Box 1, Folder 23 – General Speeches
September 13, 1960 – “International Expansion – A Case Study” Stanford Conference titled “American Business Looks Abroad”
(See also Hewlett speeches dated April 14, 1961, March 8, 1962 and June 14, 1962 on this general subject.)
12/13/60, Typewritten text of Hewlett’s speech
This Conference is titled “American Business Looks abroad”, and Hewlett says “I interpret my role at this session as follows: To report on a moderately sized company’s international expansion program in Europe. The fact that this expansion program was stimulated by the signing of the Treaty of Rome, and the reality of a European Common Market, is pertinent to the theme of this meeting.
DESCRIPTION OF HEWLETT-PACKARD COMPANY
Hewlett starts with a brief description of HP, saying that “We are a manufacturer of precision electronic test and measuring equipment. Our instruments are characterized by a high engineering content, and by high quality and reliability of operation. We manufacture about 300 to 400 standard catalog items most of which would be classed as off-the-shelf capital goods.” He gives the location of the main plant in Palo Alto and adds that “…we have three domestic subsidiaries, one on the East Coast, two on the West coast, and we have recently started another manufacturing branch in Colorado.” He says 2500 people are employed in Palo Alto, 3500 in total.
Hewlett says products are marketed in the United States through independent representatives who also handle “compatible lines of equipment” for other manufacturers.
Hewlett says that foreign sales were initially handled by a “local export agent” from the U.S. These agents had representatives in various countries throughout the world. As the Company grew they found it “appropriate,” to take over the direct contact with the representatives in the foreign countries. “By and large,” he says,” these same representatives now form the backbone of our present international marketing organization.”
Hewlett tells the audience that exports have traditionally been about 10 to 15% of total sales – but currently running about 15%. “To understand the character of our foreign market,” he says, “it should be realized that broad scale use of electronics is almost exclusively confined to the more technically advanced countries of the world….About 66% of our foreign sales traditionally go to Europe, about 15% to Canada, about 9% to Japan, and the remaining 10% is spread throughout the world.”
Hewlett classifies HP’s products into two broad groups: “One group of products,” he says, “is represented by fairly sophisticated engineering designs, but is basically an assembly of standard component parts. Another group of products is equally sophisticated in design, but requires a great many special and precision parts for which expensive and extensive tooling is required. In the former group we have found that our competitors abroad have had no difficulty in duplicating or paralleling our designs, and thus we find that sales of this class of product have been small in foreign markets. In the latter group, however, our heavy tooling and production expenses may be liquidated against the large mass market which exists in the United states, and this gives us a clear advantage over our foreign competitors who do not have such a mass market. As a result our sales have been almost exclusively in this latter classification.”
DECISION TO EXPAND FOREIGN OPERATIONS
It was against this background that Hewlett says they evaluated the long range effect of the Treaty of Rome which was signed in March of 1957. “It was our conclusion,” Hewlett says, “that the coming of the Common Market would provide Europe with a true mass market, unrestricted by tariff walls. This would give them the same advantage that the United States has enjoyed for so long on almost an exclusive basis. To the Hewlett-Packard Company this would mean a potential loss of its present competitive advantage and a consequent reduction of sales in Europe. On the other hand, if we were to enter the European Common Market with a manufacturing facility, we would be in a position to protect our existing market and in addition to compete in the assembly type of operation from which we were almost completely excluded at the present time. The choice was obvious, we had to move at once to develop a manufacturing operation somewhere in the Common Market. The question was, what type of operation – joint endeavor or 100% owned subsidiary – and where should this operation be located?
Hewlett says the first question was easy – they definitely felt that a 100% owned subsidiary was the most desirable way to go. The choice of what country to locate in was more difficult. By studying informational material from such sources as the U.S. Department of Commerce, and from individual countries, they were able to evaluate factors like general character of the countries, tax structures, labor situations and so forth. “By studying such sources,” Hewlett says, “we were able to narrow the selection to the Netherlands, Belgium, and Germany.” So, in the spring of 1958 Hewlett went to Europe to try and determine which country would be the best country for their manufacturing plant – and, if possible, just where in that country it would be best to locate their plant.
While visiting each country Hewlett would visit U.S. Counselor officials, as well as local government people. He had letters of introduction to local manufacturing executives as well. And he also talked to local Americans who represented U.S companies. He says local banks were “one of the most important sources of information.”
