„Proper preparation is better than acting hastily.” This basic principle is applicable especially for direct investments in foreign countries (FDI). Every error during the preparation costs money. Very often small avoidable wrong decisions are what prevents you from reaching the goal of the investment, and, therefore the financial return over many years, or, at least, reduces it. Three points decide about success and failure:
- The study of the legal and technical feasibility of the planned projects;
- The search for the right location;
- The study of the internal preconditions for the realization of the project and its organization
ASEAN INTERN offers in this tripartite article series practically orientated pointers of the three requirements for a professional investment preparation.
The Feasibility Study
Important legal preconditions of technical requirements may be available at one location, at another, they may be limited or nor present at all. Both have to be secured before a decision for investment is made at all.
The criteria of a feasibility study are only standardizable in a limited way. They are, to a big extent, depending on the motivation, targets and technical requirements of the investment.
Motive and goal of the investment regulate the approach
It is something totally different whether a company wants to produce in a foreign country, to only manufacture components or whole products cheaply and then re-import them, or whether the company desires the proximity of the customer to the foreign market by having the production in the vicinity as well. In the first case, the free-trade agreements or legal preconditions for the product trade have to be taken care of. Only of possible importance in this respect are the production costs and the import duties from this country to Europe. If customers in the whole region of the new location are to be supplied, the interconnection of possible trade agreements of the intended country, the rules of local content and possible non-tariff obstacles are of substantial significance for the success.
Also, the criteria for a feasibility study will then be important when the local market is of particular significance for the success of the investment. Here, the market mechanisms, the market potential, existing competition and the availability of strategic sales partners belong to the considerable content of the feasibility study.
Thereby, we already reached the first recommendation for the preparation of foreign investment:
Recommendation 1: Motivation and target must be exactly defined and documented. You determine the content of the further approach.
That sounds trivial, but it isn’t. It does make a big difference whether for example:
- key customers demand that production has to be in the vicinity or whether the location can be optimally chosen without concerns for the customer;
produced components of the new location are to be imported back to the mother company, thereby, other requirements concerning the logistics and goods traffic are applicable;
- from the location of the new production plant, new marketing activities or even local product development is expected, this throws up relevant questions about customs legislations and commercial laws and the available personnel resources.
- Synergies or cooperations with local partners are envisaged, this brings relevant challenges concerning the protection of intellectual property and the choice of suitable partners, or whether for example
- a 100% subsidiary or even a joint venture participation is applicable. The former is not permitted in all countries and in all sections, especially the Asean countries.
At these few examples, that can be extended randomly, it can be seen that an exact definition of the motive and goals of the investment mainly influence the criteria of the feasibility study and later on the choice of location too.
Single-stage or multi-stage feasibility study
Once motive and goal are given, the criteria of the feasibility study are to be defined as specific as possible. A lot of money can be “thrown out of the window” for generally formulated feasibility studies without finally being able to profit from them. Consultants and institutions gladly offer such studies that refer to economic data, general legal regulations, and registration regulations, without answering the questions concerning the specific company situation. For this reason my
Recommendation 2: The feasibility study should be restricted to the few criteria that have a decisive influence on the project’s chances of success
The author Dr. Gunter Denk was himself, for 25 years, a responsible businessman and lead a German branded company with several locations in Europe and Asia. In the year 2000, he took, after fusion, the executive responsibility for a company that is noted at the stock-exchange in China. 2004, he founded the SANET ASEAN ADVISORS, a group of industry consultants at 5 locations in Southeast Asia. The group accompanied and accompanies under his leadership various direct investments of market introduction projects in china and Southeast Asia.
Before we turn to typical criteria, I would like to refer to an often reoccurring situation. Often the country for investment is not pre-defined. The businessman has several possible countries for investment to choose from.
In such cases, it is not recommendable to conduct feasibility studies for all possible target countries. The time-related and financial expenditure would not be reasonable.
A two- or multi-stage study of feasibility is rather more advisable.
For the first pre-selection of the possible investment plans, I would completely forgo the comprehensive study. In this phase, it is sufficient, according to my experience, to sit together with the experts for one or two days and to compare the basic data and the conditions at the potential country for investment. Included are for example:
- Protection of intellectual property
- Legal applicability of the intended activity (production)
- Reliability of the legal system
- The requirements in regards to the political framework
- Fulfilled expectations of possible key customers according to lead-time, customs duties, and costs
- Investment protection agreement
- Investment incentive
- Affiliation with free-trade agreements
- Import and Export restrictions
- The right of 100% subsidiaries of the company for the customer
- To buy land/property
- Market Proportion
In general, in such workshops, two or three main options crystallize quickly, others will be rejected as nearly hopeless. As a result, this leads to
Recommendation 3: At a still open decision about a certain country for investment, it is recommended to initiate a multi-level study of feasibility.
This saves time and money.
The second stage then consists of a comparable feasibility study of the countries to be included in the closer selection. For this, two options that offer objectivity towards the selection on the one side, while on the other side they, unfortunately, also differentiate themselves concerning the connected cost factor.
