A while back I cam across an excellent article detailing way Americans tend to fail when they rush off to start a business in a foreign country as a way to make a living … or even grow rich there.
The article was written by a fellow with experience in Panama, but I couldn’t help noticing the similarities to doing business in the Philippines. Especially for foreigners trapped in the belief that "they know better" and that "good old American ingenuity" will always show the "locals" how it is done.
- 1 Eight Common Mistakes Expats Make When Starting or Buying a Business Overseas
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By Michael Manville
After years of watching expats struggle with new business ventures, or accept low paying jobs just for the privilege of “living in paradise”, I recommend people carefully consider these common pitfalls before investing time and money in an overseas venture.
In a minute, I’ll point out the eight most common pitfalls you are likely to face as an expat starting or buying a business overseas, but first, here is a case example of a business that went very wrong….
True Story: A U.S. businessman (we’ll call him Joe to protect his identity) moved to Panama and started out with the best intentions and plenty of capital (see common mistake #2 below). Even though Joe had never built homes in his life (see common mistake #6), he felt:
- the existing contractors weren’t building to U.S. standards,
- weren’t building fast enough, and
- weren’t paying their workers enough.
Joe’s solution was to start his own construction company, catering to foreign buyers….
I can’t count high enough to tell you, gentle readers, how many times I have heard very similar ideas from fellow Americans.
In particular, the ones who really surprise me are the ones who have never started and run a business in the USA. Some have even told me, "Oh, I never tried to start a business here in the USA, it’s too difficult. But in the Philippines, I know it will be so much easier because I’ll have the time. And things are cheap there. Hmmm.
… Since Joe spoke only a few words and phrases in Spanish (common mistake #1), he hired English speaking purchasing managers, architects, and attorneys to help him run his business. He increased his employee’s wages, added employer benefits not normally offered to employees in Panama, changed the “typical” construction style to one that matched the wishes of his foreign clientele, and ordered huge volumes of high end custom home construction materials from Miami (see common mistake #5).
Sales were brisk, because the market demand was very high, but finished homes didn’t materialize. Permits were taking too long to obtain (common mistake #4), and cost overruns were surprisingly high, due to a combination of insufficient or incorrect materials, and under skilled laborers who were not familiar with modern construction techniques.
After several months of focusing on sales without tracking exactly what was happening on the construction sites, Joe eventually discovered his workers had stolen many of the imported construction materials. He also discovered that some of the locally produced materials he ordered and paid for had never arrived in the first place.
When Joe tried to fire the culprits, his workers conspired against him by reporting him to the labor department, pointing to an archaic clause in the labor code designed to protect employees. Even though Joe’s business was designed to benefit the workers with higher pay and better benefits, (my emphasis. I can’t count the number of times I have seen this happen here in the Philippines. Filipinos are NOT going to honor you as a saint for providing jobs. Yet another example of the cursed “Messiah Complex” so many foreigners labor under)
Joe left Panama with about $1 Million less than he started with, and three unfinished houses which he had serious trouble selling after the market turned sour…
As the story above demonstrates, there are a number of things that can go wrong with your overseas venture. Here are eight common mistakes made by expats starting or buying a business overseas, especially in the Philippines
1. You don’t speak the local language of your new country
I’ve always been amazed at the number of people who can barely speak a sentence in the local language, yet believe they are capable of running a business in their newly adopted foreign country. Most times, this is because their friends and the people they know in this country all speak English, which lends them a false sense of comfort. While it is natural to gravitate toward English speakers in any foreign country, relying on them for your business to move forward is a big mistake. If you don’t have what it takes to learn the language of the country where you intend to operate, chances are you don’t have what it takes to succeed in a business in that country either. Also, there’s a difference between knowing conversational English and knowing how to direct workers in the technical details of building.
In addition to not knowing the exact terms a Filipino would know to get what s/he needs, you have to remember that even the exact same word in English may be used differently here in the Philippines.
I’ve also found a number of situations where salespeople tried to sell me goods based on what they thought I wanted, in many cases driven by the somewhat distorted view they have about how Americans really "are".
