Features
9 Feb 2016 11:27am

Foreign riches

Trading overseas can be a means of growing a customer base, reducing overheads and increasing turnover. So why do so many businesses remain reluctant to get involved, asks Nick Martindale. Additional interviews by Amy Duff

One of the signs of a healthy economy is generally seen as the value of goods and services it exports as opposed to imports – the so-called “balance of payments”. By this criterion at least, the UK has much to improve on; the deficit widened to £34bn in 2014, despite recording its highest ever surplus in services at £86bn, according to the British Chambers of Commerce (BCC). And the government target of increasing exports to £1trn by 2020 – announced in 2012 – appears hopelessly unrealistic.

“We’ve been quite vocal in terms of the government’s target, and we’ve stated that if things remain the way they are then we’re off target by 14 years,” says Sukhdeep Dhillon, global economic adviser at the BCC. “That means that businesses aren’t exporting as much as they should.”

In fact, things appear to be getting worse rather than better. ICAEW’s Business Confidence Monitor for the third quarter of 2015 found export growth fell to just 2.2% over the last year, the weakest reading since 2010, sparked by the rise in the value of sterling against the euro and concerns over the health of the Chinese and other emerging economies.

Despite this, trading overseas – whether exporting goods or services or drawing on foreign suppliers – is still a compelling proposition for some organisations. Research by commercial insurer RSA found that 26% of UK small businesses use an overseas supplier and 24% have customers outside the UK. It also found, however, that 56% of business owners are held back from growing internationally due to fears of the UK leaving the EU, and 75% want more assistance from the government to help them expand abroad.

New and used welding equipment supplier Westermans International, based in Leicester, has benefited from looking overseas. “We’re a family business that has been going over 50 years, and were initially totally UK-based,” says Claire Spillane, finance director. “In the early 1990s people got in touch with us from overseas and we started to supply them, and then my father went on a couple of trade missions to New Zealand and Greece.”

In 2009, the business began to actively seek overseas customers, making use of pay-per-click advertising, and now around half of its sales are to non-UK customers, mainly in English-speaking areas including Nigeria, Ghana, Malta, Ireland and Canada. “We’ve had something like 125% growth since 2009, and most of that has been due to the push of the international trade,” adds Spillane.

 

We've had something like 125% growth since 2009, and most of that has been due to the push of the international trade

Claire Spillane

The government is keen to see more of this. But the BCC points to a specific issue around the lack of new businesses considering trading internationally. “Around 50-60% of our exporters have been trading for over a decade, as opposed to 6% which are new exporters,” says Dhillon. “That shows that we’re not developing a pipeline of new exporters, and that’s a key area to focus on if we are to achieve the target.” She identifies a number of reasons why these younger businesses are being held back, including a lack of access to finance to fund overseas trips; uncertainty over how to meet the right contacts once abroad; and a lack of skills back in the UK, which prevents them from being able to focus on new markets.

ICAEW has held a number of roundtables with small businesses where members met with UKTI to discuss stumbling blocks. It also fed into a BIS Select Committee inquiry, which led to a call for more financial incentives such as export vouchers or a tax relief for small business, which reduce the upfront costs and risks. “A lot of companies don’t see the benefits of exporting, simply because they’re quite comfortable with how things are,” says Stephen Ibbotson, director of business at ICAEW. “They see international travel and working out how things happen overseas as potentially disruptive to their lives.” Painting a positive picture on exporting should go hand in hand with advice, adds Ibbotson, or a framework in which businesses can receive “whole of life” support by mapping each stage of the export journey. “Simply raising awareness is half the battle,” says Ibbotson. “Small businesses lack the necessary digital infrastructure and our member feedback has said the quality of the UKTI website is particularly poor,” he adds. “The government must look to expand its digital horizons. It could connect SMEs to global markets by re-opening the Broadband Connection Voucher Scheme, for instance.”

One of the main issues any business owner would need to overcome is fear of engaging with the unknown says James Berkeley, managing director of Ellice Consulting and author of The Five Myths of Going Global. “Clients may perceive that it will distract from their core business in the UK and that might be quite a reasonable fear,” he says. “But the fear that they don’t know the market, how to price, how to deliver or sell and they might lose money is more of a personal fear; an emotional fear rather than a logical one. There are businesses that just want to make money doing more of what they do now, because they are fearful about change.”

