Export Opportunities Challenge US mid-Market Companies

Ed Marsh | Sep 5, 2011

Great Article

Came across this article (Global export opportunities challenge US mid-market companies to identify niche market solutions) from Financial Times (this article is provided to FT.com readers by mergermarket—a news service focused on providing actionable, origination intelligence to M&A professionals. www.mergermarket.com)  and decided it is worth providing nearly in its entirety (below - but please also use the link to ensure copyright compliance.)

It neatly captures many of the issues facing American companies:

    • company "accidentally" "caught wind" of an export opportunity "It knew absolutely nothing about any Asian markets, let alone how to gain access to the market for its products and services. Like most US small and mid-market companies, it lacked even the most basic information on foreign markets for its products."

    • requirement to look at export markets to meet revenue growth requirements "many companies are forced to come to terms with the fact that they can no longer rely on America’s large, consumption-based market providing them with the growth opportunities to which they have grown accustomed."

    • market diversification "challenges and the opportunities facing mid-market America as a whole: the urgent need for companies to reinvent themselves, to identify and expand their products into new, wealthy foreign markets, and to diversify their customer bases away from a domestic market destined for slower growth."

    • comfort level/familiarity with the home market "The issue of the domestic market and how it is prioritized emerges with nearly all the private, small and mid-market companies interviewed for this article. In many cases these companies’ innate conservatism manifests itself in a tendency to focus on the home market, which they know. In many cases this preoccupation can result in their failure to take any meaningful steps towards exporting at all."

    • resource constraint "Small manufacturing companies don’t have time to research foreign markets" and "funding their expansion plans require."

    • niche market focus - really means strategically understanding how export fits into the broader corporate objectives and then carefully selecting markets which offer the best, diversified opportunity to satisfy the strategic goals

Plan, Prep & Execute

The stumbling blocks nearly all boil down to lack of familiarity with the process and the myriad of tools provided by the US Government (under the National Export Initiative) as well as states, localities, trade groups, etc.

A commitment to export, and a modest allocation of resources (financial and management time) is all that is required to start using the proven Consilium Method.

A solid plan is created, the internal and external infrastructures are developed and then the plan is tactically executed in digestible phases.

For companies facing domestic growth limitations and concerned with inadequate market diversification, there really isn't a substantive reason to avoid export.   Consilium can serve as a capable advisor and assistant in launching an initial program, revitalizing a languishing one or tuning a robust program.

Article (again for easy reference, but please use the link to ensure access to all related content)

Earlier this year a salesman at a small Rhode Island-based filtration and industrial sand company called Holliston attended an out-of-state industry conference at which he caught wind of a large potential sales opportunity in Singapore. The intelligence that Mark Mueller picked up was vague, but the potential opportunity was too huge to ignore given that it could mean that the largest market for drinking water in the world had a need for the kind of specialized filtration sands that Holliston produces.

Holliston had one small problem, however. It knew absolutely nothing about any Asian markets, let alone how to gain access to the market for its products and services. Like most US small and mid-market companies, it lacked even the most basic information on foreign markets for its products. Holliston’s predicament is hardly unique, with recent surveys showing that as few as one-third of US mid-market companies export. The good news is that those same surveys point to that percentage more than doubling in just three years’ time as many companies are forced to come to terms with the fact that they can no longer rely on America’s large, consumption-based market providing them with the growth opportunities to which they have grown accustomed.

Until the housing crisis decimated the construction industry, Holliston had been able to rely on such domestic opportunities as the provision of its specialized sands for golf courses, parks and sports fields. Now, with such opportunities few and far between, it is taking leads like the enigmatic one in Singapore very seriously.

Holliston’s interest in markets outside the US was piqued earlier this year when it won a serendipitous order for its filtration sand for use in an aquarium in the central Asian Republic of Georgia. It did not take long for the company’s sales team to grasp from this that the global opportunities that existed for Holliston to provide the multiple varieties of refined sands used in water filtration equipment and the specifications of other large industrial customers had the potential to propel the company’s current gross revenues of USD 6 to 8m into the big league.

