt investors to dump all emerging-market holdings and hide out in safer countries until conditions improve.

But those who bail now could miss out on big opportunities. For the first time since the financial crisis, the emerging markets aren’t trading in lockstep. Some countries look strong despite—or because of—the recent turmoil, with solid growth prospects, little inflation pressure and the ability to capitalize on rising oil prices. Among them, say money managers and market strategists: Russia, Mexico, Thailand, Taiwan, Turkey and the Czech Republic.

The overall statistics are gloomy, but they tell only part of the story. Since the start of the year, the MSCI Emerging Markets Index has dropped 2.2%—compared with a 5.7% rise for the Dow Jones Industrial Average and a 3.5% gain in the broader MSCI World Index. Investors have pulled money from emerging-market mutual funds for six of the past seven weeks, according to EPFR Global, a financial firm that tracks global fund flows.

“Most emerging markets are past the recovery stage,” says Ousmene Mandeng, head of public sector advisory at Ashmore Investment Management in London.

But emerging markets aren’t the monolith they used to be. Russian stocks, for example, are up 6.4% since Dec. 31. Hungary isn’t far behind, jumping 5% so far this year. Morocco has gained 3%, the Czech Republic is up 2%, and Thailand has edged up 0.8%.

In fact, the average “correlation” between the MSCI index and its component nations has dropped to 0.53 on March 2 from 0.8 on Dec. 31, according to financial-data firm FactSet. (A correlation of 1.0 means two assets move in lockstep; a correlation of minus-1.0 means they move in opposition. The closer the figure is to zero, the less correlation.)

By another measure, the emerging markets are less connected than they have been since at least 1995. Goldman Sachs Group Inc. recently measured the difference between actual economic activity in 24 emerging-market nations and the historical trend, a spread known as the output gap. It found that there is more divergence now than at any point since at least 1995.

Markets were almost as differentiated during the debt crisis of the late 1990s as they are now. Investors who bet smartly back then were rewarded for their courage. For the 12 months beginning July 1, 1997, the MSCI Emerging Markets Index lost 28.4%. But Turkey soared 108%, while Hungary and Morocco gained 38% and 29%, respectively.

The battle now brewing is between economic growth and inflation, says Dominic Wilson, co-head of global macro and markets research in the economics group at Goldman Sachs. “Good growth and low inflation is better than the opposite.”

So far in 2011, a portfolio of the five emerging-market countries with the most industrial-production growth beat those with the least by 4.7 percentage points, according to FactSet. The nations with the smallest month-over-month rise in inflation have outperformed ones with the largest by 0.75 percentage point.

Solid economic fundamentals are meaningless, of course, amid political chaos. Egypt’s stock market dropped 20.4% this year before trading was halted on Jan. 27, despite an economy that grew 5.5% during the third quarter or 2010, the most recent data available. Markets throughout the Middle East and North Africa remain on edge—but the goings on there have little to do with what is happening in Southeast Asia or South America.

“The increase in political turmoil is making investors look more at the idiosyncratic risks of each emerging market,” says Alex Bellefleur, a financial economist at investment bank Brockhouse & Cooper Inc. in Montreal.

Another big wild card is oil prices. From June 2009 to the end of 2010, oil and emerging markets largely moved higher in tandem, on expectations of stronger global growth. The 26-week correlation of the two asset classes, measured on a weekly basis, averaged about 0.88, according to Thomson Reuters Corp.

This year, however, the correlation has declined from 0.83 on Dec. 31 to 0.49 this week. The difference: Oil prices now are rising not on growth expectations but on supply fears. That has hurt oil importers such as India but helped exporters like Indonesia, where stocks have risen more than 10% since Jan. 28, as protests in Egypt erupted.

Where to Buy—and Sell

Given all of these factors—growth, inflation, political stability and oil—many money managers and strategists cite Russia, Thailand, Taiwan, Turkey and the Czech Republic as the best plays now.

Russia is the most sensitive to oil-price swings, with about three-quarters of its public companies in oil and energy. The correlation between oil and stock prices there is 0.92, the highest among emerging markets. Yet despite the recent run-up, Russia’s price/earnings ratio based on 12-months of analyst earnings forecasts is just 6.8, well below its historical average of 8.1.

