A Strategy for Winning the Trade Game

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A Strategy for Winning the Trade Game

• Bob Graham
• Managing Partner
• Ridge Partners
• Sept 16th 2004
• North Carolina World Trade Association

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Ridge Partners

• Consults in the Storage, Networking, and
  Outsourcing markets.
• Bob Graham
• 30 years of experience in the technology
  business.
• Many years as an IT professional.
• Managed manufacturing and engineering operations
  in Europe the US and Asia.
• Built a 1b plus outsourcing company focused on
  international business.
• Industry leader in storage, networking and server
  technology.
• Manages investing in technology companies for
  major investors.

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A Strategy for Winning the Trade Game

• OK Roger assigned me this task.
• It made me think.
• Should I talk strategy again.. Boring..
• Maybe I should focus on a real situation.
• Hope this is interesting..

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A Strategy for Winning the Trade Game

• What do we mean Winning the Trade Game
• Growing your business globally.
• Reducing your costs by accessing global sources
• Following your customers as they grow.
• Being Profitable
• Survival!!

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A Strategy for Winning the Trade Game

• Whats an easy way to formulate global trade
  strategy
• Follow the supply chain from your supplier to
  your customer and manage it differently for each
  market and product source around the Globe.

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A Strategy for Winning the Trade Game

• Our Storage Systems Company.
• A semi-fictitious enterprise level storage
  subsystem product company. ASP is 5k to 100k.

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The Global Supply ChainA Storage System
Customer
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Our Storage Company

• Companys 2001 US based model
• 100 US based.
• Direct delivery to a VAR or a customer.
• Demand generation is accomplished directly by the
  company or indirectly through selected OEMs.
• Sales may be direct or indirect.
• Some sales are through OEMs, but no
  customization.
• After sales service from the company.
• Liberal use of in house engineering and
  manufacturing to support the customer.

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Our Storage Company

• 2001 Global Approach
• Sell to selected OEMs that have global reach.
• Some off shore demand generation.
• Some off shore after sales support.
• 2001 Global Performance
• Lack of global reach was limiting global sales,
  which should be 50 of sales and where only 5.

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Our Storage Company

• Financial Model
• Sales 2001 200m Growth _at_ 10-40
• OEM 15-30 Gross Margin
• Channel 25-40
• Direct 40-50
• RD 8-12
• Profit Margin 10-15

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Our Storage Company

• The first step
• The Customer and Market Strategy to go Global

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Our Storage Company

• Going Global Potential Markets
• Europe, mostly western.
• Japan, plus re-export
• Costal China
• Southeast Asia (Including Korea, HK, and Taiwan),
• Other areas.

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Our Storage Company

• Europe
• Ease of entry, especially if the company
  starts with the UK, Ireland and Scandinavia.
• - But, poor economic growth in Europe, and this
  is reflected in the technology sector demand.
• Lack of technology companies, means little or
  no local competition.
• - Every one is already there.
• Pricing is slightly higher than the US.
• Infrastructure is generally distributors and
  Vars.
• - After sales support is key.
• - Demand generation is key.
• - Could add 5-10 to the companys sales
  expenses.

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Our Storage Company

• The Solution for Europe
• Europe is a good place to start the going global
  process, ease of entry and language.
• Indirect Channel using Var's and Distributors.
• Start in the UK and move out from there.
• Focus on the mid size market and certain
  applications.
• OEM partnerships (There are not a lot)
• Tier 2 OEMs for specific markets with no
  customization.
• Use US Tier 1 access using customization and
  product differentiation.
• Demand Generation and Support
• Sales and marketing office with no direct sales.
• Back line support and training only.
• Gross Margin will be 20-40, Sales and support
  costs increase 5-10

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Our Storage Company

• Japan
• - Entry complicated.
• - Low growth but major technology market
• Big re-exporter, leads to channel conflict
  outside Japan
• Good infrastructure
• Japan OEMs know US companies
• Distributors and OEMs can do demand generation
• - Lots of competition including second tier
  locals.
• Sophisticated support organizations exist

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Our Storage Company

• Japan Strategy
• Exclusive agreements with one or two OEMs.
• Decide strategy on re-export by markets.
• Allow back line support from OEM.
• One or two distribution agreements for specific
  markets, perhaps in conjunction with the OEM.
• Demand generation office.
• Customization
• Gross Margin target 20-25 Sales and Support
  Costs additional 5-10
• Added RD 1-5

