• High Growth Markets
  • Challenges
  • Services
  • Magazine
  • Publications
• Mature Markets

International strategy under scrutiny

Almost no market has been left unscathed by the current economic crisis. Restricted access to borrowing has combined with intense pressure on margins, driven by falling revenues and high operating costs, to create the toughest climate in decades for the international business community.

The hope that high growth markets may be decoupled from recession elsewhere in the world was dashed very early on. China and India, among others, have become too closely integrated into the global economy for such a decoupling to be realistic. Like the USA, Europe and Japan, they are suffering profound consequences in their domestic and international markets.

Until 2008, headlines generally focused on the speed with which it was possible for the high growth economies to expand. Only sceptics talked about risks. Now the story has changed. Almost overnight, business leaders have had to transform themselves into crisis managers. Many businesses are being forced to fundamentally adjust their international strategies and reassess their presence in particular markets.

The economic climate not only affects how businesses view market prospects, but also impacts their internal structures and processes. Dominating the agenda in many businesses are the issues of cost control and risk management. It seems that few were well prepared for the economic circumstances currently being experienced.

The resources available to many business managers to support restructuring and/or development plans are generally scarce: utilisation of divisions in the high growth markets is falling due to weaker global demand and margins are shrinking due to fiercer competition and tougher financing conditions.

Where the parent company (locally or abroad) is struggling, there is a risk of the subsidiary's liquidity being squeezed in order to address problems elsewhere. Investment projects may be scaled back and in the worst cases the parent may retreat from the foreign market as pressure builds to consolidate its activities.

What are the long-term impacts for overseas operations? Where and when should one embark upon cross-border activities? What are the available courses of action against the backdrop of taxation, legal and regulatory frameworks? This KPMG publication "International strategy under scrutiny" (PDF, 1.5 MB) analyses a number of important issues that take priority in the current climate.

Controlling transfer risks
Readily available capital at favourable conditions was key to the rapid industrialisation of high growth markets. Relations between parent companies and their foreign subsidiaries are being placed under pressure as a result of greatly reduced investment flows.

The focus is on the greatly increased transfer risk. This measures the current political, financial and regulatory risk position to which investments in the country concerned are exposed, in the form of national ratings, which drive the costs of hedging foreign investment. Large capital flows and losses caused by the devaluation of national currencies can jeopardise both the financial and the political stability of some markets. As a result, rating agencies may reduce a country's rating, which in turn causes lenders to raise the risk surcharges on their base rates.

Existing credit-financed foreign investments could cost businesses dearly, while banks are imposing more stringent requirements on new investments. Those businesses that pursued highly internationalised strategies may find themselves disadvantaged in the eyes of lenders, who may have concerns over potentially higher default risks.

Ideally, organisations should be more proactive in demonstrating their creditworthiness and securing their cross-border activities. Credit reports, for example, can reduce the risk - and hence the cost of borrowing - for important assets. Screening the financial situation of key foreign partners, customers and suppliers improves transparency and makes default risks easier to assess.

Business strategy: decision-making in the new environment
According to forecasts, the growth rate differential between industrialised nations and high growth markets is set to widen. This can be a persuasive argument for permanently anchoring the high growth markets into an international business strategy.

As the new environment also affects the conditions for transfer prices, supply chains and investment incentives that are part of short and medium term plans, businesses must respond swiftly and effectively.

Potential remains for a more dramatic change in the global corporate landscape. Falling asset values afford well-funded players an opportunity to capitalise on their positions by undertaking strategic acquisitions or repositioning themselves in order to achieve long-term success in a number of sectors and geographies. Particular opportunities may arise in acquiring assets that are considered non-core to other businesses or that are subject to distressed sales.

Cash flows: an effective control strategy
The fraught earnings position facing many businesses is changing as a result of international taxation and financial structures. In many cases, cooperation between group headquarters and foreign subsidiaries has been unhinged due to altered framework conditions.

Adapting the tax burden to the new reality can create new challenges, especially when it comes to cross-border group relations. While EU tax laws permit some room for manoeuvre, regulations in growth markets in Asia, Africa or Latin America can be much more complex and/or restrictive.

Reduced tax and duty burdens and so-called tax holidays granted on market entry can also be jeopardised by lower earnings.

Above all, taxation arrangements can be crucial to scaling back, divesting or even liquidating a foreign company legally and with the least impact on costs and capital.

Divestments: exit compliance
Despite the high growth markets being a beacon of opportunity for growth regions during the current climate, many companies may come under financial pressure to pull back or abandon certain foreign activities, especially those that may not be consistently profitable.

There are a host of country-specific requirements and restrictions that need to be considered when implementing an efficient exit strategy. These may include ensuring that no conditions are breached that impact tax benefits already granted and which could result in subsidies and investment incentives having to be repaid. Collective agreement law and co-determination clauses, as well as the regulations for the liquidation process must be properly applied.

Special attention should also be paid to existing tax obligations from business activities that are being phased out. Furthermore, new tax liabilities can be incurred - depending on the investment type - even as the business is liquidated.

Foreign investors who fail to properly fulfil their obligations in liquidating a foreign company could face serious consequences, including refusal of future entry to the country or of business licences in the event of a return.

Download the KPMG publication "International strategy under scrutiny" (PDF, 1.5 MB)

 

• Industries

• Legal
• Privacy
• Company Information

• Accessibility

© 2012 KPMG AG Wirtschaftsprüfungsgesellschaft, a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.