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Something Ventured:
Feb 5th

Insight For BC Technology Entrepreneurs

By Brent Holliday

The Lure Of The Euro

"As long as your going to be thinking anyway, think big. " - Donald Trump

British Columbia: Gateway to Asia. Vancouver: The North American city with the Asian influence and charm. Makes sense that companies would locate here to reap the benefits of increased trade with China, Japan and the rest of the ASEAN countries, right? Well, a lot of good that has done us over the past 18 months! Despite coming off the mat recently, Asia is a lousy trading region right now, especially for technology companies. Is there any chance for the complete recovery of the Asian tiger? Not likely.

Japan and its banking system are a mess. Despite government overtures to turn the situation around, the banks have still got billions of bad loans not yet reported to the public. The country is still in a recession. Exports improved a lot in late 1998 when the yen was getting creamed in the currency markets, but a recent bounce back has choked off that modest trade recovery. And make no mistake about Japan. Historically, it has been a low importer of technology. They have a strange "not invented here" syndrome when it comes to engineered goods. This mentality will take years to overcome. The Internet cannot even level the playing field for trade because NTT, the government owned telephone monopoly, charges the equivalent of $1.00 a minute for Internet access. Subsequently, Internet usage is very low.

China is a sleeping giant by most accounts. Many bullish entrepreneurs have bought into the hype of China's reformations and new capitalist ways. Heck, Canada sends a trade team over there every other week it seems. I do buy the theory that open trade will help break down the walls of tyranny and oppression. Eventually, yes it will. But, today China's centralist government still has control. Russia has taught the Chinese the dangers of letting go of the rudder completely. Some recent events (stealing missile secrets from the U.S., rampant copyright violations on software) have shown that despite some changes, a lot remains the same. Here's a quote from the spokesman for the German Commerzbank after default by China's GITIC state trust a week ago: "I don't think the banks are putting any new money in. There's a flashing yellow light there now." China's economy is uncharted water and the seller should definitely beware.

The rest of the ASEAN countries (Taiwan, Korea, Singapore, Philippines, Thailand, Vietnam, Malaysia, Indonesia) are all in various states of disrepair economically. Taiwan is by far the strongest economy and is turning into a technology superstar (Acer, TSMC and others). But China still thinks it belongs to the mothership. That means political uncertainty and risk.

You need look no further than earnings reports of major technology vendors to see the impact of Asia as a whole. Almost everyone I have seen recently has stated flat sales or modest gains in sales in Asian countries.

What's the point, Brent? Well the world is really dividing nicely into three camps economically: U.S. vs. Europe vs. Asia. Canada gets lumped unceremoniously into the U.S. market. If you are a technology company looking to sell your product and become an international mega company, you need to focus your sales on at least two of these three regions. Being in Vancouver, the natural edge for an exporting company would seem to be that we are uniquely positioned to take advantage of the U.S. and Asian markets. The U.S. is a no brainer. The market there is on a huge binge. It's 150 metres from my house and probably not too far from yours. We have Free Trade. This is where you get your original sales and success. Duh. Of course! But then what? Do you go to Asia? I guess, for now, the answer is no. Europe is where it's at. Let me explain:

- Europe has a smaller collective GDP than the U.S., but has a higher population.
- Four of the G7 are in Europe.
- The European stock markets have been on a dizzying upward ride outpacing even the venerable Dow since 1970 (More on that in Random Thoughts).
- The Euro has emerged unscathed from its introduction just a month ago and is a serious challenger to the yankee dollar. If Britain joins the Euro group, which it may have to despite hating the thought of being lumped together with the French and the Germans, then the Euro is more powerful than the U.S. dollar or the yen.
- According to one study, European computer sales grew at a 48% clip in 1997 and a 25% increase in 1998. While the slowdown is puzzling, the growth is still staggering.
- Finland is the first country in the world to have more cell phones than wireline models. Other European countries are soon to follow. Europe is killing the U.S. in wireless technology advances. Nokia and Ericsson (despite its recent stumble, more on that later) are undisputed leaders in wireless after Motorola stumbled badly in the 90's.
- Europe is the home of big pharma. Almost all of the world's giant drug companies are European.
- As far as consumers go, western Europeans are wealthier, on average, than their U.S. counterparts. They are closet western culture fans and have adopted technology quickly.
- Big business in Europe is a fertile market for technology, especially in financial and telecom markets. This is all good news for BC technology companies looking for customers.

What's the downside?

Well, it's not all roses. In general, the entrepreneurial bug has not bitten Europe (with the remarkable exception of Ireland). With the exception of SAP, the market is remarkably devoid of huge software companies. But the most worrisome issue with Europe, when compared to the U.S. is that is not a homogenous market with established channels to customers. Europeans have a long history of protectionism that one can only hope that the Euro will help change. In fact, Britain does not want in to the Euro because it thinks that it is all a plot for the Germans to take over Europe. Old wounds have apparently not healed. The result is that Europe is a confusing tangle of languages and local knowledge that present a huge challenge for importing companies.