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Our Storage Company

• China, Southeast Asia, India
• Growing Market
• - Lack of sophistication in user base leading to
  limited initial market.
• - Lots of competition from Taiwan and others,
  mostly at the low end product area.
• Not sophisticated in the SW area, potential to
  complete with locals.
• - Your Japan and US OEMs may be competing with
  you.
• - Lots of trade barriers still in place.
• - Corruption is everywhere

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Our Storage Company

• China Other Strategy
• China
• Establish marketing partnerships with
  distribution.
• Use your OEMs.
• Support OEM deals from other geographies.
• Use outsourcing to gain leverage and experience.
• India
• Distribution only. Little demand generation.
• Watch out for redistribution.
• Taiwan Korea
• Do not enter these markets except with OEM
  partners or distribution.

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Our Storage Company

• So what does the Strategy look like.
• Demand generation in all markets.
• Several Tier 1 OEMs providing customized product
  to their markets.
• Tier 2 OEMs supporting regional and specialty
  markets.
• Distribution in selected markets
• Some Direct Sales in selected markets

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Our Storage Company

• But, There are some problems
• Channel conflict is hard to manage, especially
  the OEMs crossing market boundaries.
• Management and sales expenses have increased
  faster than margins.
• Logistics is a nightmare when being operated from
  the existing assembly plant in the US.
• US taxes are making the company uncompetitive.
• Profit is down and if the company ever IPOs the
  value will be horrible.
• Customized solutions have driven up product costs
  and RD expenses.
• Management expenses are up substantially.

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Our Storage Company

• So, We have done a nice job of Developing a
  Global Marketing and Sales Strategy
• But, Our Storage Company is missing its
  financial goals.

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Our Storage Company

• The Solution Go Global
• Our core competency is the system and our
  understanding of the customer requirements, not
  the supply chain.
• Focus on the non core supply and design to fix
  the financials.
• Outsource Manufacturing and Logistics
• Utilize ODM (Original Design Manufacturers)
• Force subsystem component providers to do more
  design
• Move to India for software and customer support
• Move the company out of the US to fix the tax
  problems.

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The Global Supply ChainA Storage System
Customer
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Our Storage Company

• Outsource Manufacturing
• Your components are or should be coming from Asia
  to your US facility and then being redistributed
  to your global customer base.
• Move Manufacturing to Malaysia or China to be
  close to your suppliers.
• Look for a supplier that can manage your
  logistics on a global basis.
• Use consignment models with large OEMs to reduce
  Cogs by eliminating low margin drives from your
  income statement.
• Potential cost savings 5-15 of COGS. Management
  costs rise by 2-5 of Cogs.
• Tax savings could be 30-50 on 35 rate, if our
  storage company is willing to reincorporate
  offshore, use other fiscal structures, and move
  RD offshore.

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Our Storage Company

• Use ODM Capabilities
• Sub systems and components can be completely
  designed by an ODM.
• Restrict this to commoditized portions of the
  product not core competencies.
• Encourage the ODM to resell the design across the
  industry to lower component costs.
• Best ODMs are located in Taiwan and Malaysia.
• Good use of an ODM will reduce RD costs and if
  also the ODM is the manufacturer, it should
  reduce COGS by rationalizing components.
• Potential cost savings 1-3 of RD, some COGS
  savings.

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Our Storage Company

• Force sub system component providers to do more
  design and implementation.
• Incorporate into their specs additional testing,
  qualification, and functionality.
• Have them deliver the components directly to your
  out sourcing supplier in an offshore location.
  Use NRE to reduce taxes.
• Pre-load software and customer product both in
  the component or the system at the outsourcing or
  vendor location.
• A classic example is pre-qualified disk product.
• Potential cost savings 5-20 of RD. Some COGS
  savings. Minimal Management costs.

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Our Storage Company

• Move to India for Software and Support
• Move non core software development to India. (An
  alternative might be Ireland or Russia.)
• Potential cost savings are 60 per head.
• Management costs will be increased by 10-20 per
  head.
• Will support tax strategy by having off shore
  RD, especially if the company is moved off
  shore.

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Our Storage Company

• So where have we ended up
• Sales are now global and we have accessed the
  available market. In 2005 the sales are 400m,
  part growth, part acquisition.
• Cogs has been reduced substantially.
• RD has increased due to customization, but
  reduced through ODM and off shore strategies.
• SGA has been reduced through the channel and OEM
  strategy, but increased due to management
  complexity.
• Taxes have been reduced substantially.
• Go public and get rich.

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A Strategy for Winning the Trade Game

• Thanks for listening.
• Questions?