There are mixed messages coming from the UK’s export market. The government wants to see an export-led recovery, yet statistics suggest export volumes have yet to dramatically increase.
GTR brought together banks, government agencies and small-to-medium sized corporates to discuss the hurdles they face.
- John Alcock, Finance director, Union Veneers Group
- Martin Cook, Director of regions, UKTI
- Graham Dewhurst, Director general, Manufacturing Technologies Association (MTA)
- Mark Dodd, Head of international commercial banking, Lloyds TSB
- Mike Gilham, Director, international finance solutions, Lloyds TSB
- Jacqueline Keogh, Head of banks, Western Europe, Standard Chartered
- Artin Moussavi, CEO, Biofoodnutrition
- Terry Partridge, Managing director, R A Watts
- Rebecca Spong, GTR Editor, (chair)
- David Thain, Senior executive – corporate business and financial institutions, Raiffeisen Bank International
Lloyds Banking Group kindly hosted the supporting UK exporters roundtable at Glaziers Hall in London.
GTR: Let’s focus on the key challenges facing UK exporters, particularly thinking about the small and medium sized enterprises (SMEs).
Dodd: From our experience, when a lot of companies make a decision to export for the fi rst time, a lot of it comes down to confidence, and where to start, which markets and what to do.
Moussavi: We are a small SME based in London, and we are exporting to, primarily, the Middle East, South Asia and the Far East. We’re entering into these markets quite often for the first time. Market intelligence is vital to us in terms of opportunity scoping, but fundamentally to find out about potential partners in those markets. So, the banks are playing an important role there in supporting our transactions, but also the government as well.
GTR: What are some of the main obstacles facing you at the moment?
Moussavi: Being a small player, access to information, can be quite challenging. We need to get up-to-the-minute information, especially in today’s markets.
GTR: Is that something that most of you feel, that there’s a lack of information in the market that’s impeding your ability to export?
Alcock: Generally we do our own research. We started off with market reports from UKTI, then we would send our sales guys to that market. The first trip would probably But, if you persevere you will break through that barrier, eventually.
Dewhurst: I think there’s a key element in that, when you start to export into the new market, you have to be aware that it’s going Our members are generally exporting equipment from around about £250,000 upwards. So to get somebody to spend a quarter of a million pounds or half a million pounds or, in some cases, up to 5, 10 million, on contracts, is quite a big ask right from scratch.
GTR: And so how do you persuade your potential clients that you’re a worthwhile company to deal with?
Dewhurst: The maxim is; first make friends, and then make business. You have to be prepared to put the time in on the ground. And I think that’s quite a barrier to small companies, because, quite often, they’re owner-managed, and if the owner is on the ground in a foreign country selling exports, he’s not on the ground running his own business.
So, there’s this dichotomy in his mind that says: ‘Should I be in the business making sure it’s running correctly? Or should I be out getting new business?’ And I think that’s why some of our smaller businesses struggle to make that break into markets, because they can’t afford the time.
Partridge: The meetings need to be face-to- face with your customers. If the managing director cannot go then a top director or a top salesperson should go and they need to engender confidence.
GTR: One of the main challenges I’m your client is confi dent in your ability to export and that you’re confi dent in exporting to these particular markets. What other kind of challenges are you encountering?
Moussavi: In terms of credit, we tend to sell quite large quantities. We have a single business interface in each country market that we enter into, so to be able to offer our suppliers assurances is very important. Especially from an SME perspective, access to some kind of credit guarantee on the supply side is vital, because we don’t want to be in a situation where we’re growing very slowly, due to lack of credit.
Our relationship with our bank has been fundamental, for the company to grow quickly from a very small beginning.
GTR: Is that something that everybody else shares? The need to have a guaranteed source of finance?
Dodd: Finance tends to be the thing that’s left to the last moment, and it’s so important to have that conversation with the bank very early, so that the bank understands what it is you’re trying to do and what the impact of what you’re trying to do is going to be on your cash flow and your funding.
If you have that conversation early, it’s much, much easier to work out how you can best structure the company’s finances. Because it’s a long-term commitment, and there’s no point in having finance in place for one year if it’s going to take you two years to get that first order. So, it’s really important to have the early conversation and make sure you’ve got your plans in place, and are ready to go.
Dewhurst: If you do your prep work at the confirmed by a UK bank. Whereas if you’re out in the foreign country and you accept their contracts under their law, you will run into enormous issues, trying to get a bank then to confirm. And you can’t unravel paperwork once it’s been created, that is very difficult.
