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Construction of the gigantic stadium of Soweto

TRADE LINEIssue 17 August 2011

Coface's magazine for its clients and partners

Feature: United States

Focus on Asia

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Information review published by Coface - 12, cours Michelet - 92800 Puteaux

/// Jean-Marc Pillu, Publication Director /// Martine Haas, Managing Editor

/// Patrice Godeau, Chief Editor /// Françoise Crouïgneau, Editorial Advisor

/// ISSN : 1966-67802 I TRADE LINE I n°17

ContentsFeatureThe United States 3

EconomyThe United States facing the spectre of anaemic growth.The spotlight is on consumption, which accounts for 70% of the USeconomy and 18% of global GDP, even as the purchasing power ofUS households is under pressure. The federal debt is another concern, since growth is supported by fiscal and monetary policies. 4

FinanceAnalysis: Céline Choulet, Economist,Economic Research Department, BNP Paribas.The impact of the Dodd-Frank law on financial regulation remainshard to assess. 7

Services and industryUS companies are recovering but need to change strategy.Close-up look at the automotive, retail and construction sectors. 10

Interview: Kenneth Moyle, Executive Vice President of Coface North AmericaInvestment spending is picking up again, led by capital equipment. 13

Viewpoint: Roy Rabinowitz, Senior Vice President of Finance L’Oréal USA.The hidden benefits of credit insurance 15

LawHandbook on US Bankruptcy Code’s Chapter 11 16

The US marketThe euro’s surge against the dollar, a handicap for exporters.Coface’s “exchange risk for negotiation cover” provides immediateprotection upon responding to an international tender. 18

How to approach a vast market.A focus on local ties, a service-based approach and a marketspecific sales culture and products are essential. 19

Interview: Philippe Tissot, CEO and Chairman of EIE Global.Two key words, “ambition and caution” 20

Interview: Clément Lescanne, Head of Sales and Marketing at Ober. Start off with a French partner, much like the French VIE international internship program 22

InternationalAsia

AnalysisYves Zlotowski, Chief Economist, Coface With the exception of Vietnam, most Asian economies will enjoy solid and balanced growth. In China, the time for change hasarrived, the most dramatic being that of wage demands. 25

TRADE LINE I n°17 I 3

The United States remains the planet’s leading economic power. Asevidence, one need only consider the simple fact that the US consumeraccounts for 70% of the US economy and 18% of global GDP. Theeconomic spotlights are therefore focused for very good reasons on risingpetrol prices, falling housing prices, unemployment and unequal profitdistribution, all of which undermine household confidence. The outcome ofthe political debate between the Republicans and Democrats over the USbudget and national debt as well as the Fed’s orientation and monetarypolicy as from July are therefore also under close scrutiny.

Focus on the US economy.

The United States faces the spectre of anaemic growth

FEATURE: UNITED STATES

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Strengths

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The federal debtburden: pragmatism willlikely win outCoface North America held its CountryRisk Conference on the 12th of May inNew York against the backdrop of thedebate in Washington and the mediaover raising the US legal debt ceiling atthe federal level. On 9 May, the publicdebt exceeded the $14,290 billion limitauthorised by Congress. An ideologicalgap divides Republicans andDemocrats on this issue. The former areconditioning their support for raising theceiling upon drastic cuts in governmentspending, in particular the Medicareprogramme for retirees. The latter arepushing for tax hikes for the wealthiestAmericans, whilst agreeing to reductionsin some expenses, notably defence-related. A technical default by the US federalgovernment does not appear likely,since both parties demonstrated theircapacity for compromise last Novemberwhen they voted to extend the Bush taxcuts in order to support the still-fragileeconomic recovery. This agreementhelped the global economy stave off adouble-dip recession. In all likelihood,therefore, political leaders will againreach a compromise before the 2August deadline and after someelectoral concessions have been madeto assuage pressure from the Tea Partyon Republicans. The failure to reach acompromise would undoubtedly createfurther turmoil for the economy, sincegrowth has not yet become self-sustaining. But the expected agreement will needto be accompanied by a draft plan to

reduce the federal debt over themedium and long term. Placement ofthe US federal debt (still triple-A rated)on a negative watch by Standard &Poor’s in April and by Moody’s in Juneserved as warnings regarding the urgentneed to stabilise public-sector finances,since the budget deficit is expected toexceed 9% of GDP in 2011.

US purchasingpower underpressureNumerous negative effects areundermining US households’confidence. These factors come on topof the uncertainties surrounding neededreforms to public sector finances, whichentail the possibility of tax increases. Consumers must contend with risingprices, notably for petrol. At nearly $4

Christine Altuzarra, Analyst, Country Risk and Economic Research, Coface

• Pragmatism of political authorities in the conduct of budgetary policy

• Full employment is one objective of the Federal Reserve, which in the case of

price stability tends to focus more on core inflation than nominal inflation;

monetary policies are very responsive

• US dollar still plays a preponderant role in the global economy

• One-third of corporate earnings originate abroad

• Historically high net cash positions of large corporations

• Dynamic demographics

Weaknesses

• Reforms are harder to implement following the Obama administration’s loss of

a Democratic majority in the US House of Representatives

• High public-sector budget deficit and federal debt.

• Precarious financial condition of several states

• Consumption accounts for a significant portion of US and global GDP (70%

and 18%, respectively)

• Still weak production capacity utilisation rate

• Structurally high unemployment

• Workforce’s geographic mobility limited by the collapse in housing prices

• Substantial amount of infrastructure in a dilapidated state

consumer spending, whichis expected to grow bymore than 2% this year. Butthis growth in spending willbe limited by the continuedde-leveraging of UShouseholds. Householddebt has already fallen from132% of disposable incomein 2007 to 118% in 2010.Concerned about thefuture, US households willin all likelihood maintain ahigh rate of savings relativeto their past practices,around 6% of disposable income.

The pace of newjob creation isinsufficientIn an environment marked by cutbacksin public-sector spending andbudgetary rigour, the private sector willcontinue to play a key role in supportingeconomic growth through renewedhiring and productive investment. Asdiscussed earlier, although the trendobserved in the early months of 2011marks a turning point, with moresustained new job creation, it will not besufficiently dynamic to bring about asignificant reduction in unemployment.Investment spending on capitalequipment and software will continue totrend favourably (around 10% in 2011),in contrast to investment in the retail andproduction areas (-2%). The lattersectors remain in dire straits, eventhough large corporations postedrecord earnings in 2010 and are sittingon historically high levels of cash, whichin fact facilitate their share buybacks. Inspite of these strong results, companiesremain cautious. This caution can be explained in part tothe likely impact this year of risingcommodity prices on company profitmargins, with some sectors concernedthat they will not be able to pass on theprice increases further down the supplychain or, in the case of the retail sector,directly to consumers. Manufacturingcompanies – notably chemicals andtextile producers, transport companies


per US gallon, the price has nearlyreturned to its peak of the spring of2008, curbing consumers’ mobility andconsequently their consumption,notably of food and textile products.Compounding the problem of risingconsumer prices is the decline inhousing values. The residentialconstruction industry is experiencingpersistent sluggishness, as new housingstarts have plummeted and sales ofhousing have been depressed since theApril 2010 expiration of the first-timehome buyer tax incentive. Moreover,stocks of unsold housing could increaseto a significant degree, as banks andcredit institutions bring foreclosedhouses onto the market. The seizure ofthese assets was in fact suspended lastautumn after revelations of non-compliance with foreclosureprocedures. Approximately 2 millionhomes could be added to existingstocks, and at current sales rates it maytake three years to sell them all.Property asset values are thereforeexpected to continue to decline andremain underwater, i.e. below theamount of the mortgages contracted tofinance the purchases. This trend isrestricting people from job searches,since prior to this latest crisis they weremore readily able to move from onestate to another and follow the joboffers.

In addition to rising prices and declininghome values, the fragile labour marketrecovery is a third factor affectingconsumer confidence. The percentageof unemployed Americans remains veryhigh (around 9% of the working-agepopulation) relative to the usual USstandards. This figure rises to 16% ifone includes tenuous jobs. The share oflong-term unemployed workerscontinues to increase. More than 43%of unemployed workers have beenwithout a job for more than sevenmonths, and even more worrisome, themismatch between supply (educationalservices, healthcare and retail) anddemand (construction) is an obstacle toa substantial rebound in the labourmarket. Private sector job creation isexpected to continue to increase, but ata rate that is too low to make asignificant dent in unemployment. In2010, only 1.3 million jobs were created,compared to the 8 million lost as a resultof the crisis. The upcoming period ofbudgetary cutbacks at both the federaland state levels will dampen public-sector job creation and also negativelyaffect the establishment of trainingsolutions that are essential if structuralemployment is to be reducedsignificantly. In spite of these negative factors,however, the extension of theaforementioned tax cuts will support

Public debt: an ideological divide betweenRepublicans and Democrats„“


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for the United States has not returned to its pre-crisis level

Coface assesses the average default risk of companies based on their short-

term sales transactions, generally a credit period of no more than six months.