You have to remember that American TV shows and movies are extremely popular here, so you have to continually make allowances for the fact that when a Filipino sees you and mentally “sizes you up", s/he may be thinking in terms of "Jersey Shore" or "Hell’s Kitchen" or “Flipping Houses” or some other grossly distorted fictional image of American life.
2. You have plenty of capital, so you intend to purchase an existing business or buy your way through any challenges that may arise while starting your new business
Deep pockets will either be your best friend or your worst enemy in your new overseas endeavor. The people I know who lost the most money with business and investing
overseas were – you guessed it – people that started out with lots of money to invest. In fact, I am quite thankful I had hardly any money when I started my first overseas business because if I had, I would have lost most of it. Now, if you have really deep pockets, you can probably ride out most of the challenges you will face, but you should factor substantial cost overruns, time delays, and unforeseen expenses into your business plan and your return on investment calculations. When I say “cost overrun”, I am not suggesting something might cost 20% more than your best estimate, I mean something can cost 300% – 400% more than your best estimate – plan accordingly? The fact that you cannot make a reasonable estimate is what creates the uncertainty and increases your risk.
From what I have experienced in my seven-plus years here, there is no easier path to failure than to throw your money around. You will quickly find out that:
- Your pockets aren’t as deep as you think they are. You may think this is a poor country, and by some standards it is. But there is a core quasi-aristocracy here whose wealth might well water many American eyes. Trying to "impress" people with your willingness to spend often results in no more than having them form the impression that you are ‘bastos" and a hopeless show-off.
- Paying too much and upsetting the status quo in whatever area of business you are trying to get started in does not equate to generosity and being a "good guy. It equates, instead, to being a show-off and often an insult to other business people in your niche. Americans seem much more money-driven than Filipinos to me. You can’t BUY either friends or cooperation.
3. You are counting on the low cost of labor for your business to work
While most of the developing world works for paltry wages, foreign business people often start businesses in an effort to exploit cheap labor. By “exploit”, I am not referring to setting up sweat shops or any illegal practices (although, obviously, this does happen), I am simply referring to the idea that a business will be more profitable in a foreign country because labor is cheap. From my experience, you get what you pay for. Not only are laborers typically unskilled and not capable of the same levels of productivity as you are accustomed to at home, but there are usually hidden costs to hiring labor overseas. These hidden costs come in the form of social security payments, sick pay, severance pay, or worse, threats from your angry employee that his cousin in the permits department will yank your permit if he loses his job at your company.
This is a huge, huge trap, especially for business people who are hell-bent on doing it the "American way". The overall cost of living here is on the order of 40% or so cheaper than in much of the USA.
But that’s overall. Many things, especially those items imported from the USA, are significantly more expensive.
The last lawn mower I owned in the USA was a little machine I bought at Wal*Mart for something like $79.00 on a loss-leader sale. It was … well, cheap. It ran, and it cut my grass, but it sure wasn’t anything your neighbors would envy.
Not long ago I went to a homes and building supply store, and there was the exact same mower … the same cheap "made for Wal*Mart" brand, Want to guess what it cost?
A bit over $1,000 USD! How many of them do you reckon they sell a year? My guess, not many. For $1,000 USD, I can pay my weekly yard boy to cut the grass with a pair of scissors for nearly four years, and in addition his family will eat also.
So if you think you are going to equip a business the way you feel it has to be, with all US-made brands of tools and supplies, better calibrate your business financial plan accordingly. It’s nowhere near as cheap here as you think it is if you have to buy foreign, or have things "just so".
4. Your business requires approvals, permits or licenses.
What would normally be a simple procedure back home can easily become a deal breaker in your newly adopted country. Too many times, I’ve seen newbies assume they will get the approvals and permits they need to start their business, only to see them still waiting, a year or even several years later. Many businesses are legally off-limits to foreigners, others arouse unfriendly glances from the competition, who promptly invite their government friends over for lunch to ensure your permits never materialize (see common mistake #7).