Partridge: Getting paid from some of the countries in which we deal is a nightmare. The classic one is Bangladesh, where we receive letters of credit which require us to supply up to 20 different documents. Furthermore, for no apparent reason, they want numerous copies of those documents – sometimes as many as eight.
Dewhurst: This introduces the non-financial barriers that you find in certain.
Partridge: We have a lot of bankers you’re telling the bank what you’re doing. It’s very difficult to turn up and say, ‘I’ve got the order, and I need another £100,000 by tomorrow afternoon because the goods front end as well, before you even negotiate the contract, you can then basically get the wording right for all the documentation, then you can get the letters of credit right, worded correctly, that will then be fall down on. around us at the moment and those familiar with letters of credit will know that it’s no good presenting documents that are 99.9% correct. They have to be 100% correct.
When you get a letter of credit (LC) from a country like Bangladesh, it can be three regulations are where you can usually easily markets. Visa regulations and paperwork pages long, with handwritten conditions stapled to the side. You have to conform to all of the stipulations within the LC to get paid. It is difficult but we generally achieve it.
Cook: I come at this from with three different perspectives. As someone who worked in banking for a number of years, as someone who ran an SME for a number of years and as someone who’s now in government, trying to help business to trade overseas, I think there are a number of really important things to highlight.
One is I think it’s absolutely right that companies need to talk to their bank early, firstly to help structure the transaction and, secondly, because the banks will help with costs. You need to understand your costs, you need to know your margins, you need to ensure you’ve got your currency exchange risks covered, if they exist.
Those early conversations are really important, particularly if you’re dealing with currencies that can be volatile. There are also a number of things that the government can do through UKTI’s network of overseas staff to support companies to build the right contracts for when they go overseas.
Alcock: You need a broad armoury of talent to be a successful exporter. We’ve just heard the challenges of LCs. You’re never quite certain how the LC will be interpreted at the bank.
And I think that, maybe, let’s put a little bit of focus on the banks. Do we get enough help from the letter of credit departments?
Dodd: The banks, and I’d include us in that, know there is more we can do. We have the experts, whether they’re in an LC department or out in our relationship teams, but it’s making sure we’ve got them in front of the customers to help them. If you’re using LCs, what can we do to make them as simple as possible, so that you’ve got a much higher chance of getting it right first time? If you’ve got questions or concerns or you don’t understand something – it is important that you’ve got access to support.
Thain: It is usual if a bank confirms a letter of credit, that they understand the requirements and know what they will accept and what they won’t accept.
So, it’s a good idea to get in contact with the bank and say, ‘I’m not sure about this, what will you accept and what won’t you accept?’, before you actually ship and produce the documentation.
GTR: The UK government is very keen on having an export-led recovery, but do you think that UK banks and government agencies are actually delivering on their promises to support UK exports?
Moussavi: From an SME point of view, we wouldn’t have been able to achieve the very rapid growth that we have in the past 12 months, without the support of our bank, which happens to be Lloyd’s in this case.
They’ve been very supportive, and we did put a lot of effort and work right at the beginning, making sure that we had everything in place from the foundation point of view, financially, and then went to the market in a systematic way. But that has meant relying on networks of acquaintances, business that we have in place already, for reference and credit reference. Now that we’re growing and we’re entering into markets we haven’t been before, we really need to start to tap into the UK government’s network, just for introductions, to start with, and maybe involving the banks, as well.
Cook: There are only four ways the economy’s going to grow; private consumption, public expenditure, investment or trade. We all know that the public expenditure numbers are not going up.
We know that private consumption isn’t really going up. So, you’re left with investment, into the country and also local investment and trade. So, it’s really important that we do this, and it’s really important to get it right. What more can we do when companies move overseas?
Finding the right networks to access are critical to this. We have 1,500 staff overseas in about 96 countries, and we will have a set of networks that we can access. Equally, banks like Standard Chartered, Lloyd’s and other banks, will have their networks.
I think one of the things we need to do a bit more about is how do we bring some of those networks together?
Keogh: I can give a practical example that is currently a work-in-progress. Lloyd’s and Standard Chartered have been working together for some time, with a view to help UK exporters. We are about to run joint workshops in a number of locations around the UK where Lloyd’s has its biggest client base, in order to share some of the experiences that Standard Chartered has from its home countries.
We’re running four in September this year, focusing on India. So, Standard Chartered is bringing along Indian expertise, Lloyd’s is bringing along some of their interested clients.
