True Grit in a Sale to Czechs

Sometime in September, a freighter will cruise into the West German port of Hamburg stacked with eight 40-foot containers of electrical equipment from San Diego County. The cargo will be loaded onto flatbed trucks or rail cars, hauled almost 300 miles to the Czech village of Raspenava and housed in a shiny new factory.

And therein lies one of the more remarkable tales in the annals of East-West trade.

“I’ll be there to usher the ship to harbor,” jokes W. Mark Heiden, chairman of Incetek, the California firm that is selling the goods to Tesla Electronics in Czechoslovakia.

So you wonder whether America’s capitalists still have the fire to seize far-off opportunities, such as the markets opening up in Eastern Europe?

Here’s a story where success required the help of bankers in Stuttgart and Prague, an unidentified European investor, an Oregon trading company, eager Czech officials, a sophisticated Swiss financing technique, half a dozen trips across the Atlantic and a very large imagination by all concerned. With one exception, U.S. banks chose to steer clear.

“I can’t tell you how far-fetched this thing was when we first got into it,” said Tom Hodge, marketing director of World Trade Finance, a Los Angeles firm that provides export financing. “But son of a gun, it all came together.”

If the opening of the Iron Curtain has created new markets for U.S. companies, tapping them is no minor feat. Americans may search in vain for banks willing to finance their production costs, even when an East European customer is waiting.

What’s more, the East Europeans have precious little “hard” currency to buy things from the West; their locally minted money has little value beyond their borders.

Outsiders may find the obstacles to business hard to believe. When the Incetek contract was about to be drawn up in Prague in 1989, for example, negotiators hit an unexpected, two-day snag: No available typist could be found for miles around.

The challenges require a sort of creativity rarely needed by Western executives.

Right now, World Trade Finance is trying to arrange a swap of Hungarian dairy cattle for telecommunications equipment made in Orange County. The cows would go to buyers in Saudi Arabia and other countries, providing Western currency that Hungary could use to pay the Santa Ana firm, a client of World Trade Finance.

“We’ve already spent a lot of time trying to put this thing together,” Hodge said. But, he conceded philosophically, “it’s a long shot.”

Sometimes the stumbling blocks seem overwhelming, especially for smaller companies. Earlier this year, a Bulgarian bank guaranteed Food Engineering Service of Irwindale $1.5 million for equipment that makes powdered foods. But the sale--which the Bulgarians have promised to pay for in U.S. dollars--is languishing.

The San Gabriel Valley manufacturer needs financing to produce the order, and American banks have declined to provide it. The bankers “don’t trust” the stability of Bulgaria, explained Rick Smith, vice president of Food Engineering, which is also pursuing separate sales in the Soviet Union and Czechoslovakia.

Despite the hair-pulling frustrations, interest in the emerging markets of Eastern Europe is on the rise. A new poll by Opinion Research Corp. of Princeton, N.J., found that 35% of America’s largest companies plan to broaden their activities in the region this year.

U.S. firms already export more than $5 billion worth of products to Eastern Europe--mostly to the Soviet Union--according to the Commerce Department. While that amount is dwarfed by the $100 billion in exports to Western Europe, business clearly gets done.

Incetek is proving it in a small industrial park north of San Diego, where the red, white and blue Czech flag now flaps next to Old Glory. Inside, eight Czech engineers huddle around a table, learning all about ceramic chip capacitors--a tiny part used in digital watches, computers and other electronic products.

After the engineers go home this summer, they will make sure that the U.S. equipment, which produces the rectangle-shaped components, is used properly by Tesla, their employer.

Such international deals are “just a matter of making the contacts and putting the right people together,” declares Incetek President Walter B. Merriam, a plain-speaking Connecticut native, who has exported electronic equipment to China, South Korea, India, Portugal and Japan.

In this case, putting the right people together took three years. It all began when Tesla officials approached Merriam at a trade show in Munich. Their interest: Machinery to make chip capacitors could help the Czechs produce a product in demand throughout the world, bringing sorely needed hard currency into the country.

And U.S. export restrictions on the technology were not an issue. The ceramic devices--which store and release electrical current--have no special military value, Merriam said. He began planning to sell Tesla an entire factory system to produce them.

There were just a couple problems. For one, Tesla couldn’t afford to buy it--the price tag would ultimately exceed $4 million. And Incetek, a privately held firm that has 40 employees, couldn’t afford to build it. Time passed. But in 1988, when the Czechs made clear that they were still interested, Merriam decided to push hard.

He figured that the first step would be to find a loan for Tesla, a move made easier since a Czech bank had guaranteed Tesla’s repayment. Once that was taken care of, he reasoned, banks would be willing to finance Incetek’s own costs for materials and labor to produce the order.

Only, investors weren’t exactly lining up for a piece of the action. A Swiss trading company seemed to show interest, then failed to come through. U.S. banks were decidedly aloof. Finally, in early 1989, Incetek found a willing participant in the Stuttgart offices of West Germany’s giant Deutsche Bank.

