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RICHARD J. SCHWARZSTEIN : Cashing In on a New Europe : As Trade Barriers Topple, Market May Be a Gold Mine

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Times staff writer

A decade ago, the thought of 12 European states operating as a single economic bloc was nearly inconceivable. Skeptics were quick to say that the differences among the members of the European Economic Community were far too complex to iron out.

But it is happening.

Come 1992, the EEC, with 325 million people, will become the largest single marketplace in the world. In the months leading up to 1992, the EEC Parliament in Strasbourg, France, will pass laws that will change the face of Western Europe. The new laws will regulate banking, trade, transportation, television broadcasts and the movement of workers within the EEC, among other things.

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Foreign auto makers and chip makers have started building plants in the EEC to gain a toehold in a $4.2-trillion market that’s expected to grow at least 5%, or $21 billion, when trade barriers are dismantled. Other foreign firms are making moves into Europe by merging with or acquiring European concerns. For most small- and medium-sized companies, however, multimillion dollar deals are out of the question.

Richard J. Schwarzstein, a lawyer specializing in international law, said the “Davids of corporate America” can still reach for a piece of the EEC pie if they plan carefully and create a niche for their products.

Schwarzstein, one of three founders of the World Trade Assn. of Orange County, has represented high-technology companies for many years. In the last 30 years, he has advised many high-tech manufacturers on how to crack the global market.

In a recent interview, he talked with Times staff writer Cristina Lee on the coming changes in the EEC.

Q. How important is 1992?

A. I think 1992 is important only in the sense that it attracts people looking for new opportunities. It isn’t totally a magic date. First of all, the customs barriers between members of the EEC will not all go down by the end of 1992. It is a goal set by the organizers of the EEC programs. Orange County companies now will look to Europe to sell like they sell to the rest of the United States, without barriers, having products with universal applications and standards.

The lifting of barriers will encourage smaller companies here to try to deal with 350 million people in Europe. We’re used to dealing in big markets, but we’re not used to dealing in compartmentalized markets in the United States. That’s why it’s been hard for small companies to design products for individual countries. Now those barriers will come down, hopefully, and we can deal on a much bigger scale.

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Q. What should U.S. companies watch for in 1992?

A. What’s getting all of the attention is the elimination of trade barriers and establishment of uniform standards for products that will be imported into Europe. There are obstacles in some areas where there is no immediate unanimity in Europe because they have different stages of economies within the EEC countries and, perhaps, some age-old prejudices.

As the barriers come down and uniform electrical and measurement standards are established, American companies can easily figure out whether their products are designed for that marketplace. To design a product for one common standard is a lot different from designing it for 13 or more standards that have existed previously.

There’s always a possibility of protectionism in the future, and all companies will be impacted. On the other hand, it could be that these are exciting new areas to do business, and Orange County companies will benefit. I’m optimistic that 1992 will create a more competitive environment for everybody.

Q. What are the potential problems and opportunities for U.S. companies in Europe?

A. First of all, there will be a lot of questions that will be answered during the next year or couple of years. So smaller companies need to get as much information as possible by attending seminars, by contacting state organizations and by dealing with foreign investment authorities.

The other factor they must deal with is Eastern Europe’s emergence as a potential capitalistic group, and the increased activity of entrepreneurial forces there. These (political changes) are also fueling the economic activities in the EEC.

Q. What are the potential growth areas for Orange County businesses in Europe?

A. There has been so much glamour attached in recent years to trading with the Pacific Rim that people have forgotten that Orange County companies have had 20 years of active relationship with companies and consumers in Western Europe. We have had ties to high-tech areas in England, the Netherlands, West Germany, Belgium and France. These relationships will continue. But as the Eastern European side opens, they will want to improve some infrastructures. Countries like East Germany, Poland, Hungary and Czechoslovakia will look for technology and expertise that Orange County companies can provide.

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There’s no question that technology and biomedical areas will be sought after in the broader Europe, with Eastern Europe having many more years of catching up to do. With the previous restrictions that were imposed on companies during the Cold War easing, particularly in the high-tech area, there will be more opportunities for Orange County companies in Eastern Europe.

Q. For companies not yet a player in Europe, is it too late to enter the market now?

A. No, I don’t think it’s too late at all, and I don’t think it will be too late to get in on the ground floor for some years yet. The whole marketplace may dramatically increase economic activities and new opportunities may spring up as Eastern Europe becomes closely allied with Western Europe. And I think that there are a lot of companies here that are trying very hard to visualize whether they will have a future in the expansion of Eastern Europe. There are a lot of areas that will have to be addressed in the broader Europe, such as pollution control and waste management. And Orange County companies could well benefit from this unfolding Green (environmental) movement in Europe. There are companies in Eastern Europe that will need more telecommunications, and hotels and resorts may have to be expanded as tourism picks up.

The computer industry has to expand in Eastern Europe to keep up with the needs of industrialization there, and it will need as much expertise and technology as can be made available from Orange County.

The possibilities of exporting to a large market are unlimited. It just takes a global perspective. Companies that have had a provincial attitude, who said they can make enough money in the American marketplace, can increase profits and revenues by looking at this changing world. In fact, those that began exporting in a very limited way in the last 10 to 20 years have now found that international sales are a much larger portion of their overall revenue and profit. I can’t think of any company in Orange County that has launched an international trade program that has regretted doing it.

