Virginia is gaining a reputation as a major player in rapidly changing international marketsSeptember 28, 2010 5:59 AM
by Heather B. Hayes
Americans have an insatiable appetite for good deals, no matter where the shirts and shoes they buy are made. That’s one reason the U.S. had a $226 billion trade deficit with China last year.
But Lonnie Lemco and Scott Elles, co-owners of Richmond-based World Art Group, are making a dent in that deficit. They sell American-made decorative artwork — hand-colored reproductions of antique engravings and watercolors — to China’s burgeoning middle class. “The Chinese people really love traditional Western art, and they’re buying it to decorate their homes,” Lemco says.
China has become the company’s primary international sales destination since World Art Group developed an export strategy in 2003. Now exports are making a huge difference in the company’s bottom line. At a time when many businesses are cutting jobs, it has 26 employees and is hiring. More than 20 percent of the World Art Group’s revenue is the result of international sales through furniture stores and other retailers in China, Brazil, India, Canada and Australia.
Lemco says those sales have allowed the company to thrive instead of becoming another casualty of the economic downturn. “We would have definitely been in trouble if we hadn’t developed our export business.”
The company’s domestic sales have been tied to the U.S. housing industry, which has been in a slump since 2007. “It’s been a very difficult period for us over the last three years domestically,” Lemco says. “Our international business, on the other hand, has been growing at a 30 to 40 percent clip every year.”
A new economic order
World Art Group may seem like just another feel-good survival story in a tough economy, but it is, in fact, one small indicator of a new economic world order. Van R. Wood, a Virginia Commonwealth University professor who holds its Philip Morris chair of international business, has dubbed this new arrangement “Globalization 2.0.”
The first phase of globalization occurred, he says, when developing countries began making a huge volume of inexpensive goods for American companies selling primarily to consumers in the U.S. and Western Europe.
Globalization 2.0, Wood explains, acknowledges that demand now is growing among a swelling number of middle-class consumers in emerging economies like China, Brazil, India, and Russia. At the same time, many companies in these countries have matured to the point that they are major players in the global economy.
U.S. companies that recognize this changing economic model are finding new markets for their goods and working with foreign companies as equal partners rather than subcontractors.
“The game now is not about China versus the U.S. or China versus India or India versus Europe,” Wood says. “It’s about great organizations that build a value chain that stretches around the world, connecting the best and brightest people to produce the highest quality products and services that are in demand and fill human needs at the lowest possible price.”
Although Virginia is the 12th largest state in population in the U.S., it ranks 21st in exports. Nonetheless, Wood says the state is well positioned to take advantage of the changing reality of global trade. The commonwealth, he says, is quickly gaining a reputation as a major player in all three areas of international trade: exports, imports and foreign investment.
“Virginia has been on a roll the last three or four years,” he says. “It really does have all the things it needs, and it is doing all the right things it needs to succeed at international trade.”
State and national leaders increasingly tout international trade as an important tool in reviving the U.S. economy. In his State of Union speech in January, President Obama set a goal of doubling U.S. exports in the next five years. In August, he signed into law the Manufacturing Enhancement Act, a bipartisan bill that will lower tariffs on raw materials so that U.S. manufactured goods will be more competitive overseas. This month, the state-sponsored Virginia Conference on World Trade in Richmond will offer tips on how manufacturers and service companies can increase their international sales.
In competing on the world stage, Virginia offers a wealth of trade assets: a major deepwater port (the Port of Virginia); a major international airport (Washington Dulles); an extensive transportation infrastructure of rail, highway and inland ports; easy access to Washington, D.C., and a well-educated and skilled work force.
Virginia also has a network of state and local economic development organizations that are recruiting foreign companies to the state while also helping local businesses identify products and services in global demand.
The Virginia Economic Development Partnership (VEDP) has representatives in Japan, Mexico and Hong Kong. The agency expects to have additional personnel in place in China, India and the United Kingdom by July 2011. Trade and investment consultants are on call in 44 other countries. (In addition, the Fairfax County Economic Development Authority has offices in India, Germany, South Korea and Israel.)
