Soviet ventures: a capital idea - foreign small business in the Soviet Union - include related article on planning a Soviet venture

Better Than Money Corp., a consulting firm in Bloomington, Minn., would not be on most people's list of candidates for successful Soviet joint ventures. It is a small firm, and the conventional wisdom is that business ventures in the Soviet Union are so difficult to establish and manage that only giant U.S. corporations like Pepsico and McDonald's ought to consider undertaking them.

But fortunately for John Tschohl, president of Better Than Money, conventional wisdom did not prevent him from participating in a 1987 trade mission to the Soviet Union led by Minnesota's governor, Rudy Perpich.

On the mission, Tschohl met Oleg Uralov, director general of Videofilm, a division of the Soviet film ministry. Tschohl proposed to Uralov a 10-year joint venture in which Better Than Money would make training films that Soviet managers in the hospitality industry could use to make their employees more hospitable.

Tschohl says he did not even have to show the $2,000 demonstration film he had brought with him to sell Uralov on the project.

Although it took a year for Tschohl to close the deal, the wait was worth it. The venture more than doubled Better Than Money's annual revenues, from less than $4 million to about $8 million, within two years.

Better Than Money is just one of many small and midsized businesses based in the U.S. and other Western countries cashing in on the Soviet Union's New State Enterprise Law of 1987. In fact, some 90 percent of the 900 foreign joint ventures under way in the Soviet Union are capitalized below $10 million, and the average is about $2 million. These ventures encompass a wide variety of manufacturing and service activities, including:

* Design, assembly, distribution, and service of computers and automation systems.

* Development of computer software.

* Management of tours, hotels, and restaurants.

* Production of pharmaceutical and medical equipment.

* Design of control systems for the fertilizer industry.

* Construction and restoration of buildings.

* Marketing, advertising, and export management for Soviet products.

* Publishing of books and periodicals.

With the Soviet economy in shambles, many more export and joint-venture opportunities of all types remain for Western entrepreneurs.

The Soviets currently are pursuing joint-venture partners for about 300 projects they deem critical. About 80 percent of those projects are in five areas: agribusiness, chemical and timber production, social services, machine building, and construction.

The Soviets also are shopping for approximately 1,000 types of consumer and industrial products, including color televisions, videocassette recorders, refrigerators, freezers, personal computers, automated industrial-process controls, footwear-manufacturing equipment, and food-processing and packaging machinery.

This shopping list is backed in part by a $6 billion loan from a consortium of Western banks.

One midsized U.S. company benefiting from that loan is Microdynamics, based in Dallas. In the spring of 1989, Microdynamics, with annual sales of under $50 million, won out over foreign companies several times its size in landing a $6 million contract to provide computer-assisted design (CAD) equipment to five apparel plants and two shoe factories in the Soviet Union.

Ray Cotten, Microdynamics' vice president of marketing, says the Soviets will pump about $1 billion into upgrading an additional 150 apparel plants and 50 shoe factories. Cotten wants Microdynamics to capture part of that money, and he believes the company has what it will take to succeed. One ingredient is top-quality equipment for sale, he says, and another is the firm's size. "In our company, you run out of bureaucracy pretty soon," Cotten says. "The Soviets can go back to their bosses and say they have a commitment from the president or vice president. It helps them move faster."

According to Cotten, the third ingredient of a successful Soviet venture is a good agent or other representative with a successful track record in the U.S.S.R. This assertion is supported by the experience of AlphaGraphics, a franchisor of high-technology shops that offer quick printing and other publishing services.

In the fall of 1988, officials of AlphaGraphics, based in Tucson, Ariz., went to Moscow seeking someone with whom they could establish a franchise. They interviewed 20 prospective partners, mostly state ministries that wanted to create or upgrade internal printing divisions. But such an arrangement was unsuitable to AlphaGraphics, which wanted a retail business, according to Donald Isaacs, vice president of consumer marketing.

In addition, says Isaacs, AlphaGraphics was intent on establishing an outlet that would take in both hard currency, which has value outside the U.S.S.R., and rubles, which do not. Hard-currency profits would be repatriated; ruble earnings would be used for maintenance and expansion within the U.S.S.R.

Finally, AlphaGraphics used a Canadian firm, Phargo Management and Consulting Ltd., of Toronto, to forge a Soviet partnership. Phargo was then engaged in a joint venture with Kniga Publishing House, a division of Goskomistadt, the Soviet state committee for printing. Kniga wanted to open a retail printing operation, and a deal was struck through Phargo.