The rating for the United States (A2) has been assigned a positive watch.

Consequently, the country has not yet returned to its pre-crisis rating of A1.

To be sure, the US corporate default rate has begun to ebb since mid-2009,

when it reached a high of 220 (index base 100 in early 2007), whereas

defaults in France and Germany were 130 and 115, respectively. This

difference is partially due to the high degree of responsiveness by US

companies to the economic cycle, which leads them to enter Chapter 11

protection quickly. Nevertheless, the level of defaults remains well above that

observed before the crisis. Payment incidents recorded by Coface have

decreased significantly but remain slightly above the global average.


and agri-business – will be especiallyhard-hit by these commodity priceincreases. Yet another factor weighingon companies is the fallout from theJapanese earthquake and tsunami onthe electronics and automotive sectorsas regards the distribution channels andthe slowdown in the supply ofcomponents used in production. Forsmall businesses, meanwhile, thegreatest impediment to development isundoubtedly increasingly restrictedaccess to bank financing. This problemis compounded by the fact that regionalbanks (the main financial partners ofsmall businesses) have themselves beenweakened by their exposure to theproperty sector. In this environment,capital spending and employment willnot be able to record any majorincreases, especially since productioncapacity utilisation rates, which last Aprilstood at nearly 77% for the overallindustrial sector, have not returned totheir pre-crisis levels.

The foreign tradecontribution remains veryweakDespite the slowdown in economicgrowth observed in emerging marketcountries since the beginning of theyear, demand from these countries isexpected to remain vibrant. As a result,renewed growth in US exports isexpected to continue (between 7% and8%), helped by a favourable US dollarexchange rate. On the flip side,however, the foreign trade contributionwould at best make only a very slightcontribution to economic growth thisyear, given the increase in import priceson goods and services from Canada,the euro zone, Australia, Sweden andthe United Kingdom. The currencies ofall these countries are particularly strongrelative to the dollar. Although the dollarbill continues to serve as a safe havencurrency and could therefore experienceoccasional upticks, the trend this yearwill continue to favour negative pressureon the dollar.

The US Federal Reserve policy ofmonetary easing, commonly known asQE2 (“quantitative easing”), naturallyabetted the dollar’s slide. The Fed, it willbe recalled, decided to establish aprogramme to purchase long-termgovernment bonds from financialinstitutions with a dual purpose. The first is to raise inflationaryexpectations and therefore modify theconsumption and investment behaviourof households and companies in orderto prevent the United States fromentering a lasting deflationary period.The second objective is to drive downlong-term interest rates. The liquiditythus injected into the economy shouldfavour lending to economic participants.We now know that the Fed only partiallyachieved these goals, since new lendingvolume remains flat and well below thehighs observed prior to the crisis. This phenomenon must be viewed inthe context of the current de-leveragingtrend of economic participants, who onthe whole are showing little appetite fornew loans.

The risk of a slip without QE3At the time of this writing, a debate iscurrently under way over the possibilityof another round of quantitative easing(QE3) or some other form of monetarysupport for the economy. All signssuggest that the Fed, whose mission isto ensure both price stability (coreinflation target of 2%, i.e. excludingenergy and food products) andpromote employment (with a “natural”unemployment rate of 5.78% of theworking-age population), will extend itspolicy of monetary easing orreinvestment in government bondsrecognised on its balance sheet inorder to maintain liquidity in theeconomy. Clearly the Fed needs tomaintain low interest rates and a weakdollar, which supports the exportsector and therefore employment, whileat the same time funding the federaldebt through inflows from non-resident

Economic growth is supported by budgetaryand monetary policies“

Christine Altuzarra

investors. However, rising prices forimported products (excludingcommodities, which are for the mostpart denominated in dollars) wouldcontinue, thereby fuelling inflation. The risk of a surge in consumer priceinflation nevertheless appears to belimited, given the modest increases inwages and salaries in an environmentof high unemployment. In the firstquarter of 2011, core inflation was lessthan 1%, thus below the Fed’s target.The continuation of a weak dollar policywould nevertheless be a handicap forthe competitiveness of companies inthe world’s other economies, and theabundance of liquidity generated by aQE3 would increase the risk ofoverheating in numerous emergingmarket countries. That could heightenthe risk of a speculative bubble in assetprices. The well-known adage of JohnConnally, Richard Nixon’s TreasurySecretary, to a European delegationworried about currency fluctuations –“the dollar is our currency but yourproblem” – continues to apply today.Before the crisis, US economic growthwas robust thanks to the voraciousappetite of companies and householdsfor credit. Since 2008, it has beensupported by the US government’sbudgetary and monetary policies.Economic growth will be propped upyet again this year by budgetarystimulus measures adopted in late2010 and is expected to reachapproximately 2.2%. All indications arethat the recovery is not yet self-sustaining and that US medium- andlong-term growth is expected to becomparable to euro zone growth ratesof around 2%. In 2012, the Obamaadministration will have little leeway topursue effective budgetary stimulusmeasures, even in an election year.And yet household consumption is adecisive factor for self-sustaininggrowth. US companies clearly hold thekey to a return to better economictimes through new job creation and aredefinition of profit distributions.

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(FSOC) consisting of 10 members (theeight federal regulators, including theFederal Reserve, the Federal DepositInsurance Corporation, the Securitiesand Exchange Commission, etc., aninsurance expert and the TreasurySecretary, who chairs it). This macro-prudential oversight agency seeks toidentify systemic risks and issuerecommendations to minimise them. Ithas been designated as competent toarbitrate conflicts among regulators buthas not been given any real correctiveauthority. At the risk of upsetting

A still complex oversightarchitecture One federal banking regulator (Office ofThrift Supervision) was eliminated, butsome 10 new agencies were created,notably the Consumer FinanceProtection Board (CFPB) and the FederalInsurance Office (FIO). The supervision ofsystemic risk has been assigned to thenew Financial Stability Oversight Council

financial stability, the necessarycoordination between the FSOC and theFinancial Stability Board (FSB) (createdat the London G20 summit in April2009) is not mentioned in the Dodd-Frank Act.By introducing legislation as early as thesummer of 2010, US regulators soughtto take the lead on such major issues asthe handling of systemic risk andregulation of derivatives markets.However, the lack of convergence andconsistency among the prudentialregulatory frameworks of the major


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The Dodd-Frank Act, enacted 21 July 2010, has been described as the most

sweeping reform of the US financial system since the 1930s. This law is intended

to promote financial stability in the United States, limiting the inherent moral hazard

of some financial institutions “too big to fail” and protect investors and consumers

of financial products. The political conflicts and technical difficulties surrounding the

implementation of the legislation have nevertheless limited its impact, even as the

regulatory agencies complain about the lack of funding to back it up. The Dodd-

Frank law required that numerous feasibility studies (67) be conducted and that

application rules (243) be drafted by some 10 different regulators. Nearly one year

after the act’s passage, only 27 rules of the various sections of the law have been

specified by the regulators.

Financial regulation:the impact of the Dodd-Frank lawremains difficult to assess

Céline Choulet, Economist, Economic Research Department, BNP Paribas


income from arbitrage transactions areexpected to decrease, while operatingexpense (compliance measures to betaken by financial institutions to satisfythe new regulations, quarterly reports onoverall credit risk exposure ofcompanies, annual resolution andrecovery plans) is expected to rise.Some measures, which are designed toimprove the quality of mortgage loansand render the practices of lenders andbrokers more transparent, should limitallocations to loss provisions over thelonger term. Banks could partially offsetthe drop in their commission income byraising rates for other services. In fact,that concern may have led to theannouncement last 29 March of theentry into force of the Durbinamendment, which seeks to cap inter-bank commissions on debit cardtransactions and put an end to certainanti-competitive practices of the bankcard networks. The initial proposal, which set a ceilingof 12 cents per transaction, could havecut annual income from thesecommissions by up to 75%.

economic zones (United States, Europe,Asia) threatens to leave the door opento competitive distortions and regulatoryarbitrage at the expense of financialstability. Thus even as the migrationtowards Basel 2 remains incomplete, no commitments on the fulltransposition of Basel 3 or on the G20recommendations as regards financialsector remuneration have been taken sofar in the United States. Moreover, USregulators have considerable leeway asregards the interpretation andapplication of the Dodd-Frank legislation(scope of application, precise definitionsof the respective activities and products,compliance deadlines), such that itsimpact is difficult to assess..