Holliston’s story is similar to that of many other small and mid-sized businesses based in the Providence, Rhode Island area, where the American industrial revolution was born more than 220 years ago. Indeed, the condition of many of the state’s industries epitomizes the challenges and the opportunities facing mid-market America as a whole: the urgent need for companies to reinvent themselves, to identify and expand their products into new, wealthy foreign markets, and to diversify their customer bases away from a domestic market destined for slower growth.

Overcoming complacency

“We were definitely complacent,” concedes David Ashton, the President of Gripnail, when asked why the Providence, Rhode Island-based manufacturer of niche industrial metal fasteners for insulation did not start seriously focusing on foreign markets before the US financial crisis began to take its toll on the wider economy. However, the company appears to be making up for lost time, with its exports as a proportion of sales nearly tripling in the years since 2006.

As is the case with most private companies, Ashton was reluctant to provide any detailed financial information about Gripnail, revealing only that its sales were somewhere between USD 5m and 10m per year. He also pointed out that the company, which emerged from an Employee Share Ownership Plan in 2004, had to spend the first few years after the buy-out investing in its domestic business to secure a base from which it could expand overseas.

The issue of the domestic market and how it is prioritized emerges with nearly all the private, small and mid-market companies interviewed for this article. In many cases these companies’ innate conservatism manifests itself in a tendency to focus on the home market, which they know. In many cases this preoccupation can result in their failure to take any meaningful steps towards exporting at all.

However, such procrastination did not hold back Gripnail, as it pursued what Ashton described as a “stability from diversification strategy”. The company’s recognition that it needed to maintain production volumes in order to keep its costs low as the saturation of the US market loomed ever nearer was also a key driver of its increased export focus.

“We make mature products in a mature industry,” Ashton said of Gripnail’s niche, complicated product offering, qualities that he believes act as a de facto barrier to entry. “Moving to new markets was the logical next step.”

But, as with Holliston and its desire to find out about the mysterious Asian filtration opportunity, Gripnail needed outside help to execute its export plans. As with a number of other mid-market companies in the Providence area, Ashton opted to take advantage of a unique program offered by The Chafee Center, a strategic consultancy which operates within nearby Bryant University. The Chafee Center is headed by Raymond Fogarty, assisted by Gerald Cohen, in coordination with Dr. Madan Annavarjula who heads the international business program at Bryant University, and provides its students with the opportunity to create business plans and assist the more than 200 companies the consultancy firm engages each year with their strategic international needs.

“Small manufacturing companies don’t have time to research foreign markets,” Ashton observed, a view shared by many mid-market company managers, including that of Holliston.

Ashton puts the identification of viable, potential customers and distributers in markets where its products can be used, at the top of Gripnail’s export ‘to do’ list. The identification of any material regulatory information or developments, particularly environmental ones, which could impact the company’s opportunities in a targeted market also feature prominently on the list of things mid-market companies need to know.

Holliston’s director-treasurer, Paul Baillargeon, pointed to the company’s need to find out which countries are looking to replace their filtration systems media, or where environmental conditions are likely to create such a need in the near future, as its priorities.

“We need contact lists of [filtration systems] manufacturers in Europe and we need to know more about the waterworks systems in use in Europe,” Baillargeon said, referring to his unconfirmed belief that significant opportunities lay on the other side of the Atlantic as a result of contaminated water supplies in many parts of the Continent.

Gripnail’s export strategy is more advanced, having identified some years ago those countries, such as Australia and South Africa, which use the same duct insulation system and standards as those its products serve in the US. It has since gone on to develop products that enable it to move beyond what Ashton called “low hanging fruit” to markets in Europe, the Middle East and Latin America.

Brazil, a large and lucrative market for exporters all over the world, is on its list, with the names of individual companies that fit its customer profile having been flagged up by the students at Chafee in a comprehensive and highly professional report..