“Russia is one of the cheapest markets in the world,” says Louis P. Stanasolovich, president and chief executive at Legend Financial Advisors Inc. in Pittsburgh.

It is cheap largely because earnings are projected to soar from rising oil prices. The trend could reverse—but few analysts expect that scenario. In the near term the main question is whether prices will rise to $120 a barrel or more, or remain near the current $100, says Jason Press, an emerging-markets strategist at Citigroup Inc.

Taiwan is another favorite among money managers and strategists. The HSBC Taiwan Purchasing Managers’ Index, a growth measure, jumped by 9.3% in January from a 5.4% rise in November, signaling a strengthening economy. Yet its consumer-price index, the main inflation gauge, rose just 1.33% year over year in February.

Mexico, too, looks attractive. Its central bank recently raised the range of its growth forecast to 3.8% to 4.8% from 3.2% to 4.2%. And like Indonesia, Mexico is a net oil exporter. It also should get a boost from a recovering U.S. economy, since exports to its northern neighbor make up nearly a quarter of its GDP.

Thailand, Turkey and the Czech Republic also seem like good bets based on their solid growth prospects and moderate inflation, say strategists and fund managers.

Where should investors tread most carefully? Start with India, a major energy importer. Inflation is running high and growth is expected to drop to 6% this year from 8% in 2010, according to Lombard Street Research. Yet despite the recent selloff, India’s stocks aren’t cheap, with a P/E of 14.6, compared with a long-term average of 13.8.

“The impact of oil prices and a sticky inflationary environment overshadow the long-term domestic consumption and growth story in India,” says Joel Wells, co-portfolio manager of theAlpine Emerging Markets Real Estate Equity Fund.

China is facing many of the same problems, and it isn’t clear whether policy makers, who have boosted interest rates three times since October, will be able to engineer a soft economic landing while controlling prices.

“Long term, China looks good; short-term there are headwinds,” says Jose Morales, a portfolio manager at South Korea-based Mirae Asset Global Investments.

Funds and ETFs

The best way to play individual countries is through exchange-traded mutual funds. You can track Russia via the Market Vectors Russia exchange-traded fund, Mexico via the iShares MSCI Mexico Index ETF and Taiwan via the iShares MSCI Taiwan Index ETF, among others.

Placing individual country bets isn’t for the timid, however. Emerging markets are notoriously volatile, and single-country ETFs are susceptible to big swings. “These ETFs can have enormous years on the upside and enormous years on the downside,” says Howard Sontag, chief executive of Sontag Advisory LLC in New York.

With correlations breaking down, the safest way to play emerging markets is to invest in a broad range of nations. You might assume that diversified index funds or ETFs would be a good vehicle. But those tend to be dominated by the biggest companies in the biggest markets—China and India among them.

“You can’t just invest in the aggregate index,” says Nuno Fernandes, a professor of finance at the International Institute for Management Development in Lausanne, Switzerland. “You have to do a better job of choosing where to invest.”

An actively managed mutual fund might be a better alternative, because the manager, in theory, has the expertise to make the difficult strategy calls that most individual investors can’t. To find the most experienced, scour fund websites for information about managers, and look for tenures of five years or longer or other emerging-markets experience.

The top performer during the past three years has been the Aberdeen Emerging Markets Institutional Fund, which gained 11% annually, according to investment-research firm Morningstar Inc. As of the end of January, it had 17% of its portfolio in Brazil, about one percentage point more than the MSCI Emerging Market Index—and just 5% in South Korea, versus 7% for the index.

The best performer on a five-year basis is the Wells Fargo Advantage Emerging Markets Fund, returning 13% annually. As of the end of February, Korea made up just 10% of the portfolio versus 15% for its benchmark, while Mexico accounted for 5.6%, more than the benchmark’s 4.5%. The fund focuses on companies more than countries, says portfolio manager Jerry Zhang.

The menu of actively managed portfolios is growing. Firms have rolled out 23 new diversified emerging-market funds during the past 12 months, according to Morningstar, compared with six in the year-earlier period. There are 135 actively-managed emerging-market funds overall, according to Morningstar.

