Jumping the Pond

By Barry Bright and Chris Steele

Approaching international site selection with a sound decision-making process will ensure you get the most out of your investment.

The two principal motivations for U.S. and European firms to select international locations are to gain access to additional markets, and to supply those markets. They are frequently sequential, with sales and marketing preceding manufacturing. In some instances these motivations come together in a single location decision. Differences in culture, rules, regulations, and even the problems of coordinating actions across great distances and differences in time zones have caused companies to hesitate. There are challenges inherent in making such a large move, but they can be managed by a robust location selection process. The market potential at the end of the day is well worth it.  

Access to additional markets requires the establishment of a sales and marketing infrastructure to sell products or services to a new set of customers. In many instances, subject to the nature of the product or service, these products can still be supplied out of the United States, but delivered through a newly established sales, marketing and distribution network. Software is a good example of a sector in which the product can be represented and sold within Europe but supplied out of the United States.

In other products, the nature of the physical goods or service means it is best produced within the region, rather than imported. There is a long established history of European production by U.S. firms in the chemicals and automotive industries, for example. But even where the product is sufficiently small and high value to be shipped globally, local market manufacture is often advantageous or necessary. Pharmaceuticals and biotechnology are good examples where local production aids local marketing.

Both U.S. and European firms can be characterized as taking a stair-step approach to international location. As a market opportunity is identified, companies will make initial inroads into the new market by establishing a sales and marketing activity in or close to a large, established business city, such as New York City, Chicago, Los Angeles, London, Paris or Brussels. While these areas tend to be at the higher end of the cost profile, they can satisfy the immediate (and sometimes very rapid) requirement for entry into the market, with good connectivity, deep labor pools and sophisticated business support services. In addition, there is a good deal of familiarity with these locations, increasing the comfort level and reducing the risk factors for decision-makers.

Once a company has gained the experience of operating in the new country (or region), they may expand and undertake a more detailed location selection process. This will include construction of a full comparative cost model and consideration of the complete range of factors necessary for the successful operation of the business. Whereas market access, transportation to the home country and familiarity can take precedence in initial location decisions, cost, infrastructure, labor and education systems and government inducements can have more weight in later decisions.

From the outside, Europe appears to be a complex economic space, with both pan-European regulations and country level requirements. Within the European Union, while free circulation of labor and capital has essentially been achieved, there are still certain restrictions on some products and services moving across borders. In addition, there are different taxation regimes, different regulatory bodies and different labor laws and even currencies. Sometimes, if the operation to be established is a profit center for a group, then the corporate tax benefits in certain locations can overwhelm all other location factors and pre-determine the location outcome. In other instances, taxation impacts can be minimal and have no impact on the location decision.

European companies often tend to play safe, and produce in their domestic country market in Europe, with only the very large firms moving to become trans-national producers, as well as marketeers. The phenomena of companies searching for low-cost locations within the European area constantly evolves – currently attention is focused on Eastern Europe, but is now also embracing additional countries seeking to gain EU accession status.

American companies tend to have relatively parochial tendencies early in their corporate lives. Any great benefit that can be gained can likely be gained in the United States without the pain and bother of dealing with multiple governments, their rules, their tax structures, and their labor problems. However, U.S. firms already established in Europe often treat the European market area as much more of a single market than the European counterparts. Given their lack of firm ties to an indigenous European country, they are often more free than European firms in their approach to locations. Some of the functions that American companies have shipped overseas have included financial services front and back office functions, pharmaceuticals manufacturing, automotive components, some electronics manufacturing and assembly.

American companies also freely transport U.S. business models into their European operations. This is evident in shared service centers, consolidation of multiple distribution centers into larger European distribution centers, and outsourcing of noncore business processes to third-party operators. These imported business models create new location opportunities. Ernst & Young's experience in advising U.S. firms in Europe is that they will often consider more innovative location shortlists than their European peers will.

In addition, European (and American) companies sometimes fail to realize that cross-border issues of a different, lesser kind often affect location decisions within the United States. State regulations, laws, labor conventions and regulations, taxes, and in the case of at least one state (Louisiana) a different basis for case law (Napoleonic Code) can significantly impact a location's attractiveness for a particular use. As such, U.S. companies are familiar with the complex nuances involved in opening markets not precisely like the one they began in.

In any case, establishing operations across the Atlantic requires a mindset change regarding the way communications and oversight run; how the corporate hierarchy may have to change to provide for proper reporting; and for career development. Allowances need to be made for cultural differences and business practices. However, the entire customary due diligence process performed in identifying and selecting sites should be the same as that for a domestic site. Location decisions should be evaluated by the same rigorous, objective set of location criteria, but with added information and focus on local regulatory, tax and labor practices.

It is a tempting, but ultimately hollow task to put forth a top 10 or 20 list of cities for companies thinking about establishing new international locations. Those companies considering “jumping the pond” will be subject to the universal rule of all location decisions – that every location decision is an idiosyncratic event, based on business need, opportunity, geography, and timing.

With that qualification in mind, it is appropriate to state that areas that have seen considerable domestic location activity on an industry or use basis are also going to see similar activity from overseas firms – with some distinctions.

Within the United States, the southeast and Midwest will attract automobile parts manufacturers, provided that the area is near an airport with international arrivals and departures. Pharmaceutical and biotech firms will look at the Northeast, North Carolina and Southern California, especially in towns where primary and secondary schools have strong foreign language programs.

Likewise, American financial services companies will examine the UK and the Netherlands, preferably in locations that afford them nonstop access to New York City. U.S. auto manufacturers will have French, Czech and UK locations on their lists, but will place strong emphasis on English-speaking skills. Telecommunication firms will look to German and Benelux locations, but will also look to the number of other expatriate American families in the area and other support entities.

As with any business decision, applying sound decision making tools, local knowledge and information to a clearly defined business problem or opportunity will reap the best return. In a decision to establish locations across the Atlantic, the lure and excitement of developing new markets must be balanced with sound decision-making and organizational capability to deliver and capitalize on the investment.

Chris Steele (New York/Boston) and Barry Bright (London) are part of Ernst & Young's Real Estate Advisory Services Group. The group has a global advisory practice with 500 professionals – about half of who are based in major U.S. markets around the country. Visit Ernst & Young's Web site at www.ey.com.

The views expressed by Mr. Steele and Mr. Bright in this article do not necessarily reflect the views of Ernst & Young.