By 
You have, no doubt, noticed that many U.S. companies have moved their companies abroad and re-incorporated overseas. This happens for many of the same reasons that ships of many countries ply the seas under the Liberian flag of convenience, to enjoy anonymity, advantageous taxation rates and other financial perks. Corporations don’t usually float, but they are interested in some of the same things. Corporations also relocate to reduce labor costs or to be closer to their major markets.
For example, factoring companies can conduct the business of account receivable financing from almost anywhere in the world that boasts internet access.
The same can be said for many insurance companies, especially those already having a global presence, like AON plc, an insurance giant that once called Chicago home, but now flies the flag of the United Kingdom, having shifted its home office to London.
Ace Limited, another insurance giant, left its Cayman Islands home in the sun and moved to the cooler climes of Zurich, Switzerland.
The reasons behind these re-incorporations vary from company to company but the common denominator is financial considerations and by financial I mean bottom-line considerations. The top 3 reasons are taxes, labor costs and regulatory burdens.
Taxes
Aon eventually conceded that tax relief was its principal reason for re-incorporating in the UK after originally suggesting the move was designed to bring it closer to its markets. The move to the UK has the potential to add as much as $100 million annually to the company’s bottom-line. Ironically, Patrick Ryan, founder and retired Chairman of Aon Corporation, will face a hefty personal tax bite. Ryan owns an estimated 12.8 shares and when converted to AON plc shares they will be subject to capital gains tax. Aon employees holding stock outside retirement plans will take a hit as well.
Labor Costs
While an important consideration, the recipe for a successful transition to other shores must also include:
- How well the target country’s economy is integrated with the global economy
- Transportation costs
- The market for your product or service in the host country
- Facilities costs
- Quality of infrastructure
- Materials costs
Government Support/Interference
The United States has come to be viewed as a virtual minefield of regulations. Depending on the nature of the enterprise, regulations can cause delays, increase costs and a foster a host of other obstacles that many businesses believe they can avoid by moving operations abroad. On the other hand, U.S. law affords business many protections that may not be fully realized in some foreign countries.
The Argument For
For manufacturing firms, the top issue is labor costs. Labor costs usually represent around 30% of the product’s value, logically; any reduction in labor costs is free to flow to the bottom line. A Bain & Company survey of 138 manufacturing executives revealed that 80% of these executives viewed moving manufacturing costs to low labor cost countries was a high priority.
Consider $49.2 billion Emerson Electric. In the late 1970s, in response to escalating costs, the company developed a strategic plan to transfer manufacturing and certain other aspects of its operations to low labor cost countries. By 2002, these countries were in which Emerson paid 44% of its labor costs. The transition paid off handsomely for Emerson. The firm saw its operating margins improve and shareholders have received an average annual return of 19.8% since 1994. The company has also increased shareholder dividend every year.
The Argument Against
Many low cost labor countries enjoying early U.S. investment in manufacturing now have sophisticated, better trained labor forces demanding higher wages.
Caterpillar, GE and Ford, for example, have reduced operations abroad in recent years, in fact bringing certain segments back to U.S. shores. The argument might be made that the days of shifting work abroad have come and gone.
A company has to consider what its cost will be to manufacture its product not only now, but in two, five or ten years. Putting a sharp pencil to an accounting of present and future costs may reveal that it isn’t such a sound idea after all.
Cases can and will continue to be made for moving abroad. Your take away here should be that it is not just a simple matter of labor costs. Your company needs to understand where its market is, where it sources its raw materials, what the logistics are in getting the product to market, what social and political implications are at play and what reasonable projections can be made with respect to future costs.
Additionally, smart companies consider what functions to move abroad, not what factories. Not every aspect of a company’s business is a product of labor costs.
One thing is certain, emerging nations are just that … emerging. What the labor force accepts for a wage now will change over time. Perhaps slowly, perhaps quickly, but it will change. Unions will rise and policies and politics are always uncertain, both here and abroad.
Moving out of the country may not be a fix … it may be a band-aid.
About The Author:
Andrew Cravenho is the CEO of CBAC Funding, an innovative invoice finance company. As a serial entrepreneur, Andrew focuses on helping both small and medium sized businesses take control of their cash flow.
