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Investing in the USA Foreign Businessmen must get smarter Expertise is the key to success in this land of opportunity, where markets are vast, complex - and wilder than the West ever was. America, a country with a GNP of over four trillion dollars and a land mass larger than Europe, has, for a long time, interested the British and other Europeans. It is the last bastion of unadulterated capitalism and free enterprise where taxation is low and "red tape" does not appear to exist. The population is large, but less than Europe, continues to increase and this causes all property values to rise (despite some variations). There is something for everyone and room for all in this - the biggest and most profitable, market in the world. A visit to the US will make us aware of our own antiquated products, services, and management techniques. We will also be aware of the capital markets which provide a ready source of funds through full and unlisted company quotations - and all this in an English-speaking commercial environment. It should be easy to grasp just one per cent share of this market. The average European business has successfully competed in world markets through direct exports and local subsidiaries, using both local and expatriate management. After all this international experience, America should be "a piece of cake". But this is not so. The US market entry and method of operations do present unusual difficulties and the fact is that initially many foreign companies achieve a low return or loss on their investment. Statistics of profitability have not been researched and in any case those figures which are available may not be valid because of the difficulty of measuring profitability when it is distorted by transfer pricing, capitalization, interest rates, royalties, management fees, and general accounting for incremental sales. Accordingly there is no reliable source of information, which could be used as a guide by a new entrant to the US market or by one already experiencing difficulties. It is, therefore, not easy to dissuade a foreigner from doing things "their way", even when those with experience believe that to do so would be fatal. In reality the United States has many very different markets even in the same commodity, and this needs to be understood. Clothing needs differ from Arctic Alaska to Arid Arizona, and equipment to keep the frozen tundra building foundations refrigerated in the Alaska summer contrasts with the air-conditioning equipment needed to keep an Arizona home cool. It is easy to state that this market is like none other in the world, but it is often not believed by the novice or the foreign management of the US subsidiary. Some aspiring entrants still see real or just perceived opportunities or rely on the truism that a one per cent market share is attainable. Surely one widget can be sold each week. This sort of carelessness has caused problems for many companies and disaster for others. As a result there has been a tendency not to make necessary investment or carry out useful market research, which is needed to highlight differences and plan a line of attack when entering a new field. Supermarkets in Manhattan carry many items, but these have to compete for shelf space with similar items from the rest of the world. There just isn't room for everything; the store manager has time to deal with a limited number of suppliers only and space will be allocated to the most profitable items (after payment by the supplier for the privilege of being allowed to stock the shelf). The existing competitors do not take kindly to interlopers; they will physically rearrange the shelves to ensure that your new product is relegated to the least desirable area. Probably the existing wholesaler whose product is known or advertised and who can give the biggest profit margin to the vendor, will dominate. There may be other factors too, so do not underrate the importance of friendship and allegiance owing to the existing salesperson. This may be more obvious in superficially slow Texas than amidst the hustle and bustle of New York. For this reason, foreign companies should endeavor to retain the services of the middleman at least until the business has matured; he can also help with credit control (if his commission is earned after the debts have been collected). But surely, a product with superior technical specifications, reliability, and performance will succeed over obsolete equipment. The theory is fine, but there are companies with large existing market shares, which have the ability to use all the dirty tricks necessary to maintain their market. These range from political pressure, advertising, predatory pricing, and just pure friendship, in order to either drive the new competitor into bankruptcy or just create sufficient breathing space to enable the incumbent to develop a superior product and then bring it into markets which had previously been left alone. There is the case of the manufacturer that entered the market and successfully sold its product through local distributors. Instead of concentrating on a particular area, sales were made throughout the entire market; the immediate result was large sales and profits. But the sales agreement provided for dealer support and technical service and after a period when the usual mechanical difficulties arose an engineer had to be sent from one end of the country to the other- those journeys of up to 3,500 miles soon eat into profits. Product liability can have its own cost. A vehicle machinery manufacturer encountered lawsuits for seemingly trivial and frivolous matters, often by third parties. The lawyers recommended settling for a nominal $30,000 here and there, since this was cheaper than defending lawsuits all over the country or even locally, when the defense legal fees will always be more than the cost of settlement and legal fees are borne individually by the parties and can not be recouped. The company that is successful in its own market, is likely to be just as successful in the US, but only when it has acquired the same relative degree of American expertise, resources and knowledge. New expatriates are unlikely to have sufficient practical and theoretical grasp of American business to undertake or analyze a market survey; they will not have the necessary understanding to be involved with an acquisition choice or takeover strategy, and they will not have the qualities necessary for general or line management. The foreign board member responsible for the US subsidiary suffers from the same handicaps as the novice expatriate. He may not have the necessary American legal, marketing, sales, advertising, engineering, accounting, tax, financial, personnel or general experience to exercise control or make knowledgeable decisions regarding the US business; furthermore one person, particularly a new expatriate, cannot do all of these functions. US complexities America probably has more complex tax laws, higher tax rates, and more bureaucracy and red tape than the European Community. It also has governmental price supports, and an economy that can even be argued to be socialistic (since the federal, state and local governments and regulated or controlled industries or business supplying those entities, employ more than 50% of the work force). The new expatriate may therefore take