Paul Edwick is chief executive of Fairy Glam, which retails the Lucy Locket brand around the world, including to the Gulf States, Australia, North and South America, and even Japan, and manufactures its products in China and Indonesia. He also believes much of the decision comes down to the characteristics of the people involved. “I’ve always been prepared to take a bit more of a risk than people in general might,” he says. “If I’ve got to be criticised I’d sooner it was for taking a bit more risk than being over cautious.”

The use of distributors can help, suggests Duncan Montgomery, a tax partner at Whittingham Riddell, particularly where individuals initially get involved in international trade. “We often talk to people with between £1m and £2m turnover,” he says. “They’ll go to a trade fair overseas to try to sell a product direct but it’s distributors who get interested. If they have someone in France to take the products and sell them on, then they only really have one French customer or maybe two or three, so it’s not as risky as you think.”

But distributors can also inject an added element of risk, warns Richard Prior, deputy chief executive at The Risk Advisory Group. “The organisation will have to take steps to ensure that the intermediary is fit and proper, will not be paying bribes to win sales and is not a vehicle to facilitate corruption,” he says. “If end-buyers of goods or services to be supplied via such intermediaries are government-controlled entities, the potential corruption risk will be accentuated. The Bribery Act requires companies to put in place adequate procedures to ensure that corruption does not occur.”

Edwick identifies logistics as a major issue. “I’m about to move products from the Far East to the US and there are a whole host of new challenges around understanding the terminology and the acronyms,” he says. “They can have different terminology for similar, but not the same, activities. That can be difficult; it’s delayed our launch into the American market by probably six months.”

 

There are a whole host of new challenges around understanding terminology

Paul Edwick

Import restrictions can also cause issues in certain markets, adds Spillane. “Brazil has a mass of restrictions so we can’t supply used equipment to it, and there’s a similar problem with India,” she says. “It introduced a ban on certain products going in, including one of ours, and our trade just dropped off.” Her advice is to use a trusted freight forwarding company that takes care of the documentation, and to work on a to-port shipping basis, rather than taking responsibility for moving goods internally in a foreign country.

Foreign exchange rates can also be a challenge, and potentially a significant risk if markets move the wrong way. There are a number of options here, says David Lamb, head of dealing at foreign exchange firm FEXCO, including the use of forward contracts locked in at a fixed rate, and both limit orders and stop loss orders, which automatically trigger a trade when the market hits a certain point. “If the exchange rate moves in your favour, this allows you to trade at the best possible rate, but if the rate moves against you, it allows you to cut your losses before it eats into your natural margin,” says Lamb.

Coping with different cultures is another issue which comes up regularly when engaging in international trade, and there are many warning tales. Montgomery tells one about state dinners in Korea, where the protocol is to wait for the man behind you to cut your food before you eat it, and not to pick up your own knife and fork until this has been done. For his part, Edwick recalls ending up in the private rooms of a restaurant with a Chinese supplier, with the expectation that everyone take part in karaoke. “It’s a terrifying thought to have to sing a song but it doesn’t matter how bad you are, you have to sing,” he says. “There are stories of people who have lost contracts because they’re too European and won’t do it. Have a couple of whiskies and get on with it.” Language is clearly also a barrier; 18% of people reported this was an issue in the BCC research.
For those who are interested in exporting or trading overseas, there are a number of sources of help. Initiatives such as the Business Growth Service can assist small manufacturers to help them meet the different quality standards, as well as pointing them towards organisations such as UK Trade and Investment and UK Export Finance, says Ian Pateman, business growth manager. Chartered accountants, too, have a role to play, particularly around advising over the structure of any business deal when engaging in partnerships, adds Montgomery.