Q. For companies new to the export game, what steps should they take to get started?

A. I think the first step is to designate someone within the company that has an international perspective to look into the global market. That person should then start attending all the public seminars given by the trade organizations, international marketing associations and the various electronics groups. The U.S. Department of Commerce sponsors seminars about opportunities in the EEC.

Once people become more knowledgeable and have specific questions, they can contact various experts and consultants in the county, who can provide some guidance. Groups that can be very helpful are accountants, lawyers and bankers who have worldwide networks that businesses can tap into.

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Then, as their expertise requires greater help, questions about possible joint ventures or distribution deals can be addressed to industrial authorities in California. In fact, the trade development office of the World Trade Center in Santa Ana has an on-line computer system that ties into all the trade centers around the world and matches buyers and sellers. The Department of Commerce has a similar buyer-seller matching program.

The World Trade Assn. has a joint venture with Coastline Community College in Corona del Mar, where its World Trade Institute has a fine resource library in which you can find lists of exporters and importers, trade regulations and other trade-related materials.

Q. What financing programs are available for Orange County companies looking to export their products to Europe?

A. California established a program several years ago called the California Export Finance Program, which has an office in Santa Ana. The program can loan a company up to $350,000 for exporting activities. Although the financial support is limited, the program works in conjunction with both the Foreign Credit Insurance Assn. and the Export/Import Bank’s loan programs. The World Trade Assn. of Orange County has acted as a clearinghouse for some of these outreach programs. Small companies can also go to the Small Business Administration for loans.

Q. What should a company planning to build its first plant in Europe look for?

A. The location of the plant determines the company’s tax rate. But there are disadvantages if a plant is in a remote area. It may not meet your transportation needs to put factories in remote areas just because of tax breaks. I’ve seen surveys on why companies set up plants in particular countries and localities, and tax incentives seem to be one of the least important factors. Decisions seem to be based more on the quality of the labor force, the transportation system, the helpfulness of the local government and people toward the company, and the product’s usefulness to that region. These seem to be the most important things; tax benefits are an added bonus.

Q. Will establishing sales offices in the EEC be enough for companies to stay competitive in the 1990s? What are the relative advantages of setting up a manufacturing plant in the EEC?

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A. Establishing sales offices in the EEC may or may not be sufficient. For someone who has never been to Europe, a distribution network is a starting point. Use independent distributors if you need to. After that stage, a wholly owned subsidiary might be established.

For years, companies have been encouraged to establish subsidiaries in the EEC. That has been the theme used by some of the investment authorities. But I’m not sure that people should rush into setting up a plant just to be there before 1992 or 1993. There may be economic advantages for dealing with Europe from the outside. It doesn’t appear that there’s a great groundswell of protectionism springing up under the 1992 program that will deny rights to companies that make products for the EEC.

The difference between establishing a sales office and a manufacturing plant has to do with ultimate profit. When you distribute through outsiders, they set the prices and they decide the margin of profit that ultimately can be received.

And even if a company runs its own sales and distribution network, you still have extra freight costs shipping everything from here. One Orange County company I represented, MAI Basic Four Inc., found that when they set up a distribution network, their repair people in West Germany were making very exciting improvements to their products. The West Germans just had to make the products more attuned to local needs. So, eventually, Basic Four started manufacturing in the Netherlands and West Germany. It was a natural evolution of their product line.

Q. What other advantages are there for companies looking to build a manufacturing plant abroad?

A. When you get the engineers working closely with sales people from those countries, your product becomes more successful. Ultimately, you have to consider manufacturing overseas. But don’t jump in right from the beginning. You have to do it step by step.

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If the American company has a manufacturing facility in Europe, it can generate whatever profits are possible in that marketplace. And transportation costs can be kept down. But you must be satisfied that you have this potential to grow to justify a much larger investment.

A distribution system requires nominal investment. Manufacturing requires major investment, but if you are careful about this and do it step by step, you will ultimately end up with a cost-effective manufacturing facility. If there’s an area where labor rates are less, you may be able to produce components that can be shipped back to the United States and incorporate them into products that can be sold here. So you have a double win situation.

Q. How much money will small- and medium-sized companies need to start an export division?

A. We’re talking about a very minor amount, besides the salary of a person (hired to head the export effort). When the company gets far enough, perhaps that individual could take a trip to look up some people they might want to do business with.

I think three inventions took place that have to be part of any business that has a global perspective. First, of course, is the photocopier.

The second is the facsimile machine. The fax allows you to send out messages as you’re going to sleep and, by the time you get up in the morning, you have your response. Their cost has gone down dramatically. You can get fax machines for less than $1,000. And you can rent them for about $50 a month.

The third technique is to have a computer or word processor. You’ll need this to file letters, memos and just keep up with the flow of work and contacts.

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Q. Where can companies with limited financial resources invest in Europe?

A. It all depends on the products the companies make. Whenever companies plan to set up facilities overseas, they are encouraged to do a survey between countries to determine the best place for their facilities.

I think the whole situation may change when the barriers come down and some of the previous advantages may disappear. If there are no barriers; if the cost of transportation comes down and delays in getting across borders are reduced; if a product can be developed in some of the less-developed EEC countries, such as Spain, Portugal and Greece; and if the labor forces are sufficient to handle that type of product, then maybe it’s worth considering these new locations.

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