Treatment ofsystemic risk, cornerstone of theDodd-Frank ActThe US law seeks to develop an optimalpolicy for reducing systemic risk(strengthened capital adequacystandards, concentration limits,separation of risky activities from thosecovered by public guarantees,transparency of derivatives market,tightening of criteria for grantingmortgage loans), by ensuring that thispolicy limits the problems of moralhazard inherent in public-sectorguarantees (increased contribution fromlarge institutions to the Federal DepositInsurance fund, living wills, orderlyliquidation and bail-in procedures) andthat it protect citizens..

Additionaloperating chargesfor banksSince the definitive rules have yet to bepublished, the cost of the newregulations for US banks remainsuncertain. Net commission income and

Some measures,such as theVolcker rule, could encouragethe transfer ofrisky activities from the bankingsphere to theshadow bankingsystemThe “Volcker rule” seeks to separatesome risky activities from those coveredby public guarantees, in the spirit of theGlass Steagall Act, passed in 1933 andrepealed in 1999. The rule prohibitsinstitutions that receive public backing(deposit guarantees from the FDIC,access to Federal Reserve liquidity) fromcarrying out proprietary trading activitieswhen such transactions are notperformed to cover transactionsconducted on behalf of their clients or intheir capacity as market makers. Bankinvestments and sponsoring of hedgefunds and private equity funds are also

The Volcker rule weighs heaviest on Goldman Sachs

Chart 1

memorandum publishedlast April to define theshadow banking system,by its economic function,as “a system of creditintermediation that involvesentities and activitiesoutside the regular bankingsystem, and raisessystemic risk concerns, inparticular bymaturity/liquiditytransformation, leverageand flawed credit risktransfer, and/or regulatoryarbitrage concerns.” According to thestudy’s authors, the size of the shadowbanking system in the United States atend-2010 was nearly $16 trillion,compared with only $13 trillion for justthe commercial banks (see chart 2). Distinct from traditional banks, shadowbanks are not covered by bankingregulations and do not enjoy public-sector guarantees. Shadow banks arevertically integrated along a sometimeslengthy intermediation chain andmaintain close relations with regularfinance. They use a panoply ofsecuritisation and short-term financinginstruments (issuance of structuredproducts, repo transactions). Some provisions of the US bankingand financial regulatory law seek tostrengthen the oversight of certaincomponents making up the shadowbanking system (hedge fundregistration with the SEC, regulation ofthe activities of the rating agencies,strengthening of requirements for creditrisk retention and transparency ofsecuritised products). However, some of the lessons of therecent financial crisis have not beenlearned. In particular, no proposal wasadvanced to regulate the risks posedby money market mutual funds orprevent a freeze of the repotransactions market in the event ofuncertainty as to the quality of thecollateral. The US repo market, whoseliquidity is provided by money marketfunds, therefore remains exposed to asubstantial risk of a run, which is whatled to the establishment of specialemergency measures by the FederalReserve in 2008.


(*) Pozsar, Z., Adrian, T., Ashcraft, A. and Boesky, H. (2010), Shadow Banking, Federal Reserve Bank of New York, Staff Report No. 458.


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limited to 3% of the funds’ capital and3% of the banks’ Tier One capital. Thecompliance deadline was set at twoyears from the time of the adoption ofthe definitive rules, which is scheduledfor between now and July 2012,renewable annually for up to three years.Even though the requirement to complywith the Volcker rule is not expected toapply until 2014, the large US banks(Goldman Sachs, Morgan Stanley, JPMorgan Chase and Bank of America)have taken the lead by pledging towithdraw from certain activities. Whilethe constricting nature of the firstmeasure remains difficult to evaluate,given that the boundary betweenprohibited and authorised activitiesunder the Volcker rule is tenuous, thelimit on investments in hedge funds andprivate equity funds should weighheaviest on Goldman Sachs. At 31March 2011, four of the six largest USbanks had exposure to alternative fundsand private equity funds that exceededthe Volcker rule limit by 3 to 23percentage points (see chart 1 page 8).

The Volcker rule has two majorlimitations:

• Barring a clarification of the scope ofprohibited activities, its applicationcould be countered by legalchallenges. The Volcker rule could alsocreate regulatory arbitrageopportunities, since the evaluation of

bank investments in hedge funds issubjective. These funds are for themost part recognised as level 3 illiquidassets (assets whose fair value isdetermined using theoretical modelsbased on unobservable parameters).

• This rule could lead to a transfer ofrisks from the banking sphere towardsless regulated investment vehicles.This risk is even more acute to theextent that the attention focused onlarge systemic institutions willundoubtedly motivate the creation ofsmaller entities susceptible of avoidingoversight from regulators.

The size of theshadow banksexceeds that of thecommercial banksRelying on a study by the FederalReserve Bank of New York(*), theFinancial Stability Board proposed in a

Céline Choulet

Size of the shadow banking system in the United States

Chart 2


competition between generic drugproducers and the large industryplayers, all coming against a backdropof healthcare system reforms and theexpiration of major patents.

Automotive

Detroit’s Big Three automakers (GM,Ford and Chrysler) lost the confidenceof US households in 2009 after they

Gross domestic product increased at a1.8% annualised rate between Januaryand March, after rising by 3.1% in thefourth quarter of 2010. Despite theweakness of these numbers, the USFederal Reserve still expects thatgrowth will continue at a sustainedenough rate to bring about a gradualdecrease in unemployment, even if thelevel is likely to remain high throughend-2012.Job creation should provide householdswith renewed confidence and motivatethem to borrow and spend more.Unfortunately, the indicators have beenpointing in the wrong direction in recentmonths. Along with many economists andpolitical leaders, many Americanscontinue to worry about the size of theUS budget and debt. This concern wasexacerbated by rising oil and petrolprices, although in April the price at thepump slipped back as a result of thedual impact of a collapse in demand

and the considerable stocksaccumulated. In the banking sector, the situation isimproving thanks to a turnaround inasset markets, the de-leveraging ofbalance sheets and lower interest rates.It nevertheless remains a concern forseveral reasons. The number ofimpaired assets and foreclosedcommercial and residential propertyassets remains high, demand for loansis flat and regulations could becomemore restrictive.The situation varies substantiallydepending on the industrial sector. Themanufacturing sector will contribute toGDP growth in 2011, thanks in largepart to the increase in exports.Chemical industry sales are reboundingafter several years of decliningproduction and are expected to grow by3% in 2011. The pharmaceuticalproducts sector, the largest worldwide,is expected to grow by 3% to 5%. Itshould receive a boost from the

Most US companies are currently in much better health than they were during the

economic crisis. Business volume is anaemic, but several economic factors have

contributed to the stabilisation of the growth cycle. Coface North America, a

subsidiary of Coface, gives us its point of view and analyses three key sectors of

the US economy.

US companies are recovering but must change strategy

For more information: www.coface-usa.com

• 50 Millstone Road, Building 100 - Suite 360East Windsor, N.J. 08520

• Telephone: 1-609-469-0400• Fax: 1-609-490-1581 • E-mail: [email protected]

Coface in the United States

Coface has been present in theUnited States since the early1990s. Its subsidiary, Coface NorthAmerica, currently has 400employees and markets credit

insurance solutions in the UnitedStates and Canada. It also offerscompanies commercial andmarketing information as well asreceivables management services.

last in the best casescenario until the fourthquarter, the drop indemand should enable theaffected companies torecover. In the meantime,the drop in supply hasprompted manufacturersto offer fewer salespromotions, which mayenable them to generatehigher margins on the stillunsold vehicles.

Retail

Last year, a number of factorsprompted households to reduce theirspending: the sluggish economy, anunemployment rate near 9.5% and thepersistent recession in the residentialhousing market. These factors allmotivated household consumers to bemore conservative and weighed onretail sales in 2010. The number of defaults in the sectorremained stable in 2009 and 2010.Blockbuster, the largest electronicsretailer in the United States, soughtChapter 11 bankruptcy protection andBorders, the second-largest bookstorechain, did as well in February 2011. Twosmaller, regional retailers Bernie's(Northeast) and Ken Crane's (WestCoast), also filed for bankruptcyprotection last year. With no majormergers or acquisitions in the sector,the market shares of the respectiveplayers remain essentially unchanged. Many of the large electronics massmarket retailers, such as Best Buy,HHGregg, Gamestop, RadioShack andRent-A-Center, have ceased offeringsales promotions as generous as those



