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6 issues for manufacturers to consider when starting global operations

INSIGHT ARTICLE  | 

“Whatever you think it’s gonna cost, it’s gonna be more.”
—Chief financial officer, manufacturer of military-grade expeditionary, aerospace and medical products

Entering a new market without adequate planning or implementation can lead to diminished returns on a company’s investment. If a company is establishing a presence overseas for the first time, management should go into a country with sufficient knowledge of the business environment.

The challenges begin even before a border is crossed. Supply chains must be established, vendors and distributors need to be identified, organizational structures must expand to reach overseas, global processes must be established, and intellectual property must be protected.

Following are the perspectives of a number of manufacturing executives working on a global scale on the hazards and difficulties of setting up business on unfamiliar shores.

Establishing vendors and sourcing

Companies need vendors to operate in a secure and compliant manner, for peace of mind and also because certain compliance frameworks require it. But it can be difficult to set up a new network of suppliers.

As the CFO of a sports and arena lighting manufacturer put it, “We had never done any manufacturing outside the United States. So that whole dynamic of trying to find vendors, and how do you find a supply chain and how do you do a facility search, that was all new to us just generally. I would say it probably ratcheted up the complexity of the process by 50 percent.”

Creating the organizational structure

Companies operating globally for the first time should focus on the structure and duties that need changing.

That means being on-site on a regular basis.

“We’re 7,000 miles away. It’s really hard to control things through email and phone, unless you’re physically there,” noted the chief operating officer of a company that makes special purpose machinery. “We are over there monitoring things all the time. You have to.”

But the company needs to establish the structure and responsibilities up front. As one CFO put it, “Much of what we’re able to do [in China] is controlled by the operating agreements that we established with our partner when that was first set up. The management here let opportunities slip through those agreements. Even though we control that subsidiary, we may not have as much authority.”

Complying with laws and regulations

Transparency and accuracy are just some of the benefits of carefully planning for global compliance needs.

“Just doing some up-front work to ascertain tax, tariff issues, cultural issues,” advised one CFO. “You have to have all those things in the soup before you can really make some informed decisions.”

Again, robust, up-front planning is important. “Can you get the money out? Have good, strong exit strategies,” cautions a COO. “Make sure that when you draft that paperwork that it will comply [with] what is considered law in the country you’re operating in. You don’t want to be in a situation where you’re stuck.”

Budget enough time to become familiar with local regulations and compliance issues. “I spent a whole three days trying to have somebody explain to me how VAT worked,” confessed another CFO. “I just didn’t understand it. We’d never dealt with it before and it was just a whole different animal.”

Protecting intellectual property

When a company decides to do business in another country, it needs to protect the company’s brand and its products in that market. “My partner [in China] is really, really careful,” says one CEO in a discussion regarding intellectual property. “He will hire a number of Chinese people and each of them only stay in their area. He doesn’t do a lot of cross-training. He’s really uncomfortable having a general manager who has so much power that, all of a sudden, the next day he starts his own business.”

Securing a workforce

Market research should help the staffing plan by identifying the availability of and access to in-country staffing and expertise. The right people in those markets can make a real difference.

One CEO cautions that “You can’t put a bunch of expats in and expect it to be successful. It’s no different than European companies trying to come to the U.S. and failing because they try and take a European approach to management and it doesn’t work in the States. Just like when we go to Europe, if we try the American approach, it doesn’t work there.”

The expectations of workforce personnel can be different as well. In China, for example, “the employee-employer relationship’s much different,” says a CFO. “You’re expected to feed them. You’re expected to provide them a housing allowance. You’re expected to provide them transportation, so we had to create a bus route and buy a bus and drivers to go pick our team members up and get them to work.”

Understanding local labor laws

Labor laws vary dramatically around the globe, and often are more protective of local workers.

“In the States, typically we have a merit-based system,” one CFO explains. “If you and I both do the same job, and you’re really, really good at your job and I’m not so good at the job, [but] I’m 52 years old and you’re 34 years old, in many cultures, I’m getting that promotion or that raise or that bonus because I’m older than you are. It’s the seniority system. Merit-based accomplishments don’t necessarily account for a lot.”

In many countries, downsizing can be costly. “If you’re operating in Canada or France and you need to go through downsizing or you want to shut a facility, it’s incredibly expensive,” says a CFO. “There [are] incredible worker protections around doing that.”

Key considerations

What can be gleaned from the hard-earned experiences of these global professionals?

  • Leverage incentives: It’s not uncommon for companies that are beginning to implement their global strategies to overlook the many tax incentives and credits that may be available to them. Yet these incentives could have a significant impact on their plans, let alone their bottom lines. By taking advantage of these incentives, many companies could be saving a great deal of money.
  • Comply with regulations: Understanding tariffs, duties, customs clearance issues and transaction taxes can be difficult. Some countries even have rules on businesses that extend far outside their borders. But regulatory issues are not difficult once they become familiar.
  • Determine how to enter a country: In the absence of overseas networks, foreign market expansions typically start with establishing a foreign sales representation, but some companies choose to set up their own production facility; still others may partner with an overseas entity. Alternatively, companies aligned with private equity groups use the experience and network of these groups to tap into new markets and drive growth and value in their company. It all depends on the company’s strategic goals and what will work in a specific location.
  • Protect products and brands: When a company decides to do business in another country under its own brand, it needs to protect the company’s brand and its products in that market. A trademark will protect the brand and its elements (such as the logo), but it will not protect against competitors making, using or selling a product. To that end, understanding patent and trademark policies is critical. Organizations operating globally should identify potential key risks and barriers and develop mitigation plans.
  • Understand the international playing field: To overcoming trade obstacles, it helps to have a deep understanding of U.S. free trade agreements and U.S. government trade advocacy programs. Arranging visits with potential business associates and key foreign officials with direct support from U.S. officials stationed overseas can help.
  • Have an exit strategy: Have an exit strategy to mitigate unexpected and potentially costly tax consequences upon departure.

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