Using PRI to protect international franchise royalties and investments

By Alexander Gordin (reprinted from the June issue of the Franchising World magazine)

In my thirty-plus years of international business development and financing, I have met and worked with dozens of franchisors and investors who either took their companies abroad, or planned to do so.  Predominantly, their concerns were finding the right local partner, generating sales and winning against competition.  But one concern that I rarely heard voiced was: “What will happen to our company’s investments and royalties if the country we are operating in experiences a change of government and a new government goes on to expropriate our assets or change regulations that would affect our ability to conduct our business?  How would we manage if our business were to fall victim to terrorist attacks, war, civil unrest or other political perils?”  I began to explore reasons why fairly savvy business owners, franchisors and managers who routinely use tools like cargo, health or travel insurance, were hardly using insurance against political risks to protect their investments and income abroad.

There seemed to be two recurring answers: (READ MORE )

An Interview With Sergiy Arbuzov, the Governor of the National Bank of Ukraine

As Ukraine and Poland co-host EURO-2012 soccer (football) finals starting this week, we thought that it would be a good idea to spotlight these countries from the economic angle and track their development pre, during and post the EURO 2012 tournament.  Both these countries represent very interesting examples of emerging markets, each with a full set of issues, solutions, problems and potential business opportunities.  To help us achieve our goal we set up special pages on this blog called “Emerging Markets Spotlight  – Ukraine and Poland respectively.    On these pages we will profile each country and will attempt to highlight more interesting and pressing issues, both domestic and external.  We will also interview with various parties involved in economic landscapes of these countries.  Our first interview is with the Mr. Sergiy Arbuzov, The Governor of the National Bank of Ukraine.  Full text is found below

An Interview with 

the Governor of the National Bank of Ukraine – Sergiy Arbuzov.

National Bank of Ukraine

National Bank of Ukraine

June 8, 2012

Today, as the world economy overcomes financial turbulence and experiences probably the most difficult period  since times of Great Depression, we interview The Governor of the National Bank of Ukraine Sergiy Arbuzov to find out how Ukraine, and particularly its financial community, is dealing with the these complex economic times.  Governor Arbuzov believes, that today’s challenges and problems require non-standard approaches from all participants of the financial market. With this objective NBU recently suggested considering a possibility of inclusion of platinum in the international reserves of the central banks.

As of today, out of all precious  metals only monetary gold is included in reserves of the central banks; though values of other rare metals, such as silver, platinum, and palladium, etc., continue to grow. Leading economic experts consider these metals for possible inclusion as additional currency reserve metals. If the world financial community will support Governor Arbuzov’s initiative, one more useful financial tool for management of tumultuous processes in the world economic markets will be created.

Recently, the Publisher of Fluent In Foreign blog, together with the Governor of National Bank of Ukraine discussed the work of the National Bank of Ukraine over the last year and explored interest of investors in new tools of NBU, which are currently under development and review.  Exclusive excerpts of this interview follow below:

  • Governor, how do you assess the development of the economic situation in Ukraine already this year? What key factors determine it?

Ukraine has achieved significant progress in the implementation of a comprehensive strategy. Now we follow the large-scale transformation of all aspects of the economy and the social sphere. We introduce pension, customs, and tax reforms that are materializing into real results. Deregulation of the economy is taking place. The reform of the judicial system and criminal justice as well, is under the process of implementation. The National Anti-Corruption Strategy for the years 2011-2015 is approved. This year new laws to fight corruption started to operate. New Labor Code. – is under the process of devevelopment.

We have some success in the macroeconomic sphere. According to our estimates, in 2012 Ukraine’s economy will grow by 2-3%. As a result of stabilization in the sphere of public finance deficit of the State budget will amount to 1.8% of GDP. The level of inflation for the second year in a row beats minimum historical records, now it is 0, 6% in annual terms. Our inflation forecast for this year is about 5%. For Ukraine, it is an extremely good result. The National Bank of Ukraine will continue to make all the efforts to keep inflation stable at a low-level.

Development of economic situation in Ukraine is to a large extent dependent on external factors.  Together with the Government, we are following the developments in the global financial markets, and we have a comprehensive plan of action in case the negative external effects on the economy of Ukraine would happen.

