Business Abroad Drives U.S. Profits, but is SME sector being left behind?

For those businesses whom have not yet internalized that in today’s day and age the international expansion, whether by means of exporting, or foreign direct investment (FDI), must be an integral part of their operations, the article below offers a convincing argument. Yet, if a reader merely scans it, one factor clearly stands out: the list of beneficiaries of foreign expansion is dominated by well-known large U.S. corporations names.  Does it mean that international business for American companies is dominated by large corporate players and excludes the Small and Medium Enterprise (SME) sector?  Alas, the answer is both Yes and No!

Large U.S. corporate players have been dominant players in the international arena for centuries. These corporations have human and financial resources, infrastructure, global brand recognition and well-deserved reputations for quality.  Many SMEs have been also present in international markets, primarily exporting their wares to anywhere between one and three countries.  Yet, as the international arena has become increasingly competitive, it has been much more difficult for SMEs to enter new markets or compete on their own in foreign lands where they have been doing business.  All this at the time when a domestic slow down is forcing many SMEs to develop or expand their international strategies constraining them with tight lending markets, limited resources and increased regulation.

Despite such constraints there has been clear increase in SME international expansion.  Yet, much more can and should be done.

One highly effective tool for enabling SME international expansion is a Multidisciplinary Alliance.  Under such an arrangement a number of SMEs with complimentary skills combine and retain their brands and identities under a common umbrella for a common purpose.  For example we have had considerable success with the Princeton Healthcare Alliance, which counts among its participants various equipment manufacturers and service providers, doctors, healthcare facility managers, educators, hospitals, attorneys, financiers, logistics professionals and builders.  Such an alliance essentially creates a virtual corporate giant, and yet is still nimble able to draw on highly specialized skills of its participants in each functional area.  As Princeton Healthcare Alliance members, each participant (remove “s”) is able to pursue business opportunities normally not available to individual SMEs. From the client’s standpoint – those who usually comprise foreign governments or large corporate enterprises in host countries – such alliances are beneficial.  They provide a single point of contact and contract negotiation, transparent service providers, lower pricing, increased execution speed, better customization to address their needs, ability to choose best in class services and products, all under one easy to use common umbrella.  The success of the Princeton Healthcare Alliance has inspired creation of the Public Safety, Telecom, Hospitality and Education Alliances, all currently under development.

Thus, in order for U.S. SMEs to bolster their profits and assure long-term survival independent of the U.S. economic situation, senior management of practically every SME must develop and implement a viable international strategy.  Becoming part of an international busines alliance is one way to pursue international expansion.

I would be pleased to discuss other available techniques that companies may deploy to become “Fluent In Foreign Business”*, and take a rightful place among U.S. success stories of businesses excelling abroad.  A few of these companies are mentioned below.

Hope you enjoy the article and, as always, I welcome your comments and questions.

Business Abroad Drives U.S. Profits

By KATE LINEBAUGH And JAMES R. HAGERTY  The Wall Street Journal, July 25th, 2011

While the U.S. economy is struggling, U.S. corporations aren’t.

A third of the way through the second-quarter reporting season, earnings at companies in the Standard & Poor’s 500-stock index are the highest in four years, according to S&P analyst Howard Silverblatt, who predicts the second half will be even stronger. Yet there is little indication that the strong results will jump-start the U.S. economy and get the millions of Americans idled by the recession back to work.

About three-quarters of the companies that have reported so far have done better than analysts expected. Many of them—ranging from manufacturers Honeywell International Inc. and Caterpillar Inc. to drug maker Abbott Laboratories—raised their earnings forecasts for later in the year.

Corporate profits—one of the few areas of strength in the limp U.S. recovery—appear to be weathering the economy’s soft patch. But the gains in many cases have come from international operations, particularly in emerging markets that aren’t struggling with the debt problems and other uncertainties that have consumed policy makers in the U.S. and Europe.

“We aren’t creating jobs,” said Paul Huck, chief financial officer of Air Products & ChemicalsInc., on a conference call with analysts and investors Friday.

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Air Products, which supplies argon, oxygen and other industrial gases to retail, manufacturing and construction customers, expects to split its capital investments about equally between the Americas and Asia this year, but the balance is shifting. “We think that that number starts to tilt more toward Asia going forward,” Mr. Huck said.

Companies as diverse as industrial conglomerate United Technologies Corp., toy maker Hasbro Inc. and fast-food giant McDonald’s Corp. have pointed to strength in their operations outside the U.S.

General Electric Co., which reported a 21% increase in earnings to $3.8 billion for the second quarter, saw U.S. revenue in its core industrial businesses shrink about 3.4%. International industrial revenue, meanwhile, soared 23% to $13.4 billion, accounting for about 59% of the company’s total industrial revenue.

