Expanding a business overseas is not the same as
expanding somewhere in the United States. The laws are different, the cultures are
different, the languages are different, the education levels are different. Labor
and management styles are different.
In fact, it often seems as if the differences far outweigh the similarities, so
much so that
we begin to wonder why we're doing it in the first place. It all boils down to basic
business decisions, though. When all is said and done, if there's profit in it, it's
probably worth the risk.
That said, there are still some basic pitfalls executives need to be aware of
when considering an overseas business expansion. To explore some of these areas,
Expansion Management Magazine put together a panel of well-known international
site selection consultants to discuss some of the things a company needs to consider
before embarking overseas.
Countries With High Unemployment Are More Willing to Deal With Companies to
Bring New Jobs
"Today, Europe's No. 1 problem is unemployment," said Jean-Claude Goldenstein,
Managing Director, JCG International, Inc. "That has caused many governments
to improve the incentive to international firms to create work for their citizens."
He sees more flexibility in attracting U.S. firms on the part of most European
countries, particularly those that earlier have been reticent.
Country Borders Are Blurring as Regions Become More Important
Within Europe there is a rising trend toward regionality.
"There used to be only two choices -- setting up operations country-by-country,
or operating in a pan-European, continent-wide style," said Goldenstein. "Now,
for call centers, new firms are picking one key country in a given region, and siting
operations that cater to a small number of culturally-similar and geographically-nearby
countries."
As an example he pointed to Sweden for Scandinavia, Britain for the UK and Ireland,
a number of options for serving southern France, Spain, Portugal and Italy, or a
location along the French/German border for France, Germany, Switzerland and Austria.
Local Labor Laws Can Severely Limit Your Flexibility
In the last year or two, a number of factors have become increasingly important.
In certain countries in Europe, for example, inflexible labor legislation can strictly
limit staffing flexibility. The chance to raise or lower the number of employees
is infinitely more difficult than in the U.S., according to Jan Scheers, Plant Location
International, Price Waterhouse LLP in Brussels.
"If you need to have 200 people this year, but might need to later reduce
staff to 150, that reduction could either be illegal, or cost you a fortune,"
he explained. "That's particularly the case in Germany, Belgium or the Netherlands.
And, with the new Labor Government in Great Britain, likely job protection legislation
could well add the UK to the list."
Currency Strength and Stability Are Critical
Another hot issue involves attempts to establish the European Monetary Union.
With its goal of a common currency -- the "Euro" -- substituting for traditional
national currencies among members who meet strict requirements such as deficit reductions,
Scheers sees a raft of questions looming for U.S. site selectors:
Which countries will be in and which will not? What will happen to currencies
of those who do not participate? And how will those currencies fluctuate against
the Euro?
This summer, the dollar and British pound sterling (Britain has strongly indicated
it wants nothing to do with the Euro) gained strength, particularly against the German
mark and French franc. For Scheers, that indicates widespread apprehensions that
the unified currency would be weak. Therefore, selectors must ponder what a potentially
increasingly-strong dollar means to a company's export strategy. Or, indeed, its
basic decision to expand overseas.
And, what would operating in a country with a much weaker currency mean to corporate
strategy? According to Scheers, the countries he expects to ultimately employ the
EMU include France, Germany, Belgium, the Netherlands, Luxembourg and Austria.
Also, though not directly tied to the Euro question, Scheers also points to instability
among Asian currencies, particularly the recently-devalued Thai Baht.
"Monetary instability is something investors generally want to avoid,"
said Scheers. "When you put hard money into an overseas plant, you also want
that country's currency to be as solid as the ground upon which you build."
Infrastructure and Stability Are Improving in the Third World
Farther afield, Scheers points to quiet rebounding in sub-Saharan Africa, long
considered among the world's most challenging locales. Currently, investors are closely
examining opportunities there, particularly in terms of mining and mineral exploration.
While infrastructure rebuilding or creation is a prime requirement, and corruption
and civil wars a continual threat or reality, select countries -- including Gambia,
Senegal and Uganda --have made significant progress. And, with stability returning
to the mineral-rich Congo (formally Zaire), Scheers feels mid-continent Africa may
be starting a long-awaited recovery.
It May Take More People to Do a Job Overseas
Labor is also a concern, particularly when it relates to precisely how many people
it takes to do a job satisfactorily.
"In some Southeast Asian countries, crime and security is a real issue, and
definitely can affect the number of people on your payroll," said Richard Greene,
manager of international corporate real estate for Ernst and Young. "In one
particularly unstable country, I know of a firm that hires security guards to watch
the security guards!"
Also, Greene said that while individual wages may be low, site selectors should
investigate precisely how many people are needed to get a job done.
"If it takes two low-salaried workers to accomplish the same goal as one
U.S. worker, where are your gains?" he said.
Labor Markets Can Cross National Boundaries
You can also get tripped up by countries such as Luxembourg, where the unofficial
unemployment rate is just 3.6 percent.
That might make Luxembourg appear to be a very tight labor market. But, the fact
is that many workers in Luxembourg commute daily from neighboring countries with
double digit unemployment rates. That, in turn, makes Luxembourg a place with many
more potential workers than official statistics might indicate. That's just one example
of why it is so important to really do your homework in order to get accurate statistics,
Greene added.
Always Plan an Exit Strategy
Greene also pointed to the need to appreciate "exit strategies" when
hiring for a European location.
"It can be an infinitely greater problem to shut down a plant overseas than
in the United States," he said. "To do so in Europe, you might have to
prove that your reason is economically valid. And, be prepared to cope with time-consuming
legal measures, plus significant sums to laid-off workers."
Watch Political Changes Closely
Greene also urges selectors to watch political changes for major trends.
"The more socialist-oriented new French government will likely put in place
more worker-protective laws, something that would never have happened under the former
government."
However, the Netherlands, according to Greene, is experimenting with flexible
contracts, allowing workers to be hired on a temporary basis. Somewhat like tenure
in U.S. education systems, these "contracts" allow a grace period in which
a U.S. firm could see if expected staffing needs match reality.
He also urged selectors to look past the "usual suspects" and consider
the widest possible range of potential countries. He particularly pointed to Portugal,
an EU member where inflation is down, business is relatively inexpensive to conduct,
and politics are stable.
Make Sure Infrastructure Is in Place
Bill Lutrell, Senior Manager, Western Region and Asia Pacific, Deloitte and Touche
Fantus Consulting, advises clients to set up shop in countries with infrastructure
well in place. But they must also consider situations where one's goods can actually
get to market within a reasonable period. Places where those challenges are most prevalent include Thailand and Taiwan.
There, traffic within capital cities is so congested that gridlock is virtually a
permanent facet of every business day.
"There are some exceptions, such as Hong Kong and Singapore, which boast
two of the world's finest subway systems," said Lutrell. "But while that
lets people move relatively easily within the cities, truck traffic can, even here,
be a serious concern."
There's Often a Trade-off Between Infrastructure and Skilled Labor
In Asia, demand for skilled labor has made labor turnover a growing concern, according
to Lutrell.
"Nowadays, once you train someone in your systems, they become very valuable
commodities," said Lutrell. "Indeed, much of your training efforts might
go to helping another company. This is particularly the case in more developed areas
such as Malaysia, Singapore and Thailand."
Indeed, the availability of skilled labor is just one factor that affects overall
productivity.
"Sometimes you have excellent labor, such as in Vietnam, but the infrastructure
is very undeveloped," he said. "Weighing the pluses and minuses of a given
location is a never-ending challenge in this part of the world."
Labor Availability Doesn't Mean it is Skilled
Back in Asia, Robert Price, a principal of Lockwood Green Consulting, agrees that
labor availability is a major regional concern.
"It's directly impacted by dramatic economic development trends in what were
formally called developing economies," said Price. "Today, there is little
available skilled labor for small projects requiring, say 200 workers."
In the urban areas -- where the infrastructure is established and companies tend
to congregate -- everyone is competing for same limited supply of areas, he said.
Many firms rely on labor contractors, who drive up costs. Others put together transportation
routes -- sometimes as much as 40 miles long -- that bring workers to and from work
sites. Frequently a group of local companies partner in these minivan or bus efforts.
Part of the problem, Price emphasized, is that with large numbers of American
firms seeking out skilled competent labor, wages have, not surprisingly, gone up.
"When you're looking for someone to do more than just stitch up sneakers,
you're talking about trainable skills, skills that are appropriate for operations
within electronic, chemical, food processing or similar Pacific Rim plants,"
he said.
He also cautioned that, while seeking skilled laborers who will work for a good
deal less than U.S. counterparts, companies also must ensure they can handle tasks
that are sensitive to operator error.
"No one wants another Bhopal," said Price, referring to the Union Carbide
chemical plant disaster in India -- attributed to worker error -- that killed hundreds
and subjected the company to horrendous publicity and seemingly-endless lawsuits.
Check Beyond Salaries to Determine Total Worker Compensation
Of course, Price added, wages aren't the entire picture when determining worker
compensation.
"In fact, actual weekly wages may not even be the largest pay component.
Other items can include cost of living adjustments, or bonuses," he said.
In South Korea, for example, Price said it's common to pay a bonus every other
month, equal to one's monthly salary.
For companies assuming they've sited a plant where they have competent employees
working for half of U.S. compensation, Price said that finding out about such local
bonuses after the business is established is the kind of shock most locators would
clearly want to avoid.
Protect Your Intellectual Property Rights
Even more important, Price stressed, is protection of corporate intellectual property
rights.
"It's absolutely vital for companies to protect their proprietary processes,"
he said. "A worst case scenario would be investing $2 billion in Asia, and then
find out your neighbor has stolen your secrets. The risk of losing control over your
technology is very real in some areas. And a little investigation will define those
nations in which this is a major concern."
Most of these unwanted "technology transfers" occur during licensing
procedures in which documents submitted for government approval somehow find their
way into competitors' hands. Price said that Singapore is particularly vigilant about
ensuring protection against such happenings.
"U.S. companies must vigorously do their homework to make sure it doesn't
happen to them," he added. "For if it does, then all the subtle advantages
you thought you gained by siting overseas will have been blown right out of the water!"
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