Falcon roundtable: Boosting British exports

With the UK government unlikely to reach its target of £1tn of exports a year by 2020, what exactly are the challenges facing companies, and what can be done to boost British exports? Specialist financier Falcon Group hosted a roundtable at its London offices to dissect the exporting landscape – exploring the challenges and opportunities as well as possible solutions for the long-term growth of British exporting.

Roundtable participants:

• Louis Taylor, CEO, UK Export Finance (UKEF)
• Jon Coleman, chairman, British Exporters Association (BExA); group treasury, export and structured finance, BAE Systems
• Phillip Herod, power generation business unit (PGBU) global credit manager, Cummins Power Generation
• Mark Ling, head of international large corporates, Santander
• Frédéric Bourgeois, managing director, Coface UK
• Chris Southworth, director, International Chamber of Commerce (ICC) UK
• James Penn, policy advisor, ICC UK
• Will Nagle, CEO, Falcon Group
• Emma Clark, head of business development UK and Europe, Falcon Group
• Nick Gowlland, CFO, Falcon Group
• Melodie Michel, deputy editor, GTR (chair)

GTR: We’re expected to miss the export target set by the government by more than a decade. What are some of the factors preventing British companies from exporting?

Southworth: It is important to note that the target set by the government was always aspirational – it was designed to highlight the fact that the UK isn’t exporting as much as it should be and to provide clear focus and drive underpinning an ambitious new export strategy.

Foreign exchange (FX) rates are obviously a key factor in influencing whether or not companies are exporting, as is the global economic environment, but they do not explain the fundamental issues why the UK isn’t exporting enough.

The slowdown aside, the Chinese economy is still growing at 5-7% annually. The opportunities are there for UK firms. The lack of investment and focus on languages at school acts as a major barrier to basic communication if you are then trying to trade overseas, and puts the UK at a disadvantage. Similarly, the long-term under-investment of infrastructure in the north and west has put good businesses in such regions at a big disadvantage to their counterparts in regional France, Germany, or Japan.

The balance between services and manufacturing and how the data from each has an impact on the figures is also worth noting. Unlike Germany, the UK is primarily a service economy but service data doesn’t always easily fit into export statistics.

GTR: The UK’s manufacturing sector’s growth resumed in mid-2015, but the industry contracted again shortly after. How can we redress the balance between services and manufacturing?

Coleman: The manufacturing industry can fluctuate so I would view the news with caution. That said, even if it is the first step, we still have a much smaller manufacturing base now than we did 20 years ago. Manufacturing does need a boost.

Ling: If you look at Asia you can see that the manufacturing base can move not only to different parts of a country, but even to different regions and territories. So there is no reason to think that we couldn’t bring parts of the manufacturing base back to the UK.

However, we need to change the way we look at what we manufacture. We are never going to have the labour cost advantage that some emerging market countries have, so trying to revive certain types of manufacturing – the production of clothing, for instance – doesn’t make sense. Instead, our manufacturing base should focus around value-added, highly-skilled, complex, and innovative areas – leveraging our entrepreneurial skills.

Southworth: ‘Manufacturing’ as a term is crude – it doesn’t describe who we are, what we do, what we’re good at, and what we’re admired for overseas. The lines between services and manufacturing can be blurred. Take a Rolls Royce factory, for instance. It is extremely high-tech manufacturing, some of which is more a service that is also being exported and sold overseas. Rolls Royce is not just making physical engines goods and moving them from A to B. There are many UK manufacturing companies behaving like Rolls Royce. Indeed, the UK is operating at the top end of manufacturing/services worldwide.

Bourgeois: The UK has a very strong service industry, so I agree with Mark that the British should focus on adding value, and not try to replicate what Vietnam or the Philippines are doing. There is a place for civil engineering in Britain, yet whilst the UK acts as a magnet for services, Germany remains more attractive for civil engineers seeking employment.
Of course, that is where education can play a role – Britain could do more to encourage apprenticeships, or train people with more of a focus on manufacturing.

GTR: Education certainly plays a part in creating a culture that encourages exporting. Chris, you mentioned languages as a key focus-area, can you expand on this? And is there more we can do to teach the younger generation about exporting?

Southworth: If you look at the CVs of European employees it is normal to see candidates with three languages, high levels of technical ability and work experience in several European cities; Madrid, Berlin, Paris – they have no issue moving around. And then you look at UK candidates who clearly have the talent and ability but struggle to compete with regards to technical and language capability. Unfortunately, these are the basic ingredients you need to run a successful international business.

