Finding the right international partner for small businesses.

Continued rapid export growth should be welcome news for small companies in light of lackluster prospects for the domestic economy. Real gross national product grew only 2.5% in 1989 and a miniscule 1% in 1990. Consumer spending, which fuels a large segment of small business, was virtually flat, with a 1.9% real gain in 1989 and a .9% rise in 1990. Little, if any, significant improvement is expected in either category for 1991.

However, President Bush's state of small business report to Congress estimated small businesses accounted for about 20% of all U.S. exports in 1989, up 2% from 1988. Because total exports grew 14% during that period, the estimated dollar value of small business exports rose by 25%. With more small businesses entering the export market, Small Business Administration officials expect similar gains in the dollar value of small business exports for 1990 and 1991.

Even though exporting is unfamiliar territory and somewhat frightening to small business a\managers, internationalization is becoming a reality for more small companies. The SBA estimates 25% of all U.S. exporters in 1991 had 100 or fewer employees. John Miller, an international trade officer for the SBA, expects that percentage to increase "because most larger companies are already operating in the export market. Those coming on board now are generally smaller and more specialized."

CPAs are traditionally the chief financial advisers to small companies and often the only counselors with broad business experience. CPAs in public practice can guide their clients, and management accountants their companies, into exporting by showing them how to identify and locate a suitable international joint venture partner and how to minimize the costs and complications.

WHY INTERNATIONAL

JOINT VENTURES WORK

Tony O'Reilly, chairman and chief executive officer of H.J. Heinz, once said, "By and large, joint ventures should be the vehicles of choice for a small American company entering an overseas market. Joint ventures spread the costs and provide needed expertise."

Central to international joint ventures' appeal is their flexibility. Under proper market opportunities, ventures cana be organized to operate on a continuing basis. For example, a U.S. electronics company forms a joint venture with a Spanish company to manufacture and market electronic components in the European Community (EC). Such a joint venture may be a candidate for local tax advantages. The use of less expensive local labor can also lead to a pricing advantage, and the arrangement will satisfy EC local content requirements.

International joint ventures also can be structured to handle a specific project, where the partners have no particular interest in establishing a long-term relationship. Often, one partner contributes technical expertise or raw materials and the other provides financing for the project. They share the rewards. Joint ventures of this type are common in motion picture film distribution and in the mining industry.

OVERCOMING CLIENT EXPORT OBJECTIONS

Before a search for a joint venture partner can begin, the CPA will, in all likelihood, need to resolve one or more concerns expressed by the company or client. Small business owners are almost always wary of a move into the export market, even if they believe the move is justified. One small business owner recalled, "I knew my company needed the boost overseas sales could provide, but I was afraid to take the first step. Then I found an overseas partner, and the rest was easy."

The reasons for the hesitancy vary, but they usually can be grouped into one of three broad categories. Notice how a joint venture arrangement with a suitable international partner can reduce the potential problems in each area.

* Preoccupation with domestic problems. Competition in the domestic market may be intense, requiring most of the owners' time and energy and limiting their ability to concentrate on developing new markets. This problem may become particularly widespread if the economic environment of the early 1990s continues for any length of time. By sharing the development of an export program with a joint venture partner, the small company owners can enhance its growth prospects, while devoting needed attention to domestic operations.

* Cultural skills. Trading on international markets requires a range of cultural skills and knowledge not easily available to small companies. This may include areas such as a working knowledge of a target market's language, customs and culture. An international partner in a joint venture will bring these skills to the enterprise, enhancing competitiveness.

* Financial strains. Any new venture costs money--and an export venture is no exception. However, there are a number of government-assisted export financing programs available for small businesses. Moreover, by finding the right joint venture partner, small businesses can share the development costs.

AVOIDING JOINT VENTURES CONFLICTS

Since a joint venture entails a partnership between two management groups, it is open to problems arising from misunderstandings and misconceptions. The potential for difficulty increases in an international joint venture because the partners are separated by geographical and cultural barriers. CPAs should make certain their clients and companies avoid some common mistakes:

* Jockeying for control. By far the most common management error in newly formed international joint ventures is a tendency for each partner to want control, independent of the other. This is particularly true in small company joint ventures, where management is accustomed to absolute control. An investment banker specializing in international joint ventures warns, "You can't act as if you own 100% of the venture when you own 51% or less." Both partners must adjust to the perceived loss of management control over the joint venture if it is to have a chance of success.

* Hidden agendas. Often, the motives behind the formation of a joint venture change after the venture has been in operation for a period of time. For example, a U.S. machine tool manufacturer forms a joint venture with a French company to manufacture and market its product line in the EC. Over time, the French partner may decide it can manufacture a product line of equal or better quality on its own. Conversely, the U.S. company may decide it has learned enought about marketing in the EC to conduct its own operations. In either case, the joint venture is in trouble and may be nearing the end of its usefulness.

There is no way to be certain that a joint venture partner will not seek to end the venture after acquiring certain skills or expertise. However, a very careful screening of potential partners for possible conficts of interest will reduce the chances of a future clash.

