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What Business Model Will Work for European Suppliers
Wanting to Start a Business in the USA?
Alan R. Bird, B.S. Mech. F.B.I.M. and William C. Cairns

Alan R. Bird, B.S. Mech. FBIM, ASHRAE has been working for several large American organizations since 1987. During this time he held corporate level positions including Vice President of Operations & Engineering. He also spent many years working for an English company involved in selling and managing capital equipment to the food and consumer packaging industries. More recently, he has been an operations management consultant, undertaking assignments for a number of European Companies that have succeeded in setting up operations and penetrating the vast American market. This paper was prepared in collaboration with Bill Cairns, an International Marketing and Sales Executive who has worked for European and Asian manufacturers in various sales and marketing positions. Most recently he has served as President of a global pharmaceutical processing and packaging equipment supplier. He has over twenty five years experiences successfully developing markets and introducing new technology, and rapidly expanding US-based businesses for global suppliers.

 

What is The Right Model?

First, we should qualify the type of business that we are discussing. These are mainly capital equipment manufacturers who want to break into the US market. Their portfolios offer their customers a wide range of equipment including flexible packaging machines, liquid and semi solid fillers, product drying ovens and specialized product handling and conveying systems.

 

How Are Americans Viewed as a Culture and as a Market?

It is our belief that one of the main reasons European Companies fail to meet their goals is the way they look and approach America. In general they look at North America as though it is just like any other country, and being that it is just another country they see no need to change the way they do business. Typically, they appoint a local Agent, Representative or Distributor, then sit wait for the rep to pull in a project This activity may suit a number of suppliers but it is no way to run a business. They are not making the most of their potential in the market. Their cost outlay is nil by making commission agreements that are, on the whole, acceptable to both parties. Their belief is “Why not, it works in all the other countries, so it should work in the US”. I must say that in some cases it does work to some extent. Do they get the best action, or their product promoted in the best manner way? From experience, the answer is a thunderous NO. Their position is “ What is wrong with this approach? It has worked successfully elsewhere. We find a rep, train them and they are on their way.” They have the fall back situation that says “OK if this rep does not workout we can change him are six-months to a year”. However, there are many stories of disagreement due to the changing of terms, and cutting commissions, all of which has lead to friction between the vendor and the agent representative. That inevitably creates a problem that I have clearly seen and experienced as the customer, up to the point that many of my peers in large companies have said “ I don’t want to deal with rep’s or agents who do not have some kind of commitment from the European company by not taking the initiative to set up and fully commit full time employees with a USA based office.” Why do they say this? Clearly because the- customer does not want the risk that this is just a one off sales exercise which as soon as the market gets tough they pull out or change rep’s agents at the drop of a hat. This has happened all over the US.

 

What is the Local Situation?

Most of the companies that fail have, what we believe is a naïve and (maybe use myopic?) simple view of the US market. In their enthusiasm to get into the market they have not done their homework on what I think is the biggest issue, understanding how the American market works, (how Americans think?) and what America is made up off.

On the whole America looks like what it is- a large country with lot of opportunities. This is true but not quite correct. Look carefully at what is said “These United States of America” At the federal level that is true. Now look at it from the state level, where most of the business is done. From this view it looks very much like the EEC. It appears as a lot of small countries trying to work together. To further complicate the situation, each of the states has its own rules and regulations, tax laws and conditions, which must be met. As a result, many of the states operate and work within their own borders, choosing to use local suppliers, merchants and resources. At the corporate level, you may have a conflict since their responsibility is to oversee the business and remain true to the mission of the company and its owners. This is the same continuing battle between each of the states as they operate with many different agencies such as OSHA, FDA, EPA, DEP and many more. So why do the European companies choose to treat the USA as a single country? It has only been in the last 80 –100 years that they (USA) have started to recognize that there are suppliers outside the states who can supply their needs. Up until then they have remained very true to America by buying American.

To further compound the issue, the sheer size of some of the companies makes it difficult for agents brokers to operate and grow. This is because once the customer expands to certain size to meet customer and market demands, they are usually operating in several states, and on a the national bases i.e. the Corporate office Inc. vs. the local plants. Some of these companies have developed and grown so big, that although they do not export they are still in the top ten in the world in their class. These companies did not depend on European technology or expertise. This is as a result of the companies’ management saying to themselves, “ what are we in business for, making process equipment or manufacturing goods? So we have a culture and nation on the one hand that says “if its not made here or supplied by a company that is here in the USA, then they don’t want deal with an agent or rep that does not have any other commitment other than his commission check. Or work with foreign companies that will not fully comment to this market.

Our opinion is the only way to approach this question of “Why do European companies fail in the USA (and not all do, but they usually are not the ones that make a great deal of money for their owners either.) is that they simply think of the US as another country and they will use their currently successful business model to achieve their goals. Their plan is to hire a rep or agent and give them a one-year commission only contract. These types of contracts are domed to failure. In most case they do not have sufficient time to generate enough momentum to get the business activity off the ground ,and those who do have only gained by the fact that one project fall into their laps.

 

Would the US Model Work In Europe?

We have revised the question and asked a number of European company owners and presidents. Posing the hypothetical fact that they were starting out fresh in Europe today, we asked them what business model would they would use to sell their products and equipment in Europe. Almost to a person they all said, 1.) open an office in their country of residence, manufacturer the equipment and export their goods to other countries through agents, distributors and reps with commission only agreements. I have then asked them why they have not used this approach in America. They all replied that this is one country, so their present business model should work there as well. I don’t want to comment to them that this is wrong, but , in fact, it is. Just as the EEC, is not one country, but many, the same business view should apply for the Unites States.

