How to: set up a company overseas
Once your company has built up experience of exporting indirectly, the next step may be to set up a more permanent presence in a particular country or region. Depending on the prevailing business culture, or just your customers’ preference, you might find that it improves your chances of increasing sales.
Some customers will welcome a local office as a sign that you’re committed to their market for the long term. Many also prefer the reassurance of a local presence for handling post-sales support. This section looks at the issues to consider when establishing a presence in the market.
In many countries, the possibilities range from a single-person sales office to full manufacturing operations. You don’t always have to set up a fully separate legal entity to start with; it might be sufficient to set up a representative office, and graduate to another company form later.
Keep in mind that your choice will dictate what functions the office is allowed to carry out. A representative office usually has limited authority to carry out some business development, but contracts can only be signed with the company’s head office. On the other hand, its tax liability might be much less onerous than that of a legally registered branch.
Branches and subsidiaries
More permanent options such as branches or limited subsidiary companies usually have a lot more autonomy when it comes to doing business and employing staff. However, they will most likely be liable to pay tax on their activity in that country.
Joint ventures are another possible option; the advantage in this case is that the risk is shared with a local company. What’s more, if the partner company has been established for some time, it also potentially brings an existing customer base to the table. Acquisitions are another option if you prefer not to dilute the shareholding in your business.
Export checklist: tips for export success
- What company forms are available and which is the most suitable for your business?
- What restrictions, if any, does your intended market put on foreign ownership?
- Will your business require permits to operate?
- Who should head up the office: someone from your HQ who is familiar with your company’s ethos, or a well connected local who has experience in your chosen sector?
- How will you manage the operation from your head office – especially if there is a substantial time difference involved?
- What support services will you need: can you use your own professional services firm to register the business and file accounts, or will you need to retain local legal and tax advisors?
- Where’s the best location to set up the office?
Case study: H&K International
First established in 1975, Irish-owned H&K International (www.hki.com) supplies kitchen equipment to some of the world’s biggest fast food and casual dining chains including McDonalds, Burger King and Subway. It supplies 20,000 restaurants in 70 countries annually, with an annual turnover in excess of $500m with most of its business coming from the US. It has manufacturing facilities in Mexico, USA and the UK, and recently acquired a facility in Indonesia. It has service – warehouse operations in a further 10 countries with the headquarters based in Dublin. CEO David Bobbett shares the secrets of what it takes to set up successfully in foreign markets.
What are your criteria for deciding to set up in a particular market?
I think everything has to be dictated by the customer. You have to decide where the customers are and what their needs are. We make about 7,000 different items and therefore we work very closely in offering total solutions to our customers, to support their brand. In our case, it’s a lot of project management, it’s a lot of drawings and knowing what’s in each individual restaurant. Why you go into a market has to be dictated by what the customer’s needs are. Having Mexico so close to the US was without doubt the most logical step because that is our biggest market. Indonesia was also logical because it’s easier to do business there than in China where there are more challenges. Because of legislation, China is a difficult market to operate in.
“You have to do an evaluation and understand that no market is perfect. There is a need for a long-term vision, it needs investment”
What’s key to making overseas operations work, in your experience?
If you are going to go abroad, you need to have the management structure. You can’t devote the resources away from what you’re doing well. You have to have a very solid foundation and you need a very strong level of operational control: you need to have operations excellence which can be easily transferred to other locations. That’s a huge factor in our mind as to why you would go into a market. But it really is customer driven.
The big thing about anything like this – opening a new plant is like an acquisition. Mexico is a very bureaucratic country and there are always risks and rewards which you have to balance and you have to realise what those are. We had a partner in Indonesia who understood the local requirements, so we didn’t rush in. We moved in with them and over time, took a greater percentage of the business. You have to do an evaluation and understand that no market is perfect. There is a need for a long-term vision, it needs investment.
How do you go about setting up in a new market?
We’re very clear that our Irish-based tax advisors manage our business worldwide. We actually get our audits done worldwide, other than in Sydney and Mexico, by the advisors in Dublin. And they send their audit teams from Ireland. Obviously, tax is handled differently per country. We have a tax partner at who deals with that. Our job is to serve the customer in the most efficient way and our audit and tax support we get is excellent. I come from an accounting background myself and I think it’s an excellent broad education.
