Interest rates in the major Western economies are at levels not seen in the last decade putting a hefty financial burden on many businesses. Manufacturing and technology are key affected sectors. Achieving cost and efficiency savings is therefore today more vital than ever. It is suggested that one way to do this is to go international both for talent and to manufacture.
Let us look first at the tech sector as this is in many ways a bell weather for the health of the U.S. economy.
The private equity world fuels many technology businesses. However, high interest rates mean all bar the largest PEs find it harder to raise capital. As a result, businesses they fund have been told to make do with the capital they have received for a far longer time than originally intended. This in turn results in a squeeze on costs, resulting in layoffs as well as business restructure.
In these circumstances businesses will look to foreign countries to source the cheaper talent they need in order to develop their IP and also to cut their overhead costs. Typical destinations are Eastern Europe, India, China and Latin America.
Allied to this there is a growing trend to move key management positions such as CFO and COO to foreign countries where salary costs are lower. In this way, companies can reduce their cash burn while still staying on track for the development and rollout of their product or service.
In the case of manufacturing, there is a trade-off between manufacturing in a key foreign market or doing this elsewhere that is cheaper but then incurring the additional transportation, storage and regulatory costs of shipping to the customer. India and China with their large populations are a favorite target for B-to-C type businesses.
However, many businesses are reducing their dependence on China given the US/China geopolitical tensions, India, Indonesia, Malaysia and Philippines being popular destinations.
Whichever way a business goes global, there are several common key parameters that need to be carefully evaluated. Firstly, depending on the scale of resources being sought, significant tax breaks and tax holidays may be available which need to be fully explored. Secondly local customs and practices as well as local employment laws need to be assessed in terms of employer risk and the cost to company of employing personnel must be evaluated as should also the capital costs involved together with the availability of subsidized loans.
If IP is to be developed, the level of IP protection available locally is an important consideration. In the case of manufacturing, the reliability of the local infrastructure covering water, power and transportation facilities must be carefully evaluated.
While global expansion presents opportunities for businesses to thrive in a high interest rate world, meticulous planning and risk assessment are imperative. By understanding and addressing challenges such as IP protection, regulatory compliance, and geopolitical dynamics, businesses can make themselves lean and efficient and navigate the complexities of global expansion, positioning themselves for sustainable recovery and growth when interest rates drop as they surely will in the future.
_______________
Dr. Shan Nair is the President of Nucleus, a one-stop global expansion solution for businesses and a a consultant on international expansion.