There are several agencies which rate the relative ease of doing business in any of the world’s approximately 200 countries. Typically the USA comes out very close to the "very easy" end of that list. The Philippines is typically down in the 1290’s or so.
Permits, red tape, bureaucracy, and yes, out-and-out corruption in some cases.
Not long ago I was stuck waiting for someone in the "Municipio" (Municipal Building) of a small country town. While I waited for the person to show up, I wandered around reading the various rules, regulations and notices "decorating" the walls of the lobby.
One huge bulletin board caught my attention. In a large sign at the top it proclaimed this board was the "Mayor’s Simplified Procedures" for Licensing a Tricycle.
Friends, I don’t know higher math. I sorta know a little trigonometry and never made it into calculus.
But I tell you what, I could take a graduate level calculus exam easier than I could have navigated all the various permits, fees and the offices (spread out over several towns) the "Mayor’s Simplified Procedure" laid out for the simple process of licensing a little two-stroke noisemaker.
If you haven’t done it for yourself, I guarantee you are way, way underestimating how much work it will be.
5. Everyone is doing it wrong in your newly adopted country, so you will show the locals how to do this business the “right way”
There is usually a reason why the locals are doing it “wrong” and a reason why their way IS actually the “right way” once you factor in the local customs, culture, regulations and other nuances. You should realize how narrow your vantage point is as a foreigner, and how unlikely it is that your idea will work “better” even if it makes obvious “logical sense”. People resist change no matter where you go, so “hoping” your business will change the way things are done is like the Israelis telling Palestinians to change their ways – good luck with that. Real change, if it ever happens at all, happens over years and decades, not weeks and months, and chances are your business will fail before anything or anyone “changes” to your way.
"People resist change no matter where you go." How true is that? Answer, very true. You know it’s true, You know you get upset even when they change the checkout procedures at your local library. You get annoyed as the dickens when you find out your supermarket changed how they work the express lane. Oh, and wh
en the city made that intersection on your way to work "No Left Turn", how angry did that make you?
And we won’t even talk about how you feel about the new manager at work with al those “wet behind the ears" college boy ideas.
You’re only human. And so are Filipinos. What makes you think you are going to arrive here, FOB (Fresh Off the Boat), and start telling people how you know everything better?
Who The Hell Are You, Anyway?
There’s another hidden pitfall here, one that I have fallen victim of myself, many times.
When you start telling Filipinos "how much better it is done in the USA", did you ever stop to consider that you are also saying, by inference, the "Filipinos are dumb and Filipinos don’t know how to do things"?
Maybe you didn’t mean it that way, but that is sure how it comes out, trust me. Many of us are very much “Ugly Americans”, even though we never, ever think we are.
One thing I notice many of us lack is imagination. We’re often very smart, well-educated, good-looking and rich, but we can’t transpose experience in one area into something we are familiar with back home.
Put The Shoe on the Other Foot
Suppose you were the manager of a 7-11 store back in the USA and one day a Filipino fellow came in, said "Hello, I’m new in town" (in a booming voice, of course), and then continued, "You know, we have 7-11 stores back in the Philippines, but we don’t let the customers do what you do, and we don’t carry this product, or that product, and our prices are so much cheaper …."
Get the picture? You’d be pretty pissed, especially if you had put up with Southland corporation’s common corporate BS for 15 years in order to become a store manager. In fact, I’d venture to say many of you would be downright angry, and also very hurt that this stranger hadn’t even been in your country long enough to know why things are done the way they are.
Why on earth do so many arrogant Americans figure they will come here to the Philippines and have the "poor" Filipinos fall all over themselves to change everything around to the "American Way". It’s foolish. It’s "bastos" (extremely rude). And, if you start throwing your investment money around, it can be downright expensive.
6. You have no experience or past success with your business idea
I’ve seen too many people arrive in a foreign country with intentions to start a new business in an area where they have no experience. Home builders move overseas to become bartenders, bartenders move overseas to become property developers, and property developers move overseas to start call centers. “Stick to your knitting” comes to mind here – doing what you already know how to do comes with enough challenges, when starting off in a foreign country try to avoid entering an industry or business sector you know nothing about.
