29 July 2020

Due South: What Canadian businesses need to know about expanding into the United States

Questions? Ready to get started?

Running a business is daunting enough, requiring endless amounts of ingenuity, time, energy and commitment. After beating the odds and growing, expanding to new markets brings its own unique set of challenges and considerations for every business owner, whether they helm a small- or medium-sized businesses or even large corporations.

Once the COVID-19 crisis subsides and an economic recovery takes hold, the United States remains the obvious choice for Canadian companies looking to expand. According to our 2019 Navigator Surveyi of more than 9,000 corporations around the world, Canadian businesses continue to look predominantly to the U.S. as their trading partner of choice. Just over two-thirds (67%) of Canadian companies polled told us the U.S. is one of their top three trading partners, with China and the United Kingdom (at 17% and 13% respectively) in a distant second and third place. A direct presence in the United States, like a sales office, a retail outlet or American partners, can help Canadian companies capture even more of the U.S. market and drive sustainable growth over time.

The Navigator Survey found that the U.S. is attractive because of proven customer demand, favourable partnership opportunities and the advantages that come from new trade agreements. The U.S., as well, has the largest economy in the world, and is a massive market with affluent consumers, especially in its major urban centres. There’s a common language between Canada and the U.S., similar cultural references and geographical proximity -- it’s relatively easy to hop on a plane at 6 a.m. to make it stateside for a business lunch.

The low Canadian dollar also benefits Canadian exporters. Shipping costs are considerably lower to the United States than they are overseas. Favourable tax exemptions, including those contained in the Canadian-United States Income Tax Treatyii, exist between Canada and the U.S. that aren’t available anywhere else in the world. There is a robust advanced manufacturing ecosystem across the country. And the American workforce, if Canadian companies are considering setting up offices in the U.S. to be closer to customers, is productive and well-educated.

Considerations

None of this guarantees success, of course, particularly for smaller Canadian companies squaring off against much larger U.S. firms or international competitors.

One area to watch is the protectionist, “America First” policies that have strengthened under U.S. President Donald Trump and aren’t necessarily expected to ease in the post-pandemic worldiii. As recently noted by the Conference Board of Canada, export bans on medical supplies during the peak of the COVID-19 crisis are escalating a trend toward broader protectionist measuresiv, and should they be extended indefinitely, they’ll certainly have an impact on U.S. trading partners and Canadian businesses hoping to expand into the states.

With unemployment levels that threatened to reach as high as 20% and a presidential election looming on the horizon, it’s expected that both Republicans and Democrats will keep this narrative front and centre in the short-term to appeal to voters that want to see a more self-sufficient America. Given the U.S. is Canada’s biggest trading partner, increasing American protectionism could have a considerable impact on Canadian businesses that export to or import from American partners.

Canadian businesses aren’t naive about these challenges. In the Navigator Survey, two-thirds of Canadian businesses (68%) said they believe U.S. protectionism is on the rise, but still almost nine in 10 (86%) have a positive outlook for cross-border commerce. They said they intended to address protectionism by reducing costs (25%), changing their offerings of goods and services in affected markets (25%) and entering into joint ventures with local companies (24%).

Nonetheless there are still some big challenges facing entrepreneurs when they’ve made the decision to expand into the United States that can stand in the way of conquering the U.S. market.

“First and foremost, Canadian companies must prepare themselves for intense competition when entering the U.S., because it's a market 10 times the size of Canada,” says Daniel Leslie, Senior Vice President, Head of Client Coverage & Deputy Head of Commercial Banking, HSBC Bank Canada.

“That means companies must focus on how they're unique, different and able to create value for customers. Particularly during and after the pandemic, companies must ask themselves if there are better or easier ways to reach their customers. How has the supply chain changed and what opportunities does this create?”