“They said, ‘We’ll buy Czech paper any time’--that’s exactly what they told me, and I nearly fell off the chair,” Merriam recalled.

The Germans had a plan. Under an approach developed by Swiss export financiers, Tesla would be able to buy the equipment in installments, yet Incetek would still get paid fully on delivery.

This is where the strategy starts to resemble an elaborate chalkboard diagram in a football locker room.

In simplified terms, Incetek agreed to make a four-year loan to Tesla for the equipment. But since Incetek wanted its payment up front, it would hand off the IOU to Deutsche Bank, which agreed to take the loan for a fee of about $120,000, to be paid by Incetek. The German bank arranged to profit further by passing on Tesla’s IOU to an unidentified European buyer, possibly a Swiss investor, according to one source familiar with the elaborate deal.

Deutsche Bank--which has historically had dealings throughout Europe--would pay Incetek for the equipment when it was delivered in Czechoslovakia.

Within days of the agreement, Merriam was sitting in Tesla’s import-export office in Prague, negotiating the final provisions of a 30-page contract, all set for a triumphant return home. Maybe for a moment, he forgot where he was. But then came reality: “They told me they couldn’t get it typed for two weeks.”

Frustrated, he tried to do it himself, borrowing an old Czech manual typewriter from his hotel. But he was stymied by an unfamiliar arrangement of letters on the keyboard. Finally, he wrote the entire contract out in longhand, and a Czech bureaucrat drove it to Tesla’s headquarters in Roznov, more than 200 miles to the southeast, where a typist was waiting.

In Czechoslovakia, he explained later, “You don’t Fed-Ex the document. You jump in a car and drive for four hours.”

The freshly typed contract was signed in two days, and Merriam flew back to Southern California. All Incetek needed now was cash for its own expenses, some $2 million to produce the equipment at its San Marcos plant and a machine shop in Tijuana.

Southern California bankers, however, were in no rush to fork over the money. Eastern Europe was in the midst of historic upheaval last fall, and the bankers feared for the safety of new loans to the region. “There were an awful lot of turndowns,” Merriam said. “People were skeptical about Czechoslovakia. They didn’t know or understand the country.”

Jitters extended to both sides of the Atlantic. Shortly before the Berlin Wall began to crumble--and political agitation spread in Czechoslovakia--Merriam was stopped by police while walking on a Prague street. The nervous police, who were checking many people who appeared foreign, inspected his papers and let him proceed.

Several months passed, and the financing dilemma persisted. By last March, when Merriam approached World Trade Finance, the deal was in jeopardy. Members of the export-finance firm had a thought, however: Maybe the wary bankers would be less wary about lending Incetek money if somebody guaranteed they would be paid.

The somebody turned out to be the California State Export Finance Office, former employer of Hodge, now working at the private World Trade Finance. The government office tries to help qualified exporters get financing by pledging to repay a share of their debt if they default. A bank, however, must actually come forth with the cash.

Although other American banks remained aloof, the state guarantee proved sufficient to interest U.S. Bank International, a newcomer to Los Angeles owned by U.S. National Bank of Oregon.

“We met with managers of the buyer. We met with the banker. We met with everybody included in the project and satisfied ourselves that it was viable,” said Kenneth W. Rosenberg, an executive vice president at U.S. Bank International.

The Oregon-based bank loaned Incetek $411,000, secure in the knowledge that the state of California was guaranteeing $350,000 in repayments. While that money was enough to start the job, it wasn’t enough to finish it.

So in another twist, the U.S. bank arranged for an affiliated company, U.S. World Trade Corp., to buy the Incetek equipment as it was manufactured, providing Incetek with critically needed cash to complete the big job.

Through a Byzantine series of loans and guarantees, and despite a Czech government overthrow and a frosty response from the U.S. banking establishment, both seller and buyer finally had their money.

“It’s amazing how many creative ways there are to finance an international transaction,” noted Hodge, who has been involved in international trade financing for six years. The Czech deal, he added, “is definitely the most complex transaction that I’ve been involved with.”

The order, which will fill up about 60 crates before going into the eight huge containers, is now more than half complete, stored in a warehouse in San Diego. Later this month, it will be hauled on flatbed trucks to the Port of Long Beach for the voyage through the Panama Canal and across the Atlantic.

In September, it should arrive in the tiny Czech village of Raspenava, near the border with East Germany and Poland, where a renovated factory is waiting to house it.

At that time, Rosenberg of U.S. Bank International will deliver the shipping and other documents to Deutsche Bank in Stuttgart. Bank officials then will wire some $3.5 million--actually, an equivalent amount of Swiss francs--to U.S. World Trade Corp. in Portland. (The remainder of the $4.1-million bill will be paid shortly afterward.)

And the Portland trading company will pay Incetek an undisclosed share of the profits. Three years after the idea was first broached in Munich, the sale will be complete--almost.

“It can be terribly hard, and people have to recognize that,” said Merriam of the challenge in trading with Eastern Europe. “But if you have the patience and perseverance, you can put together some good deals.”