As an interim manager and management consultant with many years of management experience in North America, I specialize in advising European SMEs in particular on entering the market with their own sales or production site in the USA and Canada or in managing the project.
With 50 federal states and around 330 million inhabitants, the USA represents a huge sales market, especially in comparison to Germany. In contrast, Canada, with ten provinces and three territories, is larger in terms of area, but with a population of only around 39 million, it is a much smaller market, albeit one that is growing rapidly due to strong immigration. On the other hand, the weaker Canadian dollar means that companies can produce cheaply in Canada and export to the USA.
Investing in the USA or Canada is initially quite costly and time-consuming. However, setting up companies or branches is relatively simple. As always, it is crucial to approach such a project correctly and avoid unnecessary risks.
Aspects that deserve special attention here are the following:
- When investing in the United States and Canada, there are a number of legal, tax and cultural particularities to consider. If these are not taken into account right from the start, many investments run the risk of failing.
- The costs of entering the market and the financial outlay required are generally high, especially when it comes to manufacturing in the country. However, the human resources that need to be made available can also represent a major hurdle. Of course, all of this also places a burden on the existing organization, i.e. the parent company.
- In order for the market entry in North America to be successful, the project must be carefully planned step by step, prepared and finally implemented with as little friction as possible. This is not only a question of project management, but also of experience - especially in view of the aforementioned peculiarities compared to Germany.
- Preparation also includes thorough due diligence. Scientific studies show that medium-sized companies in particular often make hasty decisions during mergers and forgo thorough due diligence. This often leads to unexpected problems after the takeover, including the complete failure of the acquisition project.
Successful market entry in the USA therefore requires thorough planning, consideration of certain legal and cultural peculiarities, a calculation of the costs of market entry and detailed due diligence.
In detail, I would therefore advise you to take the following steps:
1. Understand why you want to invest transatlantically.
The first step is to understand why you want to invest in the United States or Canada. Typical questions are:
- Do you want to avoid an import solution in the long term in view of less robust supply chains and exchange rate fluctuations?
- Are your customers asking you to produce in the USA or Canada?
- Are you following the request of one or more customers in your industry in Europe who have already invested in North America?
- Do you generally see great opportunities for your products in the North American market based on a market analysis?
So first of all, make it clear what reasons you have for entering the market.
2. Determine your strategy.
Once you are sure that you want to take on the challenge and enter the market, the question arises as to which strategy you want to pursue. As you know, you essentially have two options:
- building a new plant on a greenfield site (Greenfield) or the purchase of an existing building in which you then set up your facilities (Brownfield), or
- a merger.
Which one is better cannot be answered in general terms, but depends on several factors, such as
- the requirements for the location,
- the production buildings,
- den Produkten,
- dem Zeitrahmen, until the investment should or must be completed, and
- how much experience your company already has with business in the target market.
When weighing up the pros and cons of a greenfield or brownfield strategy...
The first question that arises when discussing a greenfield or brownfield strategy is: where would be the best location?
Decisive factors include the following:
- the availability of building land and/or suitable buildings
- the quality of the infrastructure
- is there a port and/or airport nearby?
- What are the rail and/or interstate connections like?
- Is the energy and water supply secure?
- How is the internet connection?
- usw.
- proximity to customers and/or suppliers
- the number of skilled workers on site
- the access to government support for training and further education
- Umweltauflagen
- der Zeitrahmen
- the investment budget
The advantages of a greenfield approach in particular:
- more freedom in the choice of location
- the possibility of constructing new, buildings optimized for the planned processes
- the consideration of possibly required hygiene standards
- greater chance of obtaining subsidies
- modern machinery and equipment
- no entrenched corporate culture
This is offset by at least the following disadvantages of the greenfield approach:
- usually longer lead time until the start of production
- no takeover of existing customers
- high costs for hiring and training specialists
- often higher costs due to construction costs, Machinery and equipment, market development, product qualification and employee training
In principle, the generally faster approval procedures than in Germany speak in favor of a greenfield or brownfield strategy. Added to this is the support for investments with favorable building land from the municipalities and counties as well as the significantly lower requirements for buildings. Nevertheless, the lead time for establishing a production facility or branch will generally be significantly longer than for an M&A project.
