Regaining Momentum in Cross-Border Operations

Finance executives are looking beyond the turmoil created by the coronavirus pandemic and toward economic recovery and growth.

Will nothing derail U.S. companies’ international expansion plans?

Apparently not, was the answer provided by January 2020 and April 2020 surveys by CFO Research and Vistra. The CEOs, CFOs, and other senior finance executives surveyed took a long view of their international operations strategies and cross-border merger and acquisition plans. They’re seeing beyond the present moment toward economic recovery and organizational growth, and many of their pre-pandemic concerns, such as those related to supply chains, have only intensified during the crisis.

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The January CFO Research/Vistra survey, conducted before the coronavirus pandemic was declared, asked 215 executives about international expansion and operations. The subsequent April survey by CFO Research polled 333 executives about their response to the coronavirus crisis.

Maintaining Momentum

A strong percentage of the executives in the April survey, 31%, said supply chain disruption was a major concern. That dovetailed with the January survey, which reflected a similar preoccupation with supply chain management. In that earlier survey, maintaining supply chains was the cross-border expense expected to increase the most dramatically in three to five years, as cited by 35% of the CFOs and other senior executives. And 22% of the respondents said they would update their supply chains in the next three to five years to address concerns about global expansion and operations.

On the subject of M&A, only 8% of the respondents in the April survey said they were delaying acquisitions or takeovers. That aligned with pre-pandemic survey results, which showed that nearly nine out of 10 executives were considering expanding into new markets, and 97% of their organizations were engaged in cross-border mergers and acquisitions.

While it remains to be seen if M&A will be a key driver of global expansion in the future, momentum had been building prior to the coronavirus crisis. The primary reason for cross-border M&A was to expand to new markets, as cited by six out of 10 executives in the earlier 2020 survey. A quarter of the survey respondents said their primary reason was to acquire new intellectual property and technologies.

The most important factor considered when selecting a target region for M&A was economic stability, said 36% of the executives in the January survey. That suggested the global economic uncertainty created by the pandemic could potentially slow cross-border M&A momentum worldwide, at least in the short term. Number two on the list of important M&A target-region factors was political stability, cited by 27% of respondents, followed by labor costs, cited by 24%.

The April survey asked executives about the short-term steps they were taking to survive the revenue and profit impacts from the coronavirus outbreak. The top response — from half of the executives — indicated that companies were delaying investments, showing they were more inclined to slightly alter their strategies than to abandon them altogether.

Only 20% of the April survey respondents said they were shutting down some operations or idling business lines. This may be evidence of finance leaders wanting to maintain their global operations where possible. That finding was reinforced by the fact that only 2% of the executives reported their companies selling businesses or assets to raise cash.

Companies were on the lookout to promote efficiencies. The January survey found that 61% of respondents’ companies were considering or engaged in legal entity rationalizations. Cost savings and tax-structure simplification were the primary reasons cited by executives for rationalizations. It’s reasonable to assume that multinationals will continue to look to legal entity rationalizations in a post-pandemic global economy.

A Healthy Appetite

While it’s too early to know how the coronavirus will affect the global business environment, the January 2020 survey of executives pointed to some interesting pre-pandemic trends. The survey showed a healthy appetite both for maintaining global operations and for international expansion. About half of the companies represented by the survey respondents operated in two to five countries outside the United States, and 30% operated in six or more countries. A stunning 87% were considering expanding into new markets.

The executives’ answers about the countries they were targeting for expansion were illuminating. The United Kingdom was a target for 40% of the executives considering expansion, China was for 24%, and Brazil and other Latin American countries were said to be a target by a combined 47% of the executives. The popularity of these countries and regions as expansion targets indicated that companies had particularly strong, long-view growth strategies that were not going to be disrupted by the newsworthy challenges of the moment, including Brexit and the U.S.-China trade war.

Respondents were also undeterred by longstanding economic and regulatory hurdles, such as those traditionally encountered by companies establishing businesses in Latin American countries.

While the survey showed a persistent appetite for international expansion, global political events were certainly affecting corporate strategies. When asked specifically about how U.S.-China trade tensions and tariffs had affected their global expansion and operations strategies, only 25% of the executives said the situation had not affected their strategies. Yet 54% of the executives said they were considering expanding into China, despite the trade tensions and tariff battles.

Areas of Concern

In the January survey, the top concern about global expansion and operations was in fact global economic uncertainty, acknowledged by 29% of the executives. That seems prescient now. The second concern was data protection challenges, cited by 26% of the respondents.

The January 2020 survey showed that executives’ plans for dealing with their concerns about global expansion and operations over the next three to five years were diverse. Remarkably, the top solution was international expansion itself, at 27%.

CFOs and other senior finance executives of course face myriad regulatory issues tied to international operations. The January 2020 survey showed that the top-three compliance concerns for companies operating or expanding globally were data protection and privacy, corporate governance, and intellectual property, all named by about one out of every four executives. The January survey also revealed that economic substance laws (a tax issue) were a significant concern, with 78% of the executives saying that compliance in this area was “somewhat burdensome” to “very burdensome.”

The April survey showed that regulatory challenges continued to be a major issue following the pandemic declaration, with 23% of the respondents citing government policy and legislative response to the coronavirus crisis as one of their most pressing concerns.