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were particularly hard hit by the globaleconomic crisis. This crisis also showedthat the vehicles offered by these threecompanies were not competitiveagainst cars with more modern designs,reflecting more aggressive research anddevelopment efforts. Moreover, the Big Three’s sales consistmainly of pick-ups and SUVs asopposed to smaller cars, which run onless petrol and are increasingly favouredby consumers in the light of higherpetrol costs. This trend could affect theprofitability of the US carmakers, whichis largely dependent upon sales of pick-ups and larger vehicles. Ford and GMhave nevertheless reoriented theirstrategy and chosen to manufacturesmaller, more compact cars, as well asmid-size sedans such as the FordFiesta, Ford Fusion, Chevrolet Cruzeand Chevrolet Malibu. All of thesemodels sell well. Thanks to their amplenet cash positions, Ford and GM willalso be able to withstand any temporarysetbacks. The large US automotive manufacturershave recorded dramatic improvementsto their operating income. In 2010,Ford’s sales increased by 19% to 1.94million vehicles, while those of GM andChrysler rose by 7% and 17% to 2.2million and 1 million units, respectively.In the first quarter of 2011, Fordrecorded a profit for the seventhconsecutive quarter after years oflosses. This profit was the highest sincethe first quarter of 1998. GM’s first-quarter 2011 profit was $1.7 billion, thehighest since 11 years ago, when itrecorded a profit of $1.8 billion in thesecond quarter of 2000. Meanwhile,Chrysler recorded its first quarterly profit

($116 million) since 2006. After itsdisposal of Volvo, Ford has only theFord, Lincoln and Mercury brands,while GM has refocused its activities onfour major lines – Chevrolet, Buick,GMC and Cadillac – and has sold ordiscontinued the Saturn, Hummer,Pontiac and Saab brands. Ford also decided to round out its lineof luxury cars (Lincoln) at the expenseof Mercury brand vehicles, which thecompany ceased manufacturing asfrom end-2010. Ford plans to launchseven new Lincoln models over thenext four years, including a small car.The earthquake, tsunami and nucleardisaster in Japan seriously disruptedthe activities of automotivemanufacturers and suppliersworldwide. Automotive equipmentsupply chains incurred variousdisruptions, which led to productioninterruptions, workday reductions andorder cancellations.The United States is the leading salesmarket for Japanese vehicles, and byitself Japan accounts for 13% of globalautomobile production. Some 40Japanese automotive suppliersexperienced production problems as aresult of the shut-down of the nuclearpower plant and power outagescaused by the earthquake. The supply chain disruptions wouldappear to be less serious than initiallythought, and many suppliers believethat their production will return tonormal by the fourth quarter of 2011 orfirst quarter of 2012. The catastrophesthat occurred in Japan also representan opportunity for US and Europeanautomakers to regain market share.Also, even if parts shortages were to

construction picked up slightly at thebeginning of the year, but sales of newhomes fell once again following theexpiration at end-April of the federal taxcredit offered to new home buyers.Builders responded by cutting theirprices, and these reductions weighedon their margins. The scope of thestimulus measures proposed by the USadministration (to renovate motorwaysand bridges as well as in theenvironmental area) is partially limited bythe increasing scarcity of bank creditand widening budget deficits at thestate and municipal levels. This situationalso weighs heavily on some types ofconstruction such as offices andschools.For the remainder of 2011, the outlookmust be analysed with an eye towardthe fact that the US economy hasindeed begun to grow again, but stillfaces major handicaps. The drop inconsumer confidence combined withthe increase in the number of foreclosedhomes – which was already very high –only exacerbates the difficulties. At thesame time, the weakness in the labourmarket and restructuring of the retailsector increase the supply of offices andstores even as demand remains flat.

Macy's will in all likelihood generaterelatively satisfactory earnings. Thesmaller, regional chains such as Dillard'sand Bon-Ton will face an uphill battle, asthey struggle to differentiate themselvesfrom the large national chains. The discount and super-discount chainsare expected to hold on to the marketshares that they seized from departmentstores during the recession. Concernedabove all with shopping at the lowestpossible price, households will probablycontinue to favour these discountersover the department stores. This trendshould be confirmed over the next 18months. US department store earnings areexpected to increase at a very modestrate in 2011, much like those of otherretailers. The lack of confidence andincreasingly scarce credit are leadingconsumers to take fewer risks. TheNRF’s forecast of higher consumerspending nevertheless limits the risk ofincurring losses. Better stocksmanagement and cost reductions duringthe recession made it possible toimprove margins. However, the effects ofthese changes have already been felt. Inorder to generate continued growth inprofits, retailers will need to boost sales.It is not certain that they will succeed,given the aforementioned reticenceshown by consumers. Moreover,increased transport expense and anunfavourable exchange rate for importedgoods could weigh heavily on grossmargins in 2011. The increase in textilecommodity prices, which manufacturersare currently passing on to retailers,could affect the retailers’ profit margins.

Construction In 2010, some but not all segments ofthe construction industry experiencedrenewed growth. Individual home

advertised in 2009, in the wake of the2008 recession. Some smallerdistributors may, on the other hand, betempted to extend their salespromotions, thereby leading to lowerprofit margins and cash flows andcausing their key debt ratios todeteriorate. It can seem wise to cutprices in order to attract customers. Butsuch a strategy entails risks: too small totake advantage of the efficiency of thesupply chain and having only marginalleverage to pursue favourable priceterms with their suppliers, these retailerscould be drawn into a vicious circle ofsales promotions even as consumersremain cautious in their discretionaryspending. Overall, mass market electronics retailersstand to lose from any deterioration inhousehold confidence, as consumersbecome less inclined to purchase high-tech gadgets. Any time the economyexperiences a period of sluggish growthand consumers become gloomy, theirfirst spending cuts are made in luxuryproducts and consumer appliances.In spite of these handicaps, retailersappear to be well positioned to benefitfrom a recovery.The National Distribution Federation(NRF) estimates that retail sales willincrease by 4% in 2011, an estimate thatis nevertheless based on the unexpectedvigour of sales during the Thanksgivingand year-end holidays. They couldnevertheless suffer the impact of inflationresulting from rising commodity pricesand the still high unemployment rate.Even online sales, which reached arecord high of $43.4 billion in the fourthquarter of 2010 (up 11% relative to theprevious year), could fall if the pricevolatility of foodstuffs and energycontinues to force households to makecuts in discretionary spending. Department store earnings are expectedto disappoint in 2011, given the radicalchange in consumer behaviour and thefact that these retailers are incapable ofrecouping the market share taken awayby discount and super-discount storesduring the recession. Their sales growthis expected to be less than 1% this year,even as retail sales are expected torecord modest overall growth. Performance will vary from one storechain to the next. The large nationalchains such as Kohl's, Nordstrom and


The discountand super-discountchains are expectedto hold on tothe marketshares that they seizedfrom departmentstores during the recession

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“Investment spending is picking up again, led bypurchases of capital equipment”



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The situation in the property market remains challenging, but the large banks have

turned around, as have corporate earnings. The dollar’s weakness also makes US

exports much more competitive. Overall, companies that lacked the resources to

obtain guarantees during the crisis are now increasingly turning to credit insurance.

What is the situation of UScompanies on the credit front?

Kenneth Moyle (KM): The economicrecovery has enabled our clients toincrease their sales. This increase isaccompanied by increases in availablecredit and Coface credit insuranceguarantees. We are also observing renewed interestin credit insurance. During the crisis, theneed to control costs was such that UScompanies did not have the means topurchase guarantees. Now that they areseeing their sales grow slightly in amarket that is still fraught withsubstantial credit risk, they are moreinclined to obtain credit insurance. Theydo not want to see the considerableefforts made to survive the crisisreduced to nothing as a result of anunexpected default.

Have some sectors returned tonormal business volume?

KM: The turnaround in the NorthAmerican automotive sector isnoteworthy. During the credit crisis,manufacturers experienced their owncrisis. Demand was collapsing andconsumer credit was all but unavailable. This crisis not only provoked theinsolvency of General Motors andChrysler, but also that of manyautomotive suppliers. Although the largeautomotive suppliers are well known tothe general public, the crisis clearlyhighlighted the true scope of the supplychain. We thus discovered a panoply ofSMEs which, at first glance, had nothingobvious to do with the automotiveindustry. Subsequently, it becameapparent to what extent subcontractorswho manufacture parts andcomponents for large automotivesuppliers were affected by the near totalproduction stoppage at GM andChrysler.

We are also observing an uptick in retailsales thanks to the recovery of USconsumption. The evaporation of asubstantial portion of their property andfinancial market assets during the crisisprompted households to exerciseconsiderable caution and reduce theirindebtedness. They are once againready to borrow, albeit clearly in a morecareful manner than before, butconsumer spending is again on the rise.

Interview with Kenneth Moyle, Executive Vice President of Coface North America

We have a long wayto go and we are stillwitnessing manysecondary andtertiary effects

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According to some articlespublished in the trade press, UScompanies have accumulatedrecord levels of cash. Is thatreally the case and what are theconsequences?

KM: The Fortune 1000 rankings showthat companies have massive liquidityreserves. The turnaround in earningsdue to cost reductions generatedsubstantial cash, which companies arechoosing to hold. However, a significantshare of this cash remains abroad, ascompanies would prefer not torepatriate their foreign profits so as notto incur the tax liability in the UnitedStates. The large corporations’ massiveliquidity is not always available to beinvested in the domestic market.

