The UK economy is flatlining and the medicine, thus far, isn’t working. Finbarr Bermingham reports on an exports sector in dire need of resuscitation.
When UK chancellor George Osborne called for a “march of the makers” in 2011, this is hardly what he had in mind. Rather than stridently hauling the British economy out of its most prolonged malaise in decades, net trade cut 1% off the UK’s GDP in 2012. Last year was the 30th in succession that UK imports have outstripped exports. The trade deficit rose to £57bn in 2012 – 6.9% of GDP, which is the highest level since 1948.
Despite the depreciation of the pound (against the euro, it is 20% weaker than it was in 2008, while against the US dollar and the yen, the pound has lost 30% and 50% of its value, respectively), exports remain anaemic. Ordinarily, the weakening of a country’s currency makes its output more attractive to foreign importers, since it allows them to purchase more goods for less of their own currency. When the South Korean won lost 35% of its value against the US dollar in 1997, for instance, it led to a 15% rise in exports. Conversely, in Q4 of 2012, the UK’s export sector shrunk by 1.5%, with British business failing to capitalise on the devalued sterling.
So when David Cameron, the UK’s prime minister, announced in March that exports were “starting to turn around”, the sensible commentators were heard to prescribe a healthy pinch of salt. If British exports are turning around, they’re doing so at the pace of an articulated truck in an alleyway.
Where did it all go wrong?
The simplest conclusion to draw is that the UK economy simply isn’t producing enough exportable goods any longer – particularly among small to medium-sized businesses. “If you compare it to the classic German Mittelstand manufacturing model,” Peter Luketa, global head of export credit and global specialised finance at HSBC tells GTR, referring to the famed SME manufacturing engine of German-speaking countries, “we lost those capabilities a long time ago.”
Whereas the big players – the likes of BAE Systems and Rolls Royce – continue to perform strongly on the world stage, there simply aren’t enough companies further down the food chain exporting the ‘right’ kinds of goods at a tough time for the global economy.
“UK exports are quite reliant on services compared to other advanced economies,” says Martin Beck, UK economist at Capital Economics. “They account for about 40% of UK exports while goods are at about 60%. But most of those services go to other wealthy, advanced economies – exactly the kinds of economies that have been struggling, the US and the EU. Very fast-growing emerging economies such as China and India don’t actually import many services. We haven’t been well-placed to benefit from the strong growth of these countries. They’ve been buying lots of manufactured goods from, say, Germany, but the UK has been exporting the wrong type of stuff.”
Statistics from before and after the financial crisis of 2008 suggest that the UK failed to change its export profile significantly, leaving it heavily exposed to the slowdown in growth in the eurozone. Trade with the BRIC economies has been growing – up by half with Brazil and India, doubled with China and increased by 133% with Russia – but all of these are coming off extremely low bases. Half of the UK’s exports still go to the eurozone, with only 8% going to the BRICs. Overall British trade with the BRICs is up 5% from 2008, which is one reason to be cheerful, at least, but there’s a fear that the UK may be late to the table. In April, it was reported that China has entered an “era of low growth” after 30 years of breakneck acceleration. UK exporters would do well to focus on markets such as Indonesia and Vietnam, which are still reporting exponential growth.
The sluggish growth in exports to emerging markets may be partly attributable to the sheer difficulty of doing business further afield. For large corporates, with longstanding relationships and premises overseas, such challenges are easier to overcome. But, says William Clark head of UK trade credit at insurer AIG, “establishing markets in India, China and Brazil is not easy. It takes time, capital and networks. It’s a long-haul process. British businesses are just as capable as at any point in economic history to export. But they’ll have to broaden their view and export into those markets”.
Another school of thought is that 21st century Britain simply doesn’t possess the entrepreneurial spirit required to produce the next raft of world class manufacturers. According to the Central Intelligence Agency (CIA)’s figures, the UK is the world’s 10th largest exporting nation. Closely behind come Hong Kong (statistically classed as a country because China’s socialist economic policies do not apply there), Singapore, Belgium and Taiwan. Each has a population much smaller than Britain’s, but, according to Tan Kah Chye, global head of trade and working capital at Barclays and the head of the International Chamber of Commerce’s Banking Commission, they excel in areas which Britain no longer does.
“There’s a lot we can learn from them,” he tells GTR. “The UK excels in areas led by larger corporations. It could do a better job with SMEs where other countries seem to be getting a better grip. Notable examples would be Germany or Taiwan. There’s simply a stronger entrepreneurial culture at every level of society in these countries.