Export trend challenges some corporate strategies

An intriguing example of how the recent drive towards exporting can strain strategic decision-making at American companies with entrenched, traditional mid-market mindsets can be found at NATCO Home Furnishings, a family-owned, West Warwick, Rhode Island-based manufacturer. When the company’s 85 year-old chairman, Bob Galkin, told this news service in an interview in June that it was taking concrete steps towards exporting its products outside its core domestic market for the first time in its 95-year history, the move was viewed as a real harbinger of change taking place at the heart of the American economy. After all, it’s one thing for smaller, struggling businesses to look abroad for growth that has dried up at home, but quite another for an established and highly-successful company with more than 1,000 employees and what one local industry source described as “a USD 275m dollar business” to take on the export mantle.

Unfortunately the ultra low-profile company, which supplies a number of the country’s largest retailers via a well-established global supply chain that includes wholly-owned production facilities in China, has been unable to make any progress with Galkin’s previously-stated export initiative. While NATCO, whose day-to-day management is headed by its President, Michael Litner, recognizes the logic of diversifying its customer base away from the US market as much as other businesses in the region do, the company’s specific circumstances make the proposition less compelling. Unlike the US market saturation that loomed in Gripnail’s future, for example, NATCO’s production capacity remains fully absorbed in meeting the demands of its existing US customers, thereby making the many challenges and costs of moving into unknown markets harder to justify. In addition, the commoditized nature of the home furnishings industry that NATCO competes with lower cost producers in, makes it a less obvious engine of export growth than other higher value-added sectors where American companies possess clear competitive advantages.

Vision vs pragmatism

Even so, it would not be surprising if some viewed with irony the contrast between NATCO’s caution and the meaningful steps undertaken by a much smaller player in the crowded coffee market to get its products into foreign markets. But this is exactly what Susan Mills and her daughter, Nicole Markarian, are exploring at Mills Coffee Roasting Company. As with many other family-owned manufacturers, this 150 year-old company’s decision to identify new markets was driven by its growing awareness of the limited potential for domestic growth. Mills expressed particular concern about the weak financial position she has seen at many of the smaller, independent retailers that make up the company’s existing market.

Markarian, who has taken on responsibility for Mills’s international expansion as well as the online retailing strategy it is on the verge of launching, said that the company has been studying the idea of moving into foreign markets for a number of years now. Its current market comprises some 2,200 customers, most of which are high-end New England-based wholesale accounts, which brings in between USD 5 and 6m in revenue. This is just half what the company, whose margins have come under pressure recently because of high commodity prices, was able to generate some ten years ago.

The US coffee market is highly competitive and the costs of breaking into larger supply chains prohibitively expensive for small players. This scenario left Mills with little choice but to come up with a shrewd and aggressive expansion strategy which entailed the establishment of a gateway into the hottest trend in the coffee business, the growth of the single-serve market. The key to opening up this gateway lies in the establishment of a special relationship with Dov Glucksman, the Massachusetts-based inventor of a patented, break-through innovation in single-serve technology. Glucksman’s Appliance Development Corp (ADC), has developed a coffee delivery system that claims to overcome the biggest obstacle to the widespread adoption of single-serve coffee: the environmental damage caused by the large number of small plastic or metal coffee capsules that are a feature of this consumption model. Mills has begun distributing its coffee in a unique 100% recyclable plastic brewing compartment that is used in Glucksman’s Brew 1 single-serve coffee system.

In terms of new markets, Markarian believes that the less widespread adoption of single-serve coffee in Europe, particularly in the UK, as well as the more rigorous environmental consumer preferences that exist there, provide it with a real growth opportunity. With the aid of the consultancy services offered by the international team at Chafee, Mills Coffee has singled-out a number of high-end UK hotels as the entry point to this market. Looking further ahead, Markarian sees Hong Kong and Singapore as markets that offer opportunities as well

“We’re into the things that they like,” Mills says of the UK market, with her daughter adding that UK consumers were raising their expectations in terms of environmental issues as well as quality.

Such bold export initiatives on the part of so many small Rhode Island companies stands in marked contrast to the pragmatic commercial strategy that characterizes NATCO. Only time will tell whether the company’s cautious strategy was the prudent course of action or whether it epitomized the myopic, US-centric mindset that many view as the root cause of the massive trade deficit that has put the country in its current vulnerable strategic position.