“We have a great message to tell about Virginia, and our companies have high-quality, innovative products and services to offer,” says Paul Grossman, VEDP’s director of international development. “The key, though, is you’ve got to tell that message, and you’ve got to do what you can to get those products into those emerging markets that are willing to buy them.”
More overseas sales
During the past five years, Virginia businesses have increased the export of all goods and services by 56 percent, according to the VEDP. That momentum, however, was slowed by the recession. Sales of Virginia-produced commodities (the key measurement tracked by the U.S. Department of Commerce) dropped from $18.9 billion in 2008 to $15.1 billion in 2009. These products include electronic circuit boards, bituminous coal, tobacco and soybeans.
But international exports now appear to be on the rebound, according to Theodora Noll, client services manager at VEDP. In the first six months of 2010, commodity sales to foreign markets were up by 15 percent over a comparable period in 2009.
Noll attributes this recovery in part to the weak performance of the dollar, which makes American-made products more affordable to overseas buyers. Also, exports increased because a growing number of Virginia companies have turned to overseas markets to diversify their customer base.
“We have noticed that many companies, with the domestic market being what it is in this economic downturn, have really had to turn to international markets, because in many instances they may have lost domestic market share,” Noll says.
“By going international, they’ve been able to continue with production and minimize the impact of that domestic decline in their revenue,” she adds. “In many instances, their international sales have kept them afloat, preventing furloughs or layoffs or having to shut down parts of their operations.”
In fact, some Virginia companies such as Bode Technology Group have thrived in the international market. Lorton-based Bode offers a unique DNA identification service, as well as DNA testing kits and training. The company began working on an export strategy in 2002. It took nearly a year to get its first international contract, says Ed Huffine, Bode’s vice president of humanitarian services and international development. Seven years later, international sales now account for 25 percent of the company’s total revenues. It has contracts or proposals in more than 70 countries, and this year has increased its staff from 100 to 130 employees.
Huffine says international deals also have helped the company gain new U.S. customers, especially state and local governments. “They saw our successes overseas as validation of our ability to work in difficult environments, and so the international business resonates domestically and vice versa,” he explains.
(Bode’s success also attracted a suitor. Its parent company, GlobalOptions Group Inc., is selling it to New York-based LSR Acquisition Group in a deal worth up to $30.5 million.)
International sales success also came quickly to Virginia Beach-based VSD LLC, which provides software engineering, consulting and analysis services. The company began exporting in 2008, and international sales now make up 50 percent of its revenues. VSD doubled its work force in the past year, jumping from 50 to 100 employees, says Fred Stewart, director of international business development. The company currently has projects in the Middle East.
“Our goal is to increase our revenue and increase the size of our company while continuing to do great work,” Stewart says. “Our international work has enabled us to meet that goal and, based on how things have gone so far, we anticipate that will continue to be the case in the future.”
But some Virginia companies entering the international market have faced daunting problems. Mary and Paul Schellhammer, owners of Spice Rack Chocolates in Fredericksburg, were thrilled when, with the help of VEDP, their first foray into international sales landed their products on the shelves of Harrod’s and other high-end stores in London. Then their distributor dropped them. “I had chosen him because it was a fit logistically, but he didn’t have any other products like mine, and he had never dealt with the stores I was targeting, so it just wasn’t a fit,” says Mary Schellhammer, the company president.
After significant investments of money and time, Schellhammer is back at square one, but she hasn’t given up. She has turned once again to VEDP, which is now helping her negotiate with a new distributor. “It’s not a lost cause because I did learn at least that there’s a market out there that is interested in my product,” she states. “Logistically, it sounds easy on paper, but it does take a lot of perseverance.”
Foreign interest running high
While an increasing number of Virginia companies are dipping their toes in international markets, the commonwealth also has been successful in getting foreign companies to come here. More than 700 foreign-owned businesses from 45 countries have offices or facilities in Virginia. During the past six fiscal years, 49 percent of all capital investment made by companies new to Virginia has come from international sources, says Grossman.
In 2002, China Telecom Americas, a subsidiary of Beijing-based China Telecom Corp. Ltd., established an office in Herndon to provide telecommunications services to multinational organizations in North and South America. Tata Communications, a subsidiary of India-based Tata Group, recently selected Arlington for its North American headquarters.
Virginia has been particularly aggressive in recruiting cash-flush companies based in Asia, says James V. Meath. He is a partner and vice chair of the board of directors at Williams Mullen, a Richmond-based law firm that has been assisting the state on international trade. Meath recently traveled to Hong Kong and Shanghai with Jim Cheng, Virginia’s secretary of commerce and trade, who is a native of Taiwan.
“Apparently there have been a lot of people from the U.S. that have gone over there and tried to court the Chinese and then they just don’t come back and follow through,” he explains. “But it’s important to them and to their culture that you make a lasting investment and commitment. That’s what Virginia has been doing, and it’s paying off.”
Relationships, in fact, were a major factor in Mercury Paper’s decision this spring to locate a 400,000-square-foot manufacturing facility in Strasburg. The company is a subsidiary of Shanghai-based Sinar Mas Group, which makes paper towels and tissue products.
Mercury Paper CEO Philip Rundle says it was wooed by several other states, including Georgia and North Carolina, but company officials were impressed by the attention they got from state and local economic development officials in Virginia.
“I would say that they outplayed in this chess game all the other states,” says Rundle. “They took the time to understand what we needed, they put incentives on the table that were very, very attractive, they helped us with site selection, and they helped us with job fairs. They made it clear that they really wanted us to locate there, and they partnered with us in whatever way was necessary to make that happen.”
Mercury Paper already has hired 186 employees and is adding another 200,000 square feet of warehouse space. The company’s next East Coast investment likely will also be in Virginia, possibly in the Hampton Roads region, according to Rundle.
Import traffic set to rise
The VEDP works hard to increase foreign investment and exports but it doesn’t focus on boosting imports, says Grossman. “The American consumer takes care of that,” he states.
But that doesn’t mean that imports aren’t beneficial to Virginia. Imports through the Port of Virginia, for example, have sparked the development of more than 240 distribution centers throughout the state, which employ thousands of workers. The presence of the port also has been crucial in decisions of many companies in locating in the state.
In 2009, the VPA handled about 10,000 metric tons of imports worth nearly $26 billion and 35,000 metric tons of exports, worth $19.2 billion.
The total value of imports and exports last year, $45 billion, was down 12 percent from $51 billion in 2008. VPA spokesman Joe Harris, however, expects port traffic to climb significantly after expansion of the Panama Canal is completed in 2014 to accommodate a new generation of supersize container ships. These ships will carry more than double the amount of cargo carried on today’s vessels.
The only East Coast port that will be able to handle the new ships fully loaded is the Port of Virginia, Harris says. “It’s not a possibility, it’s a reality,” he says. “We are in a very advantageous position in that we don’t have to do anything to get ready.”
He explains that VPA has the deepest water on the East Coast, the necessary cargo handling capacity and infrastructure and on-dock rail access service by Norfolk Southern and CSX, the two largest rail carriers in the East. And there are no bridge obstructions.
“They could show up tomorrow and we could go to work on them,” Harris says.
Right market, right product
In assessing prospects for international trade, Lonnie Lemco of World Art Group says Virginia companies must realize that there is not a single global market, but hundreds of foreign economies with distinctive characteristics.
“For our business, China is clearly booming, and I’m doing very well in Brazil because it’s a growing economy, but I can’t give away a print in Ireland or in Spain,” which are in recession, he says. “It’s really a matter of finding the right outlet, the right channel and the right product.”
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