“Taiwan is an example: every employee wants to be a boss so they can get a Ferrari. In the UK every employee wants to climb up the corporate ladder. It’s a more institutionalised culture in the UK whereby over the last decades we have excelled in bigger organisations and structures. We don’t have a culture of people wanting to be their own boss.”
Access to finance
It’s at this point that opinions start to diverge. Westminster rhetoric places the hopes of a UK recovery in the hands of small businesses. The business secretary Vince Cable last year established goals to double UK exports to £1tn, to get 100,000 more companies exporting and to increase the proportion of companies that export from one in five to one in four, which is the European-wide average, all by 2020.
The recovery, the story goes, will be spearheaded by existing exporters or those who have aspirations of becoming exporters. Speaking to businesspeople and business leaders, though, the general feeling is that many small businesses would love to export – or to export more – but can’t get access to bank capital in order to fund their operations.
“British business is on the horns of a dilemma,” says AIG’s Clark. “On the one hand they want to grow and realise that growth lies in the form of exports to non-EU markets. They’re kind of stuck with this circular argument: to grow they need capital, but they can’t raise the capital to fund that growth. No business likes to wither on the vine or see anaemic levels of growth.”
For larger businesses, with healthy balance sheets, established trading partners and routes and longstanding relationships with their banks, access to finance is always going to be easier to come by, according to Jon Coleman is assistant treasurer for export and structured finance at BAE Systems and chairman of the British Exporters Association (BExA). “I don’t think the large corporate is seeing an impact on its credit lines or access to working capital, because it’ll have those locked into a term period and that’s the sort of client the bank is focusing on,” he tells GTR. “If you’re a small company trying to export, you are likely to encounter problems in finding a working capital facility or discount your invoice or letter of credit so you can discount your receivables. It’s tough out there.”
The majority of the bankers that GTR spoke to in researching this report, however, argue that the market has never been more liquid. The banks want to lend and, indeed, are lending. But there is a lack of credible small exporters meeting their lending requirements.
“I’m fed up at the bank-bashing and saying the funds aren’t available to support exporters. They are undoubtedly available,” says Martin Hodges, head of trade at Santander. “We’re well-capitalised and liquid, we want to lend. We’ll lend to those companies that have a sound business plan. There’s not a queue of exporters and manufacturers outside the bank’s premises asking for money. We find it quite tough in terms of searching out exporters that are looking to expand or refinance. Are they out there? Do they want to borrow?”
It’s a notion reinforced by Barclays’ Tan, who says that there has been no better time to seek bank financing over the last 20 years than now. He continues: “18 months ago the cost of financing an export to India or China using a 90-day letter of credit (LC) would be about 100 basis points (bps) if you want to get paid on day one rather than day 90. The same transaction today costs 30bps. 100bps was already very low! It has gone below the basement price. I’ve never seen so much liquidity in the market. I’ve never seen bank lending at such a low price. There’s a huge amount of liquidity for exports and pricing is at an all-time low.”
Definitive export finance statistics are unavailable from the banks most active in the UK, but there are some general figures which may help us come to a conclusion as to the state of the market.
According to data gleaned from the government’s Funding for Lending Scheme (FLS) in the UK banking market (non-trade specific), borrowers repaid almost £2.5bn more than banks lent in the last three months of 2012. The likes of Lloyds, RBS and Santander all cut lending in 2012, arguably due to the regulatory pressure on them to hold more liquidity. Of the major British banks, only Barclays increased its overall lending portfolio, by £5.7bn. While the figures are not trade finance-specific, it’s reasonable to suggest that they could reflect trends in this industry too.
SME you’re looking for?
Tony Shepherd is the chairman of Alderley Group, a company that supplies equipment (such as metering and water treatment systems) to the oil and gas industry. It’s fair to say that Alderley is the kind of company the banks say they’re struggling to find. With a turnover in the region of £60mn per year, 85% of Alderley’s business is export-based. Its biggest customers are Korean and French engineering, procurement and construction (EPC) companies and, unsurprisingly, a lot of its current business is in the Middle East.
“Most of the projects we take on take up to a year to deliver,” Shepherd tells GTR. “Within that time we have to pay for components and pay our staff. Getting that money has sometimes been a problem; we’ve had to work very hard to convince the banks that they should lend us money on the basis of a contract to supply a piece of equipment. The companies we’re dealing with are some of the biggest and financially strongest in the world. If they make an order of £1mn for a metering system to measure gas, they need it for a bigger project and there’s no way they’re not going to pay for it.”
