Hillary Clinton’s visit to Mexico last week centered around ways to deal with the violence surrounding the trade in illegal drugs. The Mexican government has been cracking down on the cartels, resulting in open conflicts with the authorities and among the drug runners. Now the violence has landed on our doorsteps. In the past, there have been drug wars on the streets of major cities (remember Miami Vice and more recently CSI Miami?) but the spill over effect along the border is something new. And the Mexican authorities did raise a valid point with Secretary Clinton that the US was the source of the high powered assault weapons.

My first international posting was in Colombia at the beginning of the “War on Drugs.” We had about 160 US prisoners in Northern Colombia (I was stationed in Barranquilla and our Consular district covered the northern coast). The attitude among many Colombians was that drug use was an American problem and if their impoverished country made money off of the stupid “gringos” then no harm was done. The problem was that the corruption that accompanied the drug trade poisoned every aspect of Colombia’s society and the country was been locked in internal strife for the past thirty years. The Mexican authorities learned from that lesson but the cost of attacking drugs will be very high.

What has this to do with business? When you are conducting business in a country that is riddled with drug corruption, you need to be very careful of vetting whom you are doing business with. The “families” of the drug cartels will have the money in the country. I would recommend strongly against using as an importer or agent anyone involved with the trade. If you can’t find any reliable agent not involved with the trade, I’d consider skipping that country. Consider what the impact would be if it appeared on the front page of the New York Times that your company was involved with drug traffickers. If you need help in vetting an agent, use your usual sources — other businesses, banks, internet searches and Embassies. I always found that the US Embassy is good about telling you who you should be careful about, even if they can’t tell you exactly why.
In addition, if you are operating in a country where there is considerable drug violence, you need to take the advice of your security advisers or Embassy very seriously. You don’t want to get caught in the middle of random violence or worse involved as a target of the cartels.

I ran a roundtable discussion on international markets at the Fifth North Bay Growth in Innovation Forum in Santa Rosa on November 13. (I organized these in conjunction with the City of Santa Rosa  — Nancy Mancester — and some great Chamber member volunteers, this time led by Mike Adler) As usual there were lots of companies with great ideas — computer architecture to combat viruses and spyware, web 2.0  social networking, green building, etc. One of the entrepreneurs told me that he wasn’t participating in my roundtable discussion because he had to concentrate on domestic markets. I said that this was exactly the best time to renew your international efforts.

Why?

– Markets that were previously very competitive may have shrunk, but this is the time where customers will be rethinking costs and traditional relationships.  If you concentrate domestically, you will be fighting on a limited market.

– Competitors may now be willing to look for partnerships with the weaker ecoomy. This opens the potential to create new product lines and markets. Again, you have the entire globe, instead of a shrinking domestic market.

– Suppliers around the world are hungry for new customers — you can cut deals now that were unattainable even two months ago.

One theme that emerged from the Fifth Growth & Innovation Forum was that there are incredible resources available. Nowhere is that more true than with international markets. Yes, there is greater risk but there is greater support. So get out there! 

Recently, a former student of mine wrote from his first overseas position with an international company. He told me that though he appreciated my class, he felt that there was one area that I didn’t address — how tough it was to be the expatriate. He was excited by the position but felt lonely and isolated. Here’s how I answered him:

“I agree that taking the overseas assignments will help your advancement, particularly in a global company. The assignments will also broaden your perspective and give you a lot of valuable skills.

“You’re right I didn’t talk about the difficulties of the expat. I tried to figure out how to convey the complex emotional issues involved for people without the direct experience. I will give you the insights that I got at the State Department in my first training course.

“Everyone goes through a series of ups and downs when moving to a new country — it’s called culture shock. The first months are great — everything is new and in some ways magical. You see life through a different set of lenses. Then the culture shock part sets in — usually somewhere in the three to five month span after arriving in the new location. You start being aware of all of the cultural cues that you are either missing or don’t understand. Ordinary tasks, like figuring out where to find a doctor or a barber get on your nerves. Traffic and local driving customs seem mad to you. Somewhere about six to eight months you achieve the long-run equilibrium. If you’re in a location that suits you, your mood will be positive. If you are in a place that is not suited to you, your mood will be less than your “normal” state. I had culture shock to some degree in all six of my overseas postings — so take it as normal. Life can feel very isolated and lonely at the beginning. The key is to go out and make the new friends — and get everything you can out of your posting.

“By the way, there is also reverse culture shock. When you come back to the US, you see it with different lenses. A lot of the customs we have seem odd — even barbaric. Our solution to health care seems inhumane for those suffering economic losses from major illnesses. I remember the time that I took a German trade delegation to San Francisco in 2000 while I was still Consul General in Hamburg. We came off the freeway from the airport onto Sixth Street, right into the Tenderloin with homeless and drug dealers wandering the streets. They were shocked and I was embarrassed as an American. Most who live here in San Francisco just drive right by ignoring the human plight.

