International Expansion – Is it Right for Your Business?
International Expansion – Is it Right for Your Business?

What do you do when your foreign business dinner entrée choices are dog meat or beetles? Lance LaCoe, president, Century Automotive Service Corporation (a MAPFRE company), shared his first hand experiences of such dilemmas after diving into international business expansion into China, where he took up residence for three years. His exciting, glamorous perceptions of doing business abroad were quickly replaced by a strikingly different reality. LaCoe candidly shared his experiences – from uncomfortable travel and odd menu choices, to dealing with bribes and local officials – and his recommendations for anyone considering expansion abroad.

In 2007, I was asked by my company to put together a strategy for expansion into China. My initial perception of China was typical – lots of bicycles and pollution, exotic cuisine and a 14-hour flight to get there. Upon my arrival in China, instead of a five star hotel with a comfortable suite and room service as I had imagined, I was greeted with no air conditioning, a lumpy bed, and the choice of cicadas and scorpions or beetles for my first business dinner. Once I got past the initial culture shock, I began to look at the business opportunities.

The thing that surprised me most was the difficulty in language. I knew communication would be difficult despite having a translator. The problem with negotiating contracts in a foreign country is that every word is important. When you have a translator, you can lose a whole layer of that communication. It is extremely helpful if your translator understands your business model. However, if you are taking a new product into a new market, it is very difficult to find someone who speaks the language and also understands the business terms of what you are trying to do. Communication was much more challenging than I expected.

International travel can take you to some interesting places and scenarios. To succeed, you have to adapt to the local culture - dine like the locals at a business dinner, even when the choices are not pleasant. Or, the experience could be similar to wandering around in Madrid and suddenly discovering you wandered into a bullfight. The bullfighter, though slower than the bull, has two advantages – he has a team and he has a plan. If you put the team in without a plan, the bull is going to win. You put a plan in, without a team, the bull will win. My advice? Don’t be the bull – to succeed, you need to be the bullfighter!

The ancient Chinese warlord, philosopher and strategist, Sun Tzu said, “Every battle is won before it is fought.” If you are thinking about international expansion, you have to put a detailed plan in place. And you have to adapt to the market conditions. Develop a straightforward organizational plan. Are you going to build a new company in the foreign market? If so, define what kind of company. Who are the owners going to be and how will the ownership structure be designed? You need an operations plan detailing who does what and how you are going to execute the business. Figure out all the processes you will need to have in place.

Another very important consideration is to determine what technology you will be bringing. There are tremendous technology opportunities for dealers around the world. If you look at the tools we have available here, such as menu selling, which is a core part of what dealers do in the front end of a dealership, it doesn’t exist in too many places outside of the US. Planning for your technology could be as simple as adopting your technology to the local market. Is it just a language issue, or do you have to do more development to handle some of the dealer processing requirements? You need to know the local information laws. If you are using a server based outside of that country, find out the rules that govern that. All of these things need to be considered.

As you develop a plan, here are some of the key items to keep in mind:

  • Understand the market – If you don’t, then learn about it. If you can’t learn about it, don’t do it.
  • Determine the legitimacy of opportunities – With contacts that start with “I’ve got a cousin who is a dealer . . .” determine if it is a real opportunity. This requires some due diligence on your part.
  • Determine how to add value – There are dealerships in every area of the world. What are you going to do differently to add value to the car dealer and to the customer, or the distribution structure? If you can’t determine how to add value, don’t do it.
  • Know the personal costs – Consider the impact to your current business. Can you afford the distraction to your business to go and work in a country thousands of miles away with the time differences, and potential miscommunications that will be involved?
  • The best use of your resources – Where could you spend your money more effectively? International business typically takes a long time to develop. Is there something you could do locally that would yield a better return? When and how will you get paid?
  • Know your partners – This is a key requirement in any venture. As you look to do business internationally, know who you are working with. Do you have a great relationship with them? Make sure you know what you are going to do when things are good, as well as what to do when things are bad.
  • Do a high-level market analysis – Know all of the local and cultural variables. Determine if there is a consumer demand for the product you are bringing into the market and if the market is ready for it. If it is something that needs to be financed, find out if financing is available. What are you going to have to pay in commissions and spiffs? You need to know how to source and market the products locally. Find out if details such as color and numbers matter. Our first contact in China had a form number of 41. We later learned that the number four is bad. It means death! If we had done a little more research, we would have learned not to use 41 for our contract number.
  • Know the competition – There are going to be competitors. There is inevitably some other product in the space you are looking to fill. It may be a different product, but they are most likely going to react to your entrance into the market. What will their reaction be and how can you counter that reaction?
  • The OEM/dealer relationship – This is different in other countries. You have to understand what this relationship is like and use that to your advantage. Can you put your program materials inside the dealership? Maybe. Will they have to take them down when the manufacturer comes? Probably.
  • Staffing and employment law – This is very different in other countries and understanding it is often overlooked. Get experienced local legal counsel so you can successfully navigate hiring and retaining people without being sued.
  • Foreign currency exchange rates – When you are in a foreign country, you have to consider the local controls for their currency. All currencies trade freely. When I was in China, there were very strict guidelines on how you could bring money into the country, what you could use and exchange it for and how you could take money out of the country.
  • Capital - It takes money to get a business started in a foreign country. You have to determine how much capital you will need. You need to come up with a pro forma that calculates all the needs of your business – how long it will take to get started, the product selling price, anticipated profit, and when you will be able to take money out of the country. Don’t neglect the hidden expenses.
  • Tax impact – How does tax come out of what you sell? You have to consider the business tax and sales tax that you have to build into the receipts. The tax impact can be very significant. Consult with a good tax attorney in the foreign country where you are doing business to make sure you have all your bases covered.