  • How NBU would change its policy and support banks in case of a deterioration of the situation?

We will continue to strengthen the role of the hryvnia in economic turnover and dedollarize economic relations. We have already tightened supervision of the banking system, launched the international mechanisms for the protection of the reserves, currency exchange rate and currency market as a whole from the pressure of demand on the cash market.

Undoubtedly, the NBU must have additional tools to support the banking sector in the event of a worsening of the situation. We are aware of our responsibility and are developing these tools. We working together with the banking community and consulting with IMF concerning our activities. In addition to have a good feel of the market, we always communicate with bankers, domestic and foreign investors, as well as representatives of hedge funds.  We intend to continue this dialogue with the purpose of creation of  favorable conditions for investing in Ukraine.

  • What were main obstacles to the growth of investment in Ukraine last year? What did the Government and NBU do to make investors feel more comfortable?

I regularly meet with foreign and domestic investors and often hear complaints about imperfections of the legislative field, the bad reputation of the courts, overregulation and risks of working on the Ukrainian investment market.  Last year, the National Bank was focused on steps aimed at improving at least part of these issues.

Last year, with the Bank’s initiative, Rada adopted four important laws: on the protection of the rights of the lender; about improving the transparency of banks; about supervision on a consolidated basis; about the peculiarities of corporate governance in banks (adopted in the first reading). Moreover, the banking community and the international financial organizations were closely involved in development of each bill. This year Government adopted a law on the system of supporting deposits of individual persons. We handed over the withdrawal of problematic assets of banks from the market to the Fund supporting deposits of individual persons.

Also we simplified mechanism of repatriation of dividends to foreign investors: reduced package of documents, cancelled the confirmation of mandatory payment of all taxes from the income. In addition, we improved procedure of return on investment for operations of purchase-sale of securities on the stock exchanges. In the course of liberalization of the foreign exchange market, we have also allowed banks to conclude the currency swaps that would allow banks to attract cheap funds in the future, and issue other financial instruments both on domestic and international markets.

  • Which priorities and tasks of the NBU for this year? Is there among them to improve the investment climate? What specifically you can offer investors?

As contribution to the improvement of the investment climate, The National Bank carries out  the support of price stability in the country, promoting the stability of the banking system and support the economic policy of the Government. Of course, we will pay attention to other activities, for example, improving the functioning of the stock market, which should become the main source of long-term capital for domestic investment.

The market of investment gold coins is functioning already (as well as silver and platinum). By the way, there is a high demand for this tool. We are discussing the question of Ukraine’s Development Fund creation.  We plan an expansion of lending instruments for banks. In particular, we want to allow lending to enterprises that own a license for mining, using the license itself as collateral.

In the final stages is the development of the program, which deals with improvement of the current  payment systems in Ukraine. We want to solve the problem comprehensively. In particular, we aim to seriously increase the share of cashless payments, reduce the underground component of this market and develop a system of electronic money.

A lot already has been done in the arena of Land Bank creation. After all, our calculations show that the launch of the land reform will increase the volume of investments into the economy of Ukraine and will give an additional impetus to the development of the financial market. We switched to payments for external contracts with Russia in the national currency. Also in the final stages are talks with China. The projects on improvement of the financial literacy of the population have been launched. The Bank started broadcasting channel-Bank TV.

  • Is there intent by the National Bank of Ukraine to initiate  the issue of  inclusion of new financial assets as part of  global international reserves? What should be done to achieve this?

Searching of new approaches to the recent calamities and challenges that the world economy faced during recent years, is still very important.  In this regard, we pay close attention to the leading economies, as well as to the International Monetary Fund for development of innovations aimed at softening the world’s financial crisis and accelerating the recovery of sustainable growth of the world economy.

However, many of the initiatives undertaken, have a limited impact on the  emerging market countries (particularly Ukraine), mostly because the leading economies are themselves the beneficiaries of the innovative measures.   In this context, the National Bank of Ukraine appealed to the leadership of the International Monetary Fund with the initiative to consider the feasibility of expanding the spectrum of  international monetary gold reserves, and inclusion as part of them other  precious metals such as platinum.

