Change Is Occurring at Warp Speed

Several decades ago, as Albert Einstein monitored an exam for a graduate level physics class, a student raised his hand and said there was a problem: the questions on the exam were the same as the previous year’s test. Einstein agreed. The questions were indeed the same, but in a year’s time the answers had changed completely. Given the accelerated pace of change today, the “answers” in business are not just different from those of last year. They are different from those of last month, last week, and, in many cases, those of yesterday.

As we enter the 21st century, new dynamic global trends are taking hold that are dramatically impacting business. As a result, many economic assumptions no longer seem to apply — yet new realities still need to be defined. And basing decisions on old assumptions undoubtedly will lead to undesirable outcomes.

One example is the new trend in rapid capital movements. Today, new sophisticated technology allows investors to transmit capital to all corners of the world at historically unprecedented speed. This is affecting assumptions about financial controls. Thus, the belief that governments or central banks still can manage their capital outflows or currency fluctuations to the same degree as in the past is dangerous and has resulted in extensive economic instability. This is exemplified by the recent Asian financial crisis, Mexico’s peso crisis that began in December 1994, and to a lesser extent, Great Britain’s and Italy’s withdrawal from the European Exchange Rate Mechanism in September 1992. And, as the speed of capital flows accelerates, foreign exchange and international business transactions that today exceed $1.3 trillion daily will continue to soar, further limiting government control.

An even more extensive trend well under way is the trend toward globalization. It is so massive that it is affecting almost every aspect of our lives. From a business perspective, globalization is forcing companies to seek markets outside their domestic arena. For many years, the United States’ enormous internal market more than satisfied the needs of U.S. industry. Globalization has changed this. The world quickly is becoming economically integrated, forcing unprecedented changes at every level of industry. U.S. companies need not look beyond their own backyard to realize they are in a very serious contest against experienced foreign companies. As a result, U.S. firms, both small and large, are facing record levels of foreign competition. For companies to survive and remain competitive in this environment, it takes more than a quality product or service at an attractive price. Today, it requires firms to expand internationally. And this demands access to capital.

For many small businesses, expansion will be achieved through exporting. However, in order to do this, businesses need the help and support of their financial institutions. Now, and to a greater extent in the future, an exporter’s ability to obtain working capital in a timely manner and offer attractive financing to foreign buyers will provide an important competitive advantage. And, in an increasingly competitive business environment, every advantage is vital.

In addition to globalization, other trends already have changed the nature of competitive advantage. New paradigms are emerging as old ones fade. For example, for centuries an abundance of natural resources was known to secure a nation’s competitive advantage. This is no longer the case. Japan, a country of much wealth and few natural resources, clearly has disproven this. Today, knowledge and information has become the new generator of competitive advantage. This is becoming more evident in every industry. Thus, many of our largest corporations, who for decades dominated the economic landscape, are being pushed aside by leaner, more knowledge-intensive companies. And since knowledge and skill are infinite resources, obtainable by both large and small companies alike, smaller companies are not disadvantaged by their size. As a result, a real sustainable competitive advantage is the ability of a small company’s workforce to learn faster than the competition.

Over the next decade, if a worker’s skill level is highly competitive, he/she can anticipate much opportunity and a higher level of income. However, if his/her skill level is not competitive, compared to workers anywhere in the world, this level of opportunity is likely to decrease. In today’s global economy, employment is increasingly tied to educational attainment and skills. According to the Bureau of Labor Statistics, in 1995, although the total unemployment rate averaged 5.6 percent, the rate was 12.8 percent for those without a high school diploma, 5.8 percent for those with only a high school diploma, 3.5 percent for those with associate degrees, 2.6 percent for those with college degrees, 2.3 percent for those with Master’s degrees, and 1.9 percent for those with doctoral degrees.

Change, which is often accompanied by fear and disorganization, is not always easy. But with change comes new challenges and exciting opportunities. Importantly, embracing these challenges and seizing new opportunities will help position employees, companies and lenders to succeed well into the future.

Lending and Trade Finance Has Changed Forever

The business of lending is no longer “business as usual.” Globalization, coupled with tremendous advances in technology, is having a profound effect on the financial sector. As a result, the old days of doing business solely in the domestic arena are over. And because many businesses today are contemplating nothing less than global expansion, their financial institutions must be able to satisfy their financing needs. To achieve this, lenders are taking steps to obtain a greater understanding of international trade and finance.

