It’s becoming more and more difficult to find a closely held business that does not have some international aspect. Expanding business internationally can be very lucrative, but it can also be a significant drain on resources if it isn’t well planned and properly executed. When developing international strategy, smart businesses are doing their homework up front and saving time, money and headaches.
A common pitfall when expanding overseas is over-committing, whether financially or from a managerial standpoint. Make sure your team is prepared and can handle the expansion without dropping the ball. You need to address the difficult questions: Do you need your own sales force, or are independent distributors the normal model? Do you have internal logistics expertise to handle a longer supply chain? Does your financial team know how to manage multiple currencies? Another major question to ask is: Are you over-relying on your foreign business partner and not taking the time to make sure that the interests are aligned?
It’s a given that you will face new and different tax systems. However, dealing with even more fundamental challenges often dooms many foreign expansions to failure. These include entity selection and formation, identification and monitoring of local strategic relationships and protecting foreign investments or transfers of plant, equipment and technology. Successful foreign expansions spend as much time understanding where to locate and how to operate their business in a foreign economy as they do understanding how to deal with new, complex foreign taxes. It is crucial to understand the reality of the country in question.
Here are a few tips to remember when considering doing business in specific countries:
- China, with a projected 300 million people as middle class, continues to be an attractive market. “China requires Guan Xi (relationships). It’s very important to have good relationships with all the stakeholders in China (including government, employees, suppliers, etc.),” said Alex He, office manager of Plante Moran’s Shanghai office. Inflation is rampant in China — especially on labor and real estate. Beware of the “low-cost” country trap. China has a controlled currency and the pitfalls that come with it. The requirements for transferring money outside the country are detailed and non-negotiable.
- Brazil has experienced significant growth in recent years and an increasing middle class. It’s an attractive destination. Brazil is Latin America’s largest economy. According to economists, it will remain in this enviable position well into the future. “Brazil is a country with many realities. It has 190 million people and is larger than the continental United States, so where you choose to operate within Brazil matters,” said Mariana Mizoguchi, leader of Plante Moran’s in-country efforts in Brazil. Brazil has one of the most complex tax systems in the world and it doesn’t have a tax treaty with the United States. Brazil is very protective of its domestic industries. Products with equivalents made in Brazil are subject to high import taxes and duties. The Central Bank controls every transaction between Brazil and foreign countries.
- Mexico, with oil price increases in the last 5-10 years, has become desirable from a logistics perspective. “Form over function: Every form and supporting document has a specific format or template, and forms are often more important than the parties’ intent or even the reality of the situation at hand. Failure to comply likely results in disallowed tax deductions, fines and penalties,” said Alejandro Rodriguez, office manager at Plante Moran’s Monterrey office. Mexico offers several customs-program options that allow companies to have operations in Mexico with significant tax benefits. The currency in Mexico has fluctuated more than 40 percent in as few as three months during recent years. The impact this may have on operations will depend upon many factors.
- Russia, thanks to the ever-increasing price of commodities (including oil), has become very wealthy due to significant resources. It’s on the way back to reclaiming its former position as an international superpower. Because of its new wealth, there’s a lot of capital in Russia from middle- and upper-class private investment. It also boasts low costs in terms of labor and logistics due to physical proximity to the European Market. However, Russia is not a transparent place to do business. Relationships and government contacts are key, as it’s very difficult go into Russia and develop a viable business on your own.
- India is enjoying high single- to low-double-digit GDP growth each year. There’s still a heavy emphasis on the service economy, but the government has recognized that it needs to focus more on manufacturing. However, India’s internal infrastructure is very weak. There’s a significant lack of traversable roads, and the government is slowly working to address the problem. India will be a large market for the foreseeable future — but not a manufacturing titan until the logistics of freight are improved significantly. “The Indian government is encouraging cross-investment between Indian and Chinese businesses, combining India’s technical skills with China’s manufacturing prowess. We’ve witnessed a number of these ventures successfully negotiated and consummated,” said Lou Longo, leader of Plante Moran’s Global Services division and head of Plante Moran’s Mumbai office.
Jason Marvin is a partner at Plante Moran PLLC who concentrates his practice in manufacturing, distribution and construction industries. He can be reached at email@example.com