The UK is looking to exports to boost the economy and get us out of recession, but how likely is it that international trade will provide the impetus that will deliver growth?A roundtable discussion hosted by Lloyds Bank and chaired by The Business Magazine brought together experts to discuss the opportunities, the new and established markets, the obstacles, and the support that exporters are looking to receive.
UKTI has a lot to offer and ambitious aims
Rory Pereira began the discussion by outlining some of the support available from UK Trade & Investment (UKTI). He told the Roundtable that UKTI, involved in more than 100 international markets, had 220 UK trade advisers working regionally, 30 in the South East, and 1,000 staff operating overseas.
“We have international trade advisers throughout your region, and a huge amount of information, contacts, training and experience to offer. UKTI can help but we just need to get alongside the right local businesses and we can’t do that all on our own.
“We will succeed or fail on our ability to work with local partners. You should see us as your international trade arm. We don’t do what you do, but we do have an advisory network and funding at your disposal.”
He mentioned the UKTI suite of services, including:
Key UKTI ambitions are to help UK exports to double to £1 trillion with 100,000 more UK companies exporting by 2020, and the UK meeting the European average of one in four companies exporting (UK currently 1:5).
While UK’s traditional export markets have been western Europe and north America, other markets are now developing, notably with BRIC economies and CIVETS (Columbia, Indonesia, Vietnam Egypt, Turkey, South Africa). Following public sector cutbacks, the UKTI has had to be flexible and redirect its resources to areas where it adds most value for British industries. UKTI teams overseas is now heavily staffed by local business expertise rather than British diplomats. “So now you can talk to informed Egyptians in Cairo etc, who know the best local partners. Our aim is always to get British businesses in front of overseas opportunities before they are gone.”
UKTI is staging nationwide awareness events during Export Week (November 12-16).
Current international trading update
ABP’s Doug Morrison agreed that “emerging markets are the future.” Port of Southampton will handle close to 670,000 cars, up 30% on last year. “While we are seeing very good numbers in the car export business (mainly to the Far East and USA), the downside is that we are spending £150 million on expanding our container terminal and that business is currently disappointing. This reflects the UK High Street spend, because 95% of what we handle in Southampton containers is imported Far East manufactured goods.”
Morrison suggested Southampton’s container business was a good economic barometer. “UK retailers order months in advance but they are not stocking up with the Christmas supplies that we would expect. It means they have enough stock to cope with the demand out there. It tells the tale that what is coming around the corner is not any better than what we are seeing now.”
Sean Wright agreed: “None of my clients sees a consumer-led recovery. It will be more of the same in 2013.”
Morrison pointed out that 40% of what the UK exports is fresh air – knowledge and services – not something that you can put in a container. UK waste products like scrap metal and paper were still being container exported, but there are few signs of any dramatic increase in other goods, apart from cars.”
Banker David Squibb had a more upbeat message, quoting the Ernst &Young Item Club report (October15) that suggested the UK economy would have modest consumer-led growth over the next two years – contrary to the IMF’s view. E&Y argued that the Olympic, Jubilee and ‘summer of success’ boosts had not been adequately considered.
“I agree that retailer orders are down, but they are simply making sure that what they stock they can sell.”
David Murray asked about the competitiveness and local importance of Solent import-export businesses.
Morrison explained that ABP’s Port of Southampton business was broadly focused on cruises, cars, and containers. With 95% of UK imported goods coming in by sea it was an important and integral part of the UK economy, a major Solent region employer.
“But, we compete on a international sector basis rather than by location. Felixstowe is a UK competitor for container business, but equally so is Rotterdam or Le Havre. People from throughout the UK and beyond access cruises embarking and disembarking from Southampton.”
Jolyon Pope’s company exports tyres to the Caribbean and Europe “We tend to concentrate on the smaller export markets – “when the currency is right” – that the big companies don’t want to go to because of low sales volumes.” He reported cost-conscious drivers resorting to part-worn tyres and cutting back on their mileage.