Are US company investmentsback on the rise?

KM: US companies have cut back ontheir investments. They are concernedabout rising energy prices and apossible slowdown in global economicgrowth. That said, we are observingrenewed growth in investments sincethe end of the crisis. They are expectedto record overall growth of 6% to 8%this year, driven mainly by capitalequipment purchases. Meanwhile,construction spending will remain weak. We are also observing an increase intechnology investments by companies.Microsoft Vista was a failure from theirpoint of view. They now appear to beturning to Windows 7 and are beginningto replace old computers using theWindows XP operating system.

Consumption, the US growthdriver, is waning once again.What are the consequences?

KM: Despite a drop during the secondquarter of this year, consumptionspending remains higher than it wasduring the recession. While theturnaround may be modest, the trend isfavourable. US companies see it asgrounds for optimism. However, as long as unemploymenthovers around its current level of morethan 9%, the growth in consumption willremain limited.

What impact willPresident Obama’splan to stimulateexports have on theUS economy?

KM: Industrial companies,whose production accountsfor 12% of the country’seconomic output, remainthe spearhead for therecovery begun in June2009. They are benefitingfrom companies’investments in new capitalequipment and the demandfrom emerging marketssuch as China, Brazil and Mexico. USexports reached an all-time high inMarch. While the weakness of the USdollar may upset some of our tradingpartners, it nevertheless has the effect ofmaking US exports significantly morecompetitive.

The United States represent anenormous outlet market forconsumer electronics made inJapan. Does the recentcatastrophe there affect UScompanies?

KM: The events in Japan will in alllikelihood affect the automotive andretail sectors. Japan is a leading supplierof specialised automotive components,and the supply chain will be disrupted atleast temporarily. As regards retailing,high-end brands such as Tiffany & Co.,which generate a significant portion oftheir sales in Japan, will be negativelyaffected. Other retailers with a strongpresence in Japan such as Gap, Inc.and American Apparel will record salesdeclines in their Japanese stores. Wal-Mart Stores, which owns more than 400stores and supermarkets in Japan, willalso feel the impact. A substantial portion of consumerelectronics production has beentransferred from Japan to other low-costcountries such as China and SouthKorea. Nevertheless, the manufacture ofessential components, in particularcertain memory cards, remainsexclusive to Japan. Thus disruptions areto be expected, but they will be morelocalised than widespread.



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Are there other sectors that arestruggling to rebound?

KM: The market situation for residentialconstruction and real estate remainsproblematic. Many assets are stillsubject to foreclosure proceedings. Andthe stock of vacant housing unitsremains very high relative to any reliefthrough demographic growth. We therefore have a long way to go andwe are still witnessing many secondaryand tertiary effects. Demand forfurniture, flooring and householdappliances is highly correlated with newhome sales. A turnaround in residential constructioncannot be excluded at the regional levelthis year. It should be noted that thecentral regions of the United Statesexperienced a record number of naturaldisasters this year. Between floods andtornadoes, towns in some regions wereentirely destroyed and they need to berebuilt.

Is the banking sector back onsolid footing?

KM: The large New York banks havewithout a doubt recovered. Most havealready paid back the funds received aspart of the TARP plan and consolidatedtheir balance sheets by bolstering theirequity. The massive losses andimpairment charges on credits andderivatives are now behind them andtheir operations are returning to normal.I believe that credit standards haveimproved, but that demand remains wellbelow the pre-crisis peaks.

Despite the consolidation in the secondquarter of this year,consumptionspending remainshigher than it wasduring the recession„

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Interview by

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L’Oréal USA is the US subsidiary of the cosmetics industry’s global market leader,

which is based in Paris. It sells to large department store chains and thousands of

smaller, local boutiques. It has subscribed credit insurance from Coface North

America (CNA) for four years as part of a policy managed by Roy Rabinowitz, the

company’s Senior Vice President of Finance. Although his main responsibilities

involve legal matters (including taxation and customs duties), Rabinowitz is also

the person responsible at the company for determining customer credit limits.

“The hidden benefits of credit insurance”

“We pay close attention to our 50largest customers, who account forthe vast majority of L’Oréal USAsales,” notes Roy Rabinowitz. To limitthese major risks, L’Oréal USA hasworked with CNA to come up with aspecial credit insurance policy: creditsof less than $25,000 are not insured,those between $25,000 and $2million are reviewed and those above$2 million are systematicallyguaranteed.”

For credit lines of that size, direct andfrequent contacts with the main CNAunderwriters are necessary. Accordingto Roy Rabinowitz, CNA'sunderwriters are first-rate financialprofessionals. They are open-mindedand capable of obtaining suitableguarantees.

Based on his experience in creditinsurance, Rabinowitz has discoveredtwo unexpected benefits. “The mostimportant is unrelated to theinsurance policy we subscribed.Naturally, credits represent animportant part of our balance sheet,for which guarantees against non-payment are useful. But there are twoother additional benefits.

First, the decision to subscribeinsurance requires us to establishrigorous and standardised proceduresfor managing credit problems. Tosome extent, such proceduresreassure subscribers with whom wecommunicate more easily.”

In addition, credit insurance hasenabled L’Oréal USA to get closer toits own customers. “We really need tounderstand their business, in order tobetter define their needs as regardscredit,” says Roy Rabinowitz. Forexample, during the economic crisis,we discovered that our cosmeticsproduct displays attracted customersin the department stores, therebyconfirming the role of L’Oréal USA asan essential supplier to these stores.That enabled us to convince Cofacethat the department stores, cognisantof L'Oréal’s importance, would settletheir bills on time.

Mr Rabinowitz recognises that thisunderstanding of the customer couldlead to a change in direction. “Even ifthe answer to the credit request isnegative, we will continue to seek tominimize the risk profile by organising,for example, smaller or more frequentdeliveries or perhaps by monitoringstocks.”

Roy Rabinowitz, Senior Vice President of Finance, L’Oréal USA

Credit insurance enabled us to get closer to our customers and refine our sales policy

“Interview by


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The US Bankruptcy Code consists of 15 chapters; since October 2005 and with

the exception of Chapter 12, they are all odd-numbered.

The Chapter 11 procedure deals with the reorganisation of legal entities in difficulty

(“bankruptcy reorganisation”) and, occasionally, of individuals. Thanks to its

substantial flexibility, this chapter is often a reference point for the bankruptcy

reorganisation laws of many other countries.

The US court-ordered insolvency processes are administered by the bankruptcy

courts, which are special federal courts.

Handbook on US BankruptcyCode’s Chapter 11

Initiation of the procedure

The request to initiate bankruptcyreorganisation process is made by thedebtor when it can no longer satisfy itsliabilities (voluntary petition) or, more

rarely, by three creditors (involuntarypetition) whose total credits amount toat least $14,425 (this amount wasadjusted most recently in April 2010).To support the reorganisation request,the debtor must produce various

balance sheets and financialstatements, the list of the 20 largestunsecured creditors and make apayment of $1,039 to the court clerk’soffice for case handling andadministrative fees.

Jean-François Rondest, Group Communications and Claims Department, Coface


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implementation of the process andreviews the monthly reports preparedby the debtor.The trustee is responsible forconvening and presiding over thecreditors’ meeting (the so-called 341meeting of creditors in reference toarticle 341 of the Code) between the20th and 40th day from the initiation ofthe process. At this meeting, thedebtor testifies under oath on theconduct of the company’s activitiesand all its assets.

Filing a proof of claim

As a general rule, creditors do not haveto file a proof of claim if they alsoappear in the debtor’s schedules.That is not the case, however, in thecase of conditional, illiquid or disputedclaims, which require that a claim befiled with the bankruptcy court clerkwithin the prescribed deadline, so as tothen be recognised and authorise thecreditor to vote on the bankruptcy planand receive dividends.

Creditors’ committee

The US trustee appoints a creditors’committee consisting of the sevenlargest unsecured creditors. This committee plays a major advisoryrole during the process, controls salestransactions conducted by themanager and participates in thedevelopment of the plan.

The reorganisation plan

Along with a disclosure statement thatpresents the financial information of thecompany to enable creditors to reachan opinion on the feasibility of theproposals, the reorganisation plan mustbe presented by the debtor within 120days and approved within 60 daysfollowing its presentation (total of 180days).The court may grant a deadlineextension, which may not exceed 18months, plus 60 days for approval(total 20 months).At the confirmation hearing, thereorganisation plan is approved if itreceives more than half the votes in

number and two-thirds inamount of recognisedclaims for each class ofcreditors.Only those creditorswhose claims are modifiedby the plan (impairedclaims) may vote.The plan, whose averageduration is between threeand five years, is thensubmitted to the court forcertification. A plan rejected by a classof creditors maynevertheless be certifiedby the court (cramdown method) if thecourt deems that the plan does notdiscriminate against the dissentingclass and has been presented in goodfaith, thereby preserving all of acompany’s chances for recovery.

