AEV, a company based in the UK, is a leading international manufacturer of electrical insulating resins, varnishes, and compounds used in the production of electrical and electronic components around the world. Prior to starting their U.S. subsidiary, the company had been operating in the U.S. market for nine years through an agreement with a manufacturer to license their product. Circumstances arose in 2020 that forced their hand into launching their U.S. business.
Problem
AEV’s U.S. manufacturer, who held the licensing for their product, had recently been sold to a VC-backed conglomerate, and sales stagnated. In order to grow within the market, the parent company decided at the end of February 2020 that it needed to open its own U.S. subsidiary. However, contractually, it could not start selling until October. Once able, AEV endeavored to quickly grow sales and show value without having to build a manufacturing plant of its own. Unfortunately, travel restrictions brought about by the global pandemic put additional constraints on the Managing Director.
MI’s Solution
MI understood the complexities and breadth of work necessary for AEV to meet its October 1st sales target. This challenge was heightened by some processes taking longer due to the COVID-19 pandemic. In order to keep operational costs down during this start-up phase, MI proposed a phased entry or soft landing approach, serving as a preparatory step before fully engaging in MI’s comprehensive International Business Incubator (IBI) program.
Deep Dive
Soft Landing
MI’s soft landing approach is meant to serve as a stepping stone to success, ensuring a seamless entry into the U.S. market. To support AEV, MI took on critical responsibilities in forming the legal entity, such as filing paperwork with the Secretary of State and the IRS (for the EIN) on behalf of the parent company. MI also provided guidance and support during the subsidiary’s formation, including selecting important additional service providers, such as their bank, CPA, and insurance providers.
As the business was being managed remotely from the UK, MI furnished the newly formed subsidiary with a U.S. address and phone number, ensuring uninterrupted negotiations, partnerships, and, most significantly, sales opportunities. MI also assisted with the onboarding of the new Sales Director and ensured that all order processes were established and ready to go by the Oct. 1st deadline.
Due to the slowdown in responsiveness by governmental agencies from the pandemic, as well as other service providers changing procedures in reaction to the new work-from-home reality, challenges arose. However, through perseverance and tenacity, MI was able to successfully meet the commercial launch date.
This level of commitment is shown to all the enterprises that enter our IBI program. In AEV’s case–and as part of the IBI-soft entry contract–MI’s regular monthly retainer was decreased until commercial activities from the subsidiary could commence. This allows companies to enter the market quickly without a large upfront burden.
Transition to the IBI
When AEV transitioned to the IBI from the soft-landing phase, further support came with the addition of a completely trained back office. MI handled the day-to-day transactions, including order processing and bookkeeping, as well as overseeing the specialized services necessitated by the product’s complexity. This included dispatching sample test kits to customers and meticulously tracking sample test certificates.
When customers were ready to order more product, MI’s team had to ensure minimum order quantities (MOQs) were met, address any price discrepancies (as pricing fluctuated), and even handle measurement conversions (the product was bought and sold in different measurements). This allowed the Sales Director, the sole direct employee of the U.S. entity, and the Managing Director based in the UK, who was unable to travel to the U.S., to channel their efforts into strategic growth initiatives. All of this operational support helped keep the company’s costs down while simultaneously achieving remarkable financial success in its first year of business.
Storage Solution
During this time, AEV worked with the previous licensed manufacturer in the U.S., who became a toll manufacturer for the company, as a means of circumventing the complexities of manufacturing in the UK and shipping the product overseas. The toll manufacturer also served as their warehouse, storing excess stock until it could be sold. However, as 2021 progressed, the relationship with the toll manufacturer began to decline after they were acquired by yet another business, resulting in exorbitant production cost increases.
Sensing the need for intervention, MI stepped in, offering its South Carolina warehouse as a storage solution for the hazardous inventory previously held by the toll manufacturer. With MI’s warehouse operations lead already possessing the necessary hazmat licenses, they successfully oversaw the shipping of products, guaranteeing quality and freshness due to the product’s expiration date.
Time to be Acquired
The timing of the challenges AEV faced with the toll manufacturer coincided with the parent company’s desire to be acquired. When AEV first engaged with MI, they had been weighing their options with regards to whether they should do their own manufacturing in the U.S. They had previous experience with a similar undertaking–their plant in Malaysia was a blending operation, which started with 3-4 people and grew to 19.
A replication of this successful venture was appealing, but they knew they needed to start with toll manufacturing and grow. However, the soured relationship with the toll manufacturer strained their timeline. AEV either had to find a new toll manufacturer quickly, or worse, build their own manufacturing facility too early into their U.S. launch.
The U.S. subsidiary, propelled by MI’s back-office support, generated $1 million in sales during its first year, making it an attractive prospect for acquisition. AEV seized this opportunity when it arose; they never imagined they would be able to build a robust operational business within the U.S. market and achieve a successful sale so quickly, especially considering the extraordinary challenges presented by the COVID-19 pandemic.
Once the paperwork was finalized, MI stayed involved until the new owners had a full understanding of the business, financials were closed for the previous U.S. entity, and all product and processes were transferred to the new owner.
Key Learnings
The strategic partnership between AEV and MI proved instrumental in overcoming numerous challenges during the establishment of a U.S. subsidiary. Through MI’s soft landing approach, comprehensive HR support, and effective management of operational activities, AEV successfully navigated obstacles, achieved significant sales growth, and ultimately built and sold a thriving U.S. business.