“We also find that people are driving less and, worryingly, taking their cars in for brake-disc changes with the discs down to their veins,” said Julian Grazebrook who’s company has brake-disc foundries in UK (Poole) and Europe, supporting major European distributors to the aftermarket. Chinese low-cost products now predominated in the Far East and the USA. Fortunately the market in the major European countries (except the UK) still tends to be brand and quality, not cost-led .
However, Grazebrook reported that labour costs were now rising rapidly in China. “Eight years ago labour costs were completely immaterial in the cost of manufacturing. The exponential increase in labour costs is severely impacting business and it will not be many years before many of the cost benefits of doing business in China are eroded.”
Murray asked if that provided opportunities for UK manufacturing.
It may, but many organisations will just move their manufacturing to other low-cost labour areas such as Vietnam, said Grazebrook.
Shaun Parsons mentioned that China was already sub-contracting work to its sub-continental neighbours such as Vietnam, a reason for the rising economies of some CIVETS.
LOCALISM, Part 1: Chinese aspirations and home markets
Squibb remarked that Chinese consumer demand has grown rapidly as seen by premium brands such as Bentley who confirmed earlier this year that China is their number one overseas market, ahead of the US.
Pope claimed the Chinese do not like their own brands. “They aspire to buy western brands, and that’s why western manufacturers are putting up factories in China to make their brands for the home market.”
Grazebrook: “A lot of the Chinese market is now focused on China and its adjoining nations because the demand is huge, but I think there will be a great deal of social unrest in the next five years because of the massive influx into cities where there isn’t the work.”
Gary Whittle said a move to localism would not be difficult in China. “A few years ago China did nothing but sell locally, so switching back will be very easy. They are used to doing it.”
Parsons confirmed the localism. “The Chinese have taken on the Indian economic model, concentrating on its vast home market and only exporting about 10% of what it manufactures. They have seen a downturn in European business and so they are now selling to themselves, sustaining their own growth, which is perhaps something we need to do in the UK.”
Global logistics operator Whittle commented: “Imports are down almost everywhere. People are consolidating what they manufacture, selling locally and buying locally, and I think that will be the case for the next 18-24 months.”
LOCALISM, Part 2: Support for British businesses
Pereira highlighted public sector cutbacks in business support and the need for Local Enterprise Partnerships to be helped to grow into effective and supportive bodies for British businesses seeking international trade. “The UKTI is currently trying to find ways to work with fledgling LEPs, mobilise that local support and link it to central government to maximise the opportunities out there.”
As the chair of the Solent LEP, Morrison stressed that many LEPs were barely a year old and their partnerships between local business leaders, authorities, education and community interests were still bedding in. “The Regional Development Agencies were definitely over-bloated, and the Government recognised that so initially set up LEPs as exactly the opposite, with no support whatsoever – although that has begun to change more recently. We are now starting to make a difference, with the right local LEP Board to support local businesses.”
Murray asked if the Solent LEP would also be supporting inward investment.
Morrison said one problem was that LEPs had to bid for additional government funding for projects. “Let’s not kid ourselves. The vast majority of government investment will likely go north rather than south, because problems up north are perceived as more acute than here.
Pereira: “We are trying to work through all sorts of local partners we have never spoken to before, because there is no other mechanism to get to companies who don’t know about UKTI and haven’t really thought about their export potential.
“We have a huge and experienced international network at the disposal of British businesses.”
Among the many UKTI services to help existing exporters or complete novices, he exampled, a £99 scheme that takes export novices to selected overseas destinations, “meeting successful British exporters, British Chamber of Commerce members and local companies, and seeing how they, even as novices, might become part of our international exporting network.”
Are there still export novices and businesses unaware of UKTI’s help? asked Murray.
