Nearly 35 years after China reestablished trade with the United States, launching a foreign subsidiary there remains difficult — especially for a smaller company. Managers must come up with a business plan, translate it into Mandarin, then submit it along with a two-inch pile of forms. That's when the real work begins, with seemingly endless revisions and negotiations with Chinese officials. From start to finish, the process can take two years.
Even then, a foreign operation needs a Chinese name before it can begin to conduct business. When The Hoffman Agency, a Silicon Valley public relations firm, reached that point, CFO Leon Hunt was told he had to come up with six possible DBAs to submit to officials in China. Hunt says he could barely come up with four that captured the mission of his company. Still, the form had to be completed, so he picked the last two names arbitrarily. "Our attorneys said not to worry," recalls Hunt. "They said we'd get our first or second choice."
The PR firm got its sixth choice. The name translated roughly as "Good Fortune Consulting Co." — an auspicious title, perhaps, but one better suited for a local tea-leaf reader than a global public relations firm. In the end, The Hoffman Agency managed to secure its first choice (which loosely translates as Hoffman Business Consulting), but not without some scrambling.
Managers at many small-to-midsize businesses can relate. Consultants say they've seen a flood of smaller companies rushing overseas over the past two years. Some of the risk-takers are lured by burgeoning consumer markets in big countries like China, India, and Russia. Some are looking to set up cheaper production facilities in emerging markets. Others are simply following clients overseas to major European cities.
Most are going sooner than they would have 10 years ago. Indeed, many small businesses are expanding internationally before they've even established a solid base of operations in their home markets. "You used to see venture-backed companies going abroad after their C or D round of funding," notes Larry Harding, founder and president of High Street Partners, a consultancy that helps companies manage their international finances. "Now they go abroad during the A round."
Many are unprepared for what awaits them. Operating in several markets across a number of time zones presents operational challenges. Tax codes may be convoluted. Quirks in local employment laws can prove baffling for inexperienced managers, landing their fledgling operations in legal hot water. Fluctuations in exchange rates can foul up even the most modest revenue forecasts. Emerging markets remain particularly risky for small companies, which can't always afford the high-powered lawyers employed by the Fortune 500.
The risk takes a toll. According to a recent study by Bain & Co., only a third of expansions overseas by U.S. retailers have returned their cost of capital. "People are naturally enticed by growth," cautions Ron Langford, managing partner at consulting firm Marakon Associates. "But they're spending less time thinking about the bottom-line implications of their decisions."
Contract First, Office Second
Bruce Ferber can attest to that. Ferber, now CFO at Herndon, Virginia-based consulting firm Digital Focus, was involved in overseas expansions with two previous employers. Neither fared particularly well.
At one, a division of General Electric called GE Capital Spacenet, managers spent millions of pesos building a satellite ground-services operation in Argentina. Customers were less than enthusiastic. Eventually, GE Capital spun off the struggling division. "'Build it and they will come' is way too risky from my perspective," says Ferber.
Instead, the Digital Focus CFO prefers a less starry-eyed approach. He advises small-business executives to sew up a contract in a foreign country before setting up a local office. Ferber stuck to that belief when management at Digital Focus began contemplating its own move overseas last year.
The planned expansion wasn't optional. Digital Focus had recorded revenue growth of 300 percent in 2003. But business at the technology consulting firm slowed dramatically the next year, with revenues up just 30 percent. Boosting sales meant opening in new markets. It wasn't hard to decide which ones. European countries are deregulating their national telecommunications companies. Such a bust-up usually means technology chaos and big IT budgets — a good combination for tech advisers like Digital Focus. With this opportunity before them, the company's managers okayed a scheme to set up an operation in London.
This time, however, Ferber was determined to match costs more closely to revenues — and London isn't cheap. "The prices in London and New York are pretty much the same," he says. "Just put a pound sign in front of the number instead of a dollar sign." Rather than committing to an expensive lease and hiring a local salesperson, the company first sent president Erin Smith to the UK to drum up business. After a sales meeting and a few phone calls, Smith landed Digital Focus's first overseas contract. The consulting firm's team worked out of client conference rooms, hotel lobbies, and local coffee shops.
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