On the one hand, the adoption of such a step would stimulate the general tendency of price increases for these metals on world markets. On the other, in contrast to countries, whose currency is freely convertible on internal markets,  economies with emerging markets do not have such advantages. Thus monetary easing  for them turns out to be much more difficult, because there will always remain risks of  impairment of their national currencies.  A reduction  of such risks and currency options for various countries could result from expansion of the list of monetary metals that are taken into account by the international community in the reserves of the central banks.

  • How will IMF’s support for your initiative on this issue affect the level of international reserves of Ukraine?

Of course the enrolment of new financial assets in international reserves in Ukraine will increase their volume. Now, when there has been some turbulence on world currency markets, it is necessary to maximally improve the potential stabilization of our country, increasing its international reserves is one such instrument. That is why the actions of the National Bank of Ukraine are primarily aimed at finding new sources of their replenishment. At the same time, as already stated, the question must be treated in a wider context. It is about finding the extra liquid instruments, which have a global recognition and can be used in international currency dealings. Under this perspective, we believe it is necessary to consider the interests of not one country, but of the entire international financial community.

  • Why the NBU is actively initiating increase of gold mining, and what will it offer to investors this year?

Ukraine has significant deposits of gold – more than 3 thousands tons. Given the significant growth of gold prices in the world, we started work on expanding gold production with the purpose of replenishment of the international reserves of the National Bank. To do this, the decision of the Cabinet of Ministers on gold-mining enterprise “Pivnichgeologia”  has been transferred to the balance sheet of the National Bank.  At this time, on the initiative of the National Bank, The State Service of Mining Exploration and Geology of Ukraine decided to issue to this enterprise special permits for subsurface  exploration of five new gold mines  Again I want to underline that following extraction of these deposits, gold in the future will be melted, processed and added to the international reserves of Ukraine.

  • What advice would you give to our readers on investing in Ukraine?

Investing in Ukraine is promising. The country was on the path of reforms and transformations. We do everything to ensure that investors receive high dividends in the future.

  • Thank You, Governor.

What is hindering your company’s expansion abroad?

TURNING THE TABLES – an industry on a comeback trail

As Fluent In Foreign expands its global network, we are always seeking to forge relationships with publications and other media resources, which  provide unbiased, thorough, interesting and useful coverage of international business issues.  It is my pleasure to announce that the Global Trade Magazine has become our latest media partner and we will be working together to promote international business development, highlight complex issues and feature success stories to help our readers and clients navigate their cross-border journeys.  This week’s post features two articles from the Global Trade Magazine. I hope you enjoy and as always welcome your comments.


By Warren Strugatch

The Cochrane clan of North Carolina began making furniture in the latnineteenth century, producing wooden benches, carved showcases and decorative mantels first from Charleston, then from Lincolnton. In 1905 Cochrane Furniture was formally incorporated and for the next nine decades its workers turned regional supplies of pine, maple and oak into tables, chairs and cabinets. Sales continued to grow and in 1982 the company opened a new factory. Payroll exceeded a thousand workers. In the management suite, a fifth generation readied to lead the company into the next century.The transition never happened. Bruce Cochrane, son of the company’s president, entered his 40s facing an industry in free fall. In 1997 his father and uncle sold the company to Chromecraft-Revington. The new owner soon emptied the factory and began laying off workers.

With no family business, Bruce Cochrane was at a crossroads. He found himself a business partner and—why not?—launched a consultancy specializing in sourcing Asian suppliers. The partners jetted to Asia and back twice each month and participated in China’s massive export boom. They were a small cog in a generational transformation that turned China, the world’s largest labor market, into a vast skilled-manufacturing workforce—and helped create that country’s burgeoning middle class.

Last October, Bruce Cochrane returned to Lincolnton to make an emotional announcement. Having reacquired the old family factory, Cochrane was now reopening it, installing state-of-the-art advanced manufacturing equipment, and rounding up customers for—of all things—a wood-furniture manufacturing business. In the grand, centuries-old tradition of North Carolina cabinetmakers, Cochrane named the company Lincolnton Furniture. Up went Help Wanted signs. In came the calls and the drop-in visits from folks who worked for his father and his uncle back in the day. He staffed up and by December was shipping Lincolnton solid-wood furniture to retailers across the country.

