Doing Business in Western Europe, Part VI in an occasional series on International Business

As the European Union gains momentum, global-minded companies are finding it easier to do business in Western Europe -- but it's not yet a single market. Discover the challenges and pitfalls of conducting business with America's European cousins.

Many Americans can trace their ancestry back to Western Europe, where American armies have found both allies and enemies in a long history of conflict and war. To be sure, there are no other regions in the world that have closer economic, cultural or emotional ties than the United States and Western Europe. And as the European Union (EU) begins to take hold, Western Europe is poised to become the largest economic region in the world -- second only to the capitalistic U.S. Europe, of course, is already a major part of the international business scene. With about 390 million customers and a combined GDP of $24 trillion, global-minded companies cannot afford to ignore this foreign market.

The EU-U.S. Connection

Many experts say the impending EU will strengthen trade between Western Europe and the U.S. "We will be dealing with the two largest economies in the world, once the Union is finalized and all the kinks worked out," says Helmut Fischer, professor of economics at the University of California, San Francisco.

Indeed, a lot of red tape will be cut by the formal arrival of the EU, a federation of Western European states that will soon have a single currency and political infrastructure. This common currency, the Euro, will act as a risk reducer for American companies that have long been forced to deal with monetary fluctuations across Western European nations. In addition, once the Euro is fully implemented next year, American companies will no longer be faced with the challenge of converting a diverse assortment of Western European currencies into U.S. greenbacks.

Joan McEntee, an international trade specialist with the law firm of Baker Donelson, says the reduction of currency risk alone should cause a dramatic increase in trade with markets that have previously been avoided, such as Spain and Italy. "These countries have had unstable economies and governments and one never knows what will happen there," says McEntee. "With the formation of the EU, all of the risk is taken by the federation as opposed to the individual states. It's a win-win situation for exporters to the region." She also suggests the Western European financial system is as solid as that of the States. "There shouldn't be too much worry about the Royal Bank of Scotland or the Societe General of France going under," says McEntee. "When you have a Letter of Credit drawn on a major European bank, there should be little doubt it will be honored."

For many years, major global marketers have approached Europe with an "if you can't beat 'em, join 'em" attitude. This strategy has spurred acquisitions, green-field developments and joint ventures that have provided U.S. companies with a local base from which to attack European markets. One major consequence of these foreign takeovers has been privatization and deregulation as European governments look for new ways to generate revenue.

"A major effect of privatization has been to open up markets to the full blast of international competition," says Ruth Stanat, author of "Global Gold: Panning for Profits in Foreign Markets," and president of SIS International Research, an international market research firm serving global-minded companies. The privatization and deregulation of the European telecommunications market, she points out, has attracted all the major North American carriers, as well as some from the Far East. "To compete, suppliers have enlarged the scope of the services they offer, improved performance, and reduced prices. Those decisions have transformed telecommunications Europe-wide to the point that the industry is converging on a single standard of service," explains Stanat. "International competition can be expected to do the same to whatever markets and marketing practices it encounters."

Western European Risk Factors

The EU market cannot be ignored, but doing business in this disparate region is far from risk-free. For all of the forces that unite Western European countries and make it an attractive marketplace, there are perhaps even greater forces that separate EU nations. Experts say the most common mistake, and also the most harmful, is looking at Western Europe as one huge market. Western Europe is not yet a single market, and it won't be any time soon -- even with the EU if full affect. It will take time for the markets to reshape.

There is a long list of complex issues that vary from country to country within Western Europe, like culture, language and politics to name a few. Culture and language are especially challenging for American's doing business with Europeans, who may speak any one of a number of different languages, and are often determined to do business in their mother tongue. The French view it as impolite to initiate a business relationship in any language other than French, says Stanat.

As well, some countries, like Germany, are still very formal in their approach to doing business and do not call colleagues by their first names. Italians, on the other hand, are known for being warm and expressive, and the British are much more informal than they once were. In Spain, the mode of conducting business is much the same as in most Latin American countries, where personal relationships are key to business success.

Americans are recognized worldwide for being very direct in their business transactions. U.S. companies like to see the deal hammered out in black and white before committing valuable resources to a project. While negotiating in the EU differs from region to region, there is one rule of thumb to follow when doing deals with your Western European cousins. "In Europe, they take things more at face value, so it's important that Americans working in Europe don't mislead Europeans by saying things that will be construed as a definite answer to something when it may not be," explains Peter Lenox, North American director for Glasgow-based Locate in Scotland, an international consulting firm designed to help companies penetrate the Western European market.

Cultural and language challenges aside, there are also drier business issues, such as Value Added Tax (VAT), the equivalent to sales tax in the U.S., Duty Draw Back, licensing, as well as constantly changing regulations that must be considered when approaching the EU market. One of the main concerns for most American companies, however, is the distribution infrastructure. Though pan-European logistics systems are being established, distribution systems are still largely organized along national lines.

New Hampshire-based toy manufacturer Just Pretend, however, reports good success with distribution efforts throughout Western European countries. "I can send a container of dolls out today to wholesalers in several markets, such as Germany, England, Scotland and France, and be very confident in the fact that those containers will be efficiently distributed."

