Having been profoundly shaken by the combined impact of the pandemic and Brexit, UK exporters continue to face significant trade challenges. As companies rethink and recalibrate their export strategies and supply chains, there is an increased focus on ESG performance and an opportunity to build back not only better, but cleaner and greener.
In mid-November, GTR and Barclays gathered top trade experts for a virtual roundtable discussion to address the crucial issues impacting the export and export finance market, the route to export recovery and growth in a more sustainable environment, and the role of the financial sector in keeping trade flowing.
Roundtable participants:
Buta Atwal, CEO of Wrightbus and Ryse Hydrogen
James Binns, global head of trade and working capital, Barclays
Marco Forgione, director general of the Institute of Export & International Trade
Louis Taylor, CEO of UK Export Finance
Shannon Manders, editorial director, GTR (moderator)
GTR: How are the well-documented disruptions brought about by Brexit and the pandemic impacting the way UK companies shape their export and supply chain strategies? What effect are we likely to see in terms of export flows going forward? How can the financial industry support with this?
Taylor: It’s too early to identify the exact causes of recent supply chain disruptions, although certainly Covid, Brexit and various other geopolitical factors have all played a part. Who knew just how taut supply chains had become?
One of the biggest impacts of all of this is the fundamental shift in the minds of businesses in terms of weighing up resilience and efficiency. If you have a 100% efficient supply chain, you probably have very little resilience. We’re now starting to see companies put more of a premium on that resilience, which implies either or both increased costs and lower returns. It’s not that we won’t have efficient supply chains, we’re just going to have to build in a bit more redundancy.
Companies’ supply chains will be different, and export credit has a significant role to play in supporting these flows. The aerospace industry throughout the last 18 months is one great example of the work that UK Export Finance (UKEF) is doing around supply chains. We’re financing airlines to buy aircraft from Airbus, and 80 cents of every euro that goes into Airbus flows down into the supply chain. We also have a finance product for big supply chain aggregators like Rolls-Royce that helps companies get their cash earlier.
I don’t think any of the disruptions are going to diminish the importance of trade to global growth, or the big priorities that industry has, particularly around achieving net zero by 2050.
Binns: Throughout the pandemic, there has been a confluence of many different factors that have created a lot of volatility across supply chains. Although the specific issues have shifted over the course of the last two years, the volatility has remained. The world is now starting to recover and open up – and that recovery is led by trade, and by a spike in demand, not just in the UK but globally.
This demand, together with other factors, is leading to an imbalance of containers and is placing increased pressure on the logistics and transport sectors that support supply chains. One of the consequences has been that container prices have shot up. According to the Drewry World Container Index, the average price of a 40-foot container as of November 18, 2021 was 238% up on the prior year. But it’s not just containers: airfreight rates have risen tremendously, warehousing space is at a premium, and the price of raw materials has increased too.
What we’re seeing from an inventory perspective is that it’s no longer ‘just in time’, it’s ‘just in case’, and there are challenges around planning for that extra contingency. Related to that, businesses and exporters are going to need increased support for their working capital cycles. That’s where financiers, export credit agencies (ECAs) such as UKEF, and all of us have a role to play.
Atwal: Wrightbus is based in Northern Ireland, which adds to the complications around Brexit. As we all know, the border between the mainland and Northern Ireland now requires administration and control, which is slowing down the parts and inventory supply chain, adding more cost and more time to those processes. Rather than ship through the UK port – namely Belfast – we’re now going through an Irish port instead to reduce the complication.
As a result of the fragility in the inventory supply chain, we’re seeing higher stocks and more administration. We’re also seeing wage inflation as the movement of skilled labour between Europe and the UK reduces. Positions in welding and painting and that of skilled technicians are not readily supported by the UK jobs market and it’s becoming increasingly difficult to fill those roles.
It means that companies have to start reshaping the business. At Wrightbus, we’re looking slightly further ahead and starting to think about alternatives, such as automation, which would reduce the need for those skills and increase our ability to react to the market.
We’re quite fortunate because we build our own chassis and bodies from raw materials – we don’t ship them in. We are very well vertically integrated, which has perhaps lessened the shock of some of the supply chain issues. But we’re now looking at how we can further increase that.
All of these changes are going to have an impact on the cash in the business in the medium and long term. If you’re investing more in stock, automation and vertical integration, you’re tying up more cash, and that’s going to be the limiting factor of your business. It’s not going to be how many orders you’ve got, because we’re fortunate to be well-supported in that regard.
Financiers have a significant role to play as companies evolve. This year, we’re building 30% zero emission and 70% diesel product. Next year already, it’s a 70% zero emission and 30% diesel product. We’re moving in line with the market and the green agenda. Financiers need to look at businesses like ours in transition and see the opportunity and the growth of the business, rather than focusing on what has been done in the past. I don’t see us as a manufacturing business anymore; I see us as a tech business because of the technology that we’re developing and exporting.
