Interested in Doing Business in India and China?
Look before you leap. Experts reveal what you should consider before your firm wades in.June 2, 2011
by Sukanya Mitra
At the recent Conference Board hosted Post Merger Integration Conference in New York, the best session was kept for last: “Managing Opportunity and Risk in China and India.” With the world abuzz about these two emerging countries that are rapidly evolving and developing, it was only a matter of time until American companies placed their mark.
While American fast food has long etched their signatures on these two promised lands, others have paused, and for good reason. Besides the cultural shock, there are a few other key considerations CPA firms should take note of before hitting the road.
India vs. China
If your company is planning on conducting a mergers and acquisitions (M&A), should they go for India or China? Is there a difference? Yes and no. It depends on who you ask.
Aileen Stockburger, vice president — worldwide business development, at the pharmaceutical giant Johnson & Johnson, thought it was easier to work with firms in China than in India. Her reasons were simple: there were two distinct types of companies in India. The mom-and-pop family types are interested in foreign investments growing their businesses but not selling their controlling stakes, while the large conglomerates are not interested in selling to foreign companies, period. She did say that the situation she faced may not necessarily be the case for all industries, but definitely was the case in pharmaceutical industry.
Robert George, director of corporate development (New York), for the Falls Church, VA-based technology solutions provider, CSC, find it easier to work in India. “The overall business environment (commercial, legal and regulatory) is more geared toward foreign investment. I believe this is due in part to a longer history of foreign investment in India, a similar political ideology, and a more common language,” said George. “Though India’s legal system is still challenging and needs some enhancement, it is more similar from a westerner’s point of view, perhaps from its heritage as a commonwealth country,” he added.
“The economies of both countries are expanding at such a rapid pace as a result of many companies that are newly forming and/or developing,” said Christian Geismann, CPA, audit senior manager at Mazars LLP UK. “Similar to any new or expanding company, regardless of the country, there are inherent growing pains regarding accounting, financing and administration matters which can become audit issues if not addressed properly.”
“Made in India or China vs. selling goods to these rapidly growing local markets must be taken into consideration when evaluating business opportunities. Both countries are still making somewhat difficult for foreign companies to set up foreign entities and they often have steep tariffs on imported goods so in that sense both countries have their challenges,” pointed out Liv Apneseth Watson, director of research and development at Accountability (New York). “India has the advantage of English being the language of business and they have a more western business culture so I would say India is easier to work with. India is also likely to have a larger population in the next century as they did not follow China's draconian "one child" policy so it will be a larger domestic market in the next 20 years.”
What Should U.S. Firms Consider Before Venturing Onto the Silk Route?
Both Stockburger and George agreed that it was best to understand the culture before heading out. George strongly advised having a “cultural notebook” of sorts somewhat like a cheat sheet for employees who will be working with their counterparts in China and India as customs and their modus operandi is very different from how it works in the U.S. Expect delays was overwhelmingly echoed. “If you expect something to be done in five months in the U.S., you can be sure it will take five years in China!” quipped Stockburger.
Stockburger also emphasized having a local employee, either from that country or someone who knows the workings of U.S. firms and can translate that easily to the Chinese. She said language was biggest barrier Johnson & Johnson (J&J) had in China. J&J opted to transfer a U.S. born Chinese employee to China when they started their M&A enabling the transition to go smoother.
Whether you are looking to acquire a firm in China or India, you need highly qualified professionals to aid in the process. Unlike Stockburger’s experience, George further drove his point home by noting that hiring a person who grew up in the U.S. and can speak and read Chinese fluently doesn’t necessarily qualify as the professional you want to take along. “It is important to know how local business is done, but also important that the advisors understand what U.S. or western firms deem higher risk. Understanding who really owns a company has been more challenging in China,” he stressed.
“Specifically to these countries, challenges exist regarding logistics, language and cultural matters. Logistically, it can be difficult to perform business when one is not able to physically interact with a client or because of extreme time differences. Language barriers can exist, even when all parties can write, read and speak English,” pointed out Geismann. “However, one's understanding of the words can take on different meanings. Culturally, there are various traditions that should be considered and there are general working styles, which can differ and must be factored into expectations by all parties in advance of working together.”
George agreed with Stockburger on the timing issue in China. He noted that everything took longer in China and that you need to be “very persistent in your pursuit of a transaction from the preliminary steps through diligence and closing or it will take even longer, or won’t happen [at all]. It is important to be persistent, but not rude, and not show your frustration with the delays,” said George. “Similarly, as a western company you need to set expectations back at home, or you will be spending a lot of time answering questions about the timeline and process.”
The Audit Trail
What nightmares should financial professionals embrace? “CPAs need to be aware of [the] local certification process. I think trust is going to be the biggest issue for CPAs to set up offices in [both] China and India. Picking the right trusted local partner will be essential to success,” pointed out Watson.
George urged hiring a law firm that is experienced and has a long history of operating in the region in which your M&A transaction is being conducted. He emphasized understanding up-front “the regulatory hurdles you will face in your particular transaction. These hurdles will vary based on the type of business you are trying to acquire and the legal form of the entity.”
In addition, he noted that the laws governing M&A in India especially when a company is listed on their stock exchange can be very tricky and challenging to acquire 100 percent. “Unless a seller has planned well for their sale, you may find yourself subject to equity claims from previously unknown shareholders, or in [an] exchange-listed company you could still be subject to the listing rules, even after you acquire a substantial majority interest,” he explained.
He said it was imperative that U.S. firms scrutinized tax and treasury matters including the types for acquiring entities. “In certain cases getting the structure right is time consuming and iterative. The form of the transaction drives diligence scope and timeline,” he added.
The key to business operations lie in taxes. George said that it is not unusual to find firms that list several office locations in tax-free zones, but in reality, they are nothing more than a post office box. Reason? This allows both employers to take significant tax breaks on large employee compensation packages that end up as expense reimbursements and would surely raise red flags and be challenged by any CPA firm.
“The balance sheet is used to defer certain transactions that normally would be expensed, further there is a higher instance of ‘netting’ transactions both in the balance sheet and the income statement,” noted George inferring that companies book transactions improperly. “U.S. companies need to be particularly concerned with FCPA (Foreign Corrupt Practices Act) matters in both countries, but more so in China due to the prevalence of State Owned Entities (SOEs).”
Whether you deal with India or China, it is best to keep a lot of time on your hands and delve deep into the background of the companies that you plan to acquire or with which you plan to merge. It is a given that U.S. firms must learn as much as possible about the countries’ culture and history, as well as socio-political views. Both George and Stockburger advised speaking with recent expats from that region, embassies, The CIA World Factbook as well as Transparency International, which is a global organization that fights corruption.
It takes baby steps as with anything else and it does get easier. “Overall, working with clients and audit firms in China and India can be a challenging, yet rewarding, experience,” said Geismann. “As these are expanding economies, it is a great feeling to be involved with companies that are seemingly on the cutting edge of development. The growing pains and logistical challenges end up becoming great learning experiences for CPAs to build on their abilities. It is also very interesting to learn about the traditions and cultures that exist in both of these countries." And as Watson quipped, “The world is global, our customers are global and so most industries cannot ignore two such emerging economical powerhouses. It is not an option, but a survival mechanism!”
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Sukanya Mitra is managing editor of the AICPA Insider(TM) e-newsletter group.