Ultimately, anyone thinking of going down this route needs to ask themselves if they have the requisite skills, mindset and experience, suggests Berkeley. But he also makes the point that any such forays are best done from a position of strength. “That means your core business is profitably growing, you have talented people, an abundance of innovation and you’re excellent in implementing strategies consistent with the goals on which you’re trying to build a company,” he says. “If you’re doing it from a point of weakness, it’s a lot more risky and you have a lot more fear.”

Those who are brave enough to look beyond their home country, however, could be set for quite a journey. “I like going overseas and dealing with people from different cultures and I’ve been able to meet people and visit places that I wouldn’t otherwise have got to,” says Edwick. “That’s one of the reasons why some people do it, and other people don’t. It’s a very personal decision but I love it.”

Mark Lawrence, finance director Ercol

"We had strong growth figures in 2015 and successful new designs in upholstery, bedroom and dining, which meant we have been able to grow market share. Ercol is in the early stages of expanding internationally and this year we are opening with retailers in Europe (Benelux, Germany and France) and the US (within several regions). Since we are relatively new to this we are yet to discover the pitfalls and perhaps theres the rub that each business has to discover these itself. The key benefits of exporting are a diversification of our market and hence our risk, so were not just exposed to the UK market. And our ability to grow our UK production hinges on being able to drive our export growth. One of the difficulties is how you access good quality information, particularly about all the different tax and legal regimes in the different countries. Were having to find that information ourselves at our cost. As a manufacturer, we got access to some very good academic consultancy through the Manufacturing Advisory Service. But there doesnt seem to be anything similar for exporters. Made in Britain still carries an ethos of quality and integrity. We also have a great story to tell as a family-owned business that has been designing and making beautiful furniture for 95 years. Exporting does feel like were starting from scratch: trying to establish distribution and brand awareness will take a long time and a lot of investment. But we are excited: youve got to eat the elephant in bites havent you?"

 

David Richardson, chief executive Pivotal Defence

“Our company produces backpacks and belts for the military. It’s quite a niche market. I had to ask myself whether or not I could export: what licences are involved? What’s the legislation? How do I find customers; how do I trust them? I had such a headache trying to set up a dollar bank account. It is the basics that cause issues. But all you’re trying to do with exporting is hit the same market in a different country. Our international work is contract work to foreign governments. We offer a lifetime’s warranty – we stand by our Made in the UK badge but it can be difficult to explain to someone why your product is more expensive. We’re fortunate that our primary market is the GCC countries, which buy high-end kit. There is no issue that I have faced, or am ever going to face, that someone else hasn’t faced before me. But we learned everything as we went along. There is nobody [in government] to give you a practical answer to a practical problem. That’s why I’m setting up an export consultancy. We’ve put people into three categories: that they lack the finances to export; they lack the customers to export to; and they lack the understanding of the regulations. We think 90-95% of people are going to be in one of those three categories. It’s not that it’s difficult to do, it’s outside peoples’ comfort zones. If we just sell in the UK the business ticks over. The international market is massive. We’re confident; we’ve got some good orders coming in. If we complete on the orders we’ve got now it could sky rocket."

 

Paul Edwick, chief executive Fairy Glam

“The markets we operate in are super-competitive but we’re happy to keep it that way because we are trying to be super competitors. We’re a B2C business, we sell enormous amounts on Amazon, and there is no more competitive place to go, but we are putting in 20-25% sales increases. The first thing with exporting is, you’ve either got something inside you that says you want to do it or you haven’t. All I’ve got in front of me are business ideas, stuff to do! The £1trn export figure is bunkum. The government needs to find those people who genuinely want to export and give them what they need. You run in to red tape all over the place: different terminology, different regulations. I’m in the insane position of filing VAT returns in the UK, Germany, France and this year in Italy. We’re five people here… UKTI will give me some help on all of this, but with the issues I have I find I’ve just got to sit down and try and solve them myself and if I can’t then probably nobody else will solve them for me. Why am I doing it? Because we think over the next five years we can scale the business between 10 and 20 times. It will be a financially interesting thing to do, and we’re keen to prove it can be done, despite all these obstacles. We design our own products so we operate in a narrow niche. We think we understand that niche pretty well and that’s where we’re staying. We’re not veering out horizontally, this is vertical: let’s sell the same product in lots of different markets."

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