* Poorly defined purpose. Joint ventures are usually single-purpose enterprises. If that purpose is not spelled out clearly in the joint venture agreement, the enterprise can move into areas far afield from the original purpose. One banker familier with joint venture financing recalled several poorly constructed joint ventures that turned into competitors for their owners.

In one such venture, a cable operator, a broadcasting company and a motion picture company banded together to form a new film company and motion picture studio. The cable company was to have a new source of feature films; the broadcasting company was to gain films for commercial broadcasting; and the motion picture company was to have an extra studio to use when space was scarce. However, unlike most motion picture ventures, which dissolve when the projects are complete, the new studio thrived and became competitive with its three owners. Finally, after a public offering, each original owner would up with a 25% stake.

CHOOSING A JOINT VENTURE MARKET

Before looking for a joint venture partner, the client or company must narrow the search down to one or two specific countries. For example, companies deciding to export to the EC through a joint venture partner in 1 of the EC countries may not have the time or inclination to research all 12 of them. Several factors, many of them personal, affect a decision on which country to choose. However, the U.S. Commerce Department suggests potential exporters look closely at these seven areas in assessing each market and will assist them in the investigation.

1. Are there import regulations or parent, copyright and trademark laws that could affect the product?

2. Will government and business relations, political events or public attitudes affect foreign trade, particularly with the United States?

3. How will population densities, literacy rates and local language affect the product? Does the product violate any local cultural taboos?

4. How will the local transportation systems affect the packaging and distribution of the product? Are adequate in-transit warehouse facilities available?

5. How big is the market for the product? Is it stable? Is it forming, expanding, maturing or declining?

6. What are the generally accepted trade terms at wholesale and retail? What are normal commissions and service charges? What are the laws regarding agency and distribution agreements?

7. How many international competitors will there be? What is the market share of each and what prices do they charge? How do the competitors promote and distribute their products?

FINDING A PARNTER

Once the company has decided on a specific export market, the search for a partner can begin. The best place to start is with the Commerce Department's International Trade Administration (ITA), 14th Street and Constitution Avenue, NW, Washington, D.C. 20230; telephone: [phone]. Trade specialists assigned to the 47 district offices are trained to locate and investigate potential overseas partners for U.S. exporters. ITA staff has access to information compiled by 186 commercial officers stationed in 67 countries and by industry and country specialists in this country.

Domestic and international trade shows and missions are a proven way to meet overseas business owners and managers who share an interest in a given product and who could become a joint venture partner. The Commerce Department has developed several programs to help identify a joint venture partner. Capsule descriptions of these programs are below. The sidebar on pages 62-63 contains specific dates for events.

* Foreign buyer program. Through this program, the Commerce Department promotes domestic trade shows worldwide to attract foreign trade center where exporters can meet foreign delegations. The Commerce Departments also counsels participating companies.

* Overseas trade fairs. Such fairs allow exporters to meet potential partners face-to-face and also to take a look at their overseas competitiors. The Commerce Department selects, or certifies, a group of international trade fairs for special endorsement. It then works with the private show organizers to obtain special services for U.S. exhibitors designed to enhance their market promotion efforts. It helps exporters set up displays and promotional materials and arranges meetings with potential foreign buyers or partners. A service charge is involved for participation in this program.

* Overseas trade missions. Small business owners looking for partners also can participate in a trade mission, which offers the opportunity to confer with foreign business and government representatives that may be helpful in the search. The Commerce Department will arrange a full schedule of appointments in the chose country or countries.

* Matchmaker delegations. Matchmaker trade delegations, cosponsored by the SBA and the Commerce Department, are short, inexpensive overseas visits made for the express purpose of matching small U.S. companies with prospective partners or licensees. Small business owners meet potential partners in one-on-one interviews.

WHERE TO LOOK FOR ADDITIONAL HELP

Although the Commerce Department has the chief responsibility in the federal government for promoting exports, it is by no means the only agency that can offer assistance to a small company looking for an overseas partner. Many states, for instance, have international trade programs that seek foreign investments and promote international joint ventures with companies located within their borders. Forty-one states maintain offices in 24 countries. Phone numbers for state offices are listed in the exhibit at left.

In addition, trade specialists working in foreign embassies can be a valuable information source. These diplomats are serving in the United States to promote trade with their countires and are eager to help whenever possible. Industry trade associations also may be of help. Many have created departments to assist members in exporting. Finally, many CPA firms have sizable international operations. A CPA firm with offices in the company's country of choice could help to locate and identify a potential joint venture partner.

HARD WORK BUT WORTH IT

A small business owner recently told an SBA international trade officer, "I worked the hardest I've ever worked in business to crack the export market. But it paid off, and it now seems worth it. Last year, my export business just about took up the slack in domestic sales caused by the recession." That story may be repeated over and over again in the next several years. Moving into the exprt market is indeed hard work, particularly for a small company. But, for many, it may be the key to survival in a stagnant domestic economy.

Gene R. Barrett is a news editor of the Journal.

Mr. Barrett is an employee of the American Institute of CPAs and his views, as expressed in this article, do not necessarily reflect the views of the AICPA. Official positions are determined through certain specific committee procedures, due process and deliberation.