Like most industries, the banking industry is undergoing major changes at rapid speed. With the introduction of “nonbank” lenders (i.e., brokerage and investment houses, mutual fund companies, consumer credit operations), and acquisitions and mergers, the fewer banks that exist today are experiencing shrinking margins and eroding market share. To cope, banks are diversifying and offering more services in an attempt to generate larger market shares. From 1972 to 1998, the number of U.S. banks decreased from approximately 17,000 to 9,000. However, the number of international departments, which number approximately 300, has remained about the same, even though the number of customers and their needs has changed.

As international trade has increased, so, too, has the need for trade finance tools among exporters of all sizes. Thus, for many seasoned exporters, trade finance has become a regular treasury function, where accelerating international receivables and managing international credit risk are increasingly viewed as a variation on domestic collections and credit management. Many of these firms now use trade finance as “just another tool” to sell their goods — often providing an increasingly important advantage over European and Asian competitors.

Traditionally, domestic U.S. lenders have been very conservative with respect to financing the working capital needs of exporters. Thus, when payment was guaranteed by a letter of credit and confirmed by a well known U.S. bank, the domestic lender often would doubt the exporter’s ability to fulfill an overseas order and effectively collect on it, and refuse to incorporate the guarantee of payment as security for a working capital line. Even when the exporter was confident and exhibited a successful track record in selling to a particular customer, many banks were inhibited by their own lack of information of a particular overseas market.

More recently, however, the picture has changed. Spurred by programs offered by the SBA and Ex-Im Bank, and driven by competition, financial institutions have developed global networks and are more amenable to incorporating overseas sales in their customers’ working capital lines.

Within the international trade environment, banks have taken on a variety of roles. For example, they:

  • Provide working capital funds, with or without the guarantee of a department of the U.S. government, to the exporter;
  • Collect funds on behalf of the exporter, under a letter of credit or on documentary collection basis (see Chapter Two);
  • Buy the foreign currency received by the exporter and sell U.S. dollars to the exporter;
  • Provide funds, with the guarantee of the Export-Import Bank of the United States to the buyer (see Appendix B).

The Growth of U.S. Exports Benefits Lenders

Many U.S. firms have come to understand that in order to maintain a high standard of living in the United States, it is imperative that we develop strategies designed to support worldwide exportation. In fact, in just the last decade, the number of companies exporting — especially small and medium-size companies — has increased significantly. According to President Clinton, “Exports now account for almost one-third of real U.S. economic growth and are expected to grow faster than overall economic activity for the remainder of this decade.”

From 1990 through 1998, U.S. exports of goods and services increased from $394 billion to $931 billion, an increase of 137 percent. This supported approximately 12 million American jobs. What’s more, according to the Office of the Chief Economist, Office of International Macroeconomic Analysis, Department of Commerce, workers in jobs supported directly by exports earn 20 percent more than the average national wage. Workers in jobs supported directly in high-technology industries receive 34 percent more. And workers in jobs supported both directly and indirectly by exports are paid 13 percent more.

The non-traditional export of services also will become a major generator of economic growth in the future for many U.S. sectors. Typically, services now account for 60 to 70 percent of gross domestic product (GDP) for industrial members of the Organization for Economic Co-operation and Development (OECD). And because services are not yet internationally traded on a large scale, the benefit to their trade balances is not yet evident. Thus, in 1965, services accounted for 24 percent of total exports; in 1998, services accounted for 28, just slightly more. This, however, is anticipated to rise significantly. Currently, international trade in services is growing at a faster rate than trade in goods. As this trend continues, service exports will have a greater and greater positive impact on a company’s and country’s trade balance.

Most politicians, scholars and business people agree that exports are very good for the United States and participating companies. But just how good has been difficult to determine. And the impact on U.S. workers has been questionable for some time. Over the past few years, however, more data has been collected and analyzed. And the quantifiable results are very positive. Additionally, selling products in diversified markets, located throughout the world, not only raises corporate sales figures, but also spreads the risk, should a particular country or region experience a period of slow or negative economic growth. But that’s not all. According to the report, Why Exports Matter: More!, published by the Institute for International Economics and The Manufacturing Institute, “in U.S. plants that export, worker productivity is higher, jobs are compensated better and technologies are adopted more aggressively than among non-exporters.”

