Against a backdrop of uncertainty and market volatility, with business confidence monitors fluctuating between optimistically upbeat and cautiously sluggish, and political leaders from China, Europe and the US exchanging blows over free trade agreements, how realistic is it to expect smaller businesses to seek growth outside of their familiar home territory?
For UK SMEs in particular it’s a precarious time. Weighing up the potential to add value and longevity – the Institute of Export says companies are 34% more likely to stay in business if they start exporting – against the prospect of a different trade landscape after 29 March (“Brexit day”) raises more questions than answers.
The uncertainty has many businesses tied in knots, especially those that export to the EU, currently the largest market for UK exporters. As ICAEW’s head of enterprise Nick Levine points out, the status quo is unlikely to continue. “If the EU is where we’re having most success and where there’s appetite for exporting, then it’s reasonable to think there will be some kind of disruption.” But while international trade remains critical to economies – Germany exported goods worth more than €1.4trn in 2017, for example – governments around the world will campaign to encourage businesses to export, in order to drive growth, job creation and long-term prosperity.
You may recall former UK chancellor George Osborne targeting £1trn of goods and services exports for the UK by 2020 (exports were £621bn in the year to June 2018). The current “Exporting is GREAT” campaign led by the Department for International Trade (DIT) is part of this government’s ambition to increase exports as a proportion of UK GDP to 35% (it was 30% in 2017). DIT describes it as the most ambitious export campaign ever, created to drive substantial economic growth, while the British Exporters Association (BExA) welcomes the “whole of government approach” to export. But the campaign was launched in 2015, before the EU referendum, and while the government looks to strengthen ties with countries outside the EU such as China, India, the US, Australia and New Zealand, Brexit “remains the single most important issue affecting the UK’s ability to trade overseas in both goods and services”, according to BExA.
The uncertainty around what happens when the 21-month transition period theoretically begins in April is undoutbtedly reflected in various pieces of research that were published in 2018. Feedback showed that SMEs were largely behaving true to form – optimistic, resilient, agile and opportunistic – but were still concerned by Brexit and its potential affect on business. In ICAEW’s latest piece of research, exporters said they would continue to pursue international trade but listed Brexit, regulation and competition as the top challenges when selling outside the UK.
In its sixth annual survey of over 1,000 SME decision-makers in September, logistics firm CitySprint found that many SMEs were confident about their future, and international trade remained part of their strategy. “It’s encouraging to see that small and medium businesses have continued to maintain their optimism in the face of uncertain economic times,” said CEO Patrick Gallagher. But, he added: “With Brexit just around the corner, it’s worrying that the smallest members of the SME community are the least prepared for it, with the large majority having no plans in place yet.”
More recently, BDO’s European Export Index for Q4 2018, which distils data from confidence monitors around Europe to provide snapshots of export markets in Germany, the UK, France, Italy and Spain, said exports picked up marginally in Q4, suggesting export growth will increase following a disappointing performance in Q3. But a slowdown in economic growth in China and the US will affect external demand for EU exports and intra-EU trade will be dampened by meagre GDP growth. According to the report’s author Peter Hemington, a corporate finance partner at BDO, a graph revealing export growth from 2011 to 2018 is particularly illuminating.
“The UK has had a marked fall in export growth and that’s since the back end of 2016. It’s more marked than anything else going on in that chart, and what that’s saying is exporters are finding it a lot tougher and are not expecting exporting to grow. That’s a consistent picture over quite a long time now. “You would usually expect a decline in sterling – even marginally – to be a positive, but people are generally negative.”
But this is no time to batten down the hatches: “Where there is change there is opportunity,” adds Hemington. “We would be advising people to embrace the opportunities that might arise from Brexit, to maintain your growth outlook and extend your reach.” In the event of a no deal, he cautions, that might be trickier.
“That would be a potentially big negative for the UK economy in terms of the sudden adjustment of complying with a completely different trading regime.” The general message from business support organisations and consultants is to embrace the opening that change brings, including export. The good news is that support is widely available for UK SMEs, via: the DIT’s export advocates, a nationwide network of UK companies acting as ambassadors for export; ICAEW’s export community, which has 2,000 members for peer-to-peer support; Growth Hubs, local public/ private sector partnerships led by Local Enterprise Partnerships (LEPs) that link national and local business support; a local chartered accountant; or the Institute of Export, which has an action plan for beginners.
“Once you’ve saturated your domestic market it’s natural to start looking for new markets,” says Institute of Export director general Lesley Batchelor. “International trade is a great learning curve because you find out how to standardise your product and take into account people’s preferences, which nearly always improves the end product. Businesses begin to grow a great deal when they start to export. But there’s a tendency to infer that exporting is easy, which it only is once you know how to do it. We’re big on helping everybody learn how.”
