RSM Resources

In his best-selling book The World Is Flat, New York Times columnist and author Thomas Friedman argues that international borders are increasingly irrelevant in the business world. However, they haven’t disappeared.

Outside the United States, American businesses still face marketplaces filled with Byzantine — and sometimes costly — local regulations and customs.

Just ask Jim Ahlborn, vice president of finance at Tuthill Corp. With more than 24 plants and five sales offices in 13 countries, the Chicago-based manufacturer of industrial products has learned that every new foreign venture has its own set of challenges.

One company’s international odyssey

Tuthill’s experiences are as varied as the places it does business. In Italy, for example, regulations require Tuthill to perform two types of financial audits. It must perform a quarterly statutory audit, known locally as collegio sindacale, to ensure that the "company’s structure and organization is adequate to its size and kind of business." After paying about $10,000 annually for collegio sindacale, Tuthill must also contract with a separate firm for a financial audit.

"You can’t have one firm do both audits," Ahlborn says. "One firm is seen as checking up on the other." However, only the financial audit provides value to the company, he says.

In China, Tuthill doesn’t need to employ two sets of auditors but has encountered several challenges at its plants in Shanghai and Beijing. Six years ago, the company signed a joint venture with a state-owned firm in Shanghai to produce vacuum pumps and blowers for industrial applications.

At the time, the government prohibited foreign firms from opening manufacturing facilities without a Chinese partner. That has since changed, so Tuthill has been attempting to buy out its state-owned partner. All a company usually needs in this scenario is a fair valuation, a willing seller and fair negotiations. But Tuthill’s situation has proven to be much more complicated.

In this case, both sides hired independent valuation firms to price the operation. The government-owned firm contracted with a Chinese company to compile its valuation. Tuthill asked a non-Chinese firm to come up with a fair price. Once the valuations were made, the parties had 90 days to consummate a deal. After completing the first set of valuations in 2004, the firms couldn’t agree on a price. Two additional valuations later, Tuthill still isn’t the sole owner of its Shanghai operations.It seems the seller isn’t especially interested in a speedy deal or this is just how business is done in China.

"Every 60 days I say it will be settled in 60 days," Ahlborn says.

Meanwhile,Tuthill fully owns its operations in Beijing. However, U.S. visitors to the factory might be surprised at what they see. An impenetrable door seals off one room from the rest of the building. Within that room lie stacks of yuan, the national currency.

"The Chinese still believe it is acceptable to transact business in cash," Ahlborn says.

At first, Tuthill resisted, insisting on making purchases with bank orders. But that proved unworkable. Sending an employee to the bank required a half-day bus trip across town. So Tuthill, a company with about $400 million in annual revenues worldwide, embraced the cash-based culture in Beijing. As a consequence, it pays a third party to monitor financial operations and internal controls over cash at the plant: a hidden cost of participating in one of the fastest-growing economies in the world.

Sometimes closing a foreign office is as difficult as opening or buying one.

Several years ago, Tuthill created an office in Singapore, a prosperous island nation of about 4 million people. It hired three salespeople and one monitor, a necessary risk-reduction tool. The operation didn’t pan out,so Tuthill chose to shutter it. But it hasn’t proved easy.

Each time the company’s local consultant returns with a list of six or seven action items needed to close the Singapore office, Tuthill complies. And then another list of six or seven action items, based on official requirements, appears.

Odd government requirements are a frequent complaint. When Tuthill created a Belgian company to hold investments in their European subsidiaries, the company soon had to file a lengthy report on its consolidated operations in Europe. It didn’t matter that Tuthill’s Belgium office was simply a holding company created to transfer funds around the continent.

"We didn’t know about it going in," Ahlborn says of the report. "We get zero value out of the audit and the filing of our consolidated results in Europe, and it doesn’t help us gain access to credit. No one cares about it other than the government. Yet, we have to do it."

Mexico: Regulating payday

American businesses operating in Mexico face many challenges. Like Italy, Mexico also forces companies to comply with a "mandatory audit" that many business owners say doesn’t add value. But Mexico’s most costly requirements are in the payroll department.

In Mexico, all businesses must contribute to mandatory social security, retirement and housing funds for employees. That adds an extra 30 to 35 percent to each salary. In addition, companies must pay a holiday bonus equal to 15 days pay by Dec. 20 each year. And vacation pay isn’t just an employee’s salary in Mexico: It’s salary plus 10 percent after the first year — and the vacation benefit increases annually.

Then there’s profit sharing. Owners don’t get to keep all the spoils. Mexican law dictates that companies must share 10 percent of profits with employees.

"Some companies are surprised to learn they have to pay this," says Alfonso Elias, a managing director with RSM Bogarin, Erhard, Padilla, Alvarez and Martinez, a member firm of RSM International that’s based in Mexico.

Common lessons around the globe

Sometimes, rules differ even in separate areas of the same country. In India, the states of Andhra Pradesh and Tamil Nadu offer businesses relatively few bureaucratic hassles. However, that’s not the case in Uttar Pradesh,home to more than 170 million people — and a golden opportunity for local reform, according to a World Bank report.

Despite the complaints, hassles and unending challenges of operating offices overseas, Tuthill’s Ahlborn says it’s worth the effort. The financial costs of complying with the various government regulations typically aren’t prohibitive, although they are often puzzling.

"It’s our biggest frustration," he says. "We’re always wondering why we have to file this or that paper. If we understood it better, it would definitely help."

That’s why Ahlborn recommends hiring a consultant. Without one, companies jumping into foreign markets may spend too much time on unnecessary paperwork. Or they may not be aware of requirements for other procedures or filings. An effective consultant speaks the language, understands the culture and can untangle complex rules.

When it comes to regulations, each nation (and sometimes, region) has its "absolute musts" and "sort-of-need-to-haves," Ahlborn says. A talented consultant will "be able to tell you which is which," saving time and money and giving executives more time to focus on strategic concerns.