The report contends that since the late 1980s, plants and firms that have sustained an export commitment, or that have initiated exports, experienced almost 20 percent faster employment growth than those that never exported or stopped exporting. Additionally, these plants and firms were 9 percent less likely to go out of business in an average year. During the period of 1987 through 1992 (latest available statistics), employment at a typical plant fell 2.5 percent, while employment at exporting plants grew approximately 18 percent, indicating better corporate performance. In fact, the report states that communities that hosted exporters benefited from a stable, growing, high-performance workforce and tax base.

Many companies in foreign countries already have learned the lessons of globalization and have adapted. For example, a relatively large percentage of Canadian gross national product (GNP) is dependent on exports. In order for Canada to maintain its high standard of living, Canadian companies must operate on economies of scale that necessitate larger markets than are provided by its domestic population base of only 30 million. As a result, Canadian exports are of extreme importance to Canadian companies and to the overall well-being of the Canadian economy. Very simply, many Canadian companies must export or go out of business. Companies located in many areas of the world, specifically in Belgium and Hong Kong, also have small domestic markets and need to export in order to maintain their high standards of living. In many cases, imported goods are further processed, adding value, and are then exported.

In 1998, world merchandise exports were $5.5 trillion. According to the World Trade Organization (WTO), the United States was the leader, with 12.7 percent of world merchandise export share — up from 11.6 percent in 1995. However, on a per capita basis, the United States ranked low as compared to other developed countries. Germany was second with 10 percent; followed by Japan with 7.2 percent; France with 5.7 percent; the United Kingdom with 5.1 percent; Italy with 4.5 percent; Canada with 4 percent; and the Netherlands with 3.7 percent. Interestingly, in tenth place was Hong Kong with 3.2 percent of world export market share; in ninth place was China with 3.4 percent.

How did Hong Kong, with a population of under six million, rank almost equal to China, with a population of 1.3 billion? In order to survive, Hong Kong has no choice but to export on a massive level. Because “necessity is the mother of invention,” in 1998, Hong Kong exported $174.1 billion in goods globally. Of this, only $24.3 billion were domestic exports, or exports originating in Hong Kong. Due to necessity, many small companies worldwide and in nearly every industry are exporting or teaming up with foreign partners as a way to expand internationally. “Going global” has become a basic fundamental of business. And if banks wish to remain competitive, they increasingly will have to serve these new needs of business.

Export Participation by Small U.S. Firms Is Rising

Export participation by small and medium-size companies is significantly higher than at any time in the past, according to the Institute for International Economics and The Manufacturing Institute report. And according to the United States Small Business Administration (SBA), small businesses provide virtually all net new jobs, represent 99.7 percent of all employees, and provide 55 percent of innovations. Their international success has numerous implications for every industry — especially the financial industry.

Many small firms new to exporting are unfamiliar with international receivables and managing international credit risk, while those familiar with exporting often cannot obtain the financial tools they need. Consequently, lenders have an opportunity to increase their value to small businesses that export. To do so, however, first requires an understanding of the obstacles that small businesses face.

For instance, one of the obstacles small firms regularly face when exporting to developing countries is the foreign buyer’s difficulty and expense in obtaining financing to pay for imports. The banker’s ability and willingness to provide the exporter with a flexible financing structure, contingent on the level of risk, enables the exporter to offer more attractive and competitive liberal payment terms. This strategy is becoming more important due to the exponential increase in global competition.

The bottom line: exporters who can manage risks and move quickly to arrange financing at attractive rates win the business benefiting themselves and their banks. In order for banks to defend and increase customer market share, they need to be proactive in meeting the needs of business. As such, it is important to understand the dynamics of international trade from the exporter’s perspective; help him/her identify and assess opportunities, risks, and finance needs; and deliver timely, cost-effective solutions. Therefore, effectively managing international financial risk is becoming essential for export-oriented firms and a mainstream need in the marketplace.

While many small companies are already very successful internationally and have contributed to United States export figures, most will need to adjust their strategies just to keep up with changing environments. And many others, still unfamiliar with the international landscape, will need to act. Exporting can be more difficult and costly than selling in the next U.S. state — but also far more financially rewarding! Small companies often approach exporting with a great deal of trepidation. At first, pursuing global markets may appear overwhelming. However, by taking a step-by-step approach, companies will find it no more difficult than any new undertaking — an important lesson for both exporters and lenders new to international finance.

This appeared as Chapter One in the book Trade and Finance For Lenders, 1999.
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John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the ManzellaReport.com, is a world-recognized speaker, author and an international columnist on global business, trade policy, labor, and economic trends. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.




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