Going global comes with lots of forewarning

Jan. 1, 2020
CHICAGO — Going global is becoming a more common theme among manufacturers, but the places they are going are changing.

CHICAGO — Going global is becoming a more common theme among manufacturers, but the places they are going are changing.

According to Ernst & Young research presented at the 2008 Global Automotive Aftermarket Symposium (GAAS), out of a list of the touted top 100 automotive aftermarket companies, 59 percent have facilities in Mexico, followed by 50 percent with factories in China.

Mike Hanley

The other top three countries housing these overseas facilities are Brazil, 46 percent of companies; India, 42 percent; and Russia, 27 percent.

And that order is not surprising to Mike Hanley, partner, Automotive Industry Leader, Ernst & Young. But if we know where the companies are going, how are they getting there?

Other research from Ernst & Young shows that 40 percent of opportunities are self-generated from the business unit, and another 35 percent are self-generated by the corporate development.

“It’s not a group of investment bankers. It’s not a group of private equity firms. It’s not a group of accounting firms,” Hanley explains. “It’s you and your people on the ground, building relationships, understanding where the deals are understanding how they mix with your strategy that seem to be generating most of the opportunities.”

Those also are critical to make the endeavors successful. Only 11 percent of the time does the target company approach the company doing the purchasing.

“You have to be there, have to meet people and develop relationships,” Hanley says. “And that’s really critical throughout the whole process (of going overseas).”

Also critical is getting the best deal, Hanley explains. “Step back and say, ‘How important is this?’ not what is the best financial deal or accounting deal or legal deal.”

In doing that, always respect cultural norms, exhibit persistence and promote creativity and get the positions in the company that matter.

Hot issues in going abroad
Each country that a company might look to for expansion, has its own lessons to teach the new business.

For example, multiple taxes with “fast changing legislation” as well as environmental sustainability with higher penalties coming into effect and a challenging need to comply with foreign corrupt policies acts wait to greet those wanting to set up a joint venture in Brazil.

And if you want to set up a joint venture or alliance in Russia, you could end up owning a fire truck before the deal is closed. Hanley says the time required for license and utilities is unpredictable, and up to near 100 licenses could be required to start an automotive facility. Even the fire department might have to license you, hence the new fire truck that department could want.

That’s just one piece of the pie in terms of joint ventures, and as for mergers and acquisitions there, it is difficult to negotiate transfer of control, Hanley reports. Several problems often arise months after the deal, “and there is not lawyer, not judge that is going to help you resolve that. It’s just you against the Russians at that point.”

But that’s not the case, necessarily, in India. There, Hanley notes, joint ventures can be limited by the local partner’s lack of financial capabilities. “So what you end up with is a partner with great products and no money to expand it,” he says.

Regulatory challenges when setting up base is a problem when getting the land to set up a greenfield in India, and even where in terms of the four automotive hubs spread around the country can make the decision difficult. In other areas, such as merger and acquisitions, accounting norms and diligence are different, especially with private family-held entities, which comprise many businesses in India.

Even acquiring a publicly traded company is difficult, especially if you want to take the company private.

As for China, cultural issues are key, especially when doing a merger or acquisition. The wrong wording can make or break a deal. And if that goes off without a hitch, there still is the situation of intellectual property transfers and deals including taking up historical liabilities, such as tax and social welfare insurance.

And even if it’s a greenfield or joint venture, there are long approval processes, unique demands from workers and a lack of spending of foreign compliance requirements such as the US GAAP, IFRS and SOX 404.

That also is an issue in Mexico in setting up a merger or acquisition. Also, there are high costs to setting up facilities, and very few potential local joint venture partners have proven market experience to add value to a business.

Starting from scratch also requires a long lead time and facing the shortatge of appropriate sites.

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