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

Nation's Business, Oct, 1990 by William Mueller

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

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

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

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

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

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

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

* Development of computer software.

* Management of tours, hotels, and restaurants.

* Production of pharmaceutical and medical equipment.

* Design of control systems for the fertilizer industry.

* Construction and restoration of buildings.

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

* Publishing of books and periodicals.

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

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

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

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

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

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

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

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

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

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