Increasing globalization leads corporate America to examine options overseas.
Commercial real estate professionals who do most of their
business in the U.S.
often focus on the local rather than the international picture. Yet in today's
fast-globalizing economy, that may be a short-sighted stance
to take. In the last 10 years, the world has become a much smaller place and U.S. real
estate markets already are affected. For example, consider how the increase in
volume of Asian imports is changing the U.S. warehouse and distribution
industry. By the same token, corporate America's
acceptance of outsourcing is sending U.S.
real estate executives to such markets as China
and India to oversee
development, acquisition, and leasing of space for U.S. companies. Sooner rather than
later, more globalization factors are going to affect local real estate
markets. Those who are aware of where we are headed are better able to act,
rather than respond, to these events.
The Corporate Revolution
Strong market forces have changed the way corporate America and the
world do business today, particularly in relation to emerging global markets.
These forces of change have created a new measure of success in terms of
companies competing in a world gone "flat," according to New York
Times reporter Thomas L. Friedman in his best-selling book, The World Is Flat:
A Brief History of the Twenty-First Century. Technological, political, and
economic changes in the last several years have shrunk the world from small to
tiny and flattened the playing field, Friedman contends, giving the power to
individuals to collaborate and compete globally. As a result, old business
models involving centralized control and minimal leveraging have given way to a
new model that allows for leveraging of new processes and creating
opportunities for horizontal collaboration.
This new paradigm even affects the course of emerging
businesses. For example, a recent venture capital conference in Silicon Valley revealed that today's venture capitalists
are far more critical of new business offerings than in the past. A primary
consideration for funding a new company is assurance that the business model
demonstrates a global deployment of staff and resources. The 20/80 rule
dictates that new firms invest only 20 percent of the funds in the U.S. and 80
The logic is simple. Venture capitalists have seen that
resources in markets such as India
are less expensive, readily available, and operate largely on a 24/7 work
ethic. By taking full advantage of these resources, companies are leveraging
the venture capitalist's investment fully, translating to a greater return with
a more balanced business plan.
Managing a Global Team
Fortune 500 corporations have been outsourcing non-core
business services to India
for years. Clearly, this is not a passing trend, but rather a global business
But corporate America has found that managing a
global team requires adaptability, which can be challenging. Most companies
manage existing business activities well, but find it much more difficult to
incorporate long-term changes into their global business plans and operations.
ingrained in the heart of most organizations are three
basic barriers to adaptability:
• management team inflexibility;
• increased organizational complexity; and
• poor alignment between current resources and future opportunities.
photo caption: Shanghai, China, with about 38 million sf of office space, has a 6.8 percent vacancy rate and an average rent of $41.32 psf.
Overcoming these barriers to adaptability requires a
rethinking of an organization's "social architecture" - the bringing
together of individual behavior, structure, and culture, which determines a
company's long-term performance.
Approaching Global Expansion
To successfully expand globally and maintain a competitive
advantage, a market-driven strategy combined with a respectful and cautious
approach to foreign markets is necessary. Crucial to a company's global
viability is the ability of its top executives to think and act indigenous in
each market while increasing international reach. The business strategy should
not be limited to establishing a geographic presence in China, India, and other emerging markets,
but should specifically outline the resources inherent to each region to take
advantage of existing and future business
opportunities and ensure an understanding of local industry, customs,
and cultures. As with any new endeavor, doing one's homework in advance - in
this case examining legal, financial, and real estate regulations and practices
- is a prerequisite for success.
Corporate real estate service providers are helping
companies meet this challenge by replicating their traditional line of
integrated services - brokerage, consulting, transactional, and lease
management - on a global scale. Often that requires partnering with local
resources and ultimately committing more resources to offshore markets,
possibly at the expense of U.S markets. Whether the 20/80 rule will apply to
multinational real estate companies remains to be seen, but clearly, if clients
are moving to global markets, corporate service providers must move with them.
While India and China currently attract the most attention from
corporations, experience in these countries sets the stage for further
exploration into other global markets, Southeast Asia and Latin
America in particular.
The Asian Attraction
There is a compelling rationale for doing business in
Asia, particularly in India
The business environment in this dynamic region is constantly evolving, and China and India will continue to be the top
markets to watch in coming years. U.S.
companies are rushing to do business in Asia
for a number of reasons, including:
• lower-cost raw materials, components, and products;
• supply chain improvements enabled by locating closer to
customers who are increasingly building plants in Asia;
• relatively inexpensive, educated, and seemingly
unlimited labor: for example, direct labor in China
runs at roughly one-tenth of U.S.
• access to growing consumer markets in the world's most
• low cost of capital and a myriad of tax incentives.
While both India
and China are recipients of U.S. corporate-funded growth, China has
received more real estate development attention, primarily because of its
potential for consumer growth. [For more information on India, see
"India Calls," CIRE, Jan./Feb. 2006;
www.ciremagazine.com/article.php?article_id=894] For example, China has 38 cities with more than 1 million
people; the U.S.
has nine. China's labor
force is nearly 800 million people; the U.S. labor force is 147 million
people. With such a clear demographic advantage, China has emerged as a major
business, economic, and political force.
direct investment in China
includes manufacturing, hospitality and chain restaurant projects, and
companies have established "more than 20,000 equity joint ventures,
contractual joint ventures, and wholly foreign-owned enterprises in China. More
than 100 U.S.-based multinationals have projects in China. Cumulative U.S. investment in China
is estimated at $54 billion, through the end of 2005, making the U.S. the second-largest foreign investor in China,"
according to the U.S. State Department.
Potential technical breakthroughs to watch for in China include
plant genetics, biosciences research, wireless applications, semiconductor
device development, flat panel technology, automotives, and online games. These
growing industries ensure that China's
future in research and development is solid.
The country's leadership shows a great deal of interest
in intellectual property development. Recently appointed generals have all
completed postgraduate studies, and all are firm believers in the application
of technology. As technocrats, they do not believe China can become an economic power
without proprietary technology, and they chafe at the idea of paying royalties
on core technology and protocols.
photo caption: Monterrey, Mexico, was recognized by Fortune magazine as the "best city for business opportunities in Latin America."
will continue to be the top markets for corporate expansion in the coming
years. A combination of abundant resources, highly educated, low-cost labor
forces, 24/7 work ethics, labor and tax incentives for multinational companies,
and rankings as primary consumer demographic opportunities in the world for
growth, they show no signs of slowing down. Other international markets to
watch in terms of new outsourcing solutions will include Vietnam and
select Latin American countries.
challenges will continue to impact the current wave of global expansion,
including changes in interest rates, oil prices, terrorist activities, and
governmental trade restrictions. Still, the impact of globalization is too
large to be ignored.