So, we can understand better what the exporter requires and also share information on how the Indian market operates, the challenges you face when exporter.
Gilham: We have to leverage our financing, but some of the more intangible aspects, such as market knowledge and market information. Standard Chartered has a wonderful franchise in Asia Pacific, the Middle East and into Africa. Leveraging that knowledge and that experience, we want to bring that to our customers.
Dodd: There isn’t one simple solution, there are lots of things that you have to either acquire, and if you don’t have those skills, it knows where you can go to get that help.
It is really building that access and that knowledge and that expertise and making sure that as many SMEs that are thinking about exporting know that they’re not making that journey on their own; that there are people out there they can talk to.
Gilham: I do see a level of engagement, not just between the banks but across all of those involved in the exporting industry that I’ve not witnessed before.
And we see real engagement with the MTA, the UKTI and with banks such as Standard Chartered and Raiffeisen International Bank. Collectively we can come up with a lot of the solutions to help small companies gain the confidence to export. It’s about knowing where we can direct people to, signpost them.
Speak to UKTI, they can provide the information. Speak to your trading association, they can help you out with some of these questions about logistics and practicalities, and that together we can actually make a difference. The challenge for me is; how do we encourage more people to export? There was a statistic from our latest Commercial Business in Britain survey that showed that almost 50% of companies surveyed expected to see growth in exporting in the next six months. That’s fantastic and it’s not been at that level since 2004.
If you contrast that with sluggish domestic demand, there is a real potential there for companies through exporting. Exporting offers a great opportunity to diversify income streams and risk. However, to realise these opportunities requires investment.
GTR: Can we talk a little bit moreabout what support programmeshave already been implemented bygovernment agencies and banks?
Dodd: Through the Business Finance Task Force, one of the 18 recommendations was that banks would work to raiseawareness of alternative forms of finance and would help SMEs broadly, in terms of access to finance but also specifically around exporting.
So, there’s a mentoring programme that’s been launched, there’s a programme of events around the country, Better Business Finance, which are really all intended to get SMEs talking to banks, understanding what’s available and what’s out there.
Specifically, on the export front, the government has come out with three support schemes for exporters, two from ECGD and one from the Business Innovations Skills Department, which is very welcome.
It’s a very tangible sign, and it shows that in addition to what the banks are doing and their commitment more broadly to lend to SMEs, the government is providing that additional capacity.
Dewhurst: We’re hugely enthused by it. We want to be getting out to our SMEs and saying: ‘These banks are working positively for you. Whatever you might read in certain newspapers, they are working very positively, let’s go and find out how to get involved.’
Gilham: In the UK we’ve become rather lazy in recent years. Credit has been freely available for a long time and at relatively low rates. So, we’ve seen trade finance requirements and its usage diminish in the UK. There is an educational responsibility incumbent on us as a bank the UKTI and the wider industry, to raise corporate awareness that there may be alternative ways of financing certain transactions, such as trade finance.
At Lloyd’s Banking Group, our net lending to SMEs in the 12 months to the end of June, grew by 2%. We lent £6.7bn to SMEs you operate in that country, and the help available to you.
It’s a reflection of two organisations doing exactly what you reference; coming together to share knowledge and experience to attempt to help the UK strengths; we want to support our customers, not just in terms of direct in the first half of 2011. That demonstrates the level of commitment that we have to supporting UK SMEs.
In trade finance there is definitely potential for additional growth. And I think that’s back to that point about understanding and helping customers through the process. Bodies such as MTA and the UKTI have a great role to play in raising awareness of how trade finance may assist companies.
Moussavi: From the company point of view, getting access to information about all these new initiatives that are coming through would be very helpful, because we don’t have enough time to keep up with the changes that are going on behind the scenes with the government working with the banks on that.
So, access to more efficient ways of financing the business is going to be very helpful for our growth.
But also access to the government’s long established networks in target countries, if we want to enter into, it’s going to be very helpful for us. We haven’t really tapped into UKTI’s network as we should have, I think, in the past.
We haven’t been going for very long, there’s still plenty of time to do that. But, again, I think the government can play a very important role in educating SMEs, as well, in what’s available from their offering, and maybe from their dealings with the banks, and what initiatives are going to come through and the timing of those initiatives.
Cook: How would you like to see that kind of information presented?
Moussavi: I quite like the seminar approach, there’s less paperwork and there’s one-to-one interaction at the end and Q&A and things like that, and I’ve learned an awful lot. I went to a couple of UKTI events, talking about specