Member Articles

Company: Wild Blue Export Development LLC

A company that is ideally suited to begin exporting to China will typically have a well established place in the domestic market, some experience exporting to foreign markets, and the financial and human resources required to make a serious effort to develop the Chinese market. Aside from these internal factors, before delving too far into the process it’s imperative to establish whether or not a demand for your product does (or will) exist in China. Even with all of these internal factors in place, and a strong indication that consumers want your product, successfully exporting to China can still be very elusive.

When considering making a foray in into the Chinese market, many small and medium sized enterprises overlook that while consumer habits and production capabilities in China may be pretty well caught up with those of more developed markets, distribution channels in many industries remain fragmented and convoluted. Particularly in industrial based B2B sales, it is not uncommon to find that the network of wholesalers and distributors that pump your products into US and European markets flat out does not exist in China. And without wholesalers or distributors to hold inventory and connect with consumers, a small or medium US manufacturer’s China export efforts can be seriously hindered.

In such a situation, if your company has the money and the confidence, you can develop an offshore distribution hub, hire a Chinese sales team, and hope that it all pays off. More likely than not, these are not the type of risky investments that small and medium enterprises are interested in making.

The key lesson here is that despite ‘green lights’ and signals for success, the foundational distribution networks that many US businesses take for granted can be the swift demise of an overzealous exporter. If you are interested in selling to China, even if you’ve had a few one-off sales to get you excited, take the time and money to obtain good market research. If you are looking for answers regarding the value chain for your industry in China, feel free to contact us at info@wildblueexports.com.

Even when facing such gaps in one’s value chain, there are plenty of creative solutions available to clever companies who are patient and open-minded. In our forthcoming posts we’ll discuss these and other pertinent topics related to exporting to China and international market entry.

We are delighted to be new members of the World Trade Center and we are viewing our membership as one of the most important resources of our company. We see that we can leverage global relationships through the broad, vast, and deep network that exists among fellow worldwide members. There seems to be a wealth of visionary people that we can take an “idea” to and create some valuable projects. It’s really not that difficult to go global anymore, but to be successful we had to reevaluate our business model. Things have really changed. That being said, I had to ask myself this question: “How does a small or mid-level business succeed and thrive in today’s global economy? First by thinking outside of the box. I believe the key points to being successful in today’s business environment is to recognize that small and mid-level businesses must become more profitable on existing sales and not be solely dependent on increasing sales to increase the bottom line. Washington has made it more and more difficult for small to mid-size businesses to be profitable and as such, today’s business owner must be willing to become more flexible with an eye towards increasing efficiency. To do any less will result in the business struggling or possibly failing. We must be more competitive in pricing. So the burning question becomes – “How do I accomplish these key points?” It is accomplished by reassessing your current business model and by being receptive to positive changes. A wise man once said – “All improvement is, is a series of changes. If you never change, you never improve”– So what is the 900 pound gorilla in the room? Simply – reducing the cost of goods. How do you change the parameters? By reducing the cost of manufacturing. So with ever increasing government regulations and higher taxes, our Company had to preserve its profit margins to Survive. We made the right decision and went with a flexible Contract Manufacturer. Now we are growing and competing in the Global Economy. We could not change the Market, but we could Change how we respond to that Market. Through our international partners we are now capable of producing 100,000 units a week when necessary, cut our lead times to 1 to 2 weeks from the time the order is placed and the raw materials are received and reduced shipping time. Our manufacturing costs for labor have been reduced up to 50% resulting in more profit on same sales, and we have accessed a work force of over 800 associates working for us. It was time to reevaluate your Business Model and we did it! Now we want to help fellow member WTC companies anyway we can. Thanks for the opportunity to tell some of our own evolving story. 

Author: Brian J. Friedman

Company: GHP Investment Advisers

The Mexican Presidential Election: Reform or Business as Usual?