Shepherd says Alderley had excellent arrangements before 2008 and while it took a while to convince the banks of his company’s viability post-2008, the pipeline of bankable orders the company has on its books allowed it to gain access to the finance needed to deliver them.
On the other hand, at a recent seminar hosted by the UK-India Business Council in London, GTR spoke with numerous businesspeople who were hoping to export to the subcontinent. A common complaint was that in exchange for financing, banks were making “unreasonable” requests for collateral. One exporter of anodes was told that in exchange for enough finance to purchase a piece of manufacturing equipment (valued at £2,500), he would have to put his entire premises up as security.
Bill McGawley is the chairman of TDR Group, a company that provides training for science and engineering professionals. Keen to establish a base in Bangalore, his bank offered him a loan to buy a laboratory, but told him that he had no chance of getting the finance he needed to kit it out with scientific equipment. “A lab,” he said, “is no good without equipment.”
Perhaps the problem is the communicative disconnect between the business and finance sectors. Banks are adamant that they’re eager to lend, without always fully acknowledging the fact that in the Basel III era, the goalposts have had to be moved. It may well be a cheaper time for businesses to borrow, but it may also be a more difficult time for companies to convince banks of their creditworthiness. “We need to differentiate between anecdotal and quantifiable observations,” Barclays’ Tan tells GTR. One way of doing so would be for stakeholders to collaborate on a concrete, all-inclusive and easily-scrutinised set of industry figures, which would go some way to alleviating the perennial tête-à-tête surrounding access to finance.
Elsewhere in these pages, you’ll read eulogistic accounts of the excellent work being done by export credit agencies (ECAs) around the world. In myriad conversations with the bankers, exporters, insurers and lawyers involved in the UK exports sector, the one thing everyone can agree on is that the UK’s edition needs to do much more to support the industry.
Under its previous guise of ECGD, UK Export Finance (UKEF) was criticised for pandering to Britain’s largest exporters and also for providing funds and guarantees for ethically questionable exports (data released last year showed that the agency once helped Zimbabwean despot Robert Mugabe purchase of a fleet of fighter jets). It was rebranded in 2011, ostensibly to alter its offering to support smaller businesses, but has since taken flak for its relative inactivity.
A report by a House of Lords committee, released in March of this year, criticised UKEF and other government agencies for failing to provide enough support to the UK’s 5 million SMEs. According to the study, a mere 21 small firms had received UKEF assistance as of August 2012. In his autumn statement last year, George Osborne allocated £1.5bn for UKEF to distribute via its direct lending scheme, in loans with a value of £50mn. If fully utilised (as GTR goes to press, the scheme has yet to be realised), that would facilitate only 30 transactions.
By comparison, in the first half of 2012, the German ECA Euler Hermes underwrote almost £30bn of trade with UK exporters. Since the beginning of the year, the Export-Import Bank of the United States (US Exim) has been involved in almost US$15bn of transactions, either as a guarantor or a direct lender. So while the noises being made by UKEF are promising, the contribution they’ve made to date seems like a drop in the ocean.
Speaking to those from both sides of the spectrum, there’s also the feeling that UKEF may be seeking to fund areas which are not in the most desperate need of support. From the bottom end of the chain, Graeme Fisher, head of policy at the Federation of Small Businesses, tells GTR that “£50mn is quite a big export. On the micro-small end these aren’t facilities our members can take advantage of”. While from the banks’ perspective, the direct lending scheme will only pick up transactions that are coverable in the commercial market.
“Those sorts of ticket sizes are quite easily accommodated in the bank market,” Barclays’ global head of capex financing solutions Gabby Buck tells GTR. “It’s the big ticket transactions for major infrastructure projects where you may have a build period of up to five years, repayment periods of 10, 12, 15 years where there’s a requirement for support.”
Further problems lie in the lack of awareness among UK exporters of UKEF’s services, as well as a lack of resources within the agency to deal with demand for its services. “The difficulty is that at the front end there’s a lot of interest, but UKEF doesn’t have the resources to manage that,” says Buck. “It’s taking longer to get decisions out of UKEF. When you talk to them about various products and transactions, it’s not uncommon for us to be waiting for two months or so to get a response.”
But the last 12 months have produced some examples of the potential UKEF has to work successfully with the trade finance industry. In August 2012 it guaranteed a loan of US$162.5mn made by Barclays, Citi and JP Morgan to the Ghanaian government for the construction of seven district hospitals. It helped UK contractor NMS Infrastructure make the leap from being an SME to a midcap.