The concept of “criticalvendors”

This concept originates with thedoctrine of the need for payment andcase law. If the company’s reorganisation runsthe risk of failure because vendors,who are already creditors, choose towithhold new shipments essential forthe company to maintain itscommercial activity, the debtor mayobtain court approval for thesevendors to receive preferentialpayment for their pre-petition claimsand new deliveries. These vendors aregiven the status of “critical vendors”.In January 2002, the critical vendordoctrine was contested as part ofthe K-Mart Corporation bankruptcyproceedings before the SeventhCircuit Court of Appeals in Illinois,which had to address the abuse of thenumber of critical vendors receivingpreferential payments. Going forward,the debtor must justify that thedeliveries required for the continuedoperation of the business willultimately benefit all other creditors.

The debtor remains in chargeof the business

The debtor is responsible for turningthe company around and undertakesall measures aimed at reconstitutingthe company’s treasury. The debtor isknown as the “debtor in possession”,or DIP.That is the unique feature of thesystem, since the debtor is also thetrustee (except where fraud, deceit,incompetence or gross negligence isinvolved, at which point a case trusteeis appointed).The manager may undertake all currentmanagement and asset disposalactions independently as part of thecompany’s activities. The managercontinues to operate the companynormally. For unusual transactions, the debtorneeds to obtain court approval afterconsulting with a committee ofcreditors.It is up to the debtor to settle normalexpenses incurred following the“bankruptcy reorganisation” and, eachquarter, US trustee fees until theprocess is either converted into aChapter 7 (liquidation) proceeding orconcluded through a vote on theChapter 11 reorganisation plan.

Automatic stay

Individual claims by creditors aresuspended for all claims originatingprior to the declaration of insolvency.That is the so-called automatic stay.This breathing spell is supposed toprovide the manager with anopportunity to reorganise thecompany’s business free from anyexternal pressure, which explains thecommonly used expression of acompany seeking bankruptcyprotection under Chapter 11. Creditors with secured claims may notexercise their financial guarantees,unless expressly authorised by thebankruptcy court.

United States trustee

The US trustee – a civil servant of theUS Department of Justice appointedby the bankruptcy court – oversees the



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Jean-François Rondest


The start of 2011 was once again marked by a sharp increase in the euro/dollar

parity.

After the European Central Bankincreased its benchmark rate from 1%to 1.25%, the first change since May2009, the euro reached a new high of1.47 against the dollar, a level not seensince December 2009 and a 13%increase in the first four months of2011. The appreciation occurred following ahighly uneven trend in 2010, as the

common currency fluctuated in linewith attitudes ranging from mistrust toappetite for the euro.As evidenced by the trend line on thechart below, the euro lost 18% againstthe dollar during the first six months of2010, at the height of the Greek debtcrisis. This downward trend was thenhalted by a confluence of severalfactors: the creation of a euro zone

stabilisation fund, the end to the strictyuan/dollar peg, the establishment ofbudget austerity plans in Europe, etc.The euro then embarked on an upwardtrend in the second half, albeit withfrequent corrections, and regained16% between June and November2010. This situation weighs on Europeanexporters, whose competitive position

Sylvie Portero, SME International Development, Public Guarantees Department, Coface

Euro versus dollar trend

The euro’s surge against the dollar, a handicap for exporters


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Sylvie Portero

Depending on the status of the negotiations, Coface offerstwo guarantees:

Exchange risk for negotiation cover Coface:immediately upon responding to an internationaltender

• Protection against currency losses: 100% indemnificationof any currency loss recorded at the time of payment.

• In the version with participation: opportunity to benefitfrom a 50% to 70% rise in the currency during thecommercial negotiation period in order to improvecompetitiveness.

• 11 currencies are covered: US dollar - British sterling -Canadian dollar - Swiss franc - Yen - Singapore dollar -Australian dollar and Hong Kong dollar - Norwegiankrone - Swedish krona and the Danish krone.

Also, under certain conditions, the Czech koruna andPolish zloty.

The cover binds the exporter only if the bid isaccepted.

Coface exchange risk cover for contracts: inthe final negotiation phase or for contractssigned within the past 15 days

• Contracts up to €15 million maximum

• US dollar and British sterling covered

The cover binds the exporter only if the contracttakes effect.

has deteriorated relative to companieswhose costs are denominated in USdollars.Companies that engage in occasionalforeign currency transactions musttherefore be able to stabilise the priceupstream from the transaction, as soonas the bid is made and even before thecommercial transaction outcome isknown.

That is the principle behind Coface’s“exchange risk for negotiation cover”,as part of the guarantees it manageson behalf of the State. Given thefluctuating environment, the exchangerate guarantee is essential to maintaincompetitiveness and profit margins. Itis not surprising that demand forguarantees increased by 22% in 2010relative to the previous year.

At present, considerable uncertaintyreigns: the debt crisis in Europe,persistent political upheaval in theMiddle East, the nuclear crisis in Japan,US deficit, etc. In other words, companies need to becautious and hedge against currencyrisk.


The US economy’s vast size attracts European exporters. Michael Deschodt has

helped exporters approach this market for seven years. He offers some tips.

Focus on the local connection

According to Michael Deschodt, “in theUnited States the key is not necessarily tosell but to provide high-quality service tothe market. A French company can easilymanage its exports to a neighbouringcountry such as Germany using itsexisting infrastructure. Thus an officeequipment supplier based in Lyon can sellhis products in Frankfurt without anydifficulty. But when you serve the USmarket, what do you do if business doesnot go as planned, or if trouble arises? Youfirst need to reassure your customer, lethim know that you will take care of him.For most industrial companies, that meanshaving an on-site presence. In somesectors, such as wine production orfashion, companies are fortunate to have awell-honed distribution network thatFrench exporters may use. But in otherbranches, everything needs to be startedfrom scratch. Companies find that they areisolated.”

Develop a culture of service

“The US business culture revolves aroundservices. In the United States, companiesexpect to work with local subsidiaries, andany difficulties should be resolved at locallevel. Customs clearance, for example,should take place even before newrelations are developed with a customer.Stocks should be kept on site, and inorder to succeed the company must beable to provide local service. Companies should have a full-timerepresentative in the United States. A

customer will be reassured to see a USaddress and telephone number on asupplier’s business card. The customer willthen feel confident that he will notencounter communications problemsrelated to time zones or language with hisnew business partner. Deschodt concedes that such an effort tomaintain a local presence requires timeand money. “The employees are the key tosuccess,” he adds. And that is where thechallenge lies for small export companies.Many face a dilemma. To establish a localpresence, they would prefer to send anexpatriate that they know and trust ratherthan hire someone on site. But the peoplewith the best chance for success are theones who are native to the country”. One effective method consists of using aFrench controller working with a localpartner, who becomes the company’sambassador in the US market. Deschodtrecognises that “it may be more costly, butit can also increase the chances forsuccess”.

Having a sales culture

“Another key factor is understanding thatthe US sales culture is very different fromthe French one”, adds Deschodt, whohimself has dual nationality. “Frenchcompanies have a hard timeunderstanding that US companies do notrespond to sales pitches based on ademonstration of their worth in the past.”The French approach consists ofdeveloping a good reputation and thenexplaining the company’s activities in

detail, whereas the US approach is muchmore direct. “The US customer wants to know howyou are going to satisfy his expectations,the time it will take and the cost.”

Suitable products for the market

“Don’t be afraid to adapt your product orhow it is sold or marketed,” saysDeschodt. Wine is a good example. UScustomers appreciate wine from aroundthe world: United States, France, NewZealand, South Africa, etc. So while theconcept of terroir (local area of origin) mayhave major connotations for French wineconsumers and exporters, a US consumerwill in all likelihood have a more generalapproach and will talk of a “Frenchchardonnay” as opposed to referring to aspecific wine region or French village. According to Deschodt, “the solution is tovisit the market and talk to somecustomers who might be interested in aproduct like yours.” There are manyorganisations such as the FrenchAmerican Chamber of Commerce that canbring together exporters and potentialcustomers. “The value of such marketresearch cannot be overstated. Americanswill answer you honestly. It is up to you tolisten and adapt your products andservices to satisfy their needs”, he adds. The French American Chamber ofCommerce is the largest organisation inthe United States in the area of Franco-American inter-company relations. Formore information on this institution, pleasevisit: www.faccnyc.org


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TMichael Deschodt, Director of Trade Services at the French American Chamber of Commerce in New York

How to approach the US market

Interview by




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Philippe Tissot jumped into the US market in 1999. Over 10 years, he has

experienced ups and downs, successes and failures, but has ultimately seen his

project through. As a French Foreign Trade Advisor, he also devotes some of his

time to sharing his experience with other SMEs interested in exporting.

