On foreign soil: The trials and triumphs of operating overseas

Nothing about establishing an overseas presence came easy to Hankscraft Inc. And with labor costs rising meteorically in the last few years in China, where the company employs 300 workers, company president Mark Blume knows he still faces some keen challenges.

But Blume, who spoke on "Strategies for Establishing and Managing Your Overseas Office" on Feb. 8 as part of the monthly Madison International Trade Association (MITA) meeting, says that China has definitely been a land of opportunity for his company, and he has more than a little advice for people looking to mimic his success.

Hankscraft, which sells its electro-mechanical, electronic, and plastic components to original equipment manufacturers, the point-of-purchase advertising industry, and beer brewing companies, began sourcing from China in the early 1990s. At first, the company was reluctant to shift any part of its operations overseas but ultimately decided that it needed to lower labor costs in order to stay ahead of the competition. After a false step or two – including a manufacturing and sales partnership that blew up after Hankscraft's Chinese partner started selling directly to one of Hankscraft's customers – the company decided to set up a wholly owned foreign enterprise, and even in the harsh business climate of the past few years, Hankscraft has prospered.

"Hankscraft is actually fortunate," said Blume. "In 2010, our revenues increased over 15%, and that was on top of a significant increase the year before, so in many respects I look forward to the economy improving because our top line, I hope, will improve even greater, but it does come with challenges."

One of those challenges involves dealing with those spiraling labor costs. And that, along with the appreciation of foreign currencies, is something that companies looking to set up abroad are now forced to keep in mind.

"Labor cost is a huge input cost for us, so it's something we're looking at," said Blume. "It's something we need to pay attention to, and anybody that's thinking about going over there needs to understand that the costs are going to continue to rise."

Covering all the bases

A tip sheet distributed by MITA and developed in part by Blume and the program's other speaker, CUNA Mutual Vice President Mike Celichowski, outlines effective strategies for establishing and maintaining an overseas presence. These strategies include completing a cost-benefit analysis, ensuring that you have support from top-level management before devoting resources and time to the move, and making sure that you approach your efforts with at least the same level of analysis that you'd dedicate to the opening of a new domestic office. You also need to become familiar with laws regarding foreign ownership, product registration, and labor, and then decide what kind of setup is right for you – a wholly owned foreign enterprise, branch office, joint venture, or acquisition.

But most importantly, you need to decide if setting up overseas really makes sense for your company.

"I think the thing that you've got to identify is, what's your reason for looking at an overseas office?" said Celichowski. "Is it to diversify away from the U.S. market, is it because there's a customer base that you want to exploit, is it because [of] a supplier you need? For us in financial services, the question is, 'What differentiates us? How can we be successful?' If we're going to be just the same as someone else … then it's not going to make a lot of sense, but if there's something unique that we can bring to the table where we can be successful, then I think that it's definitely something you want to explore."

It's also important to make sure that the move meshes with your company's goals and business practices and that you can find experienced people who can help expedite the process. This includes hiring local managers who have experience working with U.S. or European companies and seeking legal and financial help from trustworthy people in the area. It's also crucial, says Blume, to solicit the help of Wisconsin's trade offices.

"You need to figure out what's going to be important to your success and how does going overseas play into that?" said Blume. "Once you decide that an overseas operation might make sense for you, you need to draw in people who have expertise who have already worked with companies that have done it … people that can help you get there quickly and effectively so you don't end up spending a lot of extra time and money that's unnecessary."

Plan for success … and failure

But while finding experienced people is crucial, it's also important from a cultural perspective to approach new markets with an open mind and learn as you go.

"A lot of it is reading and researching, but more comes from just developing relationships with people there and having the willingness and taking the initiative to actually learn about them and about the country and about the local history," said Blume. "You want to learn what's going on and how they see the world and what things are important to them. … So it's really a personal thing for me more so than a Business 101 class in college told me that I needed to learn about the culture in a different country."

Of course, the best-laid plans of mice and men often go awry, and the business world is no exception. Anyone setting up overseas should know the limits of their commitment and risk tolerance and should be prepared in case things don't go as planned. Part of that preparation is having an exit plan that minimizes the costs and headaches involved in pulling out of a market.

"Plan for success but have a backup and be prepared if something doesn't happen," said Celichowski. "So you've got your thresholds … if you don't meet them, what are we going to do? … The worst thing you can do is not have a plan."
 

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