Globally and in the US, a new breed of company – including manufacturers – are taking advantage of growth outside their home market and going international.
Industry Today: To what extent are small and middle market businesses becoming more multinational? What’s driving this trend?
Mark Luppi: Small and mid-sized companies, including manufacturers, are increasingly taking advantage of growth outside their own market and going international. In the past, much of the goods and services focused largely on the resources available to companies and manufacturers in their domestic markets and operating internationally required a physical presence in foreign markets. The focus was on the comparative advantage between markets. But now we are entering an age of global firms focusing on increasingly narrow specialization to gain their share of lucrative markets. Technology has been a driving force behind this trend. Technology has made information and making new connections more democratic, with companies being able to research online and network across borders more easily.
The onset of the digital age has allowed smaller companies to level the playing field against their larger competitors. Digital and online solutions have also cut costs and barriers to entry, especially in emerging markets. Even cross-border costs are getting less expensive. Technology is also playing an important role in creating efficiencies. Younger firms, unburdened by legacy systems are using these new tools to serve new markets and more efficiencies to gain competitive advantage. Micro-multinationals are also more likely to benefit from the rise of social media. Social media is helping smaller brands, once confined to domestic markets, become globally coveted which, in turn, helps their expansion. Social media can mean that once a brand is established in on market it can quickly and easily be communicated around the world – this is something micro-multinationals are really taking advantage of.
IT: What is a micro-multinational? How are they a departure from traditional categories such as middle market companies and large multinationals?
ML: Micro-multinationals are dynamic small and mid-sized companies that are not just buying and selling internationally but operating in multiple markets. They are a new breed of company which is challenging the old ways of doing business. They are changing the face of global commerce, challenging bigger, more established players and providing lessons from which for smaller firms can learn. They have a global mind set, vision and risk tolerance to aggressively pursue attractive growth opportunities wherever they may be. Micro-multinationals think differently but are still concerned by working capital issues, efficiently managing their supply chains, and ensuring they understand the international markets in which they work.
IT: How many US companies fall into this category? Do you expect to see more micro-multinationals appearing in the next few years?
ML: The rise of the micro-multinational is not limited to a specific country or region. These small and mid-sized firms also have a significant and often under-appreciated impact on the global economy. In the US, nearly 40% to 60% of US companies with annual sales revenues of $100 million or higher will conduct a cross border transaction over the next 12 -24 months. This is up from 40% just three years ago. Additionally, small and mid-sized companies make up 95% of all the export companies based in the US.
IT: What challenges do micro-multinationals face in areas such as cash management, payments, trade, or risk management?
ML: Because of their global orientation, these companies are exposed to additional risks including FX risk, interest rate risk and regulatory risk. They need to work with different payment instruments and overcome regulatory, cultural and language obstacles. If they have expanded by acquisition, they may be left with complex and inefficient banking structures. Often the management and infrastructure is not fully resourced to support this and they can find themselves lacking local expertise. Another challenge for micro-multinationals expanding is how to optimize working capital across multiple jurisdictions. If you have ‘restricted capital’ and you are funding your local operations with local capital, your working capital requirements are going to be much higher.
IT: How do these compare to the challenges faced by large multinationals?
ML: In the past, micro-multinationals have had limited access to some of the more sophisticated trade, credit and cash management services, which can limit an organization’s ability to grow over the long term and mitigate risk. These services are now available to micro-multinationals, however, and they can be used for a wide variety of activities. Additionally, micro-multinationals have fewer providers with less products or service options. Large multinationals are already aware of many of these risks and are prepared to manage at the outset.
IT: What can micro-multinationals learn from their larger counterparts in areas such as bank relationships, centralization structures, liquidity management, products and solutions, working capital?
ML: When it comes to managing company finances, having the right technology in place can be a challenge for micro-multinationals. Investing in a Treasury Management System (TMS), for example, can be prohibitively expensive. But if they are operating across multiple markets, and don’t have a TMS then suddenly they can be handling exposure in multiple currencies and inefficient working capital. As a business becomes successful, this can cause new headaches. The more successful you become, the more supplies you need. In some cases, suppliers can end up being paid faster than the payments are coming in. Perversely, additional orders bring significant financial pressure on the business, as this only adds to the difficulty in managing working capital. Micro-multinationals will often need to have different conversations with their banks as they need to use finance as a competitive tool in their business. For companies expanding by acquisition, they may need to consider consolidating banking relationships as the company grows. If legacy arrangements are kept in place, the company may end up with a number of different banks and platforms in different markets, which can lead to additional costs and inefficiencies. Typically, micro-multinationals expanding overseas will rely on an audit firm or consultant to help them through the process of incorporating overseas. Local chambers of commerce and organizations such as UK Trade & Investment (UKTI) can also help companies gain a deeper understanding of new markets. Banks can advise on what solutions are being used by the most forward thinking companies. Often management resources are tied up in growth strategies and sometimes a good banking strategy can end up as a ‘nice to have’, rather than a ‘need to have’. The most competitive firms know this and lean on their banking partners to understand what best in class looks like, not just financing but right up the supply chain.
IT: How important is it for micro-multinationals to think like large multinationals? What does this look like in practice? What do they need to do differently/better?
ML: Micro-multinationals need to identify and manage potential risks even more aggressively because they often do not have the resources to manage through the issues once they occur. Micro-multinationals need to surround themselves with partners that have local expertise in the foreign markets where they are doing business. They should also build relationships with banks that offer a full international product set and have a presence as well as strong brand awareness in these foreign markets. These partners can act as trusted advisors in navigating the local culture and custom, laws, regulations and tax codes.
Mark Luppi is Executive Vice President and US Head of Commercial Client Coverage for HSBC Bank USA, N.A., based in New York. The Q&A is intended solely for informational purposes.