Overseas markets are proving fruitful for middle market companies and, facing a declining U.S. economy, many are intending to expand globally, according to a survey by KPMG LLP, the U.S. audit, tax and advisory firm.
KPMG's Global Enterprise Institute, dedicated to global middle market companies, surveyed 1,013 executives from middle market companies in 10 cities across the country in December and January to gauge success overseas, to assess plans for future expansion and to better understand key challenges and risks. In doing so, KPMG found that 58 percent of middle market executives plan to expand their global presence in the next five years, compared with 33 percent who expressed that they will maintain their
In addition, 41 percent of the surveyed executives felt that their company has been successful at achieving its global expansion objectives over the past two years, compared to 20 percent who indicated limited success. The global aspect of their business strategy was also expected to increase, with 39 percent indicating that global expansion is an integral part to their company's growth strategy.
"Middle market executives feel that their companies' success is tied to the geographic diversity of their business interests," said Jerry Jolly, KPMG partner and leader of the Mid-Market practice. "They've expressed valid concerns about the declining U.S. economy in the survey and see better prospects for revenue growth in overseas markets. Overall, our survey found middle market companies conducting business overseas to have few regrets and are seeking to build on what they've established."
With respect to expansion overseas, the survey found that execs say economic factors in the U.S. and abroad have the most impact on global expansion decisions. In fact, with 45 percent saying the U.S. economy is worse than last year, only 22 percent saying it is better, and 68 percent expecting it will either be the same or worse next year, expansion overseas is being increasingly seen as a way to generate revenue growth.
As far as how they intend to expand overseas, 50 percent of the execs indicate that they plan to increase the number of vendors and distributors they work with, and 45 percent see an increase in partnerships, strategic alliances and joint ventures in their future. Additionally, 38 percent will increase the numbers of employees and 32 percent have plans to add offices or physical plants.
"What middle market company leaders have conveyed to us is that there is plenty of market potential in new countries and in extending services to new markets," said KPMG's Jolly. "We should expect that many more companies will recognize opportunity and get hit with the overseas bug in terms of generating new profitability and revenue. It is no longer a question of testing the waters. It is a question of strategy, commitment, and mitigating risks."
For those surveyed, the average percent of revenues gained from overseas operations was 23 percent, with an impressive 36 percent of execs saying the percentage of total revenues generated from overseas exceeded 21 percent. According to respondents, that percentage has been increasing and is expected to continue increase. In fact, 48 percent indicated that non-U.S. revenue as a percentage of company's total revenue has been up the past two years. And, 57 percent said that the percentage of non-U.S. revenue will increase in the next five years.
In reviewing the challenges to growing their global operations, regulatory challenges and local laws, language/cultural barriers and hiring qualified personnel were the most prominent concerns. What the execs saw as very significant risks were available capital, human resources issues and geopolitical issues.
"Mid size firms do not have the infrastructure and processes of larger firms and they typically have greater difficulty in managing global expansion efforts," said KPMG's Jolly. "Successful businesses are the ones that more quickly overcome the cultural barriers and obtain knowledge of the market and who they are doing business with."
Global expansion has not resulted in a loss of U.S. employee base, the middle market execs surveyed by KPMG said. In fact, 33 percent said that their employee base in the U.S. has expanded as a result of global expansion and 53 percent indicated that global expansion has had no impact on their U.S. employee base. Overall, the survey found that 14 percent of employees are in non-U.S. countries, though 38 percent of respondents expect to increase non-U.S. employees in next five years.
KPMG's Global Enterprise Institute, focused on global middle market companies, was established to enable business leaders to share knowledge, gain insights, and access thought leadership about key middle market issues and emerging trends.
KPMG engaged research firm Penn Schoen & Berland Associates to conduct the survey, and Penn Schoen interviewed execs from companies that sell overseas, outsource company functions or processes, have partnerships or joint ventures, have plants or offices outside the U.S., use non-U.S. vendors or distributors, or sells affiliated franchises to non-U.S. companies. The research was conducted in 10 US cities, including: Atlanta, Baltimore, Denver, Detroit, Houston, Kansas City, Los Angeles, Philadelphia, Silicon Valley, and Stamford.