Speaking of that background, how do you apply what you learned to doing business in international markets?
I think information drives decision making. The ability to plan, organise and control, to implement boundary controls – if you control what goes in, then you control what goes out. What I learned was invaluable, such as the discipline of meeting deadlines. In our case, four of our seven-strong management team worldwide are chartered accountants and two are management accountants. I think in any team you have someone in any team who is more entrepreneurial but it’s important to manage a business well and have a cross-section of views.
The other thing I learned from my audit days was that culture is important. You build the right culture in your business, and if you do that, you’ll get more opportunities with your customer. We won the worldwide supplier of the year award with McDonalds – we set the industry standard.
I think culture is king. In our business, there’s no politics. You focus on the customer. It’s about pride in performance and that can take time to achieve in new markets. That’s the most important thing: to bring that culture from your business into the new business you move into. Our approach when we open an office in a new market is that it will be led by people who are from our business for quite some time. They then pass on the reins when that operation has been going for a while. When we recruit, or do an acquisition, we do a very clear evaluation of all employees – what we call a person assessment. They have to fit the culture of our company.
Case study: OpenJaw Technologies
OpenJaw Technologies (www.openjawtech.com) delivers online retailing solutions to the travel industry, including airlines, loyalty programs, online travel agents and hotel groups. In 2005 it began selling in Spain through a subsidiary in Madrid, which now employs 40 people. The Spanish and Latin American markets now represent 20 per cent of OpenJaw’s total turnover. Ricardo Navarro Ales, Regional Director of OpenJaw Iberica and Latin America, talks us through the steps to setting up in a new market.
Why did OpenJaw choose Spain as a location to set up an office?
Spain is a well-recognised market in the travel space, being one of the top destinations in the world and of course it has a powerful travel industry. In 2005, OpenJaw was growing internationally with projects in several different countries, and they saw in Spain an opportunity for growth and expansion, investing in a market that had relevant players in terms of size. The fact that Spain was a relevant and attractive market to invest, and also that Spain is a natural bridge with Latin America – a huge market with strong growth – were the main reasons to establish a subsidiary in Madrid and delegate the management of those markets, including sales, operations and support, to a regional director.
“It is very important to have a good partner that can guide you on the legal and financial path to make the process smooth”
How did you go about setting up the office in practice?
We started small, with a minimum team, with a little office in a shared business centre, with a clear budget to invest and giving us a couple of years in mind to prove the return on investment. We closed the first deal six months after we started, which was a great success. Since then, the subsidiary has been profitable and did not require further investment from the matrix company. The initial projects were developed in Dublin, but then we realised that a local team was necessary to answer some of the market needs, like support in the local language, more frequent contact with customers – not only at C-level – and also the cost of the implementations. This is how we planned to increase the headcount in Madrid that forced us to move offices and rent our own space.
Did it take longer to get become established in the market than you expected, and was the process easy or complicated?
The establishment took longer than expected, primarily because in 2005 there was a lot of bureaucracy to resolve, mostly when the investors were foreigners. It is very important to have a good partner that can guide you on the legal and financial path to make the process smooth. The process was easy but that’s just because we were very well counselled. We have two very important partners: a law firm that helped us since inception to establish the company, create contracts, manage all legal requirements for taxes, and transfer pricing, and so on. We also work with a financial advisory firm that helps us in the day-by-day work related to accountancy, labour, payroll, etc. These two partnerships allow us to focus in the business.
OpenJaw employs 30 people in Spain. How did you manage the recruitment process?
All of them have been recruited locally. The recruitment process is costly but because we want to make it internally and we do not delegate this important task to externals, it takes time to select the right candidates and it takes time for the interviews and selection process. We are a very small company so we try to keep our standards very high when recruiting. Something that has been proven successful is internal recommendations and part of our team has been recruited via employee referrals.
What advice would you give to exporters thinking about setting up offices in a new market?
We made a lot of mistakes, and got a lot of decisions right. The balance, though, is very positive. Maybe if I had to start today I would be more focused on our ‘sweet spot’ customers because we lost a lot of time trying to get customers that will never use our technology. But when you are trying to get customers, sometimes you don’t correctly define what your target is. Another important piece of advice is to appoint somebody you trust locally. At the beginning this is a very important factor to know that your business is being well cared for.