For a service company such asyours, how does one launch aventure in the United States?

Philippe Tissot (PHT): As with anyinternational project, you need a goodbusiness plan, with a clear and well-defined strategy. You need to askyourself many questions. Where will Ibe in five years? How will I get there,and with what resources? What are theobstacles I will encounter along theway? What will help my company’sdevelopment? How are my productsand services better than those thatalready exist on the market? For theUnited States, you need to examine theregulations in your sector closely, andalso come up with a distributionnetwork. You also need marketinginitiatives adapted to the scale anddiversity of the country. Use a localagency. It will have a betterunderstanding of the market, how toapproach it, the requirements of yourfuture customers, the tone to use, thebest product design, etc. I think youneed at least three years in order to

find a niche. No improvising allowed.You also need a substantial budget tocover specialised legal fees andmarketing expenses.As you can imagine, for all that youneed time and a flawless organisation.A small company’s strategy can only beimplemented by its manager. He needsto be the one who visits the country, atleast in the beginning, and thereforecover his bases by entrusting themanagement of his company in Franceto a reliable deputy. Once on site, thecompany needs to implement reportingtools quickly in order to control andmonitor the activity closely andrespond quickly in the event ofproblems.

Doesn’t taking one’s time runcounter to the rapid responseinstincts of Americans?

PHT: You also need to allow for a keyexpectation of our American friends,i.e. responsiveness. Generallyspeaking, French entrepreneurs are not

responsive enough. An Americanbusinessman will ask a question ornote a problem and expect to receivean answer in quasi-real-time. Otherwisehe’ll have no qualms lookingelsewhere. While the French are knownfor having good ideas and goodproducts, they also need to improvethe quality of their sales support.

Is the use of lawyers a definingcharacteristic of the UnitedStates?

PHT: Absolutely! The omnipresence oflawyers in this country is impressive.Lawyers are everywhere, both in privatelife as in the business world. You have toprotect yourself against everything! Forexample, never interview a female jobapplicant alone to avoid being accusedof harassment. Leave your office dooropen during the job interview or meetthe job applicant along with anotheremployee. There are roughly as manylawyers in Chicago as there are in all ofFrance. In practice, remember that in

Philippe Tissot, CEO & Chairman of EIE Global

“Ambition and caution”, two key words when approachingthe US land of opportunity


the legal area, jurisprudence takesprecedence over the law itself. In thecase of a dispute with a customer,employee, supplier or even a partner,the contents of the contract are binding,regardless of the actual law. If you havesigned a contract with a loophole, theopposing party will seize it and it will beyour tough luck! Don’t wonder whetheror not you need a legal advisor tomonitor your activity. It’s essential. Theonly question one should ask is howmuch to budget in the business plan,knowing ahead of time that it will needto be substantial! In the United States,the rules of the game are clear. In theevent of a legal dispute, the parties’lawyers are there mainly to haggle andearn money based on weaknesses inthe opposing party’s contract.

You refer only to specialisedlawyers.

PHT: Yes, it’s better to avoid generalistlawyers, even if they may be usefulinitially to get the lay of the land. Youwill want to find a lawyer specialising inintellectual property to protect yourbrand, another to draft your salescontracts, one for your employmentagreements, another to handle anagreement with a distribution network,etc. The proverbial image of how theWest was won in the 19th centuryinvolves a six-shooter in one hand anda Bible in the other. Today, the marketis won with a fistful of dollars in onehand and a lawyer in the other. In orderto choose well, you can look to theFrench Foreign Trade Advisors who are

present in the United States. They areexperts in guiding you to the bestspecialists.

What are the typicalcharacteristics of an Americanbusinessman?

PHT: It is always dangerous togeneralise, but the business manclearly has great qualities. He is open,welcoming, empathetic, trusting andenthusiastic. He has a solidunderstanding of business and apenchant for innovation. Americans likeforeigners and are quick to acceptimmigrants. Foreigners speak severallanguages, which for a native Americanis rare. Being a foreigner is “a plus”.Take advantage of it!Open and welcoming, the Americanbusiness man has no trouble talkingabout his business and experience. Ifhe trusts you, the US business man willbe perfectly ready to recommend you,even to a competitor. Being known andtrusted by one’s customers orprospects is necessary, but not alwayssufficient. Don’t think that the excellentrelations you have with a customer willlast forever, even if the relationship istantamount to friendship. Far from it.Americans, pragmatic as they are, arenot always loyal in business. Watch outfor compliments, which they are fond ofdoling out. You may occasionally havethe impression that you have sealedthe deal since your contact personappears enthusiastic and full of praise.Americans like to talk about what isworking, and only rarely about what

EIE Global, an advisory firm

EIE Global is a service provider that helps companies

exhibiting at international trade shows increase the return

on their investment.

The firm advises customers on the communications and

production strategy and control of event-related costs.

It also manages operations at the global level and delivers

turnkey solutions in each country where the company

exhibits: trade show communications, stand and event

production, related services, travel and accommodations.

The firm specialises in the defence, aerospace, security,

energy, environment, healthcare, information and

communications technology and luxury goods sectors.

Its growth strategy is based in part on winning market

share in the United States, where the firm generates more

than 50% of its annual revenues.

At present, the firm has 12 full-time employees and

annual sales of €2.5 million.

isn’t. You therefore want to be carefulnot to fly too high. It helps to be a bitparanoid. No one is looking out for you,and everyone wants your money or thebenefits of your products and services.Nothing is free.

Do Americans have a flair forinnovation?

PHT: I would even go further and saythat innovation is one of the drivingforces behind business in the UnitedStates. Americans flock to innovation.They will leave you at a moment’snotice for a supplier who, in their eyes,is more innovative, more profitable andmore efficient, or who offers themgreater value added.

In other words, competition smerciless?

PHT: The world’s largest economy isnaturally a highly competitive market.Competitive trends need to bemonitored very closely, in particularinnovations within the sector.Customers are constantly seeking newpartners who can provide them withmore value added. For that reason, youwill be readily welcomed by companies,but also just as easily pushed to thesidelines. You must keep selling thecustomer on the advantages of usingyour products and services, and lesson the purely technical aspects. FrenchSMEs are clearly not sufficiently awareof this principle and continue to focusmore on the technology than on themarketing.



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Interview by

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What advice would you give asregards payment means andcollection techniques?

PHT: As regards payment means,everything goes. In our case, ourservices are payable before the serviceis performed, which avoids any threatof unpaid bills. But in the event oftrouble, use a high-quality collectionagency based in the United States toact quickly and forcefully. Here again,the best solution is to have the generalsales conditions and commercialcontracts be as bullet-proof aspossible, i.e. be drafted with theassistance of specialised lawyers.

What do you think of the Frenchsupport system for SMEexporters?

PHT: In France, we have a remarkableand efficient system of support andsubsidies. This system has also madesignificant strides and become moreprofessional in the past 10 years. It isprobably one of the mostcomprehensive in all of Europe. It isone of the paradoxes of our country,which favours redistributing profits overlowering taxes. The lack of equity heldby SMEs is offset by the subsidies andgrants available to them. Thus, before

you venture abroad, contact theeconomic departments of your regionalor departmental council, your chamberof commerce, the local Coface office,Ubifrance, Oséo or the French ForeignTrade Advisors. It may appear thatunderstanding how these agenciesfunction and taking the time to meetthe people there and fill out all theforms is time-consuming. But in theend it will help you save time andundoubtedly enable you to takeadvantage of needed subsidies thatcan help you reduce your risk. Go tothe meetings that they sponsor in yourarea. That will also allow you to meetpeople from other SMEs andunderstand the reasons for theirsuccess and causes of their failures.Export subsidies involve a wide rangeof fields: management recruiting,customer development tax credit,equipment and intangible investmentfinancing, WCR, receivables protection,export diagnostic, etc. Take advantageof them! In fact, the French ForeignTrade Advisors (CCE), UBI France andChambers of Commerce and Industryare organising the third North Americanspringboard in February 2012 to enable100 French SMEs to gain a foothold inthe United States or develop theirbusiness activities there(www.cnccef.org).

In two words, what are the keyprinciples to remember when

PHT: Two words: “caution” and“ambition”, in no particular order. Youneed both to succeed in this hugecountry. Do your homework and don’tbe naive. Your success depends onyou, your energy, perseverance and theresources you set devote tosucceeding in the United States. Thecost of being unprepared andunprofessional is very steep. Theopposite is also true. If you are wellprepared, well informed, professional,well advised, ambitious and cautious,the United States is still the promisedland.



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“Start with a French partner, such as a French VIEinternational intern”

Clément Lescanne, Head of Sales and Marketing, Ober

How do you view the USmarket?

