|"Without the right structure and capabilities in place, expansion is unlikely to be effective."|
|Lilliana Choi, |
Many Asian companies are at an early stage of their overseas operations. Their priority is often investment and gaining market share, rather than increasing margins.
At lower levels of international expansion, profitability matches or even exceeds revenues. However, as companies approach the point where half of their revenues come from international markets, then for many, profitability begins to fall behind revenues. The threshold appears to be about 40%.
This is the case for both global and regional companies: 46% of the globally focused companies generate more than half of their revenues from international markets, but only 38% derive the same proportion of profits from those investments.
Similarly, among the regionally focused companies, 48% generate nearly half of their revenues from international markets, but only 25% obtain the same proportion of profits.
Global expansion brings with it greater complexity, which can increase costs and drive down profitability. Companies may need to make several changes to their operations to improve the balance between profitability and revenues.
The path to profitability is dependent on many factors, but our respondents point to some functional areas where changes will be most required to ensure the success of their company’s international expansion plans. These include strategic planning, financial management, internal communications and financial reporting.
“You have to make sure you have an infrastructure that is well set up for global expansion,” says Lilliana Choi, Manager of Corporate Strategy and Development at Jebsen and Company Limited, a marketing and distribution conglomerate focused on Greater China and based in Hong Kong (SAR). “Without the right structure and capabilities in place, expansion is unlikely to be effective.”
Developing a sophisticated finance function
Deeper international investment places a much greater burden on finance functions. Companies must come to grips with multiple financial and accounting environments, which can vary considerably from market to market. They must deal with different interest rates, manage currency risk and consider an appropriate funding mix between local and overseas financing.
Enhancing tax planning
Given the focus on financial management, it is surprising that tax planning is so low on the agenda for all companies. Tax can play a very important role in accelerating the transition to profitability.
“Any company expanding overseas needs a strong tax governance model and the ability to plan their expansion in a tax-effective way,” says Jim Hunter, Asia- Pacific Tax Leader of Business Tax Services at Ernst & Young. “Without this focus, companies will not only lose the opportunities from optimizing the tax position but also expose themselves to risks that could be quite severe in terms of cost to the business.”
Rapid growth exacerbates risks, because managers may focus on keeping pace with opportunities rather than putting in place appropriate controls. “If the aim is to grow rapidly internationally, then the potential for that to be done in a way that strains or compromises risk controls and compliance increases,”
Don Vangel is Senior Advisor on banking supervisory and regulatory matters in Ernst & Young’s Financial Services Organization, “It’s important to have the right incentives and controls in place to manage expansion that occurs at a distance from central control functions, and to ensure that growth is deliberate and sustainable.”
Rudi Tsai, Director of Strategic Development at Pacific Andes, one of Asia’s largest seafood companies, emphasizes the importance of frequent communication between headquarters and local management teams to manage risk and spot opportunities.
“We stay in very close dialogue with the local management and have scheduled meetings through video conferencing with senior management of the group companies,” he explains. “This exchange of ideas helps us become aware of impending issues more quickly and allows us to resolve them together.”
Robust risk and control frameworks can provide valuable security. It ensures that companies make local level decisions within agreed parameters and with a clear framework of “non-negotiable” values and behaviors.
Nick Brewer, Group Chief Operating Officer at Noble Group, Asia’s largest diversified commodities trading group says, “We’ve invested a lot of time and effort into building our internal risk management function, both at a business and corporate level, in parallel with creating a strong culture within the organization.”
Forming transformational relationships with partners
Companies must build strong, mutually beneficial relationships with suppliers and other partners, and consider how collaboration can move these relationships from being purely transactional to transformational.
When asked about the changes that will be most important for their business to succeed with its international expansion plans, regionally focused companies point to finding the right partners as one of the top two factors.
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