GERMANY AS A BASE FOR MANUFACTURING
“As a result of this survey,” Hewlett says, “it was decided to establish an operation in the Stuttgart area of southwest Germany. The basic advantages of Germany were many. First, it had a large internal market. Second, one of our toughest competitors in Europe was located in Germany and we felt that the best way to compete was to be in the same country and not interpose an artificial tariff wall between the two of us. Thirdly, Germany has long had a strong and aggressive export policy and as we planned to export over 80% of the products manufactured there this was an important factor. Fourthly, Germany traditionally has had a supply of skilled and experienced labor, particularly at the foreman and supervisory level. Finally, Germany has had a fine record of a stable economy since the war.”
They did see some disadvantages to locating in Germany: no governmental aid, high employment, tax structure not as favorable as elsewhere.
To sum up Hewlett says “Our selection of Stuttgart was primarily based on the fact that it was an excellent light manufacturing area and that the people in the community were noted for their industry and hard work”
NEED FOR CORPORATE OFFICE IN EUROPE
Hewlett says they found some problems in considering the implementation of their decision to locate a plant in Germany. “One such problem was that of order distribution,“ he says. An example would be a situation where a local representative receives a composite order from a customer. He would have no way to find out what part of the order should be sent to the HP plant in Germany, and what part should be sent to the U.S. “Thus, some decision making agency was needed abroad to cope with this type of problem,” he says.
Hewlett tells of another problem they ran into, — the matter of a “Travel Lab.”
He explains that a Travel Lab is a large bus in which are set up various operating displays of HP equipment. This bus needed a home base in Europe.
They also needed a way to carry out training programs in Europe for sales personnel.
“All of these problems,” Hewlett says, “ suggested that we needed a corporate office of some nature in Europe, and the decision was made to establish a primary subsidiary company in Switzerland to perform all of these various functions and, in addition, act as a holding company for our German operation. Switzerland was selected for several reasons. In the first place, it is centrally located. Secondly, the Swiss are generally accepted throughout most countries of Europe, and indeed through most countries of the world. Switzerland has one of the most stable currencies of the world. It has tax treaties with Germany which would facilitate the holding company operation which we envisioned. Finally, the tax laws in Switzerland are favorable to the type of operation that we wished to establish.”
ESTABLISHMENT OF OPERATIONS
So Hewlett says he went back to Europe in the fall of 1958 with three objectives in mind, – the first being to select a canton in Switzerland, negotiate a favorable tax agreement with the authorities, and set up a basic corporate structure. Secondly, he wanted to establish the ground work for the German manufacturing plant. Thirdly, he needed to recruit key personnel for both the German manufacturing operation and the German sales organization. He says he took with him on this trip HP’s Export Sales Manager (who was to be the manager of the German manufacturing plant until a German national could be trained for this spot), and HP’s U.S. attorney.
Hewlett says they “…were successful in completing all three objectives and, in looking back, it is apparent that in two areas local contacts were most important; good bank connections and the best possible legal advice. Without either of these, it would have been infinitely more difficult to have obtained our objectives.
“By February 1959,” he says, “nearly all preliminary steps had been completed. By April, 1959, we had actually opened our Swiss office with two months inventory in a bonded warehouse in Basel under its control, and by the first of July our sales operation in Germany had commenced. Our manufacturing operation near Stuttgart did not start, however, until September of that year.
OPERATIONS IN SWITZERLAND
Hewlett says he wants to “summarize” operations in both Switzerland and Germany. In Switzerland He says the first step was to start a training program. “To understand the importance of this training…,”he says, “one must understand the character of our products. Our products are those which are sold at a technical level. That is, they are sold well down in an organization. This means that our representative group must have an adequate and well trained sales force that can work directly with the customer’s engineers, and scientists. This sales force must understand the customers’ technical problems and must be able to make intelligent suggestions as to what type of equipment will be helpful. Domestically we had found that to achieve this competence, we had to have intensive training programs for our representatives’ sales engineers. In Europe we had never had the opportunity to furnish this type of sales training. At best, we were fortunate if the principals visited us once every two or three years, and when they did they were usually more interested in matters of policy than in technical questions.
“The first training program was so successful that we repeated it again the following year with Mr. Packard and myself in attendance. I think it is interesting to note that at this second sales training conference we had representatives from every nation of Western Europe with the exception of Ireland, Portugal and Luxembourg. We even had a representative from Yugoslavia.”