A caveat: Most actively managed funds lag the index over time. And for some of the firms rolling out new funds, this will be their first emerging-markets product. Among them: Marsico Funds, Baron Funds and Fred Alger Management Inc.’s Alger Funds.

Michael Kass, manager of the Baron Emerging Market Fund, says the firm will apply the same investing discipline it has used in its other funds. Alger Funds says it has hired managers with extensive emerging-markets experience. Marsico says it launched its fund because it had been finding many emerging-market companies it liked but that didn’t fit its existing portfolios.

Other new funds, however, are established portfolios being made available to U.S. retail investors for the first time. The Brandes Institutional Emerging Markets Fund, for instance, is a new U.S. version of a long-running Canadian fund. The new fund is down 2.27% for the past month, but the Canadian version has gained 8.62% a year during the past three years, placing it in the top 3% of funds in its category, according to Morningstar.

The strategy has been in place since 1994, says Gerardo Zamorano, director of investments at Brandes. The fund has large positions in South Korea and Brazil.

“A good emerging-market fund covers the bases on all the countries,” says Karin Anderson, a mutual-fund analyst at Morningstar. The key, she says: “You have to be comfortable with the individual managers.””

USTR.gov Headlines

Starting today we will bring you a weekly summary of the headlines coming out of the Office of the U.S. Trade Representative.

Readout of Today’s Meeting of U.S. and Colombian Officials 3/11/2011

Today senior officials from USTR and the Colombian government continued their engagement on issues related to the pending trade agreement between the countries. They agreed to meet again in Washington, DC, within two weeks.

Opinion on Doha Round negotiations by U.S. Trade Representative Ron Kirk 3/11/2011
Please note new comments by United States Trade Representative Ron Kirk today on the future of the Doha Round; these can be found in an opinion piece posted on Reuters.com at the following link:
http://blogs.reuters.com/great-debate/2011/03/11/moving-doha-forward-the-u-s-view/

Readout of Today’s Meeting of U.S. and Colombian Officials 3/10/2011

Today Deputy United States Trade Representative Miriam Sapiro, along with senior officials from other U.S. government agencies, met with a high-level delegation from the government of Colombia. The meeting took place at the Office of the U.S. Trade Representative in Washington, DC. The officials had a productive discussion about issues related to the U.S.-Colombia trade agreement. Discussions will continue tomorrow.

U.S. to Host APEC Senior Officials Meeting 3/10/2011
The United States will be kicking off its host year for the Asia-Pacific Economic Cooperation forum (APEC) with a Senior Officials Meeting this Friday and Saturday, March 11-12, in Washington, D.C. Senior Officials from each of the 21 APEC member countries will gather to discuss issues such as strengthening regional economic integration, expanding trade, promoting clean energy, and advancing regulatory cooperation and convergence.

Expanding Internationally. Is it right for you?

I am pleased to announce that Wharton Magazine has added me to their Contributor roster. Below is an excerpt form the article published in the Wharton Magazine blog  March 3rd.

For any business in today’s world, not expanding internationally is practically a sin. Not only does such expansion provide diversification and additional revenue, it also exposes one to different methods of doing business. In addition, the U.S. business that expands overseas can benefit back home from increased cultural sensitivity, competitive intelligence, new opportunities and better management practices…. read more at

http://www.whartonmagazine.com/blog/

Get Ready for a Growth Supercycle

I happen to subscribe to the theory that, despite all the economic and political problems, the global economy is an a long-term positive growth trend, which is driven by the development of the emerging markets around the world.
The article below lays out a strong summary case to support this theory.

By IAN BREMMER
as published in the Wall Street Journal March 2, 2011
With the turmoil rattling the Middle East these days, it’s easy to miss the rising tide of optimism about the global economy. The good news is coming from multiple sources. A recent CEO survey from PricewaterhouseCoopers, for example, found a sharp spike in the number of business leaders who see strong growth for the year ahead. And for a long-term forecast, a report from analysts at Standard Chartered bank has produced the biggest buzz.