Market Opportunities in Western Europe

To say that the Western European market is diverse would be a gross understatement. Depending on where you draw the line between east and west and how you treat tiny states such as Monaco and Liechtenstein, says Stanat, "Europe" consists of at least 15 separate markets. The cornerstones of the Western European market are the United Kingdom and Germany, but the full picture also includes Austria, Belgium, France, Italy, Spain, Portugal, the Netherlands, Switzerland and Scandinavia, which consists of Sweden, Norway, Denmark and Finland.

But as foreign as many U.S. products are to Western Europeans, the good news is that nations within the EU are equally as foreign in each other's markets and their proximity does not always generate affection. "Indeed, 2,000 years of warfare and rivalry among European nations ensures that a supplier from outside the region might easily be welcomed more readily than one based in a neighboring country," explains Stanat. "Conflicts stretching far back into history have left scars that can subconsciously influence buyer acceptability."

Market opportunities in Western Europe abound. But the idea is to enter in areas where your company has a competitive advantage. According to Stanat, European countries are highly receptive to new developments that improve efficiency and reduce costs and suggests there are two key opportunities to look for: products or services born out of a technological breakthrough and clever ways to serve the needs not currently recognized or acknowledged by European customers. U.S. firms that manage to identify a niche for their products will find a market that welcomes innovation, says Fischer. American-made computer software and peripherals, electronic components, health care and medical devices, and aerospace technology are well received in Western Europe. High-quality American food products and fashion are also in demand by EU consumers.

"Whatever the specifics, Europe represents an additional geographical market for product developments that have worked elsewhere," says Stanat. "As such, the risks normally associated with new product development are considerably reduced although not eliminated."

Much of the risk depends on the acceptance of the product or service with Western European customers. The EU consumer has many faces, but common expectations are found in areas of technology, customer service, pricing, quality and competition. Many describe Europe as a high-technology market that places great value on delivery speed and reliability, technical support, customized products, and post-sales service. Lenox points out that Europeans expect products to last and take product pledges very seriously. "This notion of guarantee is interesting, because a guarantee in the U.S. implies that if the product fails it will be fixed right away," explains Lenox. "The notion of a guarantee in Europe is almost a seal of quality guaranteeing that it won't go wrong."

Marketing products to Western European customers can be approached on two levels: pan-European or country-specific. However, cultural and language barriers are making it difficult to find success with pan-European programs. To ensure messages are understood, experts recommend packaging, labeling and promotion be created for each individual country. Some unfortunate translations have proved embarrassing for multinational marketers. For example, the Chevy Nova was a flop in Spain because "no va" means "does not go." Then there's Pepsi's slogan "Come Alive With Pepsi" that translates into German as "Come Out of the Grave With Pepsi."

"You have to understand the marketplace you are going into within Western Europe and that could be a micro market, a niche market, or a market within a certain country, insists Lenox. "Even within one country there are various regions that demand different approaches."

EU Distribution Channels

Once you've identified market opportunities in Western Europe, the next step is pinpointing your means of penetration into this foreign arena. The small- to mid-sized business may not have the resources necessary to set up shop in Europe, but there are plenty of American and European development agencies available to assist smaller companies with EU distribution options, such as commission agents, export companies and trade shows.

Commission agents
Commission agents, also called buying agents, are headhunters for foreign firms looking to purchase U.S. products. Their goal is to obtain desirable items at the lowest possible price. Commission agents, as their name suggests, are compensated for their services by their foreign clients. This is surely one way to break into international markets, but companies who are serious about global growth will not depend on being discovered by a commission agent. Aggressive-minded companies often seek the assistance of export companies.

Export companies
Export management companies (EMCs) and export trading companies (ETCs) are basically interchangeable terms. Regardless of what you call it, export companies can act as a smaller business's export department, soliciting and transacting business for its client. Some export companies even provide immediate payment for their client's products by either making financial arrangements or directly purchasing the products for resale under their own name.

Forging productive relationships with foreign representatives can be a costly and lengthy process, and it is in this area that export companies are invaluable to the American business owner. Top-notch export companies are experts in specific foreign markets, or with specific types of products, or both. As a result, they typically have well-established networks of foreign distributors in place for your company to tap into. There are a few caveats, however.

When using an export company there is always the danger that the manufacturer may lose control over foreign sales. As well, American companies must take care to ensure their product and company image is being well-maintained in international markets. There are certain issues of control that should be negotiated up front. For example, experts suggest requesting regular reports on the export company's efforts to market your firm's products and requiring approval of advertising programs and service arrangements. Experts say maintaining close communication with your export company should allow you to retain sufficient control of your brand assets.

Trade Shows
Cabletron Systems, an e-business communications firm based in New Hampshire, takes a more direct approach to European distribution. Though Cabletron has not established facilities in the EU, the company finds distribution via participation in annual trade fairs in Germany and England. Dan Oskawicz, Cabletron product manager, says Europeans just can't get enough of American technology. "We still have strong sales with our traditional buyers such as Germany and England, but it's these second tier countries that show the most growth potential for us," says Oskawicz. "Countries like Italy, Belgium, the Netherlands and Scandinavia are all clamoring for the newest technology."

A World of Help

Penetrating Western European markets can be daunting for many American business owners. However, there are numerous organizations and publications that assist companies with doing business in the EU. Here are a few:

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