Due to its size (population about 115 million) and proximity to the United States, Mexico is the most influential country in Latin America. Immigration, organized crime and its role as a manufacturing hub (and potential industrial counterweight to China) highlights Mexico’s strategic importance to the United States. Mexico’s election on July 1^st altered the political landscape for the Presidency, Congress and the Senate. The new President has an opportunity to craft a pro-reform coalition that was denied his predecessors. The key question is whether he is a reformer or merely the stooge of entrenched interests.

For the first time in 12 years Mexico’s newly elected President - Enrique Peña Nieto - will bring the Institutional Revolutionary Party or PRI (its Spanish acronym) back into power. The PRI’s past is checkered, but its new leader is young, attractive and glamorous. Many hope he will lead a reform minded government rather than protect the party’s old “dinosaurs.” Although out of power for the past 12 years, the PRI ran Mexico as a one party state for more than 70 years from 1929 until their first electoral defeat in 2000.

During its first fifty years in power the PRI built a Socialist kleptocracy where political connections were paramount to gaining economic advantage. By the early 1980’s the Mexican economy and government were bankrupt, allowing a new generation of PRI politicians to enact needed reforms. The government reformed the monetary system, cut back its debt, privatized state-owned companies and opened up the economy to trade. The NAFTA agreement with the United States in 1994 was the capstone of this reform period. The economy grew and exports took off, now accounting for 32% of Mexican GDP (by comparison exports account for 14% of U.S. GDP). 

Although economic growth only averaged 2.6% per year over the past two decades, Mexico achieved a degree of prosperity. Many people are surprised to learn that Mexico’s GDP per capita is more than double China’s and approximately equal to Russia’s. Despite its slow growth, Mexico gets a significant boost from emigrant remittances and low cost access to the American market. The distribution of Mexican wealth, however, is much more unequal than China or even Russia. As a result, millions of people continue to live in poverty despite the economic gains of recent years.

Although market oriented reforms in the 1980’s and 1990’s boosted economic growth and improved government solvency, they did not alter the hierarchical structure of Mexican society. Most government companies were sold to the politically connected elite, allowing the new private owners to operate monopolies in almost every major industry. A striking example was the privatization of Telmex, the Mexican telephone monopoly. Telmex was sold to Carlos Slim in 1990. The Mexican government allowed Telmex to retain its legal monopoly for several years after its sale. During this period Mr. Slim launched wireless services and today his companies control 70% of the Mexican telecommunications market. In addition to telecommunications Mr. Slim controls numerous other monopoly businesses in a variety of industries and is now the richest man in the world. Meanwhile, Mexicans pay high prices for telephone services while suffering with low quality and slow innovation.

After 70 years of PRI dominance, Mexico held its first competitive election in 2000. In a generally peaceful transition the opposition National Action Party (PAN) won the Presidency. The reform agenda of two PAN Presidents – Vicente Fox and Felipe Calderón – was stymied, however, by opposition parties that continued to hold majorities in Congress and in many state governments. Unable to enact major reforms, while at the same time prosecuting a bloody war against the drug cartels (estimated deaths range from 45,000 to 65,000), the PAN lost prestige and ultimately last week’s election.

During its 70 year reign the PRI’s traditional power base encompassed powerful labor union bosses, access to state cash through Pemex (the government oil monopoly), and a business elite which grew rich from state patronage and protection. Only when this power structure bankrupted the country did a new “reformist” wing develop within the PRI. All PRI Presidents in the 1980’s and 1990’s were reformers, although the traditional interest groups remained powerful in the Congress and in state and local politics. Although dubbed “the dinosaurs” by the Mexican press the traditional groups are far from extinct and consistently protect their privileged interests.

Big Business Prospers While Small Business Struggles

While a small group of monopolists controls the Mexican economy, the average business person struggles to raise capital for investment or expansion. Mexico’s weak and corrupt legal system protects the entrenched interest groups but discriminates against small business owners. By failing to equitably protect property rights or enforce contracts small businesses are denied access to the financial system and, of course, fail to grow into large businesses that might compete with the established monopolies. Preferential access to legal enforcement allows privileged people superior access to capital which is why most business in Mexico is controlled by large conglomerates (often called “Grupos” or Groups). Once a monopolist controls one industry he becomes better positioned to dominate other industries and can deploy capital that others cannot easily amass.