Standard Chartered argues that about 10 years ago, the global economy entered a “new super-cycle” of extended growth, one “driven by the industrialization and urbanization of emerging markets and global trade.” The expansion is likely to last for “a generation or more.” Forecasts in the report run through 2030.

We’ve seen this kind of surge before, say the bank’s analysts. The first supercycle, driven by the industrial revolution and the emergence of the United States, developed between 1870 and 1913. The second wave, powered primarily by Europe’s postwar reconstruction and a rise in Asian exports, ran from the end of World War II until the early 1970s.

The especially good news, according to the report’s authors, is that though the third super-cycle will be driven mainly by emerging-market countries, particularly in Asia, “the winners will be global.” Caveats apply. Business cycles will ensure the ride won’t be a smooth one, and some countries and regions will fare better than others. The report’s assumptions depend on “a backdrop of relative peace, or certainly no global war, and stable monetary policies.”

The argument is compelling. Growth trajectories from China, India and Brazil to Indonesia, Turkey and sub-Saharan Africa speak for themselves. Americans and Europeans should be relieved to hear that other countries can do a bigger share of the world’s economic lifting.

Yet, a global economy driven by emerging market states comes with big risks. First, the storm now cutting its way across the Arab world should remind us that emerging markets can be a lot more politically and socially volatile than established powers. Developing states with authoritarian governments can appear stable for decades, but they often come apart quickly.

We’re also talking about a global economy that will depend for an ever larger percentage of its growth on countries where policy making is usually a lot less transparent and predictable, investment climates are more vulnerable to the whims of politicians and bureaucrats, and corruption is often endemic. Once confidence grows that an emerging power has actually emerged, and as it builds a larger stake in geopolitical stability and global growth, its interests will become more closely aligned with those of other governments. Its political institutions will mature and operate with greater predictability. In Brazil, for example—where a president regarded as a leftist slowly helped build political consensus in favor of disciplined, market-friendly macroeconomic policy—that process is well underway.

On the global stage, getting from here to there will involve a fundamental shift in the international balance of power. And history shows that transitions on that scale don’t come without market-moving conflict. Growth itself can be a force for stability, as in the decades before World War I and immediately after World War II. But as the authors of the Standard Chartered report admit, every supercycle also yields its share of losers. At a minimum, this new supercycle will produce a competition that provokes nationalist passion and politically motivated protectionism in some quarters.

The other big problem is that a global economic growth cycle driven by developing states will generate overnight industrialization on an unprecedented scale, as hundreds of millions of new consumers migrate toward an emerging middle class. Until new energy technologies gain a global foothold, we can only guess at what this surge of activity will mean for competition for oil, natural gas and other scarce commodities, for the quality of the world’s air and water, for the politics of climate change, and for the prices we all pay for food and other staples.

Standard Chartered’s 20-year forecast may well prove wrong. A similar projection of global growth in 1990 would have included assumptions about long-term production for the Soviet Union, and many of the problems that development will create could cut this supercycle short. But there are plenty of reasons to believe the world could be in for another sustained period of growth.

Mr. Bremmer is president of the Eurasia Group.

The Ship Modeler

Ship Modeling News from Clare Hess

Site Title

“Love recognizes no barriers. It jumps hurdles, leaps fences, penetrates walls to arrive at its destination full of hope.” — Maya Angelou

Fluent In Foreign Business

Helping To Grow and Protect Your Business Abroad

Emerging Market Insights

How to make a killing in Emerging Markets without losing your shirt?

Ideas That Work @ GIDASPOV.COM

Strategy | Creativity | Innovation | Fundraising | Marketing

Nu Leadership Revolution Blog

“Helping Emerging Leaders Gain the Competitive Advantage in the Future"

Mike Z's Blog

Exploring the causes of cancer throughout the world

Bucket List Publications

Indulge- Travel, Adventure, & New Experiences

Acceler8Success

Sharing Information, Insight & Perspective About Entrepreneurship

bizrisk.wordpress.com/

We Help Insurance Agencies Stand Out

The WordPress.com Blog

The latest news on WordPress.com and the WordPress community.

%d bloggers like this: