The Institute for Supply Management factory index for September was 56.2, up 0.5 points from the previous month and the strongest since April 2011. That followed a recent Bank of America Merrill Lynch survey in which financial officers at U.S. companies gave the manufacturing sector a score of 57, up from 53 six months ago and approaching levels before the 2008 financial crisis.
That same CFO Outlook survey showed the next horizon for many manufacturers: global growth. Compared with previous surveys, more financial officers said their companies are buying from, selling to and establishing operations in non-U.S. markets. When considering all types of global activity, 76 percent of CFOs said their companies have some type of presence in non-U.S. markets, up significantly from 54 percent at the end of 2011.
As this interest in overseas markets has grown, so has the importance for company leaders to understand the various challenges in expanding to other countries, as well as all the requirements and other considerations when entering or growing in those regions. It also may help CEOs, CFOs and other top executives to see how a few other manufacturers have managed expansion outside the U.S.
Challenges and Opportunities
A November 2012 report by the Economist Intelligence Unit highlighted the greatest barriers to increased international activity for U.S. middle market companies. Topping the list was lack of knowledge and unfamiliarity with the legal environment in foreign markets, cited by 33 percent of companies. Not far behind at 29 percent was economic uncertainty in potential target markets.
While not ranked as highly, several other challenges were noted. Those include the additional cost of operating in foreign markets, such as transportation; non-economic risks, such as the political, environmental or legal climate; finding the right partner for expansion; the lack of a market for products or services; cultural and language differences; and a lack of available financing.
Taken together, these challenges can be intimidating, and it’s understandable why some manufacturers are leery of making the leap outside the U.S. In addition, some factors are largely beyond a single company’s control, such as economic uncertainty in a country. In other cases, the lack of a market for products and services effectively answers the question about expansion before it is asked.
But looking more closely, financial officers can find opportunities to overcome some hurdles, especially by working with the right financial partners. Consider the top barrier: lack of knowledge and unfamiliarity with the legal environment in foreign markets. Embarking on expansion without addressing that challenge brings much greater risk, especially when considering the significant differences in regulatory environments. While companies in Western Europe generally face fewer restrictions and enjoy a freer flow of liquidity, some Latin American and Asian countries require movements of funds to be approved by a Central Bank, and liquidity revolves around in-country solutions.
Navigating this can be daunting, but it can be done by working with financial partners who know those markets. A global bank that has a strong relationship with a company’s U.S. headquarters and also offers local teams in other countries can help bridge that knowledge gap – not only the legal and regulatory aspect but also cultural and language differences. That expertise can better prepare a company for ramping up operations in a new market.
Cash Management, Control and Other Considerations
If a manufacturer’s leadership team is willing to tackle the above barriers, they can then move on to other considerations in growing their business overseas.
Many of these revolve around cash management and liquidity. For instance, the payments environment of a region is important. Some countries don’t favor paper checks as much as the U.S., and others use different instruments altogether. It’s vital to learn how vendors are typically paid in a market, what currency is normally used and what the typical terms are.
Similarly, financial officers need to know the common currency and typical market practices to collect and process payments effectively, which directly impacts a company’s cash flow. Companies increasingly are adopting integrated receivables hubs, which aggregate incoming payments and remittance details from multiple sources, such as lockboxes, checks, wire transfers, ACH and cards.
Companies also need to understand foreign exchange (FX) rates and decide which currency will be used to bill customers, weighing the ease of dollars vs. the advantages of local currency in negotiating more competitive pricing. On the broader liquidity issue, it’s often best to concentrate liquidity through inter-company loans, pooling agreements and netting structures instead of managing liquidity through entities in multiple countries. If regulatory restrictions prohibit such pooling, liquidity techniques such as overdraft expense reduction and credit enhancement solutions could be an alternative.
Finally, manufacturers targeting international expansion need to weigh the importance of visibility and control. A fragmented international cash management structure inhibits full visibility over balances. Even if local subsidiaries have some independence, treasurers should still consider a dedicated treasury workstation or other tool to ensure visibility – not only when setting up new operations overseas but for years afterward.
The same guidance applies to control. While the in-country team can be involved with local bank accounts and expenses, most control should stay at the headquarters level. If some processes must be delegated to local offices, it should be done deliberately and strategically to ensure local practices align with overall corporate goals. Corporate treasurers shouldn’t have to wrestle with a local controller who wants to keep balances in the market while the company is focused on repatriating cash.
How Some Manufacturers Have Grown
As these considerations clearly indicate, doing business in other countries often is a complex proposition. Financial officers need to think not only of their company’s current situation but also what they want it to be in one year, five years and 20 years. That includes the degree to which a company should depend on a bank in the new market vs. a global bank that can help centralize the control of banking activities while freeing local resources to concentrate on core responsibilities
Some manufacturers already have seen the benefits of consistency and visibility while expanding in non-U.S. markets. Griffin Technology designs and manufactures cases, chargers, cables, and home and car audio products for smartphones, tablet PCs and other devices. Based in Nashville, Tenn., the company previously worked with a regional bank but had seen its business grow in Europe and Asia. That expanding footprint required a global banking partner who could ensure centralized control. Griffin now manages all domestic and international treasury from its headquarters and is exploring the addition of Australian treasury management.
Other manufacturers have pursued global growth through acquisitions. KEMET makes tantalum, ceramic, aluminum, film, paper and electrolytic capacitors. Based in Greenville, S.C., KEMET recently acquired an interest in NEC TOKIN, a Japan-based capacitor manufacturer. In addition to securing capital with guidance from a global bank, KEMET is now leveraging that institution’s capabilities to achieve integrated financial support across the U.S., Europe and Asia. This includes not only improved efficiency through standardized procedures and simpler processes, but also greater visibility through a central online portal and increased cash availability and mobility.
As these examples show, opportunities exist for manufacturers to expand globally, but not without challenges. Companies that are serious about exploring growth in other countries need to consider several factors. But with the right financial partners and solutions—from new capital to simplified processes—manufacturers can overcome those barriers, reduce risks and chart a path for growth and success.
Alastair Borthwick is head of global commercial banking for Bank of America Merrill Lynch and is a member of the Global Banking & Markets Operating Committee. In this role, he leads more than 4,500 professionals who deliver integrated banking solutions to commercial clients globally. The client management teams under his leadership are dedicated to middle market, commercial real estate, specialized industries, dealer financial services and Bank of America Business Capital. Borthwick is based in New York.