Meanwhile, the founder was reaching out to his wide network of overseas contacts, exploring export possibilities.

China? “Definitely on the radar,” he says.

The phoenix-like resurgence has made Cochrane something of a folk hero. Throughout the fall and into the spring, he has been taking phone calls from the Made In America crowd, getting chatted up by TV journalists and cable commentators, answering questions from media pundits and shaking hands with President Barack Obama, who proclaimed Cochrane’s job-creating virtues at a White House gala. A modest man who prefers citing his father’s legacy to touting his own projects, Cochrane insists his initiative is strictly economics.

“When I was in China,” he says, “I saw the hiccups in the supply chain. I saw the labor market changing. Workers have more choices today. Companies that depend entirely on Chinese labor are vulnerable. Now is a good time for Americans to return to manufacturing.”

Still, the opportunity to rehire workers laid off so long ago was gratifying—and worrisome. A number of his returning craftsmen hadn’t cashed a paycheck since the factory closed. Their choices had been few, really. In the towns and villages of the Piedmont Triad, the heart of the U.S. furniture industry, workers laid off from jobs that once employed their fathers and grandfathers looked fitfully for similar work, eventually giving up.

In launching a manufacturing company for the twenty-first century, Cochrane recalls advice formulated in the twentieth. “One of the things I learned from my father,” says Cochrane, “was that you don’t make good furniture, you hire good people who make furniture.”

Tens of thousands of furniture-making jobs disappeared over the past generation, as the industry thrashed about, pointed fingers, and ranted at their fate. Home to one out of every six furniture industry jobs in the U.S, North Carolina furniture manufacturers employed about 89,000 people in 1990; the number dropped to 81,500 the next year and continued falling. By 2005, more than a third of 1990’s jobs were gone. The bleeding continues at companies large and small. Since 2005, Furniture Brands International, the largest manufacturer of furniture in the U.S, has closed 11 of its 27 domestic factories, including nine in the state. Today, the Piedmont Triad region, home to most of the state’s furniture and decor manufacturing jobs, employes about 16,000.

As Paul Simon lyricized years ago, one man’s ceiling is another man’s floor. While U.S. furniture manufacturers blamed unfair competition and economic bad luck, their Asian rivals saw huge global opportunity—and seized it. In 1999, according to the Dept. of Commerce, the state imported over $13.1 million in furniture, while exporting about $2.6 million. For the next four years, spanning the industry’s greatest turmoil, imports grew 10.5 percent year over year, approaching $20 million in 2003. The new competitors never loosened their grip; imports today account for more than half of U.S. consumer furniture purchases.

Rather than capitalizing on the increasingly global furniture market, U.S. furniture companies essentially wrote it off. During this time of rapid globalization, U.S. exports remained, amazingly, flat. Viewed in this context, the industry’s horrendous contraction seems almost willful.

China, meanwhile, moved rapidly. From 1995 through 2002, furniture exports nearly tripled to $20 billion a year, displacing Canada as the top furniture exporter into U.S. ports, a position it continues to solidify.

Bad times can produce good lessons, and perhaps that’s what has happened here. In their struggle to survive, North Carolina’s furniture manufacturers have deployed various strategies, including mergers, cost-cutting, off-shore manufacture and integrated supply chain management, the more extravagant examples of which so blurred the distinction between imports and domestic products that even consumers who once championed Made in USA quality became suspicious of furniture described as domestically made. Today, nearly every North Carolina manufacturer sources components or labor overseas. Some Asian manufacturers whose low-cost look-alike exports once fueled tariff campaigns amidst cries of dumping and infringement have quietly morphed into today’s supply chain partners.

Meanwhile, the billions of dollars Chinese manufacturers were making in global markets began to fuel a massive expansion—call it trickle up economics—that continues to this day. Having absorbed the benefits of an economic expansion fueled by cheap exports, its citizens are now adamant about furnishing their lives with goods made by manufacturers they nearly rendered extinct. The emergence of the Chinese middle-class is an economic event that, like the preceding wave of aggressive exporters, has the potential of changing the economic paradigm by sheer dint of its size and appetite. Already, it has helped refuel the U.S. economy, emitting a rare ray of sunshine in what has been a dark, damp and dreary post-recession recovery. As American consumers learn to do more with less, Chinese shoppers have been lining up, shopping bags at the ready.