“We’re seeing a slow-growth environment here in the U.S.,” said GE Chief Financial OfficerKeith Sherin, in an interview.

The picture is much different in foreign markets, however. Each of GE’s international divisions logged double-digit revenue growth for the quarter, led by a gain of 91% in India. At its China business, revenues rose 35% to $1.2 billion, and orders increased 80%.

“Our global growth was especially strong,” Chief Executive Jeffrey Immelt said Friday on a conference call. The growth has helped GE build a record order backlog of $189 billion.

Earlier this month, Mr. Immelt told workers at a power-turbine factory in Greenville, S.C., that GE would continue to expand employment in the markets where it sells its products, adding that he aims to keep about half the company’s workers in the U.S. But every gas turbine manufactured by the 3,000 workers at the plant is destined for export, he said.

GE has about 46% of its 287,000-person work force in the U.S., where it gets about 40% of its revenue. The company’s work force shrank by 17,000, or around 5.6%, last year, including 1,000 American jobs. GE is adding about 125 workers at the Greenville facility this year and is also adding 1,000 jobs at its unionized appliance-manufacturing plant in Louisville, Ky.

U.S. multinational corporations cut their work forces at home by 2.9 million during the 2000s while increasing them overseas by 2.4 million, according to data from the U.S. Commerce Department. In all, U.S. multinationals employed 21.1 million people in the U.S. in 2009 and 10.3 million elsewhere.

High U.S. unemployment, concerns about the European debt crisis and slowing U.S. economic growth are leading to a “muted or grinding subpar recovery,” Honeywell Chief Financial OfficerDavid Anderson said Friday in an interview. “As a result, there is a need for both caution and flexibility in terms of your operating mind-set.”

Honeywell, which makes aerospace, building-control and safety products, said its second-quarter profit jumped 43% to $810 million, as sales rose nearly 15%. It bumped up its forecast for the full year.

The company is hiring engineers and sales representatives, Mr. Anderson said, but is looking for ways to improve productivity and reduce costs in parts of the business that don’t deal directly with customers.

Wary of increasing costs and jobs, given the economic uncertainties, companies are putting much of their big cash hoards into buying back shares.

GE generated $4.4 billion of cash in the second quarter, bringing its consolidated cash holdings to $91 billion. It plans to use some of its cash to buy back $3.3 billion of preferred stock it issued to Berkshire Hathaway Inc. during the financial crisis and to continue its common-stock buyback program.

Unlike many companies, Caterpillar is expanding its U.S. work force. The world’s biggest maker of construction and mining equipment, based in Peoria, Ill., said Friday it increased its global work force by about 17,000 position, or 15%, in the year ended June 30, excluding acquisitions and divestitures. About 6,000 of the new jobs were in the U.S.

Caterpillar, which reported a 44% increase in second-quarter profit to $1.02 billion, said it expects to spend about $3 billion on capital projects this year, roughly half of it in the U.S. The company is building new plants or expanding old ones in Illinois, Texas, North Carolina, Indiana and Arkansas.

Some of the investments will help the company serve the North American market, including domestic buyers who prefer a U.S.-made product, and free up overseas plants to supply China. But foreign demand is also a factor in Caterpillar’s U.S. expansion. About 90% of the large mining trucks Caterpillar makes in the U.S. are exported.

Sales in North America, which accounts for about 35% of Caterpillar’s revenue, rose 26% in the latest quarter, compared with gains of 34% in Latin America and 41% in the Asian-Pacific region. Overall revenue rose 37% to $14.2 billion.In its earnings statement, Caterpillar chided U.S. policy makers for a “lack of clarity” in such areas as government deficit reduction and tax policy and for “the absence of a long-term plan to improve the country’s deteriorating infrastructure.” A lack of confidence among businesses is impeding job creation, it said.

Caterpillar welcomed recent signs of slowing growth in China, where authorities are using higher interest rates to fight inflation.

“We all knew that market was way too hot,” Doug Oberhelman, Caterpillar’s CEO, told analysts in a conference call Friday.

A slowdown in China would allow companies to “reconnoiter” the Chinese market and make sure they aren’t adding too much capacity there, he said. He added that he doesn’t expect any “crash” of the Chinese economy and still sees strong long-term growth there.

Harley-Davidson Inc., whose earnings more than doubled in the second quarter, said retail sales of its motorcycles rose in the U.S. for the first time since the fourth quarter of 2006. Still, the company isn’t fully exhaling.

“We remain cautious about the (U.S.) economy,” said Keith Wandell, the Milwaukee-based company’s CEO. “We think the consumer is skittish.”

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* Please note that my latest book “Fluent In Foreign Business” on how to enter foreign markets and grow companies internationally, is now also available as eBook on amazon.com and Barnes and Noble (www.bn.com).