On the smaller end of the scale, the agency covered a £2.7mn asset finance facility made by Lloyds to Soil Machine Dynamics, an exporter based in the north-east of England, which allowed it to export oil and gas exploration vehicles to Cyprus.
Move heaven and ERF
An overwhelming consensus among those in the industry is that UKEF will only begin fulfilling this potential when its pledged export refinancing facility (ERF) comes into operation. The treasury announced that it was allocating £5bn to the scheme in July 2012, which would provide long-term loans to overseas buyers of UK produce by guaranteeing short-term bank loans. ERF was supposed to be open for business by the end of Q1 2013, but as we approach the end of Q3, there’s no sign of progress.
“The export refinancing facility is something we and all the other banks in this business feel will be a real game-changer. We’re very surprised at how long it’s taking for UKEF to provide it,” says Barclays’ Buck. “This is something that will give UK exporters a material benefit, in the very least by putting them on a level playing field with other ECAs.”
The Korean ECA K-Sure, for instance, recently issued a direct loan of US$336mn to the Norwegian company Seadrill for the purchase of Korean ships. US Exim last year lent Sadara, a Saudi Arabian joint venture, US$5bn for a project that would support a huge number of American exports.
HSBC’s Peter Luketa concurs with Buck, but suggests that further direct lending is needed too: “I think every government needs to look at direct lending schemes to help drive its export business. The UK is a little bit behind the US and France. If you want a level playing field, you’ve got to have a scheme that does that.”
The danger is that unless the government takes more definitive action soon – and backs it up with substantial capital – the gradient of the field may have taken an insurmountable tilt.
Always look on the bright side of life
Things could be better, but they could almost certainly be much, much worse.
“I think we’re too harsh on ourselves,” says Tan Kah Chye of Barclays. “The UK is doing better than we give it credit for.” His point lies in the fact that despite its ongoing travails, the UK still finds itself among the world’s top 10 exporters, excelling in areas such as energy, pharmaceuticals, chemicals and defence. The UK’s industrial landscape has changed markedly over the past few decades, so much so that in 2013, it’s arguably more notable for its brainpower than its manpower.
“The high-end manufacturing content and high IP content is where the UK is competitive,” says John Bugeja, head of trade sales at Lloyds. “The pure metal-bashing end of the manufacturing hasn’t really been the UK’s forte for some time for cost reasons. So while it still goes on, it really doesn’t form the majority of what we see. It’s more design, technology-based, bespoke manufacturing in which we’re excelling, often with the components sourced from elsewhere.”
Looking through some of the most interesting transactions to involve UK firms in the past year; it’s hard to argue against the fact that these are areas upon which the country should be hanging its hopes. In December of last year, UKEF guaranteed a £20mn loan HSBC issued to Norwegian marine construction company DOF Subsea for the purchase of a fleet of remotely-operated vehicles (ROVs) from UK manufacturer Forum Energy Technologies. The ROVs will be put to work in Singapore and Brazil.
The transaction represents two of the UK’s strongest suits: oil and gas and high-end engineering and manufacturing. While there’s talk of a boon in the North Sea’s oil output, it’s the expertise which British firms have gleaned over years of accessing
it which will be most exportable in the long run. There are hundreds – if not thousands – of specialist outfits that are capable of working on energy sector projects across the world.
And while the carnival atmosphere that gripped London during last year’s Olympics may feel like a distant memory to Britons, who’ve long since readjusted to the customary grey surroundings, the skills and knowledge gleaned in their organisation is invaluable. Entire networks of service, engineering, manufacturing, security and construction firms collaborated to a hugely successful event. With Brazil, Russia and the UAE lined up to host the next series’ of World Cups and Olympics, those skills could certainly be put to use overseas. In a statistical anomaly, though, there are thousands more small businesses contributing to the UK’s output that aren’t credited in the final figures. Britain’s largest companies source parts and services from countless smaller businesses, but this indirect exporting falls between the statistical cracks.
“Our business has 2,500 SMEs in its supply chain,” Jon Coleman of BAE Systems tells GTR. “If you can get your suppliers exporting in their own name, a lot of evidence shows that they will stay around longer. They’re spreading their revenue sources across different countries and they’re more stable, so that helps us. But we also shouldn’t lose sight of the fact that there are a lot of companies exporting indirectly.”