Squibb: “Not perhaps among the mid-market sector, but certainly among SMEs there is a lot of latent export potential.” He recalled one new client who showed him a stack of overseas orders that he had not progressed ‘because he thought it would be too difficult’. “If we could reach the European exporting average of 1:4 businesses by 2020 then that would generate another £20 billion.
“There is potential among SMEs; it’s about encouraging them to be clear on their goals and providing the appropriate support. Most mid-market businesses may well be exporting
already, but perhaps they need to push the envelope and explore opportunities in some newer markets. And with that aim, we’ve also been working with the CBI on their “M-Clubs” initiative to help medium-sized businesses increase their outreach to new export markets.
LOCALISM, Part 3: Solving skills shortages
The lack of suitably skilled UK workers was hampering growth, the Roundtable agreed.
“Producing 50,000 zoology graduates a year doesn’t seem to make sense because we haven’t got enough zoos,” Whittle said with irony. “The universities are getting wise to that now, but in future I think we could see universities reflecting their locality. The cost of education, living away from home and graduating with £50,000 debts is so disproportionate that people will localise and reduce their costs. If you get local people going to their local university, it seems sensible to me that education should localise its offering of skills to be appropriate for the locality they are in.”
Murray pointed out that the Southampton Solent University was already looking carefully at the needs of the local market and devising their courses accordingly.
Whittle: “Another problem is that governments talk about engaging with business, but in reality they have talk to someone at a company like BP who has no idea what is going on locally.” He admitted, there were now hopeful signs of government consultation with “local people who understand the marketplace and what we as business people want and need.”
Grazebrook spotlighted the lack of UK labour mobility. “In the States and Far East, people are much more willing to move and follow the work. In the UK we have got a north-south divide and it’s virtually impossible to get steel foundry people to come down here from the north. Part of this is of course due to cost of housing, but this argument is contradicted by the fact that it remains very much easier to employ from Poland or the Czech Republic.”
Morrison agreed that getting capable engineers to relocate from northern UK was extremely difficult due to housing, transport and general living costs being so much greater.
Clarke mentioned that one reason for offshoring to low-cost call centres was the ability to staff them largely with graduates. “We just don’t have that level of resource and capacity here.”
LOCALISM, Part 4: Is work returning? Do we darn socks?
Squibb: “In terms of UK localism and creation of jobs in the UK, we are now seeing requests for funding and investment in capital goods – new machines, tooling etc – based on export contracts. This is the first time I have seen this sort of activity in a couple of years, and it’s all for goods that will eventually go abroad.
“These are all changes that are happening but we must not kid ourselves. Emerging markets like Brazil and China are really hard nuts to crack. You may get more success in India, but it will be very slow.”
Several Roundtable members reported problems with foreign import duties, regulations, and governmental bureaucracy.
Grazebrook: “I think certain governments are wily in stimulating and supporting their own businesses in areas that they want to, through the use of import tariffs and special dispensations.”
Squibb: “A lot has changed in UK Manufacturing over the last 15-20 years, so we shouldn’t think we are going to reverse that in 2-3 years. It will take a similar timescale to get back to where we were, and that’s if we can get equipped with the right sort of skills. To move our export average up to the 1:4 EU rating will also take considerable time, and again we have to get the skillbase right. As a bank, we’re keen to support the manufacturing sector and launched a £1b funding commitment this autumn”
Pope suggested cross-trading could be a more immediate answer. “You can buy stuff from one place and sell it in another, and the actual value-added comes to Britain. You buy the goods where they are made cheaply, and you sell them where you can for profit.”
Morrison said bringing some types of offshore manufacturing back was unlikely. “We have to focus on the achievable. We have become a very consumer-led throwaway society and we won’t go back 30-40 years to where we were a manufacturing country. People are used to going to supermarkets. We don’t darn socks nowadays. We will always import from wherever the labour is cheapest.”
Grazebrook: “But, we should always retain the capability and desire to focus on for high-value manufacturing.”