You can be faced with some challenging situations when doing business abroad. I will illustrate with an example: When working with a manufacturer, they tell you they can make things happen quickly with an under-the-table cash incentive. What do you do in a situation like this? Contact your lawyer? They won’t be able to help. Give them the money? The prospect will never know and you will probably get the business. In this type of dilemma, you should walk away from the deal and find another prospect.

It is easy to overlook things when creating your pro forma. For example, your pro forma says you need ten employees; how are you going to get those employees? Probably through a recruitment service – that is one of the things we used, and it costs money. This was a cost that we neglected to build into our plan.

Critical timelines are going to help you determine if you have enough cash to do this business. If you create a model and it says that after one year, you are expected to have a certain income level and you don’t, then you need to consider what you can change about your business model. Running out of cash is one of the worst things that can happen to you in a foreign country.

What Could Go Wrong?

Part of any good planning is figuring out what could go wrong and measuring the impact of those items. Most importantly, once you identify what these things are, come up with a plan to mitigate each risk. In many countries there are regulatory changes. If regulations change, how can you protect your business? Determine the financial impact you are exposed to if problems occur, and try to figure out the likelihood of problems occurring. Map it out. You need a strategy in place so that if the worst happens, you can recover from it.

Look at macroeconomic conditions – inflation, unemployment, etc. In the service contract business, inflation is a huge challenge. When you go outside the US, fraud and corruption can be real parts of business. Don’t fall victim to this.

Communication is the first thing that breaks down when you are doing business internationally. Fortunately we do have our own “Rosetta Stone” of sorts that can overcome any language barrier in this business – and that’s money. If you make money, you aren’t going to have any trouble with communications. If you are struggling for money, communication problems can seriously damage your business.

Partnership problems could arise. Partners have to share the same vision for what they want to do with the business. Determine company goals and the process for expansion. Ultimately, what is the end game? Are you looking to build a company that you can take public? Are you looking to sell it? Consider inluding clauses in the contract so that your partner can eventually buy you out.

Disputes with contracts could happen. If they do, you won’t win them. You are the visitor and you are in their home court. Even if something is in a contract, that contract might have a different meaning in a foreign country than it does in the US. In some countries, partners aren’t expected to be disadvantaged by contracts. So if one party is disadvantaged, it is very simple for the court to overturn the contract.

Business development could be slower than expected. I think that happens in just about every foreign venture that takes place. People go in with a strategy, they map out their best plan, but things happen. For example, you find out that the employee handbook takes longer to create than anticipated. Or, you find out that the negotiation you were having with the local insurer takes longer than expected. Be prepared for business development to go slower than you initially anticipated.

You could run out of capital. If this happens, what do you do? Is the process for adding more capital into the business clearly defined in your partnership agreement? If it is not clearly defined, then you are going to run into problems.

An important piece in any business plan is an exit plan. If you are doing business in China, my belief is that you should plan for an exit plan. Two things could happen. Everything could go right, your business could work and you make a lot of money, or something goes wrong. What will it take if something does go wrong? How do you protect yourself and get out of the situation? You have to consider what has to be left in place in the local country where you started the business. When I was in China, if you wanted to exit (with the products we were selling), it would generally take seven years! Seven years to staff an office and have an employee onsite. That is Chinese law. Be very clear on your exit strategy because inevitably, something may just go wrong!

Here is another situation that happened to me. A local government official wanted compensation before issuing a business license. The official made it clear that he was going to hold up our business until he received such a payment. I went to the official’s office with my attorney, listened to him speak in Chinese for thirty minutes, then I told him that if the official held up our business license, we would shut down our business and terminate all our employee contracts. Luckily, my strategy worked and five minutes later the business license was approved.

People often think you have to grease the wheels to get anything done. Do not do that. The US has a law called the Foreign Corrupt Practices Act. This law has real teeth. Make a payment to a government agent, or spend too much on dinner with a government employee, and you can find yourself in jail.

Moving Forward

The expatriate community can be a fantastic source of help as you get started internationally. You can locate them by looking for where they go out to eat or where they do business, etc. Make expatriate friends. You can talk about your business issues with them and it will likely be encouraging to find out that you are not alone in your struggle. They may be able to offer solutions that have worked for them in similar situations.

I continue to remain intrigued, fascinated, and enamored with China. It is a very tough country, but its size creates so much opportunity. If you are considering international expansion, it is certainly a country worth looking at.