Mr. Peña Nieto inherits an economy that successfully transitioned from Socialism to private business, but did not create sufficiently competitive markets. Legal system reform combined with the recent enactment of antitrust laws could spark rapid economic growth. Allowing small businesses unfettered access to the financial system while restraining the power of the monopolies could create millions of new jobs, lower consumer prices, diminish the appeal of emigration and boost Mexico as a strategic ally for the United States. To do so, however, Mr. Peña Nieto will have to fight the established powers within his own party.

Some Mexican companies use their monopoly cash flows to create globally oriented businesses. Good examples include Cemex in cement or Grupo Bimbo. Grupo Bimbo is the dominant supplier of bread and other baked goods in Mexico and has become one of the largest baked goods companies in the world. While Grupo Bimbo enjoys significant market power in Mexico, in more open countries it has learned how to compete and innovate. We believe more competitive markets in Mexico would certainly hurt Bimbo’s profit margins but could significantly expand its customer base. Our own economic history demonstrates that companies such as Coca-Cola or Procter and Gamble were more innovative and grew faster because of the competitive challenges they faced. We believe the same would be true for many Mexican businesses.

 

The PRI Legacy is Bi-Polar: Periods of Stagnation But Also Reform

Mr. Peña Nieto is leading a bi-polar PRI. It is the party of established interests, but also the party that launched major reforms. The PRI led the wave of privatization and liberalization (albeit for cronies), but also stifled further reforms while in the opposition. It is not clear where the balance of power now sits, nor is it clear where the new President stands. He declared himself a reformer during the campaign. We hope his actions match his words. Mexico could become a dynamic growth economy if appropriate policies are adopted or it may continue to occupy its current place in economic purgatory, not entirely bereft of competitive advantages but not fully exploiting them either. Grupo Televisa, the dominant television monopoly, feted Mr. Peña Nieto with favorable coverage they denied the other candidates. Can a President who was boosted into power by the monopolists turn around and usher in competition? The odds are long, but the Mexican economy is idling, waiting for the next wave of reform. We will watch Mr. Peña Nieto’s moves in office to see if Mexico can become a land of greater opportunity.

 

 

About the author:
Brian has more than 20 years of experience in the field of investment management and economic research.  Prior to joining GHPIA in 1999, he was a U.S. Equity Portfolio Manager with Owen-Joseph Asset Management and served as a U.S. & International Equity Analyst for Founders Asset Management, a Denver-based mutual fund company.  Before entering the investment business, he worked as a Research Assistant at the Brookings Institution, a leading public policy think tank in Washington, D.C.

 

Author:  Kimberley A. Chandler
Company:  Chandler Law Firm, LLC

Immigration is a hot topic, one that nearly everyone has an opinion about and has argued over.  Most of those arguments are about either “amnesty” or border enforcement.  There is, in addition to these topics, a huge body of law relating to the employment of non-U.S. citizens – who, what, where and when they may be employed - and the responsibility of employers to verify the work authorization and identity of all new employees.  These employer responsibilities are found in U.S. immigration law.   In existence since 1986, the responsibilities have changed over time.  Enforcement of them is a focus of the current administration; and Republican contenders for President state that they intend to crack down on employers who disregard them.  The Obama administration has, in fact, been cracking down, resulting in a dramatic increase in the number of government audits of I-9 forms and fines of non-compliant employers totaling hundreds of thousands of dollars.

 

The following suggestions are directed at employers who have not been attentive to their immigration responsibilities and to employers who believe they are in compliance but  actually are not, due to complacency and failure to keep up with regular changes to the requirements.  The list is intended to be a reminder of a few basics of  verification responsibilities and should not be relied upon as a comprehensive list of what to do and what not to do. 

 

DO:

1. Complete the current version of the I-9 form for all new hires within required time frames.

 

2. Colorado employers must complete an “Affirmation Form” for each new employee and attach required documents.

 

3. Retain forms and copied documents for the required periods and purge when the retention period is satisfied.

 

4. Audit I-9s at least annually to ensure that you are in compliance.

 

5. Designate one person, and a backup person, to be responsible for completing required forms and for keeping current on the ever-changing requirements.

