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Emerging Markets: An Entrepreneur's Guide to Staying Sane, Safe and Profitable

R. W. Nelson, Chairman, Kemin Industries Inc.

We at Kemin have been doing business internationally for more than three decades. A few years after our founding in 1961, a Chinese graduate student at Cornell University spotted an advertisement we placed in a trade publication. He asked us to ship pig-feed flavoring to his father's factory. Young as we were, we weren't about to turn down an opportunity: his request came with a check.

These days, opportunities abound across the globe, no more so than in emerging markets, such as South America, Eastern Europe, Russia, and parts of Asia and Africa. Entrepreneurial companies, in particular, must take advantage of them. As development costs soar and product life-cycles get shorter, small companies will need to sell in as many markets as possible to make a reasonable profit--maybe even to survive.

Once Kemin accepted the serendipitous Chinese request, we became global believers. In the late 1960s, we entered Europe through a distributor, setting up a full-fledged unit in Belgium in 1971. A decade later, we opened a subsidiary to serve Asia, New Zealand, and Malaysia. Today, international sales account for two thirds of our annual revenue of $100 million. We operate four overseas plants and 30 offices, and 400 of our 600 workers are based abroad.

Along the way, we have learned how to do business outside of the U.S. As we venture into countries that aren't as tame as the Western democracies and some in the Far East, we are using these valuable lessons as a starting point. At the same time, we realize that we need to take additional precautions in the rough-and-tumble environment of underdeveloped countries.

What follows is an entrepreneur's guide to the steps necessary for doing business in emerging markets.

The Basics Count

Whenever we enter any foreign market, we first do our homework. When we decided to get into Europe in the late 1960s, for example, we turned to The Exporters Encyclopedia, a classic reference. It contains information, such as the size of the animal-feed business in each country and the names of companies in the business. These days, for a small fee, the U.S. Commerce Department makes this part of the job easier: it supplies a person to do the legwork.

Our next step involves making a firm commitment. Usually, we put up no more money than we can afford to lose. Then we hire an individual to spend full time developing a market. That person begins by scouting the region, a process that takes about nine months.

Next, we look for results. When we decided to enter Asia, the person we sent turned up 25 prospects during an initial three-week journey. Once we have prospects, we expect orders. And then numbers. We believe the market should break even within a year and be profitable within two years.

As we enter emerging markets, these guidelines have become like spotting an old friend in a foreign port or train station. Learn the basics. Live by them. Venturing into undeveloped countries, you will be anchored to a certainty when all around you is uncertain.

Cash is King

With your emerging-markets foray grounded in the basics, you should understand that, away from developed countries, money will be your biggest problem: specifically, how you will be paid; sometimes, if you will be paid.

At Kemin, we operate by a rule of thumb: until we do business for awhile with anyone--even domestically or in the Western democracies--we need our money up front. In the emerging markets, this isn't merely a rule of thumb. It's a rule.

Last year, we received a big order--for $1 million--from a customer in Russia, a market we have been developing for two years. In the wake of the collapse of the Soviet Union, opportunities abound in Russia, and we surely want a share.

The sticking point was how (and, as it turned out, if) we would be paid. The Russian customer argued for rubles. We demanded to be paid in a Western currency, backed by a letter of credit. Although the customer eventually agreed, our bank in Belgium wouldn't guarantee the credit line from the customer's bank in Russia. No matter how tempting the business was, we had but one choice: to turn it down.

Cash is king. Don't forget it. Especially in emerging markets. Don't let the lure of a promising new relationship blind you. What you need, most of all, is a profit.

Manage Your Managers

With volatile governments and shaky currencies pitted against today's most enticing business opportunities, the emerging markets are nothing if not a bevy of frenzied activity. It's human nature, as well as in the best entrepreneurial spirit, for managers to get caught up.

Your job is to put clamps on enthusiasm when it doesn't make good business sense. In Russia, our people were pushing hard for that $1 million sale. Understandably, their "numbers" depended upon it. But we had to say, "Hey, we know people who've lost money there, and we don't want to."

Your managers will be the hardest to convince. Accept their exuberance as the engine for getting you where you want to go. Then temper it.

Just Say No

With the emergence of emerging markets, you mustn't lose sight of common sense. It just doesn't pay to do business in some parts of the world. You don't want to be in Bosnia, in the aftermath of a bloody civil war, for instance. Or in Nigeria, where the Sunday afternoon pastime is taking prisoners down to the beach and shooting them. At Kemin, we just say no if our employees' safety would be at risk.

We also avoid areas where custom calls for passing the "brown envelope." With bribes the order of the day throughout most of Africa, we don't do business anywhere on that continent except South Africa and Algeria.

Be safe. Stay clean. Bloodshed and bribery don't make for long-term business relationships. Once you start passing envelopes, if only to get your foot in the door, you're dead. Once you venture into unsettled countries, you could be literally dead.

Expect the Unexpected

Your business life in emerging markets will be full of surprises. To make the best of them, learn to expect the unexpected and manage the unexpected.

Last fall, in the wake of turmoil in the Asian financial markets, we discovered belatedly that our otherwise competent local manager in Thailand was selling in local currency rather than in dollars. That meant we were getting 30 percent less revenue from those orders.

The manager made a terrible misjudgment, and we could have fired him. However, since the crisis was unexpected, we took the moderate course of denying him a raise and bonus.

The formula for winning in the rough-and-tumble emerging markets calls for playing the thrills against the mundane. With your venture grounded in global business basics, with a tempering hand on your managers, with a firm grip on the cash and a healthy dose of common sense, you will profit from the surprises.

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