Clément Lescanne (CL): Winningmarket share in the United States is noteasy, especially with the euro’s riseagainst the dollar in recent years. For acompany like Ober, which specialises inhigh-end decorative wood wall panels,having an original product line that alsointegrates sustainable development in acomprehensive fashion thanks to itscontinuous search for innovation, is oneway to stand out from the competition.Another is to develop increasingly high-end products. For example, we hadpanels created by fashion designerChristian Lacroix. It is also veryimportant to invest heavily incommunications resources.

How did you enter the USmarket?

CL: We set up a representative office inNew York in 2009, with an employeeresponsible for coordinating anddeveloping our activity locally. Shemeets with architects to show them ourcollection, manages our distributionnetwork and establishes industrialpartnerships to outsource production. Iam convinced that for an SME such asour company, this approach is the best,most cost-effective and easiest tomanage. In fact we adopted the sameapproach successfully in Dubai andSeoul. All these office openings weremade with the help of Coface’s business

development insurance. Later, we willundoubtedly open offices in other UScities where the architect community iswell represented: Chicago, SanFrancisco and Miami.

Was Coface’s businessdevelopment insurance a usefulproduct?

CL: Indeed, although not for thereasons typically put forth. I’ll start bysaying that business developmentinsurance is only useful after a decisionhas been made, based on all availableinformation, to enter a foreign market.Once this decision-making process wasover, Coface enabled us to progressmore quickly, thanks especially to thefinancial advance we received. It is a realboost and also offers the advantage ofreassuring banks and making yourproject even more credible. In our case,the business development insuranceadvance enabled us to finance the start-up of the office and the advertising andpromotional campaigns.

What advice would you give ourreaders planning to enter theNorth American market?

CL: Leaving aside the traditional rules ofmarketing and communications, in myexperience it is better to have a Frenchemployee working in the United States,at least during the start-up phase (forexample a VIE international intern). As Imentioned, we sent over a youngwoman with strong qualifications: theequivalent of a master’s degree (Frenchbaccalaureate degree +5 yearssecondary education) and four years ofwork experience in Asia. In my opinion,that turned out to be less expensive andsimpler than it would have been to hirean employee locally. Moreover, that moveenabled us to avoid relying on lawyers,who have a tendency to complicatematters and slow things down. We’ll seehow it goes and whether our salesincrease at a sufficient rate. At that point,it will undoubtedly be necessary to addto the staff with one or more Americanemployees.

Interview by

Trade Line

With the Oberflex and Marotte product lines, Ober offers decorative wood

panels used to furnish stores, offices, hotels, conference and event rooms

and to decorate individual homes. Our customers include mainly architects,

designers, contractors and carpenters. The company currently has some

220 employees in France. In 2010 it generated sales of €41.7 million (+65%

relative to 2009), of which 60% abroad.

Ober, an SME specialising in high-end,

decorative wood panels


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With the exception of Japan and especially Vietnam, Asia is doing wellBack from Asia, where he participated in country risk conferences sponsored by

Coface in late May in Hong Kong and Beijing, Yves Zlotowski believes that most

Asian economies will record solid and balanced growth.

Yves Zlotowski, Chief Economist, Coface

Vietnamese economy is therefore a riskthat bears watching.

China: changingtimes China is yet another key area of concern.For the participants and economists atthe Coface conferences in Hong Kongand Beijing, this country has reached atrue turning point and fundamentalchanges have been under way since theend of the crisis. China managed to steer its way throughthe crisis in remarkable fashion. It usedthe tools at its disposal skilfully and withdetermination: substantial credit growth,stabilisation of the yuan, policy ofsupport for companies, and a majorstimulus plan. The result is that 2010 willremain, at least to all outwardappearances, a major success with 10%GDP growth. 2011 will undoubtedly be a more uphillbattle. The country has taken up thestruggle against inflation, a statedobjective of both the national and local

Overall, the Asian economies areperforming well, says Coface’s chiefeconomist. Most will enjoy solid andbalanced growth, which does not giverise to any specific concerns. However,hat is not entirely the case for Japan andVietnam. As for China, says YvesZlotowski, growth will remain promising,since any concerns are primarilymicroeconomic in nature, namely thegrowing role of that country’semployee/consumers.

Japan: the crisis is expected to endin 2012

A broad consensus is emerging thatJapan will experience three recessionaryquarters, followed by a recovery in thefourth quarter of 2011 and largelypositive growth in 2012, as the economyrebuilds from the vast damage causedby the earthquake early in the year.Ultimately, the impact of the Japanese

catastrophe on Asian production chainsappears to be limited. There will clearlybe a slightly negative impact onThailand’s industry in the first quarter of2011. However, Korean companiesappear to have been able to take up theslack left by Japanese companies, whichsparked the growth of high-value-addedKorean exports.

Vietnam: investorsremain reticent

The Vietnamese economy is the sourceof the greatest concern in Asia, with asubstantial current deficit, limitedcurrency reserves and successivedevaluations of its currency, the dong.While the authorities have taken variousmeasures to combat any overheating,the economists attending the HongKong conference expressed concernover the recent caution shown by foreigninvestors in early 2011. After all, foreigninvestment was a key driver of Vietnam’seconomic lift-off. A sudden landing of the


the short term it means thatcompanies will need toexperience disruptions andthat as a result the creditrisk is greater. For many years, the growthmodel was premised on anabundant supply of cheapand malleable labour.However, the commitmentof the well-documented“migrant workers” whoagreed to travel far fromtheir home villages isstarting to crumble. The“single child” policy has ledto a surfeit of individualism.The working age populationwill begin to decline in 2015. TheChinese worker is now increasinglylooking out for himself and is less willingto make substantial sacrifices for thecommunity.Overall, the Chinese market remainsextremely promising, with a growthmodel that is undergoing fundamentalchanges, but the market should beapproached with caution and a completeunderstanding of the facts, as thistransition may be fatal for some non-viable companies even if it benefits thecountry’s economy as a whole. Theselabour-intensive companies were highlyfavoured in the growth model thatreigned up until now but are lesswelcome in the new model that isemerging, which is not kind tooverinvestment.

authorities. The devil will be in the detailsso as not to suffocate growth. Interestrates are rising, as is the exchange rate,even as access to credit is falling.Chinese growth is therefore expected toslow in 2011. The only question iswhether this slowdown will be sudden,accompanied for example by a burstingof the property market bubble, or onlygradual. This second assumptionremains the most widely held. But this forecast is based on the ideathat the authorities still have control overthe economic levers. While that isprobably the most likely scenario, a fewcounter-examples are worth considering.To control the development of credit, theauthorities successfully brought about asharp slowdown in the official supply ofbank credit. In response to this restrictivepolicy, however, shadow banking isshowing signs of growth. Back-roombanking units, which are proliferatingoutside of any control, lend money tocompanies unofficially and atoccasionally usurious rates. To that mustbe added the growth in inter-companylending and debt issues. By its nature,inter-company credit creates a risk offragility by way of a domino effect if acompany’s insolvency spreads tocustomers and suppliers. This initialmacro-economic analysis highlightsweaknesses in the area of theeffectiveness of economic policy-making, but not of any long-termfundamental concerns. At the micro-economic level, the creditrisk exposure of companies is tending torise. The Chinese government’scommitment to put a halt to theovercapacity of its companies is real.The country’s production capacity needsto be streamlined, especially since thegoal is to shift production toward higher-end products. The authorities would alsolike to reduce the relative share ofinvestment in the country’s GDP infavour of household consumption.Moreover, companies no longer enjoythe tax incentives implemented duringthe crisis or easy access to credit. Otherchallenges include a rising currencyfollowing an extended period of nearlyfixed parity, higher commodity pricesand rising inflation.

But the most spectacular change willcome from wage and salary demands.They have been a topic of conversationfor years, but they are now real. Oneyear ago, the wave of suicides atFoxconn and the strikes at Honda werebroadly publicised by the Chinese media.The notion that value-added now needsto be shared with employees is gainingweight. Wage and salary demands arefront and centre. The annual rate of wage and salaryincreases, around 10%, was interruptedduring the crisis before returning with avengeance, averaging more than 20% in2010. That is a priority for the Chineseauthorities, since the increase inhousehold income is the key instrumentthat will enable the dynamic growth inhousehold consumption, one of themajor economic policy goals for theyears ahead. Meanwhile, labour market reforms arebeing implemented: wage negotiationsinstitutionalised within companies,strengthened employee representationon boards of directors, formalisation ofemployment agreements, etc. The roadis long, but the process of a growing rolefor the Chinese employee/consumer hasbegun. This trend is essential for thesustainability of Chinese growth. But in

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Yves Zlotowski

Wage and salary demands will representthe most spectacular change in China„“

12 Cours MicheletLa Défense 1092800 PuteauxFrance

www.coface.com

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