Steve Clarke reminded the Roundtable that UK plc earnings are largely dependent upon ‘invisibles’ like finance and insurance, which in turn depend on providing valued service. “What the past three to four years has taught us is that if we get that value proposition wrong it has major implications for the UK economy. We are now getting back to quality and value, with proper margins etc, which makes these sectors more sustainable.”
Changes in some offshore operations was reflecting this fresh recognition of service value, and bringing work and employment back to the UK. This shift might even be a catalyst for growth, Clarke added.
Confidence, risks and the need for trusted advisers
Whittle claimed that the missing element for more exporting was confidence. “Everyone has battened down the hatches and prefers taking low-lying fruit. Exporting to Europe presents one set of new issues, but going to the Far East or Brazil would not be perceived as low-lying fruit for an SME. The time and risk in exporting further afield is seen as too great.”
There are perceived and actual legal risks too, added lawyer Wright. “The investment in time (and not just money) to build a network in these countries can be considerable, particularly if you are unaware of support from the likes of UKTI.”
Wright also feared increased protectionism, In the USA government spending cuts, increased tax and regulatory difficulties will create issues for UK exporters. “I see them going into an isolationism-type market and I think UK export businesses focusing solely on the US are in for a hard time.”
Whittle: “The regulation to move goods around the world, the expertise needed, and the liability on exporters is increasing day by day. It’s one reason people don’t export, deciding instead to concentrate on their core home activities. But, looked at another way, if less people are doing it, it’s a business opportunity.”
Parsons agreed that dealing with foreign banks, letters of credit, freight-handling and so on could be “a scary thing” for novice exporters, but so were the practical difficulties of language and travel distances and durations. Europe was quicker to get to than the Far East; the US easier to talk to than other countries. “But people do export very successfully, and we (PSP) wouldn’t be in business if they didn’t.”
Pereira stressed that UKTI is doing much more work now with banks, accountants and professional services to ease British exporting difficulties.
Parsons: “To have local assistance like that to help sell a British product is great.”
Grazebrook highlighted the need to have reputable agents abroad to accompany British exporters – an area where LEPs and UKTI could definitely help boost exporting confidence. He mentioned “the frightening markets of the 1990s in Russia and South America. They are risky places but well worth it when you are into them, but you need established roots, trustworthy local partners, people who understand how local business works.”
Are there payment and cash transfer problems?
It is mainly a combination of exchange control regulations and understanding payment terms said Clarke. “You have to build freight travel times, regulatory procedures and foreign exchange variations into your cashflow, or you can get caught out.”
Complacency was a latent risk with foreign exchange rates being relatively stable over the past two years. “So there is payment risk and exchange risk.”
The Roundtable gave examples of businesses suffering from foreign exchange market fluctuations. “Exchange rates can win or lose you the profit margin game, and sometimes you just have tell your client that the price has gone up,” said Parsons.
Grazebrook said his company had put financial hedges in place to overcome euro exchange risks. It was essential for finance directors to understand the benefits (and risks) of hedging. If the price that customers are willing to pay for your goods is eroded by 40% due to the effects of exchange fluctuations, and you have done nothing about it, you have only yourself to blame!
Clarke praised the assuring assistance of the Government’s ongoing Export Credits Guarantee Department, now operating under the UK Export Finance banner.
Pereira explained that UK Export Finance was still highly active and UKTI South East had just recruited a finance specialist to assist businesses in de-risking their foreign trading.
Clarke: “If we can get a higher proportion of businesses exporting with confidence, it won’t take long to make a beneficial impact on the UK economy.”
The recently launched UK Export Finance schemes will help level the playing field for British exporters, said Squibb. When a good proposition comes forward, the Government backed schemes can be a key factor in financing or supporting the overseas sale. The range of schemes now covers contract guarantees, export finance, credit insurance and financing end-buyers. ”This is absolutely moving in the right direction for a UK exporter to be able to tell a buyer that his bank can help provide finance to help them buy their goods.”
