George Malim is a freelance journalist based in London.
Preparing a company to globalise its operations depends on the nature of the business and the suitability of its products. George Malim reviews the options open to family firms
Globalisation is undoubtedly one of the most investment intensive expansion strategies family-owned businesses can pursue. The challenges family businesses face in going global are many and varied but few are likely to be able to achieve it in one push in a single generation. Those that have been successful, such as plant manufacturer JCB, are few and far between and have not achieved their current global presence without sustained investment over many decades. Unlike motor manufacturers Porsche, BMW or Ford, still under significant family ownership but no longer under direct family control, JCB, which was established in 1945 now employs 4,000 people on four continents and continues to be family-owned with no outside shareholders. The company now offers 160 models and has sales operations in 150 countries.
It can be argued that JCB's successful globalisation over the past 50 years is as much a facet of the nature of its business as the careful management of the Bamford family. JCB makes highly specialised construction plant that, by its nature, is low volume and high value and has applications worldwide. Family-owned businesses that offer high value, specialised products are most suited to globalisation. A specialised product can be sold at a premium that insulates it from the cost vagrancies of the labour market and means a family business does not have to keep chasing the cheapest labour rate or establish manufacturing capability overseas just to compete. In addition, many specialised products do not have to compete on price.
"Suitability for globalisation comes down to the industry a business is in," said Andrew Godfrey, director of family business consulting at Grant Thornton. "In an industry that lends itself to globalisation and moving products around the world, the likelihood of successful globalisation is much improved. However, traditional manufacturing businesses are caught between a rock and a hard place and family businesses tend to do better in niche areas where competitive advantage is not based on price. For example, Gucci does not compete on price, but companies such as machine tool manufacturers offer real specialisation."
The investment requirement of expanding overseas needs to be carefully weighed but advisers point out that for the family business it's little different to large projects such as developing a new product line or building a new factory. Heavy, sustained investment is required and substantial risk is present just as with launching new products.
Globalisation requires the sort of investment that has seen many family-owned businesses relinquish their controlling interest. Equity finance is an obvious route for a family business to access the large amounts of funding required, but access to these for families that want to keep control can be difficult. "Access to markets can be harder [for family-owned businesses] because the equity markets will be warier of a company where there is a controlling interest," says Chris Hancock, head of the private banking partnership at JP Morgan. "In which case the family needs to work a bit harder but it can be done, otherwise it's the same as everywhere else."
Other options available to family-owned businesses include: a bi-lateral loan such as an overdraft; the private placement market which requires a degree of disclosure; the syndicated loan market; the bond markets; and mezzanine finance. "Debt is extremely attractive at the moment because there is a huge amount of liquidity about and the cost of debt is so low," adds Hancock.
Godfrey feels that the equity markets are not so receptive to those family businesses that want to retain control. "The ability to globalise is a feature of access to capital. For example, Ford, while a global business is not practically a family business," he says. "The average family business will find it difficult to globalise because of access to capital markets. Globalisation is certainly more difficult than more limited international expansion and certainly will take a long time because a lot has to financed by retained profit – that can take generations." For family-owned businesses that don't want to go it alone and carry all the risk themselves, joint ventures and partnerships have proved popular. "I've seen businesses that partner with other family-controlled businesses because they share a common ethos," says Godfrey. "Many family businesses find it important to share the culture of a family business with partners but there are pitfalls in that you have to have similar strategic objectives and a clear understanding of each other's expectations."
Godfrey also points out that if a family business enters a joint venture it has to have a clear idea of where that might lead. "Where does a joint venture go in the long term? At the end of the day, one family sells out to the other," he says. "There are a lot of advantages and risk is reduced but there are threats such as if the joint venture doesn't work out or the partner doesn't do their bit. In addition, you can't globalise through only joint ventures because there are a finite number of local family businesses."
Hancock at JP Morgan also has concerns about joint ventures. "Some of the history of joint ventures is truly appalling," he says. "In a joint venture you have a small number of shareholders and they work for as long as their interests are aligned. They can go wrong right from the start and should never be seen as permanent unless you see life ceasing to be dynamic."
Godfrey advocates that family-owned businesses take a smaller scale approach than full globalisation and go it alone building a small foreign subsidiary themselves. "It can be very good for a new generation in a family business to go and build a small subsidiary," he said. "It's a good way of bringing on the next generation but it's important to have the right procedures in place. Establishing a foreign subsidiary is no different to building a new factory down the road. If the right procedures are not in place it will starve the business of capital and fail."
Hancock also sees the merits of the softly-softly approach; "From what I've seen, the best companies dip their toe in – however cold the water looks – to important international markets," he says. "They won't necessary go in and buy a business and they may work with a local player. Then, as they get more confident, they will move from the light to the heavy model."
One of the key drivers for globalisation is the risk of cheaper overseas production putting profit margins under threat. This has seen the emergence of outsourced manufacture with varying effects. "Businesses can outsource production and you don't need to own a factory in China for it to be ten times cheaper than in the UK. However, there comes a point when the brand owner, for quality reasons for example, feels more comfortable to own those sorts of operations in house," added Hancock.
An example of successful outsourcing is Dyson, the vacuum cleaner manufacturer. Having outsourced production to the Philippines while making its UK manufacturing staff redundant, its founder James Dyson now employs more staff at its UK headquarters in development and marketing than he did when it was a manufacturing centre. Dyson has built a truly global business but not without risk, having engaged a Filipino tent pole manufacturer as one of his early outsourced manufacturers.
There are as many routes to international expansion as there are family businesses. All depend on the health, prospects and attitude of the shareholders of each family-owned business and require flexibility, patience and commitment. As Godfrey says: "My family business clients operate internationally because they're prepared to invest long-term and take the risks as well as the reward."