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Don’t Get Burned By Hot New Markets

January 1, 1998
Related Topics: Global Business Issues, Managing International Operations, Featured Article
The numbers practically sizzle off the page. Just look at this: U.S. direct investment abroad skyrocketed from $467.8 billion in 1991 to more than $796 billion in 1996, according to the U.S. Department of Commerce. U.S. corporations have invested more than $10 billion in China alone, another $23.6 billion in Brazil, $16 billion in Thailand and $12.5 billion in Indonesia. Many of these hot markets are growing at a robust GDP (gross domestic product) of 7 percent, or 8 percent a year.

One after another, American companies seek -- and seize -- new opportunities in rapidly growing yet unfamiliar markets. China, India, Brazil, Russia and many others offer untold opportunities with their megamillion populations and growing consumer classes. And U.S. firms are right there, offering everything from light bulbs to power plants and selling their expertise about manufacturing, marketing and managing global operations.

The ventures into these new territories can be profitable. But, they also can be risky. New entrants must navigate gingerly over a hotbed of coals that will singe those who are unprepared for myriad laws and regulations, unfamiliar political and social structures, and unpredictable infrastructures, all of which manifest themselves in workforce issues. That’s why HR’s role is central to strategizing, planning and ultimately helping to choose new business destinations.

It’s clear that the critical issues to success in new markets often revolve around typical HR concerns: hiring, training, compensating and managing people -- but in a multiplicity of environments and a maze of legal and political circumstances. These are complex and multilayered business issues, to be sure, but they are, nonetheless, issues that require understanding and thorough business, labor, legal and social analysis through an HR perspective.

HR must participate in a business analysis of proposed locations.
“We increasingly see whole new industries going out -- information technology, telecommunications, specialized pharmaceuticals, agriculture, insurance -- and we’re also seeing companies that have been established internationally for many years going into new markets,” says Bill Sheridan, director of international compensation services at the New York City-based National Foreign Trade Council.

Sure, there’s money to be made. But what makes global executives choose certain destinations as most receptive or at least worthy of the difficulties firms must surmount? The decision must always begin with the business objectives.

“Before we venture into new markets, we now start with a detailed strategic market analysis. We look at our markets over the next five to 10 years and try to determine where we need to be in four or five years’ time,” says Patrick Morgan, human resources manager, Latin America Region for San Francisco-based Bechtel Corp., the construction giant. “It’s important to actually think through what it is you’re going to do, where your market is, what your relative chances are of being successful, and then begin to prioritize where you want to go after that.”

Morgan is always a key member of the management team that assesses the big picture. The cost-benefit analysis factors in: the position of competitors, infrastructure as it relates to personnel (such as telecommunications), regulatory and trade barriers, and the tax situation (both corporate and individual). Ideally, the new market would be a country where there’s an untapped need for your products or services; a quality, skilled labor pool capable of manufacturing the products; and a welcoming environment (governmental and physical).

Are there such countries? Indeed, each has its pluses and minuses. While Singapore has an educated, English-speaking labor force, basks in political stability and encourages foreign investment, it has a small population. While Mexico shines as an excellent example of a country that has aggressively lowered its income tax rates (from 60 percent in 1988 to 35 percent today) and attempts to alleviate other governmental hurdles in an effort to attract foreign investment, it has severe pollution. Many countries in Eastern Europe possess an eager, hungry-to-learn labor pool, but their infrastructures create difficulties. And, while India holds enormous promise, conducting business there is complex and difficult.

India’s promise lays in its attributes. According to “Venturing in India: Opportunities and Challenges,” a 1996 Conference Board report, India’s impressive economic reforms have made it quite attractive for corporate investors. Because of its British roots, it has a strong legal system, developed technology and a growing financial sector. Known for its well-educated workforce, world-class scientific, engineering and management talent, and business schools that churn out excellent job candidates, India offers a labor pool that values education.

These positive attributes can be outweighed by potentially negative ones, however. India has an inadequate infrastructure, for example, with problems such as frequent power outages and crowded, unpaved roadways. And most daunting is India’s political environment and highly bureaucratic and protectionist government that stir the flames of anxiety among multinational business leaders. For HR, the Indian business environment requires adroit management of people amid mountains of regulations.