Eurozone concerns
Clarke: “It’s been going on so long that it almost feels there’s a steady state, and my mid-market trading customers are more confident they can deal with it. Certainly, many businesses are almost insulating themselves against eurozone problems by just not going there, and many are refocusing on more stable markets.”
“The Government says the way to break out of this flat market period is through exports. That’s fine, if you have a product and capability to export and a market that wants to buy it. International trade is currently a supply v demand debate waiting for the world to become a consumer again.”
“There are shining lights in high-end manufacturing that are starting to show real signs of growth, but the major challenge is trying to find the right skilled labour.”
Pereira confirmed that the US is still by far Britain’s number one market, but despite eurozone concerns “a lot of business is still going on there. We still export more to Ireland than India, which is crazy, but, on the other hand, so perhaps is poorly informed exporters going to Brazil.”
No-one wanted to envisage the dire outcomes if the eurozone imploded.
Shortsighted cost savings in the back-offices
Whittle raised the concern of de-skilling within ‘back-offices’ of international trading companies. “There used to be export or import teams within companies, local clerks with specialist credit expertise for example, but, with the general scaling back in industry, these functions have largely been outsourced.” Now, a nervousness has arisen within companies who feel beholden to the outsourcers. Companies don’t seem to know what they want, or how to do it. They lack internal market experience.
Parsons: “Ten years ago most companies had an export manager. Now the person handling exports is usually someone in the accounts department, and that’s probably why some markets are struggling, because the expertise is not there. That expertise has been viewed by companies as an expensive resource they can do without, but that’s a shortsighted saving.”
Grazebrook highlighted the expertise required when dealing with the intricacies of export finance such as letters of credit and performance guarantees. “The Chinese and Japanese in the 80’s, for example, were regularly trying to renegotiate prices when it suited them. They used to find some issue with the LoC, an expiry date or perhaps even the spelling of words and use that as a basis for renegotiation.”
Squibb confirmed seeing significant outsourcing over the past three to four years, often irrespective of the size of firms. “Outsourcers need to consider the impacton financing when outsourcing, as longer lead times and shipping periods can dramatically increase the amount of working capital required. Many customers use LoCs as part of the overall solution but this is by no means the only way of financing this aspect of their business.”
Clarke said Lloyds Bank had taken a conscious decision not to outsource or offshore its own front line operations, seeing them as key parts of its banking service value-chain.
A SWIFT solution that could take 15 years . . .
Squibb said there were moves to improve long standing letter of credit procedures with an electronic bankers’ payment obligation befitting the 21st century business world, but it could still take many years for the service to be fully introduced. “The new system is in its very early days. It sits on the interbank platform called SWIFT (Society for Worldwide Interbank Financial Telecommunication) and late last year SWIFT joined forces with the International Chamber of Commerce to start writing the new BPO rules. The technology and concept sounds great but to be truly successful the key will be getting the new service used all the way down to SMEs. That’s going to be a challenge and I believe the banks will need to help facilitate.
“It will give exporters a lot more confidence that they will be paid, and banks the opportunity to finance exports seamlessly. I see it being absolutely fantastic for trading businesses, providing the technology can be rolled out successfully across the world. That’s the challenge for SWIFT.”
The bureaucratic brake on international business
Morrison: “Every time a politician stands up and says we will cut red-tape and bureaucracy, it seems that we end up with more. Until we get a system that makes it easier for businesses to operate in whatever field or business climate they wish to, we are never going to be as successful as we could be.”
He exampled ABP’s five-year struggle against red-tape and bureaucracy to get permission to invest £150m of private sector money into the Port of Southampton. “It’s counter-intuitive to everything that business wants and needs to do.”
Major investors were global players, Morrison added, and UK bureaucratic difficulties were simply another reason for them to choose to invest elsewhere in the world. “We have to get regulation right, or we won’t get the level of investment that we need in this country.”
