The global growth imperative: Asian markets are major theme of CEO summit.

It's a contradiction that more and more American CEOs face. On one hand, an opportunity for global expansion of breathtaking proportions glimmers on the horizon; burgeoning new markets in Asia, in particular, promise tremendous potential. On the other, the allure of expanding internationally is tempered by some formidable pitfalls, from anti-American sentiment to political corruption and intellectual property theft.

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At Chief Executive's CEO2CEO Leadership Summit, co-sponsored by Bain & Company and Korey Kay, CEOs gathered in New York in late November to contemplate this blend of opportunities and hazards. They also shared experiences in establishing a toehold--or building on an existing one--in emerging markets, namely China, Japan, South Korea and India. Like most CEOs, those at the conference expressed wariness about expansion in Eastern Europe and South America. And while they predicted that Western Europe and North America will remain important, Asia, they said, is where the growth is.

Many companies, including multinational firms like American International Group and Citigroup, are focusing on building on an already significant presence in Asia. AIG is firmly entrenched there, with its largest non-U.S. concentration of activity in Japan, China and South Korea. But while CEO Hank Greenberg sees the region as his firm's No. 1 market outside the U.S., he worries about a range of factors that could fuel swelling anti-American sentiment, including trade disputes, foreign policy and the behavior of American corporations overseas.

"Our foreign policy has not endeared us to the rest of the world right now, and that's going to be a long and lasting problem," Greenberg told attendees. He also expressed concern that the benefits of globalization haven't been shared evenly among the populations of many countries, and that could be fueling a backlash against free trade and financial flows. "If all companies do is make a lot of money in a country and export it out without investing in that country, that's not going to help," Greenberg said. "We have to do more to make the locals and the country itself benefit from globalization."

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Greenberg also cautioned CEOs that building a presence in Asia requires perseverance and commitment, including personal involvement from the top. "If you're going to try to do business in any part of Asia, be prepared to be there yourself," he said. "Because a leader there doesn't want to meet with your regional vice president or No. 2. That's an insult to them. So if you're not prepared to put in the price of doing that, then don't bother, because you won't get what you're after."

Greenberg practices what he preaches. During the 17 years it took AIG to break into the Chinese market, the CEO made countless trips to the region in a campaign to build relationships and negotiate favorable terms. "The payoff was that we got the first license in 1992, and today we own 100 percent of eight branches located in the best parts of China, while everyone else has 50-50 joint ventures," he recounted. "So it was worth the effort."

Greenberg also relies on the personal touch in Malaysia, where he has met repeatedly with Prime Minister Mahathir Mohamad to negotiate a path around the country's requirement that foreign insurance companies divest 30 percent of their stock to so-called bumiputras, or local Malaysian businessmen. "I wasn't about to convert the branch to a local subsidiary and divest," he said. "So we've been pressured and tortured and I've seen Mahathir a zillion times over this--but we haven't done it. If I had sent a No. 2 or No. 3, we would have been forced to do it."

Greenberg has little patience with companies that opt for token efforts or piggyback on the success of other U.S. companies to build outposts in the region. "The worst thing you can do is be in and out," he said. "We've seen companies come in, hire people from us or from other companies and then a few years later pack up their tents and go home. You destabilize the market and wreck it for others--and soil the reputation of Americans."

While Greenberg touts his 100 percent AIG-owned Asia operations, Citigroup Chairman Sandy Weill made an equally convincing case for expanding in the region through joint ventures. Citigroup has been growing its foothold in Japan (where it now earns more than $1 billion a year) since 1902. Partnerships with local firms--including a 20 percent stake in Nikko Cordial Securities and a 50-50 investment banking joint venture between Nikko and Salomon Smith Barney--have factored prominently in its strategy. Already, 37 percent of Citigroup's $88 billion in revenue comes from non-U.S. markets, and recent moves to angle for market share in China include the purchase of a share of the Shanghai Pudong Bank and a partnership to build a credit card business.

With the growth in today's emerging markets likely to outpace that of the U.S., Weill said joint ventures bring the twin advantage of facilitating more rapid expansion in high-potential areas and, in the case of China, enabling the company to break into a lending and exchange market still closed to foreign firms. "It's not as good as the model of owning 100 percent of something if 100 percent can work in a country," he acknowledged. "But in Japan, where the bodies of financial services companies who tried to do it without partners line the roads of Tokyo, you're much better off working with a Japanese partner. And in China, where we wouldn't have been able to think about being in the credit card business for three more years, doing something in the way of a joint venture allows us to get a big head start."