I’ve mentioned this already, but it certainly bears repeating. Time and time again I hear from people who say their dream is to open some sort of business in the Philippines, mainly so that they can have an income here. When I ask them what business they know how to start and operate right now, today, the response is typically dead silence.
Even in the "business friendly" US of A, roughly 80% of new businesses fail within the first 2 years. That is, (or ought to be) a sobering statistic. I don’t know of any equivalent statistic maintained by the Philippine government, but just based on my own observation of the business I see start up and fail with alarming regularity here, I would make an informed guess that the rate of new business failure here in the Philippines is at least as high as the rate in the US.
If you want to start your own business, great. I applaud your initiative. I think in many ways it is by far the best way to go. Certainly better than a J*O*B. But don’t come here to the Philippines and make this your "live learning" exercise in business formation and management. Learn what you are doing in a safer, more business-friendly environment, or your dream of independence in your own business may very well turn into a nightmare.
7. There are large, locally owned, direct competitors in your chosen field
As an expat, you are an outsider. Your competitors are not going to be pleased about your new business, especially if you somehow defy the odds and succeed in doing something better, cheaper, smarter, or faster than they can. So don’t expect them to fight fair and improve their own businesses to compete with you. The more likely outcome is they’ll fight dirty, pull strings, talk to their connections, and find a way to stall you or shut you down one way or the other.
There Is Always Someone In Charge
And many times you won’t even know who this is. Until you get in trouble. This is huge here in the Philippines. There is someone or some agency controlling EVERYTHING, or so it seems. Legally and/or illegally, in my opinion.
Want to do something as simple as buying a cab or a couple tricycles and start a taxi service? Do you even know who controls the local franchises and how much you will have to pay … if you even CAN buy one?
Want to open a bar? Do you know who controls liquor licenses in the area you are considering? Do you even know if the people you will have to deal with are "on the up and up" or if they are Tagalog-speaking "Tony Soprano" types?
The list goes on. This is NOT a "free country" in the sense that you can just rent a building, buy equipment and open a business. And even more importantly, in many businesses, you may have to deal with people who, to put it politely, you do not want to deal with. Make sure you find out how deep the water is before you dive in.
8. You are accustomed to doing everything by the book
You should probably throw the book out the window, because most small to medium sized overseas businesses are only successful because they cut corners, operate in a grey area, bribe officials, and generally swing the odds in their favor through deep personal connections. In most developing countries,” the book” is hardly enforceable, and can be interpreted in a variety of ways. In most situations your desire to comply with precise regulatory requirements and bureaucratic processes will almost guarantee delays, and higher expenses.
This is a good rule to wrap this discussion up with.
A great many readers here,and a great many folks who get in touch with me, are engrossed in digging into the specific rules and regulations surrounding business, visas, banking procedures and other aspects of commerce in the Philippines.
They spend years, in some cases, researching, compiling and then trying to document the rules for this and the proper procedures for that. In my view, they could better spend their time starting some venture they could do online and have up and running long before they move to the Philippines, but then, I digress.
Don’t Fall Victim To AIDS (the As If Doing Something syndrome)
The point is, 90-odd percent of all that research falls under the heading of AIDS (As If Doing Something), because when you get here and actually go to some government office to apply
for a permit, or go to a car dealer to buy a car, etc., etc., it just is not going to work the way your research indicated that it would. As I am writing this, I am thinking about the fact that I only have a couple days left to go to the LTO (Land Transportation Office) and register my car for 2014. I could write along, detailed blog post about that, but guess what?
Every year the procedure changes. Every year the guy at the emissions testing shop wants some different paper, every year the guy at window one asks for something I don’t remember him asking for last year, and every year the fee structure seems different. In other words, it just doesn’t really run "by the book".
My recommendation? Sit back, relax, and enjoy things. Stop worrying and obsessing. And don’t pin your hopes for the future on starting your own business in the Philippines. Not unless you have a good answer for the eight major reasons for failure I have detailed above.
There are easier ways to make a living, trust me on that.