“A word of advice as a returning expat: The Expat comes back to headquarters with ambivalence having seen different solutions work just as well in other parts of the world and citicism of practices here in the US. This is sometimes taken by headquarters as less than enthusiastic support for the mission of the company. Some corporations deal with this by keeping their expats overseas; others banish the former expat to marginal parts of the company; the wise companies learn how to integrate these people into their hierarchy. So when you come back to the US, ask your other expats how the company rewards them. That will be a major career decision point for you.

“The Foreign Service Officer who ran that first training course gave me some advice, that I made my objectiveeveryplace I was stationed: “Make each post a better place for your having been there. Strive to leave each post a better person physically, morally and spiritually.”

I’d be interested in any of your experiences in overseas living. Please post your comments.

With the current credit crisis, one question that continues to arise is ”Is my money safe?” That certainly is a major consideration for personal banking and it is to a degree also important for international business.

If you look at the banking landscape, there are lots of banks offering services — and that works to the advantage of the international business person. Your local bank where you do your banking and credit may be fine to finance the domestic side of your business but you need a bank with global reach for international work. And more importantly, you need a bank that has experience in your principal export or supplier markets. A bank that has a good European network but few relationships in Asia won’t help you with letters of credit to pay your Chinese suppliers.

My strategy would be to have a number of banking relationships. You need a key bank in your domestic market to provide lines of credit and for working capital needs. You’ll need another bank or banks to handle your international transactions — currency transactions, letters of credit, and a resource for the local market. In many ways, the function as a resource about the local market is the most important. The bank can provide market intelligence as well as serve as a referral resource.

Lastly, if you are not satisfied with your bank, look around. The competition in the marketplace will serve you well.

A number of months ago, I blogged about the interconnectedness of modern financial markets. The events of the last month have clearly demonstrated this. 

We have to look back about a decade for the origins of the crisis which had its origins in the US policy to promote home ownership. In 1997, the US changed its rules on capital gains to allow individuals to avoid (on two properties no less) capital gains tax on less than $500,000. (Remember that the US allows a personal tax deduction on interest only for those associated with a home mortgage.) After that, banks and other lenders began liberalizing the documentation required to get home loans and lots of people qualified for loans that previously couldn’t. People do react to the economic incentives around them and the prices of houses in real terms began to soar — who couldn’t afford to be part of the great bonanza provided by Uncle Sam. 

A second enabling factor was the huge fiscal deficit by the United States. George W. Bush decided to fight two global wars without a tax increase. The result was over a trillion dollars injected into the economy. 

Next, the expansive fiscal policy was complemented by an accommodating monetary policy. From early 2001 when the tech downturn took place and accelerating after the 9/11 attacks, the Fed cut and maintained interest rates at very low levels. From their point of view, the Fed looked at domestic inflation and saw little impact, but did see a continuing weak economy. It continued its accommodating monetary policy into 2005-7.  

Both the White House and Fed saw the positive impact of their policies in a steady US expansion. What they missed were the negative results. First, despite the grossly expansionary fiscal and monetary policies, there was little US inflation as measured by the CPI or WPI.  Why — first of all housing prices were not included in the CPI — only rental prices as a proxy. Secondly, Washington didn’t look at the role of international markets. – specifically tradable versus non-tradable goods and services. 

While US prices have not move dramatically over the past years, the subsets have. Internationally traded goods — like food, clothing and consumer goods — have shown little growth and in the case of electronics, prices have fallen. Why? Because as international trade barriers have fallen, cheaper international goods have flooded the US marketplace. The consumer has profited from lower prices. There have been negative effects for those workers in those industries who saw their jobs move overseas. Non-traded goods, like health care and education, soared since consumers had extra money in their pockets (often after having taken out second mortgages on their homes that suddenly were worth much more). And the non-traded good with the largest price increase — houses — were excluded from the index. In short, we exported part of the inflation (and at the same time lots of US jobs) and we were baffled at why education and health care continued to rise far faster than the CPI. 

As Americans purchased more goods and services from overseas, the trade and current account deficits soared. Suddenly there were lots of US dollars flooding world currency markets. Here comes in the last element — normally, the rates of exchange would have corrected themselves by making dollars cheaper, pushing exports and decreasing imports. However during most of this time, China wanted to keep its exchange rate fixed to ensure continued export competitiveness. The Chinese were able to support the RMBI only by buying up the excess dollars, with which they bought US Treasury notes. 

US home prices started turning down in late 2006 and accelerated this past year. As a result, many found their home prices less than the mortgage, causing defaults. That cascaded from the mortgage holders to the guarantors of the mortgages (Fannie Mae and Freddie Mac) to the investment banks (Bear Stearns, Lehman Brothers) to the insurers of the derivatives (AIG). At the same time, the Chinese government lost the capacity to control the influx of cash and resultant inflation. It has let the RMBI appreciate at a 15% per year rate and took severe measures to restrict the leverage of the Chinese banks. When the financial crisis hit in the US, the Chinese were also worried about buying US securities, accelerating the global credit crunch. 

