Don’t freeze! Expand!

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Deer in the headlights!

Business hates uncertainty. We’ve been seeing real and scary indications all year through that global trade from the UK has been getting paralysed, and now it seems likely that the USA could be slowing down as well. All of this is driven by uncertainty over the future – in the case of the UK, caused by Brexit, in the USA by the election of Trump.

The brave words of UK politicians do not seem to be feeding into business activity. A survey by a manufacturers’ organisation, EEF, shows most businesses freezing or reducing investment, saying future uncertainty is the reason. A report by the Institute of Chartered Accountants points to an expected slowdown in domestic sales, so even if exports increase because of a weaker pound, the overall business outlook is fragile at best. The rising costs of imports are making employers cautious about spending more on new hires and increasing salaries, and most expect that salaries will rise slower than prices, which would mean living standards drop in 2017. Yet another report from Hitachi Capital says that 42% of large and medium-sized UK firms cancelled or put off investing following the Brexit vote

It’s not unusual, of course, to read about British businesses being reluctant to invest in plant, machinery and training – that’s been a recurrent theme for many years. Sadly, however, we’re now seeing businesses not investing in international expansion (or any expansion). Last month I attended  the Global Expansion Summit in London – one of the best-organised events of its type in years – but only a tiny minority of the audience represented businesses ripe for such expansion; the bulk were service organisations looking for business.  Anecdotal evidence points to low audiences in other events targeted at established businesses.

I see this “wait and see” attitude as a terrible mistake.  I’m not into nostalgia, but I think my own experience is relevant here.

Back in 2006-07, when no-one saw the 2008 crash coming, I worked on setting up subsidiary businesses in Australia, Japan and Brazil. All of them were initially very small, and intended just as customer support centres to solve time zone issues and provide a foothold for potential future expansion. The total setup costs were small, and operationally they were cost-neutral as we saved on labour in the UK and USA.

It turned out to be remarkably fortuitous. When, a couple of years later, business dried up in the UK and the USA, we switched sales effort to Australia and Japan, where economies were expanding. We moved backroom operations to Brazil, where costs were a quarter of those in the UK. Result? Global turnover and profits both increased by 50%.  We now had a small multinational valued at more than double the original UK-only business.

I’m not saying that there’ll be another crash – but I do advise all business owners to plan international expansion now. Not only is there no need to wait to see what happens – it would be foolish to do so.

There are great opportunities for so many businesses – and exporting is only one of them. Manufacturers setting up assembly operations in other countries can benefit from free trade agreements already negotiated to sell to a wider region. Most medium and larger companies can benefit from setting up service centres, not only from much lower costs but also a greater availability of the skilled labour that seems likely to become much scarcer here. Those lower costs and high skills can enable some companies to perform R&D that they simply couldn’t otherwise afford.

Whatever the reason, companies benefit from cushioning against risks of recession and exchange rate volatility – and, most importantly of all, massively increase their valuation for that inevitable eventual IPO or trade sale. The answer to all this uncertainty isn’t to wait and see – it’s to expand overseas right now.

by Oliver Dowson, CEO, International Corporate Creations Ltd.