 

6. Keep handy, and refer to, the United States Citizenship and Immigration Services (“USCIS”) publication, “Handbook for Employers.”

 

7. Educate yourself about the process using on-line sources, including the USCIS website, and/or by consulting with an immigration attorney.

 

 

DON’T:

1. Assume that the employment verification responsibilities involve only the completion of a simple form.

 

2. Require new employees to produce specific documents for I-9 purposes.

 

3. Rely on untrained employees to manage the I-9 process.

 

4. Fail to complete I-9 forms for those employees who are United States citizens.

 

5. Use outdated I-9 forms or rely on an outdated Handbook.

 

6. Retain I-9 documentation in the same files that contain general personnel information.

 

7. Use the verification process as a means of pre-screening employees.

 

About the author:
Kimberley A. Chandler has represented clients in all types of immigration matters before a number of governmental agencies and departments, including the Department of State, the Department of Labor and the Department of Homeland Security. Her clients include companies of all different sizes and industries based in the United States and various other countries, as well as individuals from around the world.

Author: Brian J. Friedman

Company: GHP Investment Advisers

 

In his bestselling book The Black Swan, hedge fund manager Nassim Nicholas Taleb argues that people underestimate the probability of extreme financial and economic events. This is why America was unprepared for the financial crisis of 2008 and 2009. While his ideas are provocative and most likely correct prior to the bursting of the housing bubble, in today’s more pessimistic environment investors may now be overestimating the probability of an extreme event emanating from Europe.

 

Financial markets are worried that Greek debt default and currency devaluation would put pressure on other financially troubled countries such as Italy or Spain to also exit the Euro. The dominoes would continue to fall as defaults and devaluations caused bank failures and contracting world trade. Ultimately even stronger economies such as France and Germany would succumb to the intense financial pressures, leading to a second global financial crisis and severe recession.

 

The European fiscal situation was created over many years and will take many years to solve. Meanwhile, European countries have a number of policies they can enact to stem the short-term crisis while setting the stage for accelerated long-term growth. The bad news is that many of the required policy changes are politically difficult. The good news is that most European governments were already implementing reforms prior to the financial crisis, just at a very slow pace. The pace has quickened, but requires even faster action in the coming months and years.

 

While European problems will not be solved overnight the stock market should react favorably as positive momentum is assured. At present, investor sentiment bounces between extreme pessimism when political problems slow progress and muted relief when disaster appears to have been averted. We believe the key to regaining investor confidence in Europe will not only be the various bailout schemes now being debated, but also concerted reforms to privatize state owned assets, increase business competition and deregulate markets for labor and capital.

 

Europe: Government Fiscal Role in the Economy

 

On average, economic growth in the Euro Zone countries has been significantly slower than the United States over the past several decades. As a result, average per capita income in the United States is roughly 1/3 higher than in Europe. The two most important reasons for Europe’s slower growth are high taxes and burdensome regulation.

 

In addition to tax policy, the state plays a much bigger role in European economic life in a number of other ways. Analysts estimate that the Greek government directly owns companies that produce 40% of Gross Domestic Product (GDP), the Italian government owns assets worth an estimated €300 to €600 billion, and the French government owns more than €1 trillion worth of banks, electric utilities, transportation companies and even some industrial firms.

 

Selling state-owned assets would make a significant dent in government debt for all Euro Zone countries. Even the German government (both at the federal and state level) is a business owner, primarily certain financial institutions such as the Landesbanken (the German equivalent of a Savings & Loan). Privatization is hardly a new policy. All of the aforementioned governments have slowly privatized state-owned assets over the past 15 years. In most cases government businesses face very little competition so privatization accomplishes the dual goal of raising cash as well as injecting dynamism into lethargic economic sectors.

