Factors to consider before making your business global
SPONSORED CONTENT - Skander Malcolm, managing director and CEO of forex provider OFX, looks at the prospects for UK exports in a post-Brexit world.
What are the prospects for UK exports?
Exports already account for one third of Britain's GDP, which is higher than the average for similar big G7 economies. However, currently only around 20% of small and medium sized-enterprises (SMEs) are exporters: increasing that proportion will be crucial in coming decades. For the UK, part of the logic of Brexit is that (assuming it does end up outside the single market and customs union) it will be able to sign its own trade deals around the world.
Following last week's agreement between the EU and UK to move on to discussing their future relationship (having fudged the Irish border question for now and apparently settled the terms of the divorce) it has become clear that this is still the path the UK government is determined to pursue. Last week's agreement definitely makes the "hardest" of Brexits crashing out with no deal more unlikely. But it does not necessarily make a "softer" Brexit more likely.
What trading arrangement will emerge?
Britain's government is still not aiming for Norway-style access to the single market, because this would mean accepting freedom of movement (ie the UK would have less "control" over immigration). Instead, it wants to negotiate a Canadian-style free trade deal which (unlike Canada's deal) would even include some services crucially, financial services.
Such a scenario means that the UK would remain outside the customs union, and would therefore be entitled to strike its own free trade deals. Such deals will certainly help SMEs in some sectors and markets. And it is obviously also important that the UK negotiates an arrangement under which we continue to trade as freely as possible with our closest neighbours in the EU as well as a smooth transition in the immediate aftermath of Brexit, scheduled for March 2019.
But what will be of even greater important to the future of UK exports will be the overall trajectory of the global economy and in particular the question of whether world trade now recovers from the slowdown in growth it has seen since the 2008 financial crisis.
Is the UK good at exporting?
It's disproportionately good at exporting services, but not so good at exporting goods. One promising sign is that since 2007, UK exports to countries outside the EU have grown by about 20% more than the average for European exporting nations. Clearly, that's an encouraging indicator of Britain's ability to grow its trade outside Europe.
That said, in key Asian and other emerging markets, growth in imports has slowed sharply in recent years making the UK's hopes of massively expanding exports in the coming years seem all the more ambitious. In 2012, the Treasury set a target of doubling exports to £1 trillion by 2020.
This year, however, the UK's projected total exports are £549bn, and the trend is pretty flat. In other words, Britain's companies especially small and medium-sized enterprises (SMEs) need all the help they can get in meeting the considerable challenges they face.
What kind of challenges?
Exporting obviously comes with a range of regulatory, commercial and financial challenges businesses would not otherwise face if they just focused on growing revenues in their domestic markets the most obvious being the risk that the best laid of plans can be thrown into chaos by currency fluctuations. In part, exchange rate risk is such a big issue because Brexit-related uncertainty has hit the pound hard (though it has been on an upward trend since January 2017).
More broadly, it's simply because many small businesses are not simply tooled up to develop an effective hedging strategy in-house. The majority lack a specialised resource within the finance department to deal with foreign exchange risk management. And only around a third of UK small and medium businesses currently take advantage of hedging tools such as forward contracts, limit orders, or euro-denominated virtual accounts to mitigate risk.
What about other challenges?
Research for the UK government found that 43% of businesses reported difficulties with legal and regulatory issues when exporting; and 27% reported customs issues as a barrier. For these kinds of issues, the Department for International Trade should be the first port of call. Specialist international trade advisers can provide skills training for new exporters, and help with everything from advice on forming international joint ventures and partnerships, to help with securing access to major buyers, governments and supply chains in overseas markets.
Meanwhile UK Export Finance, which is the UK's export credit agency, has the explicit remit of making sure no viable UK export fails for lack of finance or insurance providing British exporters (and in some cases their suppliers and customers) with a range of guarantees and loans. However, it's worth noting that the size of the money pot could not possibly support every exporter.
Of all these issues, though, a survey conducted by the Federation of Small Businesses last year found that the most frequently cited challenge for smaller UK exporters was the currency exchange rate issue. So whether you are in agritech or life sciences, renewable energy or aerospace, now is the time to start talking to experts, such as OFX, on how to manage currency risk.
Ask the expert
Skander Malcolm, managing director at OFX
Why is the UK so strong in services exports, and relatively weak in goods?
The UK economy is dominated by the service industry with the sector making up around 80% of UK GDP. London is the world's financial services powerhouse benefitting from its position geographically and English being the vernacular with most of the world's large international banks using it as their base for European operations. Goods exports have declined over the years as companies look to outsource production to countries in emerging markets where labour costs are cheaper. Countries such as India, China and Bangladesh now produce goods for some of the world's largest manufacturers.
How can we get better at the latter?
The UK has benefitted from the drop in the value of sterling; however, improved productivity would be a huge help to the manufacturing sector. Investment in technology, research and development, and machinery would help bring costs down and drive up the stagnant level of productivity seen since the financial crisis.
Is Brexit more a threat or an opportunity when it comes to exports?
The pound's fall in value meant sterling denominated goods became at least 10% cheaper to overseas buyers. This downward movement created an opportunity for UK SMB exporters to exploit and many have. But beyond the impact of the exchange rate, there's more to consider in terms of opportunities and threats. Should the UK not sign a trade deal with the EU then goods sold to the bloc will be subjected to tariffs as per World Trade Organisation rules, though this scenario looks significantly less likely following last week's agreement between the UK and EU to move on to discussing their future trading relationship.
What are the most exciting business sectors and territories, in terms of future export growth?
Once the issue of a trade agreement with the EU is resolved, then the UK can look to start making bilateral deals with countries such as America, Canada, Australia and New Zealand. We already have strong historic relations with these countries and being free of the EU will make signing trade agreements far easier. Should sterling not recover from its slump, then we can expect UK exporters' current good fortune to continue. The closely followed UK Manufacturing PMI recently posted its best reading in four years. This demonstrates how resilient the sector has been since the referendum vote and how UK SMBs are flexing their business strategies to optimise exporting opportunities.
How should exporting businesses deal with currency volatility?
Developing a sustainable currency strategy is critical for any business. At OFX we're working with clients to help them take advantage of the low value of sterling by locking in a forward exchange contract for overseas sales. A forward contract removes uncertainty with regards to currency fluctuations by locking in a rate upfront for delivery later; up to one year. This gives businesses a stable currency level to use for planning and budgeting purposes, removing the potentially negative impact that a volatile market could have on costs.
For more information from OFX on currency strategies and other matters, please click here