There are many reasons for expanding into the USA:
- The market is huge. With a GDP of 25,460 billion US dollars in 2022, the USA is still the largest economy in the world.
- The power of innovation is enormous. More is spent on research and development in the USA than anywhere else in the world. in 2021, it was 792 billion US dollars. 72 percent of the money came from companies, which also provide a large part of the research work themselves. in 2020, the ratio was 75 percent.
- Trade with Germany works. Exports worth 122 billion euros in 2021 make the USA Germany's most important trading partner.
One important milestone on the road to market entry is choosing the right location. But the size of the United States alone makes decision-making a complex process with many unknowns. That's why I advocate a systematic approach that minimizes uncertainty. My approach includes several steps:
1. Consider your motives and goals before expanding into the US.
Before you expand into the USA or the North American economic area, it is advisable
- to thoroughly rethink your motives for expansion,
- define the objectives as precisely as possible and
- make an initial cost estimate.
If this does not provide a coherent picture, it is not (yet) worth looking for a suitable location. The time for expansion has simply not yet come.
2. Develop an expansion strategy.
If, on the other hand, the reasons you have for expansion are confirmed, the first step is to decide which business area you want to locate in the United States. For example, is your company in the field of manufacturing, the first question should be whether you
- want a sales office,
- want a service office,
- a manufacturing site or
- a combination of these business areas
.
Depending on the business area, this raises further questions. For example, if you are planning to set up a new production site in the USA, you would also need to determine which products you want to manufacture at the new site and which customer groups you want to supply from there.
3. Determine your financial requirements.
Every market entry into a new region represents an investment with long-term effects on existing budgets. These additional costs must be borne by the parent company until the branch reaches profitability. A detailed and realistic analysis of the financial requirements is essential for further planning.
The analysis should build on the defined expansion strategy and develop it further.
In addition to
- the actual start-up costs for the foreign branch
are
- the long-term costs of operation,
- eventual losses in the start-up phase,
- investments and capital commitment in expanded warehousing or the expansion of production at existing sites to include USspecific products and
- the integration of the new subsidiary into existing systems and structures
must be considered and budgeted for. In addition, continuous monitoring and management of activities must be carried out in the first few years of setting up the foreign branch.
4. Formulate criteria for the location analysis.
Three aspects affect the choice of the right location. Firstly, the corporate or expansion strategy. This sets the general direction for the choice of location. The above-mentioned motives and objectives for expansion into the USA are particularly relevant here, as is the choice of business area to be located in the USA.
The second point is the budget available for market entry. This is because, in view of the funds available, some options may not be possible. The third step is to identify and prioritize options for possible locations. To do this, needs must be specified and corresponding criteria defined.
On the one hand, there are hard location factors. These include
- optimal transport connections and infrastructure,
- the availability of qualified employees,
- the proximity to universities and educational institutions, provided that the R&D department wishes to collaborate with the academic world, and
- proximity to existing suppliers or major customers.
The hard factors also include certain financial criteria. These include
- taxes and duties,
- energy costs and
- subsidies and direct investments.
In order to mitigate the costs and investments involved in expansion, for example, you should also check
- whether subsidies are available from federal states or local authorities,
- whether domestic or foreign chambers of commerce provide funds,
- whether there is targeted economic promotion through legal framework conditions.
Often overlooked is the fact that the choice of location will influence your internal communication. North America is between five and eleven time zones west of Germany: a location in Hawaii would be eleven time zones away and is therefore only a sensible choice in a few cases.
In addition to the hard factors, there are soft location factors. These are often overlooked, although they have an enormous influence on the success of a German company in the USA. In particular, the quality of life in the area surrounding the location should be mentioned here. And it varies considerably in some cases: the USA is a very large country with strong regional differences.
5. Prepare the decision-making process thoroughly.
Factors such as strategy, budget and location criteria can influence you as a company. However, there are many other factors that are beyond your control. This makes the choice of location a decision under uncertainty.
This is why it is important to avoid snap decisions at all costs. The decision must be preceded by intensive studies of the possible locations, which in particular also identify possible events and developments in the surrounding areas that could have an impact on the location. For this reason, they should definitely be included in the evaluation of the location.
A deinvestment would ultimately be cost-intensive: a wrong choice would damage the company's profitability in the long term. However, location analyses are always only snapshots that cannot predict all developments. There is always some uncertainty.
6. Avoid common mistakes when deciding on a location.
In my experience, the three most common mistakes when choosing a location are as follows:
- The quick fix: You make a decision under time pressure, for example due to an important customer.
- "Anecdata": You take the easy way out and cut short the complex decision-making process by relying on acquaintances. According to the motto: "I know someone who has been doing so-and-so for years."
- Personal preferences: Subjective wishes and preferences are - often unconsciously - put before objective criteria.
In all three cases, time and money is saved in the wrong place - often with disastrous consequences. Due to the long-term nature of the expansion, these wrong decisions have far-reaching financial consequences, leading to frustration, disappointment and often resignation. The costs of relocating are considerable. Bad investments should therefore be avoided by using a tried and tested approach - for example with the help of the multiple-eye principle. It is advisable to use a system in which the individual criteria and location factors are jointly discussed, weighted and evaluated by a group. Nevertheless, a certain entrepreneurial risk cannot be eliminated: at the end of the day, experience and expertise are crucial when choosing a location in order to minimize residual risks.
Conclusion: A systematic approach minimizes the risk of choosing a location.
Companies that want to expand into the USA are faced with the very complex choice of a suitable location. The decision-making process is based on known factors that are in the hands of the company: the corporate strategy, the available capital and the criteria that can be derived from the specific hard and soft factors.
In-depth studies can also identify developments that are outside the company's own sphere of influence. This increases the level of information and reduces the risk of making the wrong decision.
And finally, it is advisable to seek advice and support from experts with experience and tried-and-tested methods. The location decision must be made while minimizing residual risks, not least because of the long-term nature of this decision.