After starting a training program, the next task was to find local warehousing for their equipment. Hewlett says, “This program has proved to be of great value. Customers like the idea of being able to get delivery of equipment on short notice and not wait for it to be shipped from a foreign country 8000 miles away. In a sense, the fact that stock is maintained locally is a symbol that you are really interested in helping them and they react accordingly.
“The Travel Lab, too, has been a most effective sales tool. In the first place, our customers in Europe have been able to see operating displays of our most recently developed equipment without having to wait for the next International Trade fair, and without having to leave their own local community. This program has been welcomed by management for it keeps engineers current on modern instrumentation without the expense and inconvenience of travel.”
MANUFACTURING OPERATION IN GERMANY
Hewlett says progress on the manufacturing operation in Germany “has made headway, but at a slower pace than the Swiss sales company for it is a much more complex operation to establish. After about a year of operation it had recovered initial start-up expenses and was operating at a slight profit. We currently employ about 60 people and, according to plan, are manufacturing the assembly type of products referred to earlier.”
Hewlett says they found local community people more interested in helping their operation than were those in the federal government. “We were fortunate in finding …the town of Boblingen , just outside of Stuttgart. The town was most helpful for it was willing to purchase a site and lease it to us at a nominal rate. Further, if at a later date we wished to acquire the land, the town would sell it at a price that was roughly one-third of what it had originally payed [sic]for it. In a number of ways also, the town has shown a great willingness to help. This all proves the value of selecting a community that has a genuine interest in the welfare and prosperity of your facility.”
Communications, “the problem of establishing understanding with an operation some 8000 miles away,” was a serious problem Hewlett says. “It has been with great difficulty and several trips of Hewlett-Packard people to Germany that we have been able to reestablish …understanding.”
Getting component parts from local suppliers was also been a problem. “This is due in part” he says, “to the booming Germany economy, but it is also due to the presence of traditional patterns that often exist between supplier and consumer in many countries of Europe. These trade patterns pose real problems to a new concern when it endeavors to develop its own sources of supply, particularly during a period of booming economy.”
“[A related problem has] arisen in trying to find suppliers who will furnish equipment or who will make special items for us and also have a realistic delivery schedule. This, coupled with the component parts problem, has made it extremely difficult to develop a flexible production schedule; one key to efficient and economical operation.”
Hewlett says they also have had some problems with unsatisfactory quality of workmanship. “I feel that this can be accounted for primarily by the inexperience of the employees in the particular type of assembly work that we were asking them to perform, for Germany, as is most of Europe, is changing from a craftsman approach to production, to an assembly line approach. This problem of quality became so severe that we found it necessary to send over a third level supervisor from Palo Alto to help train the employees and to establish better quality control procedures. We sent over one of our young Stanford Business School graduates to work out some of the practical problems of integrating local procedures with U.S. procedures in such areas as inventory control, scheduling, record keeping and the like. Both of these moves have helped substantially to improve the effectiveness of the German subsidiary.”
Hewlett concludes that “…our original objectives have been met successfully. A sales development and coordination program has been established and is now operating more effectively than was anticipated. A manufacturing operation has been set up within the European Common Market and is now producing satisfactory equipment. These two operations have generated capital outside of the U.S. which may be used effectively for the next logical step – a manufacturing plant within the European Free Trade Area (EFTA). [In a handwritten note Hewlett added]: This we plan to do starting this fall in England, where it can serve both the EFTA group and the Commonwealth nations. With our experiences now behind us [in startups in both Germany and Colorado], I look for a much smoother startup than we experienced in Germany.
“In all, I think we as a company should be deeply grateful for the Treaty of Rome and for the European Common Market which developed from it. Its establishment has forced us into an international expansion program that was long overdue and, judging from results to date, gives every indication of becoming a vital part of our total corporate operation.”
Undated, Three handwritten drafts of a speech on this same subject (that is the considerations given to HP’s movement into Europe). A typed page outlining these notes is also enclosed.
Box 1, Folder 24 – General Speeches
Late 1960 or early 1961 – Speech on HP organization, no location
Speech, Written in outline form and handwritten by Hewlett
Hewlett titles the first section, ”Origin in Engineering,” with the following sub titles:
- Company founded on engineering
- Method of product selection at start
- Developed into “development of opertunity [sic]
- Expansion with Engineering Div. Concept
- Change in Microwave div.
Discussion of each division:
- Other Supporting Areas
- HP reputation has been built on quality of engineering and responsibility of its production
- Trend towards more research with growing decentralization – with engineering in each division
- This does not represent movement away from organization principles – rather a division of work that will guarantee maximum yield.