If you are considering a merger ...
M&A projects can generally be realized more quickly than a greenfield or brownfield strategy - provided that there are suitable takeover candidates for sale. In fact, this is usually the case.
In recent years, North American private equity companies in particular have bought packaging manufacturers and driven up multiples, most recently to over 14 times EBITDA. Such multiples are usually not acceptable for industrial investors, but there are of course also many smaller family businesses where multiples of six to ten are possible or, if profitability is rather poor, pure asset deals. Of course, in such cases, substantial investments still have to be made after the takeover. But in return, you can also buy high-performance assets and improve your competitiveness.
In the best case scenario, you negotiate directly with the seller. However, it is also possible that the seller has engaged an M&A agent as a broker. This usually results in an auction, in which the highest bidder usually wins the bid.
The advantages of an M&A strategy now include above all
- an existing infrastructure
- an existing market access
- the existence of trained employees
- the possibility of a rapid expansion of business activities
In contrast, at least the following disadvantages of an M&A strategy must be weighed up:
- a location that cannot be freely chosen with possibly long delivery routes and journeys from Europe
- an often older, suboptimal infrastructure for its own product portfolio
- an incompatible IT landscape
- a possibly lengthy integration process due to a firmly cemented corporate culture
- possibly limited expansion opportunities
- possibly existing environmentalLegacy issues
- a sales structure to be set up in parallel with the merger
3. Establish the necessary contacts.
In practically all markets, the following applies: To enter the market, you need to work together with players from the relevant market. After all, they lower the barriers to market entry, make risks calculable and help you avoid typical mistakes.
This is why you should try to establish the necessary contacts early on, for example with experienced recruiters, tax consultants or lawyers, but also with government organizations that support investments. And depending on the strategy you are pursuing with your transatlantic investment, you should also seek contact with M&A specialists. In order to identify the players who can support you in implementing your strategy as quickly as possible, it is worth working with a market expert who knows the market and its players inside out.
4. Take the special features of the North American legal system into account during due diligence.
The US and Canadian legal system is known to be completely different in structure to the German system. In order to take the differences and special features into account during due diligence, I recommend
- working with an international law firm and
- creating a detailed due diligence checklist.
Cooperation with a law firm
In view of the special features of the North American legal systems, you will also need experts with very good knowledge of the North American legal and tax systems in addition to your German legal and tax advisors. I would therefore recommend working with an internationally active law firm or with tax advisors and auditors. However, get quotes from several law firms. This is because hourly rates, especially for lawyers, can be very high.
Creating a due diligence checklist
Due to the different legal systems, it is all the more important to create a detailed due diligence checklist. To do this, you should agree with the seller exactly who must have dealt with which topics and by when. You should be able to work through the following topics, at least in part, with your own employees:
- Sales and suppliers (Sales, Supply)
- Finanzen (Financials)
- Banken und Versicherungen (Banks, Insurances)
- Property, Plant and Equipment (Property, Plant, Equipment)
- IT
- HR
However, you will need external support for some of the following topics:
- Legal (Legal)
- Taxes (Tax)
- Valuation of the property or plant (Property, Plant Value)
- Environmental Management (Environmen, /Pollution)
Much of this information to be checked can also be obtained online. However, also remember to draw up a travel budget and release and prepare employees for the on-site due diligence. After all, you can only assess the condition of the buildings and facilities on site. And only on site will you get a feel for the management and employees.
Some sellers are very transparent with their employees and have informed them about the planned sale. Others will only offer you an "incognito factory tour" and contact with a few selected managers. In these cases, you can only obtain a detailed overview after submitting a non-binding letter of intent (LOI).
However, please note that a high degree of confidentiality must always be maintained - especially if the takeover involves a competitor. American anti-trust laws are very strict: violations not only result in a hefty fine for the company, but often also a prison sentence for those responsible - in case of doubt, for yourself.