Getting your market right is crucial, continues Batchelor “and there isn’t a general rule of thumb. Certainly somewhere close by, or sympathetic to what you’re trying to do.” Think about what you’re offering, she adds, and whether you could target one city in a highly populated country like China, which has more than 100 cities with over one million residents. Emma Jones, founder of Enterprise Nation, says many businesses are already looking further afield. “Around a fifth of our members export, the majority of these are trading within the EU simply because it is currently quicker and more straightforward. What we are seeing during this pre-Brexit planning period is that many are exploring beyond the EU, predominantly Asia. They are also looking to shore-up the domestic market, in terms of sales and raw materials. Many are delaying or bringing forward product lines to avoid gridlock in April.”
It’s inevitable that the conversation returns to the potential trade implications of Brexit or more specifically a no-deal Brexit. This outcome would lead to the immediate imposition of WTO tariffs on goods flowing from the UK to the EU, says BDO. This would imply tariffs of around 35% on dairy products and 5% on transport equipment and chemicals, hitting some exporting industries hard. Batchelor says her organisation has been working with HMRC to produce training courses on customs procedures.
She adds: “You’ll find most people have got plans in place if they are exporting. If they’re exporting to the EU and they’re part of a supply chain my money is on them having set up a warehouse or a manufacturing function somewhere in Europe. If they’re bringing in raw materials from Europe I would suggest they are probably looking at sourcing them from within the UK. “Everything is going to hinge on rules of origin. Where does the EU touch your business? Make sure you understand how the rules of origin work: are you going to skew somebody else’s country of origin by selling to them, or skew your own?”
If a no-deal Brexit looms, says BDO’s Hemington, “start thinking whether to conserve cash, strengthen the balance sheet, do all the things you do when you’re about to suffer a major dislocation of markets. The problem with that is it compounds the problem.” ICAEW’s Levine says communication at this point is vital. “Thinking ahead, exporters should be talking to their key customers to try to understand in advance what the potential issues will be. Whether it’s around increased costs or supply chains or logistics: if you’re working with customers that need products just in time, can you get to them in time to meet their needs and if not, could you look at those customers doing advanced ordering? Do you need to buy, manufacture or keep more stock in advance; do you need warehouse facilities in different locations? Try to work through those problems together because everyone wants to have the same outcome.”
On a more positive note, he adds, there’s an opportunity to look ahead and think about how to define brand Britain post Brexit. “In terms of how we’re viewed by the rest of the world, we want to come across as being an international, open country. I’d like to think that would help foster more demand for UK products. “Let’s come out and create a positive story and brand for the UK that will make people want to consume and buy our products.”
Case study: wicked vision
An Australian “proudly” making boomerangs in the UK to sell in the domestic market and overseas (including, you guessed it, to Australia), David Strang’s toy company Wicked Vision is a great example of how a gap in the market grew into an exporting business. He also meets business networking group The Supper Club’s membership credentials: turning over at least £1m and growing by over 20% each year. Strang set up Wicked in 2000 when a British retailer asked him if he could import “proper sports boomerangs”.
What started as a simple conversation quickly turned into a small business importing toys and manufacturing guaranteed return foam boomerangs. He says: “I found a manufacturer and after 18 months of trial and error I came up with a design that worked beautifully indoors and outdoors. That was the making of the business because I had a fairly unique product. And I realised you can make things in this country – the UK is a great place to manufacture if the product is not labour-intensive.” After considerable success in the UK, Strang started exporting because he didn’t want to just “shift other peoples’ products. It wasn’t until the business was about 10 years old that I started thinking, are we an importer or do we want to build our own brand and have a global market for our own products? Of course, that’s the way we went. But it takes a while to find your own identity.”
Strang has this advice for growing businesses considering exporting: think about your brand and how you can sell a product globally around that; don’t chase the dollar, do it because it’s your passion; and make sure your product is suitable for export – if you’re going into different language markets, make sure your name translates around the world: “The old adage is get it right, tell it right and then make it pay.” He adds: “The pricing is crucial. Get everything in order, but don’t dwell on it – people spend too long planning. I see this all the time in business, they’re too busy thinking of all the things that could go wrong.” Target a market that’s culturally similar: “For me it’s about the path of least resistance, you don’t need to reinvent the wheel in the US or Australia – you can take your product as it is and it will translate very well.” Don’t think you have to do it all yourself, seek support, go to the trade shows: “That’s where dreams can come true.” Strang concludes: “Successful export does bring a lot of money into the country. You can be guilty of burying your head deep in your own business and not looking out to see if there’s a different way of doing things.”