Lets just look at Europe, and the EEC for a moment. There are lots and lots of countries , each with their own unique rules and regulations. Each is run by what might be called a federal government, located in Brussels. This organization looks very similar to the US federal government and operates in very much that same way. Similarly, each country has its own government running at the local level, which looks and operates very much like the state level run by a governor. At the corporate level you have multi-nationals operating across borders -- much that same as Corporate America. Except, that when you approach America with the idea that you can just use the same European method and not modify the approach, what do you have? Lets look more closely. First, you have doubled the sq miles of territory over night, with a population somewhere in the region of 250 million people. Furthermore, they are not just a couple of hours away or just one time zone away from your head office. They are 7 to 9 hours away on a jet and 6-9 hours difference in time and several time zones. From a logistical point of view, this can be a nightmare. The European day is half over when the East coast of the US is just getting started and your day is over when the west coast gets going. From my experience, and many who I have asked another completion is certainly that reps, agents, distributors are not the people I called as a Vice President. I want and expect to speak directly to the decision maker - which meant I had to call Europe. This usually involved inconveniently calling in the middle of the night or being called during the night to take a call from Europe. That’s the way it is done. Today, some things have changed. Corporate America has down sized, there are not as many mangers in some companies as there were a few years ago. Matters are managed in some cases through international teams or committees, or just the plant engineer. However, when the project goes wrong it’s the engineer’s fault not the vendor nor the agent or rep. Its the same situation when you are selling to the company. You cannot easily find who the decision maker is and what power he or she has.

Having one rep or a small agency looking after all of the US is not practical, you need a company set up with a logical and manageable business model. This should matche that of your European business model with the exception of manufacturing, inventory and engineering departments.

 

Centralized vs. Decentralized Organizations

Even for companies that take the plunge, there is an issue in the way most operate and control that business unit from afar. On the whole, it appears to be a fully functioning unit with a President and management structure in place, having authority and control stateside. But, this is not so! In many cases where I’ve interviewed the president of these companies and in undertaking assignments for these companies, it is clear that authority is not in theirs. Control is centralized back in the head office in Europe. The Presidents of these units are unanimous in this issue, saying that they spent enormous amounts of time doing damage control with customers, as they could not make the vital decisions. Some even said that although their title was that of president, it was in name only and they were nothing more than highly paid salesman.

As a secondary check, I interviewed existing companies here in states in the same type of market to see their perspective of this business model and get their reaction to how European companies are trying to break into the market. One Vice President of Sales & Marketing commented “ how do they expect their business to achieve any penetration in the market place with one person covering the whole of the USA. He explained that his company, although small, has 38 people working in teams to support and achieve their sales goals. Even at this level , granted many are in the manufacturing and engineering groups together with administration.

 

So, What’s the Solution

Firstly, is a long-term commitment from the European vendor/supplier. There must be nothing less to make it. Authority and Control to make executive decisions must be given to the USA based team. This authority must also be over engineering, if they are to effectively react quickly to customer requirements.

Authority must exist to effectively drive the European engineers to quickly turn around American customer requests and effectively address technology matters, to the satisfaction of the US division. This has, in the past, been a major issue with US customer’s decision-making process as engineering has ignored their requests. For example one president of a US-based packing machine company , was extremely frustrated with the European engineers who had completely ignored the customer request for a certain vendor’s control package to be used substituting it for another that the customer did not want. He had just come from a meeting with the customer who had said that if they are not going to listen they would take the whole project elsewhere. This is not unusual and in many cases companies have lost projects simply because the engineers are unwilling to listen. Another example that I was involved with, where the engineers and sales staff told the customer that there was no need for a certain feature and that a simpler item could do the job. It took several calls and a visit to get them to realize that the customer was not willing to accept their solution, which based incorrectly based on size and not the requirement stated in the bid package. This is typical of many situations when European companies try to break into this market.

 

Don’t Forget Service and Aftermarket Support is Critical!

Another area is that of service personnel, typically, they prefer to send their service staff from Europe quite often the current rates for the European technicians are higher that local technicians who have the ability and can be train on this equipment. Companies sending staff over to North America need to review this method for several reasons. Yes this approach does keep their service staff employed but does it make sense. Considering language differences, cost for airfare and time spent traveling to the customer, it is necessary to have service staff based in the US who is paid local salaries, and not incurring the extra expense of airfares. Customers need and expect quick reaction time to support their operation issues on the same day or next day latest.

 

How Will the Potential Supplier Achieve This Goal

We have found that the best method used is that of either fully employed USA staff or a contract that allows US companies that have been specially set-up for this type of operation.

Checklist;

  • Make a fully funded commitment, for at least eighteen months to three years
  • Do the homework about potential markets and customers for the product
  • Define how big the market realistically is
  • Make a business plan and forecast manageable and attainable growth
  • Assign local authority to make executive decisions
  • Establish local authority over engineering
  • Build a fully-trained staff with authority to drive the customer requirements
  • Compensate local/regional service staff on US salary levels
  • Maintain inventory of spares and documentation
  • Handle AR and AP functions locally
  • Legal and taxation support locally

Entering and establishing a successful business in North America is a challenging, and sometimes daunting endeavor. The vision must be long term, complimented with a balance of patience and a focused attitude. With the right product, selling and aftermarket activities, the benefits can be substantial. The first step to take is to make the commitment. With that in place, the supplier is starting on the right foot.