5. Prepare your employees linguistically and culturally.
Prepare your staff for American culture and cultural differences between Germany and the USA or Canada. Many underestimate this aspect, which often leads to considerable problems, if not the failure of the project.
In my experience, the following is important:
- Make sure that all European employees who will be working either on-site or remotely with their American colleagues have sufficient knowledge of American or Canadian English and are already trained accordingly in the preliminary phase.
- Prepare all employees traveling to the USA or Canada for the interview with the Border Control Officer upon entry. The officer will decide whether the person in question may enter the country and for how long. Just one awkward answer can lead to rejection and detention until the next possible return flight.
- It is also particularly important to train employees on the laws against discrimination in the USA and Canada. Even unintentional misconduct can have severe consequences and be very expensive for the company.
There are also differences in training: The training system in the USA and Canada is significantly different to that in Germany. With a few exceptions (in the USA, for example, in the state of South Carolina), there is no dual system with apprenticeships in industry and skilled trades.
This means:
- The employees in production and in parts of the administration are trained in a relatively short time and often do not have the detailed knowledge of the German workforce.
- Employees in sales are also often unfamiliar with the industry and need to be trained in the products and target groups.
- Coach your German staff and make it clear that any overconfidence is out of place.
One exception is academic degrees, which are usually comparable to German degrees.
On the other hand, you also need to prepare your North American employees for the German culture and mentality before you bring them to Germany for training. You need to allow sufficient time for this: at least in the technical areas, two weeks is not enough, you should expect it to take twelve weeks.
In general, you should
- allow sufficient time for the exchange of know-how and
ensure
that the employees feel comfortable, that employees can also get to know each other privately.
Then the German, US and Canadian employees will also quickly get used to the North American culture and - vice versa - to the German culture and learn to appreciate the many positive things and work together all the better.
6. Train the local workforce.
You should pay great attention to the training of the local workforce and expats on site, both at the main plant and, if necessary, at OEMs. This is especially true if you want to transfer technology and equipment in order to expand production with European technology - which is particularly the case with greenfield projects, but also occurs with mergers.
You should take advantage of the training offered by OEMs - also because the direct line to the contact persons there facilitates communication later on if there are problems with the machines or systems. In our experience during the pandemic, many issues can be dealt with in video calls, but personal contact remains important in the long term. The same also applies to training local employees and expats in administrative areas such as purchasing and sourcing, finance or IT as well as in departments such as human resources, marketing and sales.
7. Post-merger or post-invest integration?
You are already one step ahead and have already invested in the USA or Canada? And yet despite all your efforts, things are not going well? For example, because
- the sales department is not getting the orders you need,
- production is not as efficient as at the European sites,
- there are quality or delivery problems,
- existing customers drop out again,
- the fluctuation among employees is extremely high,
- your expatriate employees are frustrated and no longer want to come to the United States or Canada, despite initial enthusiasm or
- you have already changed management several times, but without effect.
Does this sound familiar? It has already happened to many investors. Now is the time to get the problems under control quickly - preferably with external support. After all, you are faced with the following alternative:
- Would your local management - be it expats or local managers - be able to manage the turnaround with external support? Then you should enlist the support of a consultant or interim manager to strengthen your management team on a temporary basis.
- Or: Your local management is overwhelmed by the situation? Then you could replace the management (again). However, it would make more sense to first commission an interim manager with the turnaround in order to hire new management personnel later on.
In both cases, it is crucial to carry out a quick analysis of the situation on site and derive a catalog of measures from this. This analysis should examine all areas of the company in question in detail, as well as the relationship between the parent company and the plant in the USA or Canada. As a rule, it is not individual areas alone that are the problem, but the sum of the interrelated problems. The human factor usually plays a decisive role here, which is even more important than elsewhere in view of cultural differences and misunderstandings.
However, a situation that has arisen from the dynamics of mutually dependent problems can only be resolved by taking a holistic approach.
Don't give up hope. With the help of an experienced expert, the problems can be solved and you can make your market entry in the USA or Canada a success after all.