Ling: The UK hasn’t had a consistent policy around language education – at least not over the last decade. We had a massive rush around Chinese language support around five years ago, and then the funding was pulled. If you look at the languages available now it is mainly French and German – which aren’t necessarily the most useful languages for global business.

Southworth: To address the education issue we need the Department for Education to take international business far more seriously but it is a challenge to get a group of teachers – which is what the Department for Education essentially is full of – to talk about exporting and business. It’s a cultural issue within the sector.

Nagle: I think the lack of education on exports results in an apathy around exporting. Companies simply do not know the benefits and understand the end game, so do not think exporting is worth the hassle. If we boost education, we might boost exporting.

Coleman: Education could also help companies understand what the risks around exporting are, and how they can mitigate those risks.

GTR: How is this regulation, and the resulting retrenchment of global banks, impacting British exports?

Ling: I do think we are very inefficient in the way that we interpret regulation in the UK banking industry and hence seek and manage solutions. You can create a competitive advantage through the way you manage regulation – just as you can create a disadvantage – and my suspicion is that we perhaps have a wider interpretation and implementation than some other countries.

What’s more, we all need to make sure we apply a universal interpretation to the rules. Customers trying to get support need clear help, rather than five answers from five different organisations, with conflicting interpretations.

Nagle: Regulation is a complicated thing to communicate, and any uncertainty permeates down to the exporter and confuses them. It means they sometimes end up with the wrong solutions for their needs.

Gowlland: The tide of regulation really should be a major government priority. From all angles we can see that the tide of regulation seems to just flow one way, and is simply not consistent with the overall focus on building our exports. The government needs to do more to re-address the balance.

Southworth: The government does have a role to play. It feels a little like the left hand isn’t talking to the right hand when it comes to trade finance – we are trying to boost exporting on one hand, and we are tightening regulation on the other. And the punishments for making a mistake and getting it wrong can be paralysing – you can’t blame some exporters for not trying or some trade financiers for feeling more risk-averse.

Bourgeois: From an insurance perspective, the amount of time we spend on wordings to ensure banks providing trade finance are regulation-compliant is astronomical. In a way we have shifted our focus from supporting exporters directly, to supporting banks as they try to deal with regulation – which is perhaps not ideal for the exporters, but it is the way the market is moving.

Southworth: I don’t think anyone will dispute that there is a need for regulation, but you do have to question whether we have gone too far. Banks are making perfectly rational decisions in response, but there are consequences to those decisions, and it is usually small to medium-sized enterprises (SMEs) that lose out.

Taylor: Banks’ on-boarding costs for an SME are huge: indeed, it can cost between £30,000 and £40,000 just to on-board an SME, and this is often followed by an ongoing annual cost of £20,000 to £30,000. So a bank can struggle to make an SME relationship profitable, which is where a funding gap arises.

There are other options – multi-banking relationships, for instance – but SME finance teams don’t have much capacity to deal with multiple parties.

Penn: The ICC Global Survey released last year showed that nearly 53% of SME requests to banks were rejected, compared to only 21% of larger companies. Capital can be tricky to access unless you are a large company with a huge balance sheet and a strong track record of success in exporting.

GTR: The trade finance gap has prompted the rise of alternative and specialist financiers. Is that going to continue?

Clark: So many companies have fallen in the past by having too many eggs in one basket and, because of that, there will continue to be a need for a wider financing base. The specialist space is growing, and larger commodity companies that have their own financing base are effectively specialist financiers already. Specialist financiers fill a need, and I doubt they will retrench.

Ling: Diversification is important: there are things Falcon will do that a UK clearing bank will not do, for example, and that is a good thing. You need more companies and more niches.

But there are, of course, risks. We need to encourage alternative financing and different mechanisms, but it is complex. Falcon is very experienced and knows what it’s doing, but there are many other players out there which don’t necessarily understand all the risks involved, and potentially could get their fingers burnt. That is one of the issues with some parts of the industry not being regulated.

Nagle: There are no barriers to entry to alternative or specialist financing – if you have US$250mn to put on the table, you can set up a specialist financier. The barrier for entry shouldn’t be the funds, but the expertise. You need experienced people who know what they’re doing, and you need the ability to sell and fund as a package, which in today’s environment isn’t so easy.