several years to reach his previous foreign management skill level; it may take much longer or may never be achieved, if the manager is required to act in several different managerial and technical capacities, As is so often the case when businesses attempt a low-cost market entry solution, any person promoted beyond his level of competence is liable to make mistakes and be blissfully unaware of the consequences. Because the foreign board director spends little time in the US, the level of expertise may never materially increase and this tends to cause friction with the US management, whether locally hired or not. Eventually, if the problems continue unresolved, the good managers of subsidiaries will leave for greener pastures, and the cycle is repeated. The Treasurer's role Like any other member of the foreign management team, the treasurer needs to be aware of and understand the ways of the US, as it relates to that function. Only then can constructive financial management be performed. Perhaps the Treasurer is lucky, because there are very few differences between the US and European countries which affect that function. Most of the major banks now lend into any State, although there are still few really national banks. It is very similar to dealing in several European countries, except that there is only one currency. The treasurer can borrow from one of major banks and accumulate funds there. Predominately this used to be New York, but now the regional banks certainly provide an array of services. Remember, that the US system allows for debit (not credit) clearing, and accordingly there used to be no standing orders for payroll or other payments, however recently the banks are copying this service through what is really a lazy person's check-writing facility, with the bank doing the writing. For day-to-day operations such as payroll accounts, petty cash and the odd emergency service, it will still be necessary to use a local bank, but, if it is not making reasonable profits on your accounts, the service, especially in emergencies, will reflect this. Paying your Colorado employee with a New York check might not be too popular; they want to be in funds this week, not in 10 days time, so rather than keeping the absolute minimum funds in the local account, it can be beneficial to leave a small surplus and transfer funds into it some days before it is absolutely necessary. Fortunately, the advent of cash machines, credit cards and internet banking have made funds accessibility in the USA and indeed the world much easier, so perhaps the location of a bank account is not so important, except for depositing actual cash. New companies also need to establish credit with suppliers, and this is often proportional to the level of funds in a bank account. Banks unlike those in the some other countries, provide explicit information over the telephone about the condition of the customer's accounts, and therefore it is wise during the early periods of operation to allow for excess balances to be retained. Furthermore, the true position must be communicated to the credit reporting agencies, especially those in the trade and also Dun & Bradstreet - not a difficult task, but if done badly it can cause annoyance. There is a difference in some terminology; for example, a margin over UK base rate is the rate offered to the best customer, whereas US prime rate is that generally offered to customers, with the preferred customers paying less. Loan documentation may be more onerous, containing specific requirements as regards the financial condition of the borrower. Historically, the requirements have been monitored and loans are called for technical defaults. Understanding financial statements An integral part of the treasury function, is the ability to use accounts, and understand the differences between the different types of financial statements British, European, Russian, Japanese or American, audited, compiled or reviewed. A subsidiary's treasurer has little use for independently audited accounts in accordance with American standards, unless they are needed for banking or credit purposes, but he does need to know the basis on which accounts have been prepared and the standards which apply. In particular he should be aware of the different accounting treatment for: foreign exchange, inventory (stock), acquisitions, tax, and goodwill. The taxation system, including "unitary tax" presents further difficulty. The Treasurer can borrow from one of major banks. Large foreign companies sometimes feel that the US banker should provide facilities to reflect the parent's good credit standing, this can be especially true if the bank is a US subsidiary of the parent's company's bankers. In the absence of guarantees, all facilities must stand on their own, and if the US company is under capitalized and inexperienced, then the facilities will reflect that fact. No smart talk will change it, other than to reinforce the inexperience of the management to the US banker. Most US banks are subject to audit by numerous regulatory bodies and hazard their own profitability it they act as nice guys. Fifteen years ago there were about 15,000 commercial banks and the same number of savings banks, this has now been reduced by about 1/3rd., but nevertheless they vary enormously. They vary in size, financial health, services and security. The average depositor generally has few security problems with deposits up to $100,000 providing the banks are insured by the Federal Deposit Insurance Corporation (FDIC) or the Federal Savings & Loan Insurance Corporation (FSLIC). Outside those parameters, do not rely on the government to repay you in case of default. Banks are generally prevented from lending more than the equivalent of 10% of their capital to any one customer, so large needs can not be fulfilled by a small bank. As usual, the treasurer will seek to use funds to the best advantage, but he will need to ensure that there is an understanding about local treasury and operating needs, including an understanding of how funds are transferred, foreign exchange dealt with and what the salesperson on the road needs. Summary The focus has not been on the foreign companies which have succeeded in the US, but rather on those contemplating entry or those having problems in the market; there is much to think about. America is different from other countries: It is vast; with diverse cultures and climates. There is: technical skill, cheap "wetback" labor, a maze of regulations, disregard of some laws, the wild west mentality, the "cultured North East", the old school tie network, the fierce competition and the personal worship of the big buck. These and other reasons explain why managing the US operation is no easy matter. America is a difficult market; but it can be rewarding. Management must be technically competent and able to deal with both cultural and commercial aspects of the American arena. Those not willing to invest money and time to provide their directors, managers and technicians with the opportunity to acquire the necessary expertise ought not to enter this market. Angus McDowell CPA FCA MS is founder and past president of the Association of Chartered Accountants in the US, hold a Masters Degree in Business Policy from Columbia University in the City of New York and has his own accounting and consulting business. Angus McDowell, McDowell CPA PC |