What’s the moral in this? Bad economic policy catches up with you. In this interconnected world, the results may be less easy to see, but the markets eventually punish excesses. So for all those who say Wall Street greed led to the collapse, you missed the essential elements. The bubble couldn’t have built up except for huge fiscal deficits, tax policy pumping up one sector, accommodating monetary policy and attempts internationally to fix exchange rates. Wall Street firms are supposed to be greedy — it’s the job of the politicians and ordinary citizens to make sure that this doesn’t happen. 

I was speaking with the site manager for a large corporation that has a significant R&D component. The Company has steadily off-shored manufacturing of its sophisticated product and little traditional manufacturing is left in the US. What is new is that the company is being tempted to offshore its R&D jobs as well. In this case Ireland is offering incentives of € 20,000 per research worker. I remarked to him that that was “real money”  — the incentive being in Euros instead of dollars. Another factor was that Ireland has a low corporate income tax rate and that in particular moved decisions at the US headquarters
There is an on-going discussion about whether offering incentives produces real long-term economic growth. There are certainly lots of examples where the jobs never materialized or the industry hit hard times later on and the new plant shut down. On the other hand there are examples like the German and Japanese automakers who opened sites in the US South, bringing jobs and prosperity to those regions.

There are several issues to be addressed  — does the industry fit the development strategy of the region? Putting a heavy polluting plant in Northern California would be a non-starter. Trying to develop a Web 2.0 cluster in an area of the country where few such companies exist may not result in lots of jobs.

Another issue is the net effect on government revenues – i.e. taxes. Some countries and localities have given such large concessions that the result is that the government unit has greater costs with a permanently lower income level (look at some of the oil drilling concessions). On the other hand, a good project will produce not only more jobs in the long run but also greater prosperity for the community and a larger tax base. With the aid of economic models, those contributions can be quantified.

Do incentives work? There are lots of examples where they have made an impact but the government authorities must carefully craft a package appropriate to the economic development strategy.

GM posted this week a record loss of $722 million for last quarter. But digging into it further the loss was from the sagging North American operations where the company is rapdily losing market share to Toyota, Honda and other international manufacturers. For 2007, GM’s revenue was flat in North America compared to the 50% gain in Latin America and 20% growth in Asia Pacific. The company continues to lose automotive U.S. market share–falling from 23.6% in 2006 to 23.1% in 2007. GM barely held on to its title as the largest automaker in the world, beating Toyota by just 3,000 vehicles.

This result came at a time when the dollar was at record lows against the Euro and was relatively weak against the Yen. Yet international carmakers figured out how to cut prices of exports to the US. Most of the international auto makers also have operations in the US and they also managed to profit despite the rise in prices for imported components due the weaker dollar.

GM, like most US manufacturers, exports relatively few cars. It chose a strategy after the Second World War of having local assembly or manufacture. In fact, GM cars in Europe bear little resemblance to the ones produced in the US. There is some sourcing of parts from the US but most of the content is local.

Over the past two decades, GM and Ford international operations have been more efficient and profitable than the domestic counterparts. But it leaves the auto makers unable to take advantage of a weak dollar since they export little. On the other hand, when the dollar is strong, imports are more competitive.

The US automakers have vigorously fought the new high fuel efficiency standards. They now must retool to produce more efficient engines. The international manufacturers, particularly the Japanese, have already made the investments in clean technology.

GM has much to do with ”right-sizing” its domestic operations. It also faces challenges in “greening” its fleet. However, if the company loses such money in weak dollar environment, watch out if the dollar suddenly strenghens. 

Mark Fuller and John Beck posit in their book “Japan’s Business Renaissance” that Japan’s economy turned a corner the early part of this decade thanks to business restructuring and increased willingness of consumers to spend. Certainly the prime example of restructuring is the automove industry with innovative leaders like Toyota (now number two worldwide) and Honda. The Japanese automakers have done well in creating new products and being at the forefront of clean technologies like hybrids and fuel efficient cars. The innovation has not paid off in stimulating greater purchases by Japanese consumers. Today the AP carried the following story:

TOKYO (AP) — Japan’s domestic auto sales fell to a 35-year low last year as the nation faced high gasoline prices, limited income growth and shrinking demand, an industry group said Monday.

Sales of new cars, trucks and buses declined 7.6 percent to 3.434 million vehicles in 2007, the Japan Automobile Dealers’ Association said in a statement. The figures do not include sales of minicars and minitrucks.

The result, which marked the fourth straight annual decline, was the lowest since 1972, when sales totaled 3.406 million vehicles.

The data showed that the world’s third-biggest auto market is slow to respond to efforts by some Japanese car makers to spark local demand by boosting their offerings of new models. Japan’s largest automaker, Toyota Motor Corp has introduced nine models since last May but estimates a 6 percent drop in its domestic sales in 2007.

The nation’s new vehicles sales in December alone fell 7.1 percent from a year ago to 236,142 vehicles, down for the first time in three months, the association said. And the outlook for the domestic market remains gloomy.

Another industry group, Japan Automobile Manufacturers Association, has put its domestic sales forecast for this year at 3.427 million vehicles – excluding minivehicles – down 0.2 percent from sales for 2007.