And it is important to act as if you are regulated – even if the industry as a whole is not yet regulated. Indeed, regulation is inevitable. We already have a regulated entity in Dubai that follows the same rules as the FCA, so compliance is a key focus for Falcon.

Clark: I’ve worked for several regulated entities in the past and from a compliance and KYC perspective we are no different from a bank – except we’re quicker and slicker because we’re fewer than 100 people, instead of thousands of people.

GTR: Clearly there are many hurdles to overcome for British companies that want to start exporting. But perhaps another problem is that those that do start don’t always continue to export. A discussion at the British Chambers of Commerce conference in early November said that half the companies that start exporting in the UK stop within six years. Why is this?

Clark: It is very difficult to start exporting in the first place. There are many issues to overcome – on top of the challenges we have already discussed, they will also need to navigate tax and logistical issues. Getting goods out of the UK is much harder than getting goods around Europe, for instance, as you have to manage ships etc., and it can be quite complex.
One bad experience in one territory can have huge consequential losses, writing off years’ worth of profit. Even big and experienced companies can get it wrong, which scares smaller companies. So the second something goes wrong it can be much easier for a company to retreat to what they know – focusing on domestic markets and familiar legislation.

Ling: You have to look at how the companies that stop exporting, particularly the SMEs, started. Did they start exporting by design, with a detailed strategy and understanding of the risks? Or did it happen by accident – with someone approaching them to export their product? You need a plan when you start to export, because otherwise you will have problems – it is a complex area.

Herod: We’ve never really had an issue that stopped us exporting to a distributor. We work with them, partner with them and support them. We’ve moved business to open account, for instance, we’ve used trade finance tools, and we’ve used solutions to extend payment terms – we support customers to continue.

Coleman: British exporters do have access to the services and support they need if things go wrong. Indeed, London is the centre for credit insurance, which means we have the resources for the areas that are a little bit too difficult even for UKEF. But exporters need to have a fundamental understanding of the risks – because if they get it wrong, it can be a disaster.

If you look back 20-25 years ago we used to have very strong trading house associations, and they would help with the trickier areas. Trading houses as a business model have reduced, and that then does put the onus on the exporters.

Ling: Trading houses do exist around the world, but the closest we’ve got in Britain, really, is probably Falcon.

GTR: It is no secret that the emerging markets provide a wealth of opportunities for exporters. Why isn’t there more of a British presence in these markets, and how can this be improved?

Southworth: 15-20 years ago, the government strategy focused on the EU, and if you look at the number of companies exporting to the EU, it was actually strikingly successful. However it came at a cost – as soon as we were hit by the slowdown of the EU economy, the UK was exposed for not having anywhere near enough companies trading with the big emerging markets.

Bourgeois: Companies will first target their domestic market, and only then look outside. If you are the Netherlands, Switzerland or Sweden, for instance, your domestic base is not that large, so you are forced to look elsewhere. One country that is even worse than the UK in this respect is the US – and one thing both countries have in common is a very deep domestic market.

Southworth: We have become very inward-looking, which isn’t the British history at all. Only 150 years ago 40% of Latin American trade was with Britain. But if we actually crunch the export numbers now, they are unbelievably low: out of roughly 50,000 companies receiving exporting support from UKTI, two thirds are EU/US exporters, which means that only a tiny proportion of companies are pulling the UK into the emerging, high-growth markets.

It is surprising how few companies in the UK are skilled enough to know how to export into the emerging markets. It could be a generational trend – in many ways the current generation has had such an abundant and affluent domestic market that they haven’t needed to tackle the challenges of exporting to the emerging markets.

Coleman: I know everyone is talking about Asia and Africa, both medium-term and long-term. But all these issues we have discussed – financing and regulation, for instance – are only going to be amplified in the emerging markets. Life isn’t going to get easier for the industry, and it is important to have a strategy.

Ling: I agree, it is a question of strategy – looking at the sector, market, and the timing within your chosen market. At Santander we have developed the ‘Global Trade Portal’ – allowing clients to use industry codes for their products and build a strategy around exporting, from broader details such as the market, down to finding buyers in a specific target market.

Taylor: Being out there and learning about a market and the differences between territories is really important, and a great indicator on how best to export. The concept of ‘Asia’ as a market is almost irrelevant, for example, because every country in Asia is completely different. Even if you look at the Asean region, there are huge differences amongst just those 10 countries.