This AlphaGraphics-Kniga joint venture opened its first shop on March 6, 1989, at 50 Gorky St. in Moscow; it opened a second shop last Thanksgiving Day in the capital city's Hotel Cosmos. Most of the trade for these shops is with Western business and news-media representatives, who express no qualms about paying 25 cents to copy a page. Isaacs reports that through the first quarter of 1990, the shops had profits in both hard currency and rubles. The joint venture plans to expand to 10 shops within five years.

Although Soviet products generally are viewed as low in quality, in most industries there are products as good as or better than comparable goods made in the U.S. and elsewhere, and some are salable in this country. Thus, there is a potentially lucrative U.S. market for imported Soviet products.

Bering Co., a midsized firm in San Francisco that provides electric-generation equipment to hydroelectric plants, tapped this market in an unusual way. Bering offered three Soviet manufacturers of high-quality generators and turbines 49 percent ownership of the American company. Under the resulting joint venture, Bering has a vastly expanded line of products and services it can offer U.S. customers, and the Soviet partners--Electrosila and Encrogomashexport of Moscow and Leningrad Metalworks--have vast new foreign sales opportunities.

The arrangement is working well. "We are ahead of the goals we set," says Alvin Duskin, Bering's president. "We have bookings for about $35 million in power equipment now, and we thought we would have only around $6 million."

The success of this venture prompted Duskin to open an importing company and a consulting business for other firms seeking Soviet import ties. These ventures also are succeeding, says Duskin, who has found a Leningrad foundry to produce shipping containers for a San Francisco company and who is on his way toward importing $150 million worth of Soviet machine tools and agricultural commodities over three to four years.

Not all companies have been as successful in Soviet ventures as Better Than Money, Microdynamics, AlphaGraphics, and Bering. The hurricane-force winds of economic and social change in the Soviet Union can blow in the faces as well as at the backs of foreign firms of all sizes seeking to do business there.

Rubin Salant, owner of S&H Development of Seattle, has signed agreements under which he is to build tourist hotels in Tashkent and the Georgia Republic. But political unrest in those areas has put the projects on hold.

Salant also hopes to develop a 520-room hotel and cultural center in Leningrad, but recent changes in the city government have stalled key negotiations. Communist Party bureucrats who signed contracts with S&H a year ago have been tossed out of office, and Salant has been unable to meet with the Social Democrats now empowered to approve his joint venture, which actually is a business agreement with the city as a partner.

A more fearsome business nightmare is reported by Irwin Gaffin, co-owner with his wife, Margery, of AmeriBag. Last year this fledgling Kingston, N.Y., firm paid a trade representative about $6,000 to display its luggage alongside the goods of about 20 other clients at a large Moscow trade show. The idea was that each of the representative's small clients would get exposure they never could have afforded otherwise in Moscow, where exhibition space can cost tens of thousands of dollars.

The representative was to obtain orders, receive down payments on them in the form of Soviet goods, barter the goods for hard currency, and finally forward the money to his clients. The representative told Gaffin it could take up to six months to convert the Soviet goods into cash, but that the Soviets would demand their orders be filled within 60 days of the conversion date.

The representative returned after the Moscow show with orders for 135,000 bags worth about $10 million. Gaffin was amazed. Domestic business was slow, and Soviet orders of that magnitude would ensure AmeriBag's financial security.

Still, Gaffin faced a dilemma: There was no way his small operation could produce that number of bags within two months of receiving the down payment. His choices were to expand the otherwise sluggish business or to forfeit the Soviet trade. Gaffin decided to take a change; he expanded his manufacturing facility on the strength of the Soviet orders, which the representative assured him were bona fide. He secured financing for the expansion from a Small Business Administration loan.

It took one year before things really began to move for the Gaffins. Their representative spent months obtaining the appropriate signatures from five Soviet ministries. "It took one day to get the orders, and four months to have them approved," Gaffin says.

It took more time to line up European banks to handle the bartering arrangements to pay AmeriBag and the other 19 American clients. The Soviets will use metals and ores on their end, and AmeriBag will receive either direct payment from the bank group or guarantees for domestic financing.

Gaffin says that "even though our situation is working out, . . . business persons should expect to go very slow. [The Soviets] don't know how to market their products or themselves. And this is where we can help."

The U.S. and Soviet governments are enthusiastically promoting joint ventures among their nations' small and midsized firms. One recent initiative was to expand the number of bilateral trade missions, make available more information on the consumer sectors of each country, and appoint a coordinator to link Soviet and U.S. business partners.

Planned seminars will explain to business people and lawyers how to undertake joint ventures. A model joint-venture program linking a U.S. state with a Soviet oblast, or region, is being perfected. The program is based on the cooperative economic-development efforts of the Soviet Stavropol region and the state of Iowa, which actively began in 1988. And the U.S. Census Bureau is preparing a U.S.-U.S.S.R. statistical handbook, which should be ready for distribution in early 1991.

Also, the Soviets sent a delegation to the U.S. in February to study how all levels of American government assist small U.S. firms. As a result of that visit, the Soviets are crafting legislation to create a ministry modeled after our Small Business Administration. Edward D. Murnane, SBA's coordinator of Eastern European activities at the time, who hosted the Soviet delegation, explains his agency's motivation: "We believe that by helping [the Soviets] turn their economy around . . . [we will be helping] American small business in particular to enter into trade relations with the U.S.S.R. and other Eastern European countries."

Although joint government efforts may yield positive results for the Soviet economy, at least some U.S. business people think the Soviets might best be helped if both governments were to move aside. Says Ray Cotten of Microdynamics: "The American businessman probably can have a greater impact on the economic future of [the U.S.S.R.] than all the politicians in the world."

Businesses Doing Business In The U.S.S.R.

There were approximately 1,100 joint ventures with the U.S.S.R. as of November 1989, Soviet officials say, and about 100 were with U.S. firms. The small number of joint ventures, reported in a U.S. Department of Commerce publication, is attributable to several things, says John Tschohl, president of Better Than Money, a Bloomington, Minn., consulting firm engaged in a successful Soviet venture.

According to Tschohl, Americans lack perseverance and commitment in dealings with the Soviets. Most U.S. business people, he says, "want to pick up a check, leave, and not come back." Other shortcomings cited by Tschohl include a general unwillingness to enter into ventures whose profits cannot be repatriated immediately, an inability to cope with the Soviet business culture, a failure to obtain adequate assistance or representation, and a lack of marketing savvy.

Better Than Money is working with its Soviet partner to produce a 60-minute videotape that will teach Western business people what they need to know to deal with Soviets. The tape will sell in the U.S. for $1,000.

Following is some general advice from Tschohl and Charalambos Vlachoutsikos, a Soviet trader and business consultant based in California:

* Identify American products and services that the Soviets want or Soviet products that Western consumers want. If your firm cannot provide or import and sell any of these, don't waste your time and money on a trip to the U.S.S.R.

* Once you are convinced a Soviet deal could be right for your firm, identify prospective partners by attending Soviet trade fairs, even though attendance usually costs $5,000 or more.

The U.S. Department of Commerce's Soviet Export Counseling Service has information on these fairs; call (202) 377-4655. Also helpful in identifying partner candidates is the U.S.-based Amtorg Trading Corp., 750 Third Ave., New York, N.Y. 10017; (212) 972-1220.

* When in Moscow, visit the U.S. Commerce Department office, which can brief you on recent commercial developments, suggest specific markets, and provide meeting space and translating services as well as equipment for photocopying and sending telexes. Commerce also maintains a current list of U.S. trading companies that sell Soviet goods in the West. Commerce's address is 15 Ulitsa Chaykovskogo, Moscow, U.S.S.R. Or call 225-48-48.

* From your list of prospective partners, identify those who really are empowered to do business, and take time and great care in selecting among them.

* Do not hesitate to embrace creative marketing or contractual arrangements, such as involving a Canadian or other foreign business person with years of business experience in the U.S.S.R. When negotiating, send the highest-level executive possible. Some firms send recently retired high-level executives who have the time required to finalize Soviet deals.

* Work out all contractual details, even the smallest, before the joint venture begins operation. If you cannot bargain for payment in hard currency, be willing to accept an arrangement that calls for profits to be plowed back into the Soviet venture for a substantial period.

For firms interested in importing Soviet goods and selling them in the U.S., Alvin Duskin, president of Bering Co., a San Francisco firm involved in several successful Soviet importing ventures, makes this suggestion: "I advise anyone getting started [in Soviet importing] to approach the producers of useful products directly. . . . With them you can make a deal exactly as you would anywhere else."

On the other hand, Duskin says, "the worst thing a company [interested in establishing a trade relationship in the Soviet Union] can do is to go to Moscow and start talking to ministries. Americans spend millions each year and make contacts at the highest governmental level [and] nothing happens. They have wonderful conversations, good lunches, and get driven around Moscow in limos, but this type of business the Soviets consider another form of tourism."

William Mueller is an Iowa-based free-lance writer who specializes in Soviet-U.S. trade and economic issues.

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