 

Europe: Government Regulatory Role in the Economy

 

In addition to direct monopoly control of business assets, Euro Zone governments actively regulate their economies to create a more “orderly” (in their view) marketplace. Most governments in the Euro currency zone impose regulations to limit business competition, constrain capital markets and protect jobs. By protecting existing jobs and employers, however, they reduce incentives to start new companies, innovate and hire additional employees. As a result of these policies many European countries suffer from chronically high unemployment, low productivity growth and sluggish economies.

 

Productivity growth has been particularly sluggish in Italy and Spain, two of the countries now suffering the biggest financial problems. While Italy and Spain are more extreme examples, almost all Euro Zone countries increased their debt to plug the gap between their slowly growing incomes and their rapidly growing government spending. Note that Greece actually performed quite well, but its borrowing vastly exceeded its strong economic performance.

 

The bond markets have now cut the flow of credit to the worst offenders, and slowed the flow to even stronger countries such as France. In response governments are reluctantly changing their policies. At present, they are relying on tax increases imposed on already highly taxed societies and predictably suffering slowing economic growth as a result. We believe a shift toward more market oriented policies is inevitable given their limited ability to further raise taxes while the need to meet fiscal obligations remains. Only accelerated economic growth will solve this dilemma.

 

While more restrictive regulations are constraints on economic performance in a wide variety of areas, European labor laws are a very good example of opportunities available from deregulation. Most European countries make it difficult and expensive for employers to fire their employees. Moreover, many European countries are more heavily unionized or force all employers to participate in a national collective bargaining system sanctioned by law. Unsurprisingly, given the dynamic nature of economic change, employers only reluctantly hire given the costs of layoffs if circumstances change.

 

Despite our current problems in the United States our economy has created jobs more successfully than Europe over the long term. France, Italy and Spain slowly deregulated their economies over the past 15 years with particular emphasis on labor markets. The payoff was that labor force participation steadily climbed. Unfortunately, this moderate pace of reform was overwhelmed by the financial crisis. More aggressive reforms are now required to improve competitiveness and growth.

 

Germany already implemented many of the labor market reforms now being debated in France, Italy and Spain. Despite significant improvement, however, German job creation only looks good relative to the current recession in the United States. Similar to the rest of Europe, Germany will require further economic liberalization to maintain economic and employment growth.

 

The Future of the Euro

 

Many pundits predict the demise of the Euro and an impending financial crisis as a result. We do not share these views. European countries have significant problems to be sure, but they also have weapons in their arsenal to combat these problems. They have sufficient financial resources to prevent widespread bank failures, they have state-owned assets that can be privatized to raise cash for debt repayment, and they have the opportunity to implement reforms that will create jobs and accelerate growth.

 

Financial markets are concerned that politics will prevent European governments from using the weapons at their disposal. Euro Zone politicians could certainly be more aggressive. Rather than bold solutions they take only the minimum actions necessary to temporarily calm the bond market. We doubt a bold solution is coming. Embedded within each short-term fix, however, has been a small long-term reform. These small reforms will ultimately add up to a more substantial change.

 

Rather than a dramatic Black Swan financial crisis or a bold political response, the more likely scenario is continued small reforms, timid spending cuts and opportunistic tax hikes. The continued drama coming from European governments is masking the very strong financial condition of most European companies (with the exception of banks exposed to government debts). These companies would generally welcome the greater growth opportunities flowing from privatization and deregulation. Outside of the monopolistic state sector, most private businesses in Europe are lobbying their governments for this outcome. Lost in the confusion is the simple fact that most people in Europe work for the private sector and would benefit from reform. Over time they will likely prevail despite vocal opposition from state sector employees, pensioners and government monopolies. The bond market is now the private sector’s ally. We believe the European sovereign debt crisis is setting the stage for a much more competitive Europe, not a world of competitive devaluation and economic collapse.

About the author:
Brian has more than 20 years of experience in the field of investment management and economic research.  Prior to joining GHPIA in 1999, he was a U.S. Equity Portfolio Manager with Owen-Joseph Asset Management and served as a U.S. & International Equity Analyst for Founders Asset Management, a Denver-based mutual fund company.  Before entering the investment business, he worked as a Research Assistant at the Brookings Institution, a leading public policy think tank in Washington, D.C.