The solution for technology companies in BC is to find reliable partners in Europe that get your companies products the most exposure. For example, a biotech firm in Vancouver that is in need of strategic partners to develop promising drugs should consider hiring a European business development person full time. They should speak multiple languages and have top-notch contacts in many countries. In another example, a software firm here needs to locate Value Added Resellers in multiple countries to sell product. Developing marketing collateral in multiple languages, understanding license agreements in each country and finding willing customers is a daunting task. Again, a business development hire in Europe with extensive contacts can set up your network and have it pay huge dividends.

Where do you find these people? Try big companies that are already there. Lure the Newbridge European Sales manager to your data networking firm. Schmooze the Microsoft Germany head salesperson. Dangle stock options in front of the Merck manager. These large company folks could be looking for more upside, they have probably received excellent training and, most importantly, have established contacts.

There is a service called ProtÈgÈ that has been created by a former Delrina (Canadian company sold to Symantec for a hundred million in 1995) executive Larry Levy and featured recently in Business 2.0. ProtÈgÈ is like a virtual European company created to manage all European business. They seek a technology start-up, prepare a business plan for the board of the company and hire the staff to run the European office. After 2 to 3 years, ProtÈgÈ steps out of the management role and keeps a stake in the European subsidiary. Larry Levy explains it like this, "You give birth, I take your kid and I give it back to you in a few years. But you do get visitation rights." Interesting model. To find out more go to http://www.protege.co.uk/

For more information on export in general, try the Export Source by Industry Canada. But the coolest site is the Strategis Dynamic country report generator where you create custom reports on any country. See it at http://strategis.ic.gc.ca/sc_mrkti/ibin/engdoc/dyna_ccg.html

Random Thoughts

- A lesson for BC: The Swedes, long used to huge government spending on programs, voted in a new tax-heavy coalition government a few months ago. They used big business as a target for what ails Sweden and now they are raising corporate and personal taxes. The death knell has possibly sounded for the country's four big industrials: Ericsson, Saab, Volvo and Telia. Volvo was just bought by Ford. Poof, you're an American firm. Ericsson announced that it is still a Swedish company, really. Honest. Oh, the new HQ is in London, but that's just so our executive team could be closer to the action (read: pay less taxes). Watch out BC.

- Terence Corcoran, formerly of the Globe and now a turncoat with the National Post, has never been shy about his right wing views. Occasionally, he writes a provocative piece as he did last Tuesday. The title was "The Worst Place In The World To Invest". No, not Indonesia. Canada. He refutes Jean Chretien's continuous claims that Canada is "one step ahead of the rest of the world [economically]". Terence got some facts from a Scotiabank report that showed what the return on $1000 invested in the stock markets since 1970 was amongst the G7 countries. Canada: $19,920 U.S. $44,960 U.K. $58,600 Canada is last. In the past three years, all of the G7 markets have outperformed Canada's by at least 50%! And to make matters worse, we have the retarded 20% foreign content rule in our RRSPs. I don't know about you, but I surely would have picked Intel, Cisco and Microsoft 3 years ago and held them in my portfolio. I'd have about twice what I have now. (Thanks Newbridge) One particular section got me. He said, in response to Jean Chretien claiming (correctly) that we have lower telecom and Internet costs and higher cable and phone hookups that he spoke to the head of ChaptersGlobe.com. Larry Stevenson said book sales on Canada's well-hyped on-line bookstore are miniscule. So we're wired to the gills. But we ain't got any money left at the end of the day to buy anything... 'cept donuts.

- One feature of my columns is the song lyric or inspiring quote that I start off with every week. You may think I have a commanding knowledge of song lyrics. In fact, I don't. I cheat. I use an on-line full text search database of 100,000 song lyrics to get my quotes. Why am I divulging this trade secret? Because my little engine of quotable lyrics has been shut down. Seems the overzealous, rear-view mirror music industry types said this guy was breaking all sorts of copyright laws. Fine. So he painstakingly copied song lyrics to his database. He isn't selling them. He has some advertising on his site. He's just some little Swiss guy with far too much time on his hands. Here's the story on him being shut down.

What Do You Think? Talk Back To Brent Holliday

Something Ventured
is a bi-weekly column designed to supplement the T-Net British Columbia web site with some timely, relevant and possibly irreverent insight into the industry. I hope to share some of the perspective and trends that I see in my role as a VC. The column is always followed by feedback (if its positive or constructive. I'll keep the flames to myself, thanks).

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