The relatively recent increase in governments regulating free-market principles is another factor driving the need to diversify both supply chains and operating models. For example, in instances where public policy has forbidden the export of sensitive technologies, or foreign firms have been barred from acquiring domestic companies, organizations have needed to diversify their supply chains and modify operating models to remain competitive. This has also reinforced a shift toward multi-hub models.
Notable recent examples include Beijing’s Made in China 2025 industrial strategy, the Biden Administration’s executive orders on US supply chains, and the UK’s changing trading relationships with the EU post-Brexit.
The demand for local, authentic, traceable, transparent and ethical consumer products (LATTE), is another powerful driver in the move to a multi-hub business model. In many ways, LATTE goods are the antithesis of those conventionally developed and distributed through traditional centralized principal company models.
In order to compete in this space, big corporations require senior personnel in the right markets to track local trends, document local consumer preferences, design and customize appropriate products and validate the provenance of ingredients used in the production process.
Weighing the pros and cons of a multi-hub approach
Until recently, one of the biggest barriers to the adoption of a multi-hub model was the fear of incurring a significantly higher effective tax rate. As a result of BEPS, the proposed narrowing of tax rate differentials and a proliferation of incentives in larger countries targeting income from intangibles, the relative tax cost difference has been reduced and sometimes eliminated or reversed.
Other reasons for not engaging with the idea of decentralization include corporate inertia — the centralized model has served businesses well for a long time, making it familiar and comfortable for many executives, as well as tax and trade professionals. Certain jurisdictions have geared their tax approach towards attracting businesses using a centralized model and have developed a high level of trust and perceived stability. The change introduced by BEPS is indirect and is being felt incrementally over time. The outcomes of the BEPS project have not manifested as a reduction in the reliability and stability of the lower tax rate countries but rather by way of a proliferation of “counter incentives” eroding the benefits of using them.
The tax incentives in other jurisdictions which may support a hub structure might seem complex in comparison. There are also concerns that the administration of a distributed hub model may be more complex compared to the status quo although multi country advance pricing agreements can eliminate that complexity. Complex administration can be countered by preparing the relevant documentation substanting the multi-hub structure or by entering into multi-country advance pricing agreements which would further eliminate that complexity.
The answer to all of these concerns is to conduct a thorough cost-benefit analysis of all business processes, calculating differentials in complexity and cost, and then weigh these against the benefits, both tangible and intangible, of transitioning to a multi-hub model.
The multi-hub business model may not be for every organization, but there are almost certainly many more companies in operation today which could benefit from exploring and adopting a more agile multi-hub approach.