As a strategy for exporting outside the EU and US, UKTI is trying to prioritise the areas where we have expertise – building a matrix of sectors where the UK has products and countries with projects that require those products, and to prioritise in a much more focused way than a more crude ‘dartboard approach’.

Herod: Certainly, there are strong opportunities for British exports to the emerging markets. People want the tag ‘made in Britain’ on their products. But it is the price on the product whenit goes out that is the problem.

Ling: If you look at the apparel industry, the British brand has a massive cachet. And as the emerging market middle class grows, we are seeing greater demand for our products. We definitely don’t make enough of that demand – there are signs, but it is either not enough, or not consistent.

Southworth: We have to give credit to the government – this one and the last – which has done a terrific job of getting ministers on airplanes, taking businesses abroad, and promoting the British brand. I completely agree that the value of the British brand overseas is extraordinary, something which other countries can’t compete with. We just don’t have enough companies on airplanes.

Taylor: Chris is right about being on airplanes and being out there. We have had a lot of trade missions from the government, although we need to plan them well in advance. My experience has been that there is quite often a scramble to fill places at the last minute, and we need to be better than that, and also better at bringing consortia together to pitch for higher-value opportunities in the way that the Japanese, Koreans, Chinese and – let’s face it – the Germans and French, as well, do.

GTR: What more should the government be doing to boost British exports?

Coleman: At BExA we would like to see more of a proactive government approach. There has been quite a lot of focus on UKTI as a delivery department, but that has limitations. I think the trade minister was quoted recently saying that UKTI is a bridge – it shouldn’t be an island. All government departments should show an interest and work together – UKEF has really stepped up to the plate in the last few years, but you’ve also got the foreign office, for instance, and the department of international development. There needs to be more of a link.

Bourgeois: The government certainly has a role to play. If you look at a country like Singapore, which admittedly is not on the same scale as the UK, they have a scheme in place whereby they pump money into supporting their SMEs through the efficient use of private market credit insurance. Even if you look at some larger countries like France and Germany, they both have very active export credit agencies, which makes a difference. I do believe that the governments of these countries are pumping in more money
to support exporters than the UK.

Taylor: Across UKTI and UKEF we are working to ensure that intelligence and knowledge is available to British companies wishing to export. The government can’t do everything, but it does have a role to play, and it should be co-ordinated better than it is at the moment.

GTR: And what about private sector efforts? Surely boosting British exports is not just the government’s responsibility?

Southworth: You can’t keep looking at governments to come up with all of the answers. In fact, Britain is the only major export nation that runs export support the way we do. Major export nations provide export support through the private sector with government adding value on top.

The Germans, for instance, are a class apart in terms of how they organise themselves. Their UKTI equivalent is much smaller – it is leaner and focused on high-value opportunities in strategic sectors. Otherwise, Germany allows the private sector and the chambers of commerce to play a lead role – delivering basic business support for smaller tier-two and tier-three companies, and incorporating government support where needed.

I went to India several years ago and everyone was talking about the Japanese. But their approach wasn’t rocket science – they were just working as a team, with their government financing operation working seamlessly with both the chambers of commerce and big businesses. The government would be negotiating a big infrastructure deal with big businesses and right behind them was the Japanese chamber of commerce supporting tier-two and tier-three companies in the supply chain.

There is nothing stopping us from doing the same. We’ve got the talent, the ability, the brand, and the demand – we just need to be better at working together. We all have a duty to do more for British exporting. It’s in all our interests to be successful. ICC has a part of play in helping provide a framework to bring the stakeholders to the table.

Taylor: It is also a question of accessing market intelligence, which established British companies already abroad have in many markets. If you look at Rolls Royce, for instance, they’re present in so many countries – manufacturing, servicing, and acting very much as part of the business community. Successful exporters have such vast knowledge, and we need to share it. There are absolutely channels of communication between companies, but we need to make it more consistent – at the moment a lot of it comes down to the individual, and we need to make it more dependable than that.

Southworth: If you’re just starting out as an exporter there is nothing that can beat actually sitting down and talking to someone who is in your target market: who lives it, breathes it, who can tell you what to do. It can save exporters thousands of pounds, as well as so much time, effort and heartache.

And we’ve got the network – Britain has an enormous network of around 90 countries where we have British chambers and business groups. We just need to get better at connecting them up and providing the knowledge to exporters. That’s what the Germans are so brilliant at – they have all the same challenges as we do, but they patiently invest and build and work together towards a common goal.