For instance, the government wrought havoc with Houston-based Enron Development Corp. for five years. Enron (along with Bechtel and General Electric Co., both of which had been successful in India with other projects) was in the midst of building a $2.8 billion power plant. It was the first foreign-owned power plant in India and one of the largest foreign investments ever. When a new regional government was elected, officials shut down construction of the plant and entangled the company in a judicial quagmire of 24 lawsuits for 16 months. Knowing situations such as these are probable, HR must determine which issues (staffing vs. regulations) are more compelling.

Consider the quality and availability of the local labor force.
The greatest challenge in entering a new market is often the workforce, specifically, senior management. “After you determine that you have a marketplace that’s going to utilize what you’re producing, you need to see if there is the capability and talent in the local workforce to support the endeavor,” says Richard Bahner, human resources head at New York City-based Citicorp. “You really need to do a total balanced evaluation. Some of these places offer less-expensive labor, but if they don’t have the capabilities you’re looking for, it may not be a savings because you’ll have to supplement it with a large amount of computer support, training or expatriates.”

The extent of the staffing challenges depends on your industry. “If you’re distributing Pepsi (TM), you can manufacture it locally and teach people how to sell it easily enough, but if you’re in global banking, you’ve got a lot more restrictions,” Bahner explains.

Citibank has experienced this in the Asia-Pacific region. With relationships in China and Hong Kong for almost a century, it had an advantage when it looked to expand into Indonesia and Thailand. But it was hampered by the need for an educated workforce. Citibank developed the market in Indonesia and taught the people about electronic banking -- eventually generating millions of Citibank Visa cardholders. But the HR issues were daunting.

“The biggest problem is the dearth of qualified locals,” says Bill Fontana, formerly of Citibank in Indonesia and now vice president of international HR for the National Foreign Trade Council. It’s a big, big problem. There are so few qualified people who can take senior positions (among 200 million Indonesians), that other U.S. companies will bid for this unique individual. “It jacks up the cost of your senior local person, and then you begin to pirate people away from other companies because they speak English, they’ve worked at another multinational organization, and therefore, you would pay almost anything to get them onto your payroll. It leads to spiraling inflation in the workforce.”

As an example, Fontana was recruiting for a treasury head at Citibank in Indonesia. The position was staffed with an expat, and he wanted to fill it with a local. It took more than one year to identify a qualified person. Citibank offered the man $150,000 and a guaranteed base of $100,000. “He turned me down,” says Fontana. “He told me that the Bank of Bali was offering him more money! And the expatriate was only making about $115,000.”

The situation is similar in other parts of the region. Experienced, multilingual Thais and Taiwanese can look to their talented colleagues in Hong Kong and China for ways to bid-up their going wages. As these countries develop, the competition for talent is becoming ferocious. Local companies are vying with foreign firms for the same employees.

One obvious solution is education. In addition to the traditional training that internationally experienced firms such as Motorola, Coca-Cola and McDonald’s have conducted for years, there are now joint ventures between universities and businesses. For instance, Baltimore-based Johns Hopkins University has paired with Nanjing University in China. Based in the city of Nanjing, 100 students each year participate in a bicultural business program and living experience (a Chinese and an American student are roommates) that prepares them for senior-level management positions.

The receptivity to education varies by location. Eastern Europe is different from Asia-Pacific. “The work ethic is very strong, and equally important, there’s a strong interest in learning,” says Fontana. “When we went into Eastern Europe, the question [from employees] was, ‘When do I get my next training course?’ The thirst for training and knowledge is staggering.” Training can rarely keep pace with need.

Evaluate laws and regulations.
The next thing you need to think about is whether the government has created an environment receptive to foreign businesses. The question is: Do the laws enhance or inhibit the chance of success?

No matter where in the world your company ventures, as economies develop and competition increases, local companies become stronger, and they often exert pressure on local governments to tighten regulations regarding foreign firms. For example, work permits for expats aren’t as easy to obtain in many parts of the world as they once were. Mandated workforce practices can either aid or decrease your company’s opportunities. Labor law and its effect on compensation and benefits requires research and comprehensive understanding.