Here are some pitfalls to watch out for, pertaining to businesses of any size:

  1. Shooting for the moon: Now is not the time to go big or go home. It’s critical to keep expansion plans manageable. Start small, focus on a particular region or community, and nail it before considering pursuing a broader market. Finding the right niche for your expansion is critically important and it’s better to learn from mistakes made in a smaller market then to get it wrong in a mammoth one.
  2. Not enough market research: Is there a demand for your product? Who are your competitors in the region where you’re looking to expand? What’s your competitive advantage over those rival companies? Is your product “borderless,” meaning it has no obvious Canadian fingerprints and will appeal to a wide range of potential U.S. customers, who tend to prefer to “buy American?” How competitive is your market segment? Businesses need to intimately know the answers to these questions if their companies are to succeed in the U.S.
  3. A failure to grasp U.S. rules and regulations: A failure to comply to them, even unknowingly, will doom your expansion plans. Make sure you’re fully apprised of all tax implications, both federally and in whatever state you’re eyeing, and prepare to fully adhere to them. Consult with accountants who specialize in Canada-U.S. trade; hire one in the U.S. to join your team if you have the budget. Tax laws, don’t forget, vary from state to statev. To get around some regulatory obstacles, look into possible alternative paths into the market, perhaps by partnering with an American firm to distribute or sell your goods.

“Expanding companies need a well-defined network of local experts – lawyers, accountants, financial advisors – that can help them navigate the variety of nuances between the two markets,” says Leslie. “There are lots of similarities between the two markets but a lot of important differences as well, and having a clear understanding of the landscape is vitally important for any Canadian company with U.S. expansion ambitions.”

Small businesses and startups should check to see if they qualify for government grants or programs to help them expand and build an export market. There are also online resources available that can help in terms of market research, including Export Development Canada’s Export Help Hub. Trade Data Online provides trade statistics by product, country or U.S. state, and can even be employed to see if Americans import specific products from the other countries. That’s invaluable market research for small businesses as they map out their expansion plans.

“It may sound cliché, but it’s the truth: organizations that have a well-thought-out strategy in place before expanding do much better in the US that those that don’t,” says Leslie.

Medium-sized businesses with travel and hospitality budgets should network, network, network once social distancing restrictions have eased. When trade shows and other events are back up and running, attending them could help connect entrepreneurs with potential partners or customers. If these are slower to return than hoped, investing in technology to enable remote connection with potential partners and customers will be vitally important. Spending on education and training for team members is also important, especially since they’re going to be grappling with the regulatory, currency and tax headaches that can go hand in hand with expanding into the United States.

Large corporations need to have a war chest on hand and prepare realistic financial estimates for their expansion into the United States that could include everything from finding partners to large-scale marketing and advertising buys in big and expensive markets. They must also ensure they have the organizational capacity to support expansion, since it may require them to create new teams and departments to oversee the foray into the United States. It will also be crucial to establish an office and a team in the U.S., comprised of local hires who understand the market, the business culture, competitors and compliance regulations. A physical presence can also provide Canadian organizations with access to future U.S. stimulus financing in times of market uncertainty, and can help to mitigate potential negative impacts of future “America First” policies.

“Any business needs a network of partners who can help unlock new markets, make introductions to potential clients, advisers and suppliers and help secure capital if needed,” Leslie said. “There are also extremely strong entrepreneurial communities in many large U.S. cities that Canadian owners should quickly tap into, in addition to connecting with the relevant city or state chambers of commerce and industry associations. Working with a partner like HSBC that has experts on the ground in the biggest U.S. markets can help to make those early inroads seamless.”

The United States could fuel amazing growth opportunities for any company, regardless of size. But every business pondering American expansion must be fully prepared to take on a truly complex market, and ensure they’ve done due diligence on every front before they take the leap.

Disclaimers

© Copyright HSBC Bank Canada 2020. All rights reserved. No part of this document may be reproduced, stored, distributed or transmitted in any form without the prior written permission of HSBC Bank Canada.

The information presented is not meant to be comprehensive and does not constitute financial, legal, tax or other professional advice. You should not act upon the information contained in this document without first obtaining specific professional advice. While reasonable care has been taken in preparing this document, HSBC does not make any guarantee, representation or warranty (express or implied) as to its accuracy or completeness. The information presented in this document is subject to change without notice.

Certain of the products and services offered by HSBC and its subsidiaries and affiliates are subject to credit adjudication and approval. This document does not constitute an offer to provide the services and products described and the provision of such services and products remains subject to contract.

“HSBC” is a trademark of HSBC Holdings plc and has been licensed for use by HSBC and its affiliates.

You are leaving the HSBC Commercial Banking website.

Please be aware that the external site policies will differ from our website terms and conditions and privacy policy. The next site will open in a new browser window or tab.

You are leaving the HSBC CMB website.

Please be aware that the external site policies will differ from our website terms and conditions and privacy policy. The next site will open in a new browser window or tab.