Mike Padjen, the state government’s point man for promoting furniture exports, and a veteran of many trade missions to China, believes Chinese consumers view North Carolina’s furniture as conveying greater status than domestic products, based on presumed higher quality. The fact that many American products are actually made in China, or other Asian countries, does not tarnish the mystique. Says Padjen: “Even American branded or designed furniture, which is made in Asia, has seen a big uptick in sales around the world and especially in China for what I perceive as similar reasons.”

This year, North Carolina’s manufacturers will export about $52 million in furniture to China. While the number is relatively compact, it’s growing fast, says Padjen, up nearly 500 percent over the last three years. That number is probably doubled by furniture manufactured in China or other parts of Asia working for U.S. brands.

Ethan Allen, the furniture giant known for its resolutely traditional home furnishings—George Washington if he came back to life could furnish Mount Vernon from one of its showrooms—has found China an enthusiastic consumer of colonial-style tables and chairs and cabinets. The Connecticut company opened its first furniture store in China 10 years ago in the city of Tianjin. Since then the chain has opened about 50 more stores, while maintaining heavy sourcing operations in China.

It’s hardly alone. Ashley Furniture Industries announced plans to open an undisclosed number of stores in China last year. In March La-Z-Boy, known for its upholstered recliners and other adjustable-seating pieces—a category known as motion furniture—announced plans to open several hundred branded retail stores in China. The Michigan firm is partnering with Kuka Home, one of China’s largest upholstery manufacturers and retailers, in order to reach a retail network of over 1,500 stores.

The Kuka-LA-Z-Boy pairing began last October in High Point, when several executives from the Chinese company were in town for the celebrated furniture market, long a global see-and-be-seen event. Like many Chinese manufacturers, Kuka had been diversifying, which in its case meant expanding its retail footprint even while shedding the manufacturing operations that had produced most of its inventory, as manufacturing in China became more and more problematic. In order to replace that inventory, company executives have hit the road and been striking deals.

Quite a few deals. Let Doug Collier, La-Z-Boy’s chief marketing officer and president of its international division, pick up the story.

“Our interest in China starts with our strategic goal of expanding our business, and a big piece of that is outside North America,” he says. “One of our core markets is China. Now, China is notoriously difficult when it comes to finding a good way to do business. We were reluctant to throw money at it because we didn’t have local knowledge. Then, we come across Kula. They’re a dominant retailer. You can’t go to a mall in China and not see them.

“China is young and fractionalized but it is a great growth market. Kuka will handle advertising and marketing. We will handle design and rely on our manufacturing expertise.”

Later this year La-Z-Boy plans to manufacture specifically for sale to Chinese, emphasizing smaller furniture and more streamlined lines. Forget the overstuffed pieces they sell in the U.S.: most overseas markets demand contemporary looks, preferring cool to cozy. La-Z-Boy accommodates them.

“A lot of [foreign] markets tend to be a little more contemporary” than U.S. shoppers, notes Collier. “They’re not looking for the overstuffed, soft” furniture Americans select. In that sense, he says, Chinese shoppers are more like Europeans than like Americans.

To hear Brad Miller talk, overlooking the Chinese market is pure folly. Miller is vice president for international sales at Hooker Furniture Corporation, the Virginia company that designs and manufactures furniture under such labels as Bradington-Young and Sam Moore, as well as its own lines.

“We sell to 38 countries right now, and China is one of our top markets,” Miller said. “There is huge demand there. They want branded American product lines. They believe our standards and our quality control are higher than they can obtain from domestic brands.”

While Hooker actually manufactures much of its products in China, as well as the Philippines, the company considers its Asian operations a U.S. outpost, staffing the plants with American supervisors overseeing local workers.

Like many U.S. brands in China, Hooker has tried different approaches over the years, generally getting its lines into multiple retail chains. This year Hooker switched to a single-distributor approach and now works exclusively with Alexandre, a dominant brand in cities across China.

