“All politics is local,” former Speaker of the U.S. House Tip O’Neill famously said. As it turns out, so is a lot of business.
The key to successful international expansion, after all, is to get the help your company needs to fill the gaps in its expertise. And —especially if you’re a small or midsize business — those advisers must be both knowledgeable and trustworthy.
That’s one of the main conclusions that emerges from CFO Research’s recent report, “Pushing the Boundaries of Business Overseas,” published in collaboration with High Street Partners, an international business software and services firm. (Download the full report.)
The report is based on an online survey of 161 finance and other senior executives at U.S. companies with annual revenues of between $50 million and $1 billion, all of which have either experience with or an interest in pursuing non-U.S. business. Among survey respondents, 89 percent are already conducting business outside of the United States, and the rest described themselves as “likely to do so” within the next five years.
For one CFO of a professional services firm, the best way to get started overseas is to “pick one country and get someone on the ground that you trust,” as he wrote in the survey. Partners with local knowledge, echoed the controller of another professional services firm, “can help us navigate our way to success.”
Such advisers can offer invaluable guidance, providing insights into government regulation, for example, or clarifying customer requirements. More broadly, they can save inexperienced companies from succumbing to frustration. “We would have to take a hard look before engaging with any Japanese customers in the future,” said the CFO of an aerospace/defense firm. “Japanese customers have been extremely difficult to work with.” The alternative may mean having to “learn the hard way,” as the VP of finance at a manufacturing firm put it.
For the most part, these companies aren’t scouring the globe in search of lower labor costs. In fact, three-quarters of respondents said that their primary business objective for international expansion is to increase revenues or gain customers. Given the sluggish pace of the U.S. economic revival, it’s perhaps not surprising that SMBs are turning their gaze toward other markets, hoping to diversify their mix of customers.
The survey respondents aren’t seeking to plant their corporate flags in utterly untested terrain. Nearly 75 percent of executives rated entering new markets in developed economies as “moderately important,” “important” or “critical” for their companies. By contrast, 57 percent saw entering new markets in emerging economies as at least “moderately important,” indicating that respondents prefer to do business in developed countries where they can establish themselves more quickly, and with a smaller investment and potentially less risk (see chart, “A Developed Preference,” above).
Survey respondents said that they are burdened by bureaucratic red tape and obscure rules and regulations, slowing the timeline for expansion and raising the price tag. After expanding into China, the CFO of a manufacturing company concluded that “regulations are made up” along the way. “We had some success on pushing back,” he noted, “but, for the most part, we’ve invested 15 to 20 percent more in the project due to these issues.” Overall, respondents found complying with local rules most challenging, followed by evaluating risk exposures and managing tax implications (see chart, “Challenging Circumstances”).
When asked to rate the relative difficulty of doing business in certain countries or regions, the largest cluster of respondents, 44 percent, cited China as being “relatively difficult.” The CFO of a health care company claimed that “China has no respect for intellectual property.” What’s a company to do in such unfamiliar circumstances? A CFO in the energy sector said his business overcame the challenge of “government bureaucracy” by nurturing “strong relations with local officials in China.”
But the same CFO struggled to find a solution to a similar problem faced in India, characterizing the country as “more perplexing.” Answering open-response questions, a group of survey takers vented about the complex regulatory requirements in India, which 37 percent ranked as “relatively difficult.”
Risk: Awareness Is Avoidance
Such hard-to-understand rules make the risks associated with overseas expansion difficult to evaluate — and the cost of an oversight could be multiplied exponentially. Strict labor laws in Brazil, for example, caught the controller of an auto/industrial/manufacturing firm off guard and made it “very expensive” to streamline operations as necessary. Ultimately, the controller said, the business was forced into “large legal settlements with each employee” it let go.
The imperative to generate revenue, coupled with the need to keep costs to a minimum, has compelled many a finance executive to try to establish a customer base before investing in any foreign-based infrastructure. While 60 percent of respondents said that their companies serve customers in six or more countries, only 28 percent reported having employees in that many countries (see chart, “Customers First”). International expansion is a step-by-step process that moves at a distinct pace. “You just need to be patient,” said the controller of a company in the energy sector. “Make plans to make sure the timeline is not going to be the same as it is domestically.”
To prepare, many finance executives advocated linking up with local business partners to gain an understanding of particular markets, cultures and legal requirements. Such knowledgeable guides are equipped to lead an expanding business in the right direction.
Perhaps the most useful bit of advice they shared? The time spent up front in preparation will more than pay for itself down the road, said a CFO in the wholesale/retail trade, adding “it will only cause larger problems later on if done on the cheap.” Or, as a CFO from the manufacturing industry urged, “Start early! It takes longer than you would think, and having somebody on board three to six months early is WAY better than one month late.”