However, it would be impossible to criticize NATCO for deciding not to jump aboard the export bandwagon alongside so many others, even if this trend is widely viewed as the most important development taking place in US manufacturing today. Who would second-guess a company that has enjoyed such longstanding commercial success, remains 100% family-owned and is completely debt-free in the aftermath of a financial crisis which has brought so many other manufacturers to their knees?.

It is also worth noting that NATCO’s enviable cash position combined with its lean management structure, which is capable of swift decision-making, buys it the time that smaller, financially and operationally weaker companies lack. If it does decide, after the rigorous cost-benefit analysis it may soon undertake, to board the export train a few stops down the line, it will be positioned to move quickly and decisively. It will certainly not have its plans held hostage to the lack of long-term funding that currently stands between many other Rhode Island companies and the well-developed and viable export strategies they are desperate to execute.

Manufacturing exports constrained by lack of long-term capital

Kevin Redmond, the CEO of Mearthane Products Corp. (MPC), based in nearby Cranston, Rhode Island, is definitely one private company executive who was not cast in the traditional, mid-market mold. His profile is more in line with that of the visionary, unpredictable entrepreneurs who have given America its uniquely dynamic business culture. He would not hesitate for a minute to use the company’s surplus cash to exploit the astute export opportunities he has meticulously identified, if only he had it. Unfortunately for MPC and other innovative and promising nearby companies, such as the fast-growing jewelry manufacturer and retailer, Alex and Ani, any such expansion remains on hold until external investors have agreed to provide them with the funding their expansion plans require.

MPC has outlined an export strategy that aims to take advantage of the opportunities created by the Asian supplier base’s focus on low cost at the expense of quality and technology. This strategy is specifically focused on opportunities in printer and office machine developer rollers and other machinery.

However, the company, whose private equity investor, Seacoast Capital, has managed to accumulate a 60% stake, is currently preoccupied with the need to raise another USD 3 to 5m. Along with so many other mid-market companies, at least a part of these funds will be used to consolidate MPC’s domestic position.

While Redmond was initially resigned to a further dilution of his equity, he revealed recently that he had held encouraging discussions with the Rhode Island Economic Development Corporation, which could result in its provision of loan guarantees.

MPC’s plan entails focusing on the higher value added elements of its developer roller business, meaning the formulation and compounding of the thermoset polyurethane needed to produce high performance applications. These would then be shipped in a partially complete state from the company’s Rhode Island facilities to lower cost local markets where the less technical, labor-intensive secondary fabrication processes would be handled. MPC would ideally establish its own local production facilities, possibly via acquisition, or it would utilize local strategic suppliers/partners who would fabricate and deliver the product in the relevant markets.

Alex and Ani, for its part, has engaged Delaware-based Gates and Company to help secure financing for the wide array of growth projects the rapidly expanding jeweler has planned. By the end of the year, the company is scheduled to open a storefront in Johannesburg, South Africa and several store-within-a-stores in El Corte Ingles outlets across Europe – all of which will be the first physical presence outside the US. The jeweler is also working on placing its products in a Chinese high-end online retail start-up to gain further exposure in Asian markets. These new openings come on the heels of seven retail stores the company has opened in just the past year in the US.

On top of the expansion of the company’s retail footprint, Alex and Ani is launching several new product lines. The Rhode Island based company has already obtained vintage sunglass molds from a local contact – a relic from when the state was known as the jewelry capital of the world. The company sees eyewear as a complement to its of mid-priced costume jewelry and accessories. But Alex and Ani’s ambitious CEO Giovanni Feroce also sees the company expanding into beauty products and branded household items such as towels and blankets.

Feroce said that Alex and Ani is seeking a total of USD 5m to USD 10m for everything it is working on, which he believes will result in it becoming a USD 50m company in the next few years. The company has already doubled last year’s revenue of USD 4.6m and sees sales increasing as the holiday season approaches, Feroce said. The jeweler has not yet obtained the funding it needs to spur its expansion plans, but should be able to secure some kind of investment soon, said Feroce.

