Going Global—World Cup Edition
Over the years, we’ve helped a number of overseas AE and environmental firms craft and execute their strategies (typically through acquisition) to enter the U.S. market. But it’s not until this year that we’ve been approached by U.S.-based firms to help them craft and execute their strategies to grow overseas. For some, it’s because they’ve been inspired by the gleaming towers and seemingly permitting-free, super-modern infrastructure of 2022 World Cup host nation Qatar. (Although, can it really be called a World Cup if footballing giants Ireland are not in the competition?)
But for most, it’s a result of market opportunities—either strategic or opportunistic—and trying to figure out how to capitalize on them. If you’re considering growing beyond the U.S. 50 states and 14 territories, here are some points to consider:
Risk vs. reward: There better be a massively superior return available to your shareholders in order for you to take on the additional risk of working overseas. Regardless of whether it’s Luxembourg or Liberia, or if you’re following a long-time, trusted client or starting an office from scratch (on the latter, please just don’t do it anywhere outside of the U.S.), your firm’s risk profile jumps dramatically when you move offshore. What additional risks? The spectrum is as wide as it is scary. It starts with the relatively benign currency risk—you won’t end up in jail, but you may end up in the poorhouse. And then—like the double black-diamond slope that you mistakenly took the chairlift to—it moves hard right and down fast to those risks that are more stomach-turning for the uninitiated, ill-advised, and under-capitalized. These include country/political risk (from coups to wars—do you really want your people on the ground when things get hot?), regulatory risk (Elon’s learning a thing or two about EU labor laws and how hard it is to fire or lay off folks in other countries), and compliance risk (believe me, there is plenty of opportunity here at home that does not require your general counsel scheduling a “private” Teams call with you titled “Foreign Corrupt Practices Act—What We Should Have Known”). And I haven’t even covered commercial or intellectual property risks. For some reason, architecture firms seem to regularly ignore several of these risks when pursuing overseas iconic projects.
Sure, globalization is real, but…: What does that mean for a U.S. AE or environmental firm that is looking to grow overseas? A key finding from the 2021 DHL Global Connectedness Index Update is helpful: “Global connectedness is still limited in absolute terms. Domestic activity far surpasses international activity, and international flows are strongest between neighboring countries.” Further, research by Pankaj Ghemawat, Director of NYU Stern’s Center for the Globalization of Education & Management, and Steven A. Altman, senior research scholar at the NYU Stern Center for the Future of Management, shows that exports of goods and services add up to only about 20% of world GDP (once adjusted for output that crosses borders more than once). Surprised? You’re not alone. Managers they surveyed across six countries estimated these international production and trade metrics between 37% and 41%. We’re not nearly as “globalized” as we think. In other words, maybe Toronto, not Tokyo, is your future overseas headquarters. Plus, talk to any retired CEOs who have run a global business in our industry, and they’ll tell you the pain of long-haul flights to Asia, Africa, and Europe. The answer to your global expansion may be closer to home than you think.
The trade agreement formerly known as NAFTA: Look, I know the feeling all too well. You’re trying to cross into Canada on a business trip, and it seems like USMCA doesn’t help you at all and is just a really bad opening Wordle word. But in reality, USMCA provides you with the almost perfect platform for expansion beyond the U.S. Given that Canada and Mexico are the second- and third-biggest trading partners for the U.S., you should seriously consider any initial overseas expansion into one of these two neighbors. After you’ve spent six months and a ton of money on research to assess which countries you should consider prioritizing to help set your strategy, you’ll find that they are the world’s 9th and 15th largest economies, respectively. You’ll see that they fall into the “Mostly Free” (Canada) and “Moderately Free” (Mexico) categories of the 2022 Index of Economic Freedom. On that note, the U.S. also falls into the “Mostly Free” category. If I were advising you, I’d suggest you think twice about looking to expand in any of the 57 countries in the “Mostly Unfree” category. And if you plan on having an actual money-making venture overseas that your employees and clients feel good about, don’t even think about countries that fall into the “Repressed” category. (“Why does it always seem like there is someone listening in on our Teams calls with our North Korea office?”) There’s a high probability that one of your existing clients or employees or business connections already has supplier or sales connections in one of these two countries. So, between their proximity to the U.S., the opportunities presented by their economies, and their relatively business-friendly business environments, you would do well to focus your expansion strategies on one or both of Canada or Mexico.
China 0 – Mexico 1: You may have noticed that things are not going swimmingly in China these days (see Foxconn riots, Covid lockdowns). And with it, U.S. businesses are getting concerned. It’s not just Apple that’s reconsidering its commitment to China. The U.S.-China Business Council (USCBC) reported recently that more than half of its 117 member firms had cancelled or delayed investments in China due to ongoing instability. One of the likely beneficiaries of this situation specifically, and “reshoring” in general, will be Mexico. The country’s combination of manufacturing competencies, low-cost structure, direct access to U.S. markets, and relative political stability makes it a likely destination for a lot of new industrial development over the next decade.
What’s the exit strategy? Most U.S. design and environmental firms seem to find themselves working overseas for one of three opportunistic reasons. Either a private-sector client has asked them to support them in a project in another country (how can you refuse?). Or an employee has a private- or public-sector connection (most likely through a relative) with a project opportunity. Or there’s an RFP for an iconic facility or infrastructure element that requires U.S. know-how and capital. These three opportunities tend to have very different outcomes. For most, the first approach lives and dies with the client’s work, and the exit strategy can be managed so long as the client relationship is solid. The second almost always turns out to be a major (unprofitable) distraction—a terrible waste of time, treasure, and talent and a painful exit. The third tends to end with an exit strategy that results in an iconic project featured on the company’s website, a burnished reputation, and a 50/50 chance of a balance sheet shredded by poor risk management.
Three tips for strategic success: If you are planning to expand overseas strategically (rather than responding to an opportunity), here are three tips to keep in mind: (1) Make sure your first overseas operations are located in a city that is a direct, non-stop, non-connection flight from your U.S. headquarters. If you have to take a connection, you’re essentially throwing sand into the gears at the very start of your initiative. It’s a huge disincentive to connect physically with your overseas clients and employees and creates an unnecessary time sink. Keep it simple; keep it direct. (2) Leverage your clients. In your assessment of which country to prioritize, your clients are your force amplifier. If they are already doing business there, use their connections to advance your agenda. (3) Know your strengths. Be they technical or otherwise, figure out what it is about what you are offering that will allow you to overcome the cultural, business, and regulatory differences in your targeted country.
Opportunity cost: The question at the start of any consideration to grow overseas is “Why?” There’s a reason that there are more acquisitions of U.S. design and environmental firms annually by overseas firms (31 and counting in 2022) than in any other country. That’s because the U.S. market for AE and environmental services is the largest, most stable, and most accessible in the world. So, if you’re considering expanding overseas, into a nation that likely has a GDP less than either of California or Texas, has less regulatory and commercial protections, and less political stability, someone on your team should be asking “Why?” Most U.S. firms have minimal shares of the markets they serve domestically. A cold, hard analysis would likely show a more sustainably profitable future for most U.S. firms lies in the U.S. and not overseas.
Overseas expansion. Is it in your future? Questions or comments, email or call Mick Morrissey at [email protected] or 508.380.1868.