Of course, the pursuit of joint ventures can be fraught with peril, especially for companies with intellectual property protection concerns. Because of trade secret and quality control concerns, Medtronic, a $7.6-billion medical device maker in Minneapolis, insisted upon complete ownership of its manufacturing operation in China and rejected the idea of doing R & D in the region. "We made a conscious decision to hold out for a 100 percent wholly owned entity in China, which was also our approach in Japan," said Arthur Collins, CEO of Medtronic. "We make life-sustaining products that are highly regulated so the ability to manufacture on a consistent basis is extremely important to us. We want to have strict control over how these people act and how they're trained."

The way some U.S. companies avoid having their latest technologies copycatted before their eyes is to simply not introduce them into certain Asian markets. Sealed Air, a $3.2-billion New Jersey-based packaging manufacturer, brings only second- and third-generation technology into its operations in China and India, said CEO William Hickey, because of concerns that its intellectual property will not be respected. "As a result, we don't bring to those people and those markets the best products we can make," he said.

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While IP theft is one major concern, another is understanding who your overseas business partners are and grasping the political context in which they operate. Jack Devine, a 32-year veteran of the Central Intelligence Agency and now president of The Arkin Group, advised CEOs at the conference to carefully screen their local employees and understand the relationships among local decision-makers. He told of how one U.S. company aligned itself with a local firm in China to build a power plant. But the plant's profit was nowhere near what was planned. Puzzled, the company investigated and found that electricity was being siphoned off to a neighboring plant. "Next they found that the person who owned the plant next door was the brother-in-law of the plant manager," Devine said. "So they took it to the governor, but guess what? The governor was a cousin of the brother-in-law."

Too often, he explained, companies rush through the due diligence process, failing to sniff out the potential pitfalls and foresee bureaucratic hurdles. "It's not just a matter of getting a handle on the books; it's understanding the political dimensions of your partner," Devine said. "Are they plugged into organized crime or into the political system in a way that will enable them to leverage you out of it?"

Ideally, companies need to build teams adept at sensing shifting political and social trends, which then can be charged with delivering relevant information up the chain of command. Such on-the-ground intelligence can provide an early warning of government policy changes, a competitor's plans or even a terrorist threat to a U.S. company-owned facility.

What's more, U.S. companies should not always expect fair play when negotiating overseas. Come back to your hotel room early from a meeting and you might just find your door locked from the inside and the sounds of activity within. "If you're involved in a major contract that impacts national economic interests, whether it's in Europe or Asia, you need to be mindful of economic espionage," Devine warned.

The same communications technology that makes it possible to call home from a cell phone in Beijing or send a file over your hotel phone line has a downside. "Picking off your cell phone or putting a sniffer on your computer and tracking your email is easy," Devine said.

Taking advantage of opportunities, while sidestepping local hazards, requires real management skill, both at the CEO level and down through the organization, attendees said. That's one reason why solid international experience is increasingly essential for the men and women who sit in corner offices. "Without cross-cultural experiences early on, you can become pretty myopic," says Ron DeFeo, CEO of Connecticut-based Terex, half of whose sales of construction equipment are outside the U.S. "It helps to have people who have lived and worked overseas early in their career." (See The Global CEO, page 24.)

However, American executives seem less willing to relocate abroad with their families than in previous decades, and certain countries impose limits on the number of expatriates who can live on their soil to manage operations. So it's increasingly important to create a blend of expatriate and local management. "Whether it be here in America or where we trade in 136 countries around the world, the immigration laws are making it more difficult to bring people into an operation," adds Chuck Pol, chief operating officer of BT Americas. "What we do is bring people in for six to 12 months, pass the intellectual capital to the locals and then bring the people back to wherever they came from."

So there are many challenges to operating in international markets, but one major challenge may be arising in Washington, particularly in an election year. AIG's Greenberg and others said they were very concerned about steps toward protectionism. His remarks were made before the Bush administration lifted some steel tariffs, but there are plenty of other trade issues brewing. "We've been preaching that open markets are good for years and now we're sending mixed signals by implementing tariffs," Greenberg said. "We've all got to start lobbying hard against tariffs, because they will have long lasting effects. There will be no globalization if we don't stop that in its tracks."

Despite these challenges, after two years of playing defense in the face of corporate scandal, recession and a plunging stock market, the chief executives at the conference argued that the benefits of international sales make continued globalization a must.