Financing is also going to be an issue for supply chain management (SCM) firm Banneker Industries when it finally decides to launch its business in China, said President and CEO Cheryl Snead. Using debt to finance the purchase of warehouse space and trucks is a typical path for many companies, but equity financing is an attractive option, Snead said. Partnering with someone knowledgeable about the country that also has a stake in the company could be the better alternative than funding it through a massive loan, she said. “I’d rather have 50% of something than 100% of nothing,” she said.

The Banneker CEO’s husband, Roland Snead, who originally ran the company alongside her, branched out by creating a consultancy called Global Bridge International that complements the SCM. Global Bridge cannot be included among the many newcomers to the export fad, having begun looking for ways to provide US companies with direct access into the Chinese market nearly a decade ago. It has since moved on to include other BRIC markets, especially the emerging African nations that have formed strong trade links with China.

Global Bridge’s access throughout China has been developed via what Snead described as the extremely solid relationship it forged many years ago with a partner based in Harbin, the country’s twelfth largest business area.

US companies are able to access the Chinese consumer via Snead’s establishment of ‘American showrooms’ which circumvent the many trade representatives and distributers which can create unnecessary and sometimes damaging barriers, inefficiencies and intellectual property issues between buyers and sellers. Aside from the risks that dishonest intermediaries pose to companies entering unknown markets, there is also the issue of costs. A recent example of this dynamic was provided by a small manufacturer whose margins have come under growing pressure from the rising costs of raw material inputs. He said he was forced to find ways of cutting out intermediaries. His limited ability to pass the increased raw materials through to his customers left him with few alternatives as trade reps and distributers offered the least value of all his overheads.

Direct access is the ideal means for US companies to penetrate foreign markets. It is unsurprising that Roland Snead, who began his move into China many years before others jumped on the bandwagon, has identified the importance of this dynamic.

Risks and opportunities for OEM suppliers

But not every company has this vision. Even if they did, smaller companies often have difficulty forming direct links with end customers. Smaller companies often gain access to foreign markets via their role as suppliers to the big global OEMs in their industries. European companies such as Siemens and Veolia represent ideal customers for a company like Holliston, according to its General Manager Carmine Iacuone, because the integrated nature of its product with the OEM’s equipment makes it highly unlikely that the latter would look for alternative suppliers once the product specification had been established.

Aside from this limited customer access, there are even worse risks to consider. MPC’s Redmond has painful memories of how the majority of the OEM customers he inherited when he bought the company in 1998 gradually migrated to lower cost markets over the following decade, making it impossible for him to compete with the local suppliers from a logistics standpoint as well as in terms of costs. And he also wearily recalls how the OEMs would force through year-on-year price reductions of 5%, all of which makes him extremely wary of getting back into a business he describes as “very difficult”.

Clearly it is unrealistic to expect every small and mid-sized American manufacturer to reinvent themselves as producers of goods which have direct access to the end customer. As outlined earlier, MPC has had to reinvent itself in part by finding new product niches that were too specialized to risk having lower cost producers take its customers. Gripnail’s Ashton used the same argument to assert that his company’s core product enjoyed a de facto barrier to entry. And Mills Coffee’s strategy of carving out and expanding its multi-faceted niche position and developing an online retailing platform to gain direct access to the end customer and end its dependence on the wholesale market is a move in the same direction.

For MPC, however, its ability to execute a manufacturing strategy focused solely on the high value-added production processes while maintaining control over the more commoditized processes, will determine whether it emerges as a manufacturer of scale and significance.

In the words of Chafee Center’s Gerald Cohen, drawing on his experiences running his own machinery manufacturing company’s international sales strategy, the factor determining the success of all these companies’ expansion goals is their ability to provide their customers with solutions. MPC, if it succeeds in maintaining control over the production process in the different locations, will be positioned to provide HP with the solution.

Similar strategies have and are being adopted by many of America’s most successful exporters, one of the most complex and controversial recent examples being the global manufacturing network that Boeing orchestrated in the production of the 787 Dreamliner. And while this example has yet to prove its commercial success, the day is close at hand. Few would dispute that variants of such complex, solution-oriented industrial models on the part of US companies, large and small, will underpin their success in the world economy.