Pope suggested that the delays experienced by APB Southampton Port in getting permission to expand were very similar to the current capacity problems besetting the South East’s airports. What was needed was a new runway at Heathrow, another new runway at Gatwick and a third new runway at Stansted – with that the job would be done, no need for imaginary projects in the Thames Estuary.
Planning permissions, employment legislation, and the no-win no-fee compensation culture, all came in for strong Roundtable criticism – largely for the excessive time and costs involved for businesses in dealing with such matters.
Morrison: “I think it is incumbent on everyone, particularly government organisations, to make it easier for businesses to operate in this country. The climate is almost anti-business. They say the recovery has to be business led; surely by making legislation and red-tape less onerous on businesses you would see a pick up in growth.”
Pereira mentioned that the UK is actually seventh in the world for ease in doing business.”
It wasn’t said, but the answering Roundtable murmur translated as: ”It doesn’t feel like it!”
Is ‘Britishness’ the key to export growth?
“Yes!” said Grazebrook. “Quality and Britain are generally perceived as one and the same. In Russia they love British goods.”
Pereira agreed: “The problem we get is with British business confidence, yet invariably when companies actually get out to trade shows in other countries, their products are well received and they are successful.”
Grazebrook noted that in the 18th-19th centuries “every self-respecting Englishman wanted to go out and do things overseas, now we seem to lack that adventurous spirit.”
Pope: “Every exporter should ask themselves one question: ‘Why do your current export customers buy from you?’ In our case, it’s because we trust them to pay us. We don’t go with letters of credit. It requires you to know your customers, to meet them and understand the risks. It’s about building a relationship, and that’s perhaps why we are cautious about going further afield to places like Cuba or Venezuela.”
Parsons mentioned the assistance of shelf life and durability to the exporting of certain products. UK products, for example, could be shipped to the Far East where larger margins were gained. Western owners wanted the latest models and changed their cars more frequently, but the model-lifespan was often longer in other countries.
Morrison pointed out that our ‘Britishness’ didn’t help when it came to playing by the rules. “The EU put down new rules and regulations and in Britain we adhere to every rule, tick every box, and then we gold-plate it. In other EU countries they find ways around the rules so they work in their favour.”
And despite EU aims, regulations and penalties, things just don’t change in those countries, added Parsons.
Final thoughts on beneficial change
Squibb felt there had been a paradigm shift in government financial support for exporting business. “There is definitely more access to finance and greater collaboration about finding the right business solutions.”
Grazebrook said low exchange rates helped British exporters, although he admitted that they would and probably could not be controlled by our government. And the result would be increased cost of imports and likely inflationary pressures, which brought its’ own issues. However, incentives for smaller companies which currently did not export, most likely through reduced taxation on their incremental profits or turnover, was not an unfeasible option.
Pereira reminded the Roundtable that the Government already provided incentives through heavily subsidised trade show access around the world, travel grants, and match-funding for certain export-linked activities.
Grazebrook: “That’s all slightly short-term. You need a mindshift of the SME who has never exported before. It’s not just about visiting trade shows, but why they should dramatically change their business operations, what should their strategy be to reach export markets."
Steve Clarke:
Area director, Lloyds Bank, Wholesale Banking and Markets
Julian Grazebrook: Group finance director, Eurac Group, brake disc manufacturers
Doug Morrison: Port director, Associated British Ports (Port of Southampton)
Shaun Parsons: Director, PSP, worldwide logistics (Southampton Boat Show sponsor)
Rory Pereira: Deputy regional director, UKTI South East
Jolyon Pope: Director, Merityre Specialists, UK retail and exporting of tyres
David Squibb: International trade director, Lloyds Bank, wholesale banking and markets
Gary Whittle: Commercial director, Meachers Global Logistics
Sean Wright: Partner, Shoosmiths, solicitors
David Murray: Managing editor and publisher of The Business Magazine, chaired the discussion
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