Turn global growth into international profits

The global marketplace offers tremendous opportunities—and challenges. Although some industries, such as automotive, aerospace, industrial equipment, chemicals, and food and beverage, have long sought international growth, others are finding significant challenges as global growth outside of the United States has slowed or stalled in some markets, and the prospects for a meaningful recovery are uncertain. But today every U.S. executive must consider their global competitive landscape—to find new customers abroad, innovate to provide quality products needed for technical situations or to defend domestic market share.

In 2015, exports from U.S. manufacturers totaled more than $1.31 trillion, a 63 percent increase from 2005.¹ The RSM Monitor survey found that U.S. manufacturers on average sell 29 percent of their products outside of the United States, and purchase 35.5 percent of goods and materials from non-U.S. organizations.¹ Even with a strong U.S. dollar and a shaky global economy, 44 percent of U.S. manufacturers plan to increase international business in the next 12 months.²

Yet manufacturers with global operations or aspirations face numerous challenges that can limit sales, drain profits and increase risks. Executives must keep international strategies current in order to:

• Assess business, economic, political and regulatory changes in the locales in which they compete, and adapt accordingly
• Ensure accurate and timely financial reporting on a global basis, while complying with local tax rules and regulations
• Manage global risks and liabilities
• Optimize global operations while integrating local cultures, work practices and supply chains

Adapt to changing international business conditions

Manufacturers engage in global activities for a variety of reasons: to enter new markets, expand in existing markets, seek new suppliers, or to follow customers. Regardless of the reason—or how long a company has conducted international business—executives must regularly review their global portfolios and understand how changes in markets, countries and regulations may create new opportunities or risks. 

Not so long ago, international success was spelled “BRIC” (Brazil, Russia, India, and China). These vast markets offered huge customer bases and low-cost suppliers and production costs. But economies evolve: Brazil is in a deep recession, for example, while rising labor costs in China are positioning suppliers in Vietnam, Thailand and other Asian countries as attractive alternatives.

Executives need to regularly quantify changing cost structures around the globe. For example, importing often seems easier and more cost-effective than in-country production, yet the analysis of landed costs—transportation, customs duties, currency conversion, insurance and the like—often may prove otherwise. There is a cost to doing business internationally, including longer production and sales lead times, which may not warrant the cost savings on imports. When making these evaluations, executives should not rely on domestic models of return on investment, which are unlikely to be effective in other countries due to unique rules, cultural norms and business requirements abroad.

Ensure accurate and timely financial reporting

International business requires accounting across a variety of jurisdictions, from countries and states to provinces and municipalities. This poses a formidable challenge, especially as reporting requirements―which are different from U.S. reporting requirements—evolve over time.

At first, many companies attempt to manage reporting from their U.S. corporate headquarters, only to find that home-country staff lack a nuanced understanding of foreign requirements or how to integrate them with the parent company’s policies and practices. Companies with global experience usually secure accounting partners in their countries of operation, and maintain books and reporting in-country—in compliance with local accounting rules, language or currency—subject to headquarters review and verification.

This “think global, act local” approach requires an accounting system that integrates in-country reporting with U.S. GAAP rollup—and a reliable IT bridge between local platforms and corporate headquarters. In addition, having a U.S.-based finance team work directly with foreign accounting groups can build the trust needed for a strong foreign accounting and reporting team. Building trust between the U.S. finance team and local personnel in international locations is critical to building confidence in the practices and results reported to corporate finance. Without this trust, the best systems in the world can fail. The objective is to harmonize U.S. policies and procedures, departments and actions with foreign rules and cultures without compromising reporting standards of the parent company.

Some manufacturers manage multiple foreign operations via a single-point-of-contact model (such as a global project management office), which offers local access to global reporting resources, manages historical documentation and fields compliance questions. Many of these offices include a global compliance management system that provides online, real-time access to the status of all a company’s global compliance requirements.

Manage global risks and liabilities

In dozens of countries around the world—and all Organisation for Economic Co-operation and Development (OECD) countries with the exception of the United States—value-added taxes (VAT) on goods or services are applied through all stages of production, including the final sale. Companies pay VAT when buying goods and services, and charge buyers VAT to cover what must be paid to taxing authorities—including the VAT they were charged in the first place as buyers of goods and services. An error in either direction poses risks or lost income.

This makes it imperative to develop a global corporate VAT strategy that coordinates all payable and receivable functions, so pricing reflects VAT based on tax jurisdictions, foreign rules and customers. It’s critical, too, that U.S. manufacturers adhere strictly to filing requirements (or face liability for improper filing) and refund procedures (or lose profits because they did not receive the full VAT refunds available). VAT issues can be significant enough in some cases to have an impact on cash flow—requiring careful management of payments and refunds to avoid liquidity concerns.

The Monitor showed the top barriers to international business for U.S. companies are factors beyond their control: the global economy, currency fluctuations and foreign regulations (Figure 1). That doesn’t mean, though, executives are helpless or sitting still: contingency plans can minimize the effects of external events that may include economic downturns, political unrest, natural disasters and geopolitical developments.

1. Factors affecting U.S. companies' international business³ (% of manufacturers)

An important tactic in minimizing risk is hedging. Companies can buy forward contracts or derivatives to hedge their currency or commodity exposures, or purchase key components and materials in bulk, locking in costs at favorable exchange rates. With any approach, executives must weigh the risks against the costs of hedging, especially the impact on the sell side.

International information and data risks may be more difficult to manage. A third of U.S. manufacturers report unauthorized accesses of company data or systems, or technology-security incidents, within the last 12 months.⁴ It’s no surprise that more than a third of companies plan a major initiative for cybersecurity risk mitigation in the next 12 months.⁵ The top steps taken by U.S. companies to enhance IT and data security involve enhanced or updated security protocols; more aggressive actions, such as testing system strength, are rarely deployed (Figure 2).

2. Actions taken to enhance IT and data security⁶ (% of manufacturers)

Get the most from international operations

Among all U.S. manufacturers responding to the RSM Monitor survey, 28 percent (average) of production and warehouse capacity is located outside of the United States (44 percent of manufacturers retain all of their production or warehouse capacity on domestic soil).⁷ Some executives are keenly interested in improving the productivity and profitability of international operations, yet many have trouble transitioning their domestic expertise into operations overseas.

Strategies and techniques that work at home may not work in foreign markets. For example, labor laws vary dramatically around the globe, and often are more protective of local workers—the ability to hire and fire, for example, can be severely limited. Manufacturers may also be restricted in the number of permitted expats they can employ, with government quotas for domestic labor.

Yet strong corporate oversight doesn’t necessarily lead to success, either. Just as in the United States, an educated, engaged and empowered (3E) workforce solves the daily problems and continuously improves operations. Expat leadership may be required to develop domestic-level 3E capabilities in foreign countries, and it also must allow autonomy among the foreign workforce, while remaining sensitive to cultural differences.

Other factors that can impair international operations include:

• Logistics and transportation management: Whether importing into or operating within a country, sound logistics can mean the difference between satisfied customers and market failure. Always have a backup plan in place, especially in regions prone to transportation strikes.
• Customs duty rates and rules: Effective compliance with cross-border rules can boost the bottom line and prevent operational problems. Monitor and manage rules and rates regularly, with an expectation that tariffs, quotas and import rules will change. 
• Supply chains: Reliance on local suppliers is inevitable. Establish strong supplier criteria—such as production performance, corporate governance and financial stability—and build in traceability capabilities required by customers and regulators.
• Financial reporting: The adage “you cannot manage what you don’t measure” is critical for foreign operations. Develop and implement a global closing process to ensure that management has the right information on a timely basis. 

Capture global opportunities

Manufacturing executives can’t take the decision to be more global lightly. But they also can’t ignore lucrative opportunities. Focus on six keys to international business success:

• Manage risks strategically
• Budget adequate resources at home and overseas to manage foreign operations and expansion
• Manage and understand local culture and business practices, and how they differ from those in the United States
• Take a long-term view, allowing time to fully leverage international opportunities
• Learn critical differences in foreign jurisdictions early in the process
• Find professional support in countries of operation