Whereas Hooker’s products are positioned as “affordable luxury” in the U.S. and other Western countries, in China the brand’s positioning reflects that country’s living standards. While China’s middle class is clearly ascendant, it still lacks the per-capita spending power found in western customers. “In the U.S., we’re not the most expensive, we’re certainly not the cheapest,” Miller said. “In China, we cater to the top 5 percent of the market.”

Bernhardt Furniture, a leading brand based in Hickory/Lenoir, N.C., entered the China market in 2010, and has seen steady sales growth since, says Peter Hancock, the company’s vice president for international sales. Like Hooker, Bernhardt has opted for an exclusive distributor relationship with Alexandre. As has often been the case, Bernhardt has seen his company’s relationship with China grow more complex over time.

“Sure, we were impacted by Chinese imports 10 years ago,” he says matter-of-factly. “But we’ve been buyers of finished goods and supplies from Asia for 20 years, which is how we got to know Alexandres.”

The company’s most popular line in China, he says, is the Casa Bella collection. A traditional line of living room pieces featuring pin knotty cherry, walnut burl veneers and hand-forged metal dark leather accents, Casa Bella embodies the kind of heavy, traditional furniture that once symbolized the North Carolina industry. As has been the case with so many traditional furniture lines, demand softened to the point where the end was near. Production had stopped on new merchandise last fall, when orders began coming in from China.

Slated for oblivion, Bella Casa got a second wind, and now is produced primarily for the Chinese market. The irony of this switch is not lost on many who lived through the furniture industry’s darkest days, times when the words Made in China could get a man into a fist fight in High Point and plenty of other places besides.

“Times change,” says Lincolnton Furniture founder Bruce Cochrane. “You have to put the past behind you. We all have. It’s about the present, and planning for the future.”

Across North Carolina, and wherever furniture is made, China is definitely part of that future.

Global Trade Magazine



By Patrick Dooley, Global Trade Magazine

Steve McMenamin says his success was “a complete accident.” He neededlaminated wood for comfortable, eco-friendly sunglasses, but when he arrived in the foyer of a nearby distributor asking about wood for eyewear, the receptionist nearly laughed him out of business.

Sixteen years later, Iwood is thriving—thanks in part to that awkward introduction. The wood laminator he was checking out had a lucrative niche: distributing to designers of interiors for private jets used by Hollywood’s rich and famous. The cackling receptionist accidentally caught the ear of a company executive who saw Steve’s odd request as a fantastic opportunity. It turns out the unused bits of wood were too small to be useful for the jets. Steve had stumbled upon a steady supply of the world’s finest woods—like Makassar ebony, zebrawood, bubinga. Steve used the cast-offs in the production of glasses he retailed through Barney’s in New York and Beverly Hills.

But Steve always had his eye on Europe. Fashion, he says, is “like the minors in baseball: You have to work your way up.” And Europe is the majors. After years on the domestic trade show circuit, Paris’ Premier Class would be like the World Series.

Just one problem: The odds of being accepted to the Premier Class show in your first decade are roughly equal to getting drafted to the majors out of junior high—unless, like Steve, you serendipitously bump into the show’s main organizers at a New York expo and they fall in love with your rare-wood sunglasses.

With their endorsements in his back pocket, Steve reached out to the federal government’s Commercial Services office in Indiana, home to Iwood’s manufacturing site. It was a smart move. CS staffers wrote the letter of recommendation that secured Iwood’s admission to Premier Class, and then gave Iwood a grant to cover booth space costs.

Iwood stormed Premier Class 10 years ahead of schedule. European Fashion magazines took note, and the glowing reviews that followed helped establish Iwood as a top-shelf brand in boutiques across many of Europe’s most fashion-friendly markets.

You’d think breaking into Milan’s Petti, the next great show, would be a lock. But officials from the U.S. Embassy in Milan, attending Premier Class, told Steve not to hold his breath: Petti, they told him, is for established brands only.

You can probably guess the ending: when he arrived back at Iwood headquarters five days later, an invitation to Petti was waiting on his desk.

So how did it get there? Call it an accident.

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