- Option 1: A consulting company is commissioned to create the study. This is generally cheaper. Caution is, however, appropriate if the consulting company is only located at one of the chosen locations and is raising hopes of accompanying the project later on too. The result could, therefore, be in favor of a country because the company fears that it will not be considered for the further pursuit of the project, in the case of superiority of another country. The result, therefore, threatens to be influenced by unrelated considerations.
- Option 2: Commissioning in each of the considered countries of a consulting company to examine according to exactly specified evaluation criteria and according to just as specifically supplied data or values and evaluating the results afterward internally for a conclusive decision about the country of investment.
The SANET ASEAN ADVISORS offer in this respect a possibly good compromise between the two options. Due to their representation in most southeast Asian countries several offices are internally assigned independent of each other, to raise the specified criteria for each country. Subsequently, the single studies are evaluated independently of each other. Both are evaluated in a short comparison study and given to the investor in the form of a suggestion. The internal cooperation of the offices with their different regional interests also guarantees a “result-open” procedure and an overall objective reasoning.
For the single-stage, as well as for the multi-stage study, it is applicable that the careful choice of the criteria to be raised is a significant factor in risk management. Typical criteria for the (also comparative) feasibility study, are next to the already named above:
- „Cost of doing Business,“ meant is the cost of land, rent, wages, cost of living, transportation
- Availability of deep-sea harbors, airports, railways and other possible facilities that are important for the planned investment
- Exact size of governmental support (amount and period of tax exemption, exemption of customs duties, right of land ownership, special write-offs for infrastructure expenditures or employee training)
- Reliability of the application procedure
- Main features of taxation laws, repatriation of profits
- Availability and costs of labor
- Availability of (very often promoted) industrial parks
- Availability of qualified suppliers
- Requirements for free-trade (prerequisites and procedure for the local content)
- Infrastructure for delegated employees (housing market, hospitals, social environment, etc.)
- Construction costs (usual tender procedure, experience values about cost per square meter for production and storage space)
- Customs regulations (classification procedure, execution time, particularities)
- Customs duties for components to be provided in Germany
- Risk concerning results and handling of corruption
This list is neither conclusive nor are all criteria always relevant. As already mentioned, the criteria for a feasibility study are extremely dependent on the individual goals and motive. These differ from company to company and from project to project.
Besides, not all relevant criteria are always known to the investor from his own general business activities. Each region of the world, especially Southeast Asia and East Asia with their different political, cultural and economic systems represent risks that a “Westerner” sometimes only becomes aware of in connection with the operational activities of his company (and then as a painful obstacle). I, therefore, give the
Recommendation 4: While compiling the list of investment-related criteria and at their evaluation, locally experienced industry consultants should be included that are acquainted with the specific risks in the examined countries or regions.
Thereby, I recommend this deliberately also for the evaluation of the criteria. Whoever for example does not know that in Vietnam, although 14 years tax exemption for investors are possible and also confirmed but that the official confirmation is only guaranteed “for the respective valid highest level of support,” will not recognize the risk of later legislative changes that can also change the confirmed support. Therefore, whoever only raises the naked facts will easily overlook risks that the locally knowledgeable consultant can include in his evaluation due to his own experience
Of course, a businessman also asks about the cost of such a study. The question is just as understandable, as it is difficult to answer. For sure is only the
Recommendation 5: The financial engagement and risk should only be heightened respectively as the knowledge about specific chances and risks of investment in a certain country grows. The feasibility study heightens this knowledge significantly.
With other words, I do not think well about it when businessmen, having once made the decision “to take money into their hands” and to invest, without knowing exactly where and what they are up against. I once had to hear how a management declared with full conviction that they would never engage external support and experience due to being able to make each and every mistake on their own and to learn from it. For those that are can afford this, it could be okay.
I prefer the above-mentioned recommendation 5 and have always, even as a businessman, been well off with it. Rather spend money in the first instance for gaining knowledge. And be it so that in the end knowledge means to discard the investment due to being too risky or even without chances.
But specifically and as notice a clue to the costs:
- The expenditure for a workshop with binding definitions of the goals and motive, selection of a “shortlist” for the target countries that are taken into consideration and definitions of the criteria for the study should not exceed 5,000 EUR.
- Depending on the scope and intensity of the data to be levied, the feasibility study with about the above-described content will cost about 25,000 – 30,000 €. With a comparative study about 60% for every further country, including the comparative evaluation, should be calculated. Should two separate companies be commissioned, then these would each calculate the stated basic price for a studied country.
For this, you can expect a comprehensive report with company specific statements, hence not only a “theoretical” study that could be valid for every company. For example, the requirements for the support, the labor market, the customs duties, the suppliers and all relevant criteria must contain answers to the specific questions of the company.
Beware of feasibility studies that in their conclusion only contain general regulations, economic data and legal requirements. Very often such studies, that are for their biggest part created from pre-formulated „report modules“, are offered for half the cost frame. All delivered data may, in the end, be correct but are practically worthless for the specific investment.