One of the first questions must be: How restrictive is the labor law? “As an example, generally, in countries where the British flag has flown, the labor code is simple, straightforward and employer-friendly. Where the Napoleanic code has predominated, you find labor legislation that’s complete, complex, confusing and expensive,” says John de Leon, regional director of international HR consulting services for Deloitte & Touche LLP, based in Wilton, Connecticut. “In Asia-Pacific, generally speaking, labor law (although very different from the U.S.) isn’t as restrictive and permits companies greater freedom to make decisions.”

These restrictions refer to the presence of work councils that get involved in activities Americans would consider purely management decisions. They may restrict part-time and temporary employees. They will have provisions that affect termination. For example, in the United Kingdom, although there’s a cost associated with terminating employment, it’s far less expensive and less complicated to calculate than in most parts of Latin America.

You can’t assume you’re operating with a U.S. frame of reference. In many countries, the labor code includes a concept called acquired rights. The code says you can’t take away anything from an individual. So, for example, job content, responsibilities, pay and benefits must remain constant. Another concern is strong labor unions. And, still another difficulty is that many rapidly growing countries spur growth by being less restrictive when a company enters the country to set up business. “It’s at the back end where you get a lot of intervention,” says Fontana. “I let go of nine people in Indonesia at a cost of $1.2 million in severance pay.”

And then there’s compensation and benefits. Social costs, medical-care costs, pension and social security costs differ greatly from one country to another. And often, the ways in which salaries are quoted and designed are significantly different. “Until recently, India capped the base salary for executives at a pretty low level in hard currency because of the socialist mindset,” says Sheridan. “So, firms offered myriad allowances -- cars, drivers, servants, clothing. American companies saunter in and want to roll it all into one basic salary, and they aren’t seeing the other factors involved.”

In other words, if you aren’t discerning, country-specific labor laws and regulations can begin to eat severely into profits. Or, if you’re not careful, you may get burned because you’ve unwittingly trespassed legal boundaries.

Ask yourself, “How hospitable is this country to the business?”
Beyond the more narrowly defined and obvious HR issues, receptivity and overall friendliness to foreign business are major factors in selecting a destination country. How protectionist is the environment? What types of bureaucratic, regulatory and economic constraints exist? Is there political tension or security risk? Corruption? A workable legal system? Economic stability?

All of these issues complicate the ability to staff your operations. For instance, if your company faces political security risks, how will that affect the expatriation of employees? If it’s a highly bureaucratic and regulated country, what will that do to your ability to hire and fire employees? If there’s gross corruption in the local business environment, how will you train your staff to handle the situation?

How do all these elements interact? Latin America, for example has always ranked prominently in international operations for Farmington, Connecticut-based Otis Elevator Co. Worldwide. The company had maintained escalator factories throughout Latin America at one time, and then it consolidated most of the operations in Brazil (as well as small operations in Argentina and Uruguay). “Even though the business climate was kind of ‘iffy’ because of the hyperinflation (at the time), we chose Brazil because we were still making money. We had invested in a factory; we had a good relationship with the government so we could repatriate funds, and the labor market was good,” says Jim Defau, director of compensation and benefits for the firm. “Overall, it’s a conducive environment for doing business.”

Defau explains that a receptive government provides a foundation from which to start the assessment of the business climate. The intangible quality of hospitality is a mixture of distinct factors. Is the legal and ethical environment one that your company can handle? Is the location a place that will attract or repel managers and workers from other countries? Will the government help or hinder your day-to-day concerns? Overall, is the country a place where all the factors combine so you’ll be able to help your employees do the best job for the company and where your company can thrive?

Success depends on so many elements. It requires more skillful management of every aspect of the organization when you edge into new markets. There are so many hot spots and fumaroles, and the unprepared will surely get burned. HR is part of the holistic picture. “The functional silos that once existed are no longer in place. We’re all business partners -- HR, legal, finance, engineering, and, every aspect of the business affects every other aspect,” says Defau.

If ever HR was core to business success, it has never been more obvious than in the pursuit of these active, hot markets.

Global Workforce, January 1998, Vol. 3, No. 1, pp. 12-22.

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