Forgione: What’s happened with the UK redefining its trading relationship with the EU, the impact of the pandemic, and the effect of the global logistics shift that’s taking place, is causing everyone involved in business to refocus and reassess how they’re going to run their companies in the future. But it’s important to remember that despite the many challenges there are significant opportunities.
To Buta’s point, the innovation that helps businesses redefine not just their supply chains but also their product development is going to be key. The UK has more tech unicorns than Germany, France and the Netherlands combined. It’s that level of investment, dynamism and entrepreneurial spirit that means we are going to be in a very good place to seize the opportunities and redefine our marketplaces.
The facilities that are available from UKEF and the incredible support that the finance industry has provided to business throughout the pandemic needs to continue now as we build for the future.
GTR: How has the landscape of export finance evolved in terms of ECA support and availability of funding?
Atwal: As we’ve discussed, there is increasing uncertainty that requires more confidence around the business, and when financiers and ECAs, like UKEF, are involved, a company is supported in a very rounded way. It gives the host country more confidence that an exporter can provide the goods and services that they need. In the current market, that confidence is worth its weight in gold and without it, frankly, we would be losing orders right now.
Forgione: The creation and delivery of UKEF’s General Export Facility, which supports exporters’ overall working capital requirements, rather than linking support to specific export contracts, has been a real step-change for UK exporters. If we’re looking to move the dial on getting more businesses trading internationally, the General Export Facility is really key.
Taylor: Every ECA around the world is set up slightly differently with different mandates. What has been novel for UKEF is that we have massively expanded what we do domestically, providing exporters with working capital, whether it’s to the smaller end, through the General Export Facility, or for larger companies through the Export Development Guarantee.
The purpose of the facilities we offer is not only to augment private market financing capacity, but also to provide government support without any stigma of bailout for the companies. UKEF’s products give the confidence that Buta outlined, but they’re also genuinely commercial in that we’re guaranteeing 80% of the transaction, with the financiers having to fund the remaining 20% on an uncovered basis, with both tranches priced the same.
Looking to the future, because of the changes that are going to be necessary to get to net zero, we anticipate that we’re going to be dealing with a lot of new technologies and projects. That is going to require us and other ECAs to fundamentally re-evaluate our risk appetite for technology, and different types of sponsors.
We’ll also need to look closely at what element of risk we can take on, whether it’s guaranteeing a power purchase agreement or a completion guarantee on a project for example, that had been inhibiting private sector financing, and which due to our participation then draws in those players. Sovereign balance sheets simply can’t deal with the volume of infrastructure spend that’s going to be necessary. There’s going to have to be huge private sector participation, and organisations like ECAs will be the enabler of private money coming in through derisking projects with this surgical application of our funds.
Binns: Because of the pandemic and uncertainty around Brexit, businesses haven’t been investing to the same level that they may have been over the last couple of years. But that’s about to change; it is likely that businesses are going to start investing again and the excess liquidity that has built up in the market will begin to reduce.
Exports will continue to grow and the need for funding is going to rise exponentially over the next two to three or four years. It is therefore critical that the likes of UKEF continue to provide support.
I commend UKEF because it is leading the charge on the ECA front at the moment. ECA support used to be a very buyer credit, large deal-driven solution. It has now become more valid to smaller companies and more oriented towards environmental, social and governance (ESG) issues, which is critical.
GTR: What has been the impact of the recent sharper focus on ESG on UK export flows and export financing? What role can export finance can play in boosting the ESG agenda?
Forgione: As they recover from the shock of Covid and are looking to trade in the future, businesses need to be making sure that ESG is a fundamental part of their thinking around their business planning and growth going forward. Some of that is about changing approach, integrating new technologies or partnering with other organisations. Are we as far ahead as we would have hoped? No, but there are good reasons why, and it is increasingly becoming a reality.
Binns: With all of its technical and technological expertise and engineering capability, the UK is very well positioned as the ESG agenda starts to gather pace globally. In many countries around the world, we’re seeing huge investments in new infrastructure to produce things like more sustainable transport systems and build renewable energy projects, all of which drives increased opportunities for UK companies.
In order for those companies to realise those opportunities, they will need investment to win contracts as well as access to more working capital funding to be able to support those contracts once they win them. This is where all parties need to be collaborating efficiently to support businesses in harnessing those opportunities, particularly in terms of ESG.
Taylor: This is a great opportunity to talk about Buta’s business. I saw Wrightbus’ hydrogen double decker bus – the first in the world – at Cop26. It’s a great example of the fact that technology is changing enormously, and that this technology is going to have to be rolled out across the globe. There’s no point in the UK hitting net zero in 2050 if nobody else does.
The UK is a technological powerhouse – we’re a massively intellectual property-rich country, and we really need to proliferate these technologies. Export is the way to do that. That’s why I think trade is going to be part of the solution for climate change, rather than part of the problem.
There is a range of government intervention that is there to help develop the technologies we are going to need to meet the ESG agenda, which is only going to accelerate.
The Cop26 climate summit was very successful in that we had a significant number of countries sign up to a pledge that their official government support for overseas projects will be focused on clean growth and away from fossil fuels from the end of 2022. To take those trillions of dollars of balance sheet capacity away from fossil fuel investment is really going to drive and accelerate the focus on clean growth.
Atwal: I listened to an interview with Warren Buffett recently, where he made the point that the top 20 stocks by market cap today are considerably different from the top 20 stocks three decades ago. Who are going to be those companies in the next 20 or 30 years? It’s likely to be those companies driving the green agenda and doing things we haven’t even thought about yet.
Without the investment, and without a level of positive risk in financing those ideas, we are going to be left behind and we’re going to have an economy that’s trailing rather than leading ideas.
GTR: Moving on to another dominant narrative: what effect are trade digitisation efforts having on export flows and export financing?
Binns: Technology is part of that whole confluence of factors that needs to come together to drive change as we enter this new era of trade. The digital transformation is significantly reducing the cost and increasing the speed of international trade, and those benefits can be passed down the supply chain. For financiers, this helps us to be able to provide more funding, more efficiently. As the velocity of funding goes up, it starts being able to reach more counterparties, increasing access to funding deeper into supply chains. This is absolutely critical to everything we’re talking about today.
Atwal: Our focus on digitisation is on the customer side, in terms of the information we gather to better understand our customers’ needs. One of our focal points at the moment is telematics, and getting to grips with how our customers perform their operations, their strengths and weaknesses in doing so, and how we can support those through our design, development and pricing.
Although we are not involved in digitisation on the financing side, I can certainly recognise the benefits that would bring in terms of speeding up the finance decision-making process. Anything that reduces the time between asking ‘can we do it?’ to saying ‘we will do it’ will always be an advantage in the market because customers want the certainty of a supplier that is there with them and not prevaricating on whether they can or cannot do something.
We’re seeing that with some of the interactions we’re having with our financiers. We’re giving them more data and they’re giving us a more proactive response. To give you an example: when we took over Wrightbus, we brought our bank in to demonstrate our technical data and outline our key control indicators, which then gave them a greater sense of knowledge and confidence in the business in terms of where we’re going and why.
Taylor: From UKEF’s point of view, we have to an extent – and I think we may go further – delegated the use of our guarantee to financiers to the point where they only digitally tell us what we are guaranteeing once they have put us on cover. Certainly the information flows that are enabled digitally have facilitated our greater efficiency. We’ve talked about inefficiency coming into supply chains through redundancy and resilience. But across trade, there is the opportunity still to squeeze out a lot of cost and improve effectiveness and efficiency through digital.
GTR: How do you see the export finance landscape evolving into the future, over the next five years?
Binns: We are likely to see an increase in competition between the world’s ECAs as they start to follow UKEF’s lead. With that may come a greater proliferation of government-supported export finance, which I think is a good thing. Another probable feature is more ECA support and involvement in day-to-day trade flows.
Wrapped around all of this will be the elements that we’ve talked about today: increased use of technology and a greater focus on sustainability and ESG trade flows, which will ultimately result in more resilience.
Taylor: Historically, the ECAs provided access to liquidity that wasn’t otherwise there. Going forward, I think our role is going to be more about pure credit enhancement and risk mitigation, rather than, say, providing a guarantee over all the financing of a project. We don’t have the balance sheets to be able to do everything that we would love to do in the next five years and beyond as we get closer to net zero. That means that the operating model is going to be about the surgical application of smaller amounts of money to mitigate risk in a way that liberates the plentiful liquidity that’s out there to come in to de-risk projects.
Atwal: What I’d like to see, and which I’m starting to see already, is industry and export finance working together more proactively, for example, by sharing information about market opportunities before the finance conversation. That will encourage greater connectivity between business and finance, and be particularly fruitful for growing businesses – we talked earlier about the support that technology companies will need.
Secondly, based on that data and knowledge shared between the parties, which ultimately leads to greater confidence in the business, I’d also like to see bolder, quicker decision-making with regards to finance.
Forgione: International trade, and all elements relating to it, will be a lot more data driven because of the clarity of insight that will be provided by the technical solutions that are being devised. To Louis’ point, this means ECAs can be much more surgical with regards to how they deploy their resources. For Buta, this means there will be traceability and visibility, which leads to quicker decision-making from their financiers because of the clarity provided by the technology. For financiers, it means that the risk profile in their investment decisions is reduced, because there’s a better understanding of the borrower as a result of the increased data. Essentially, better visibility will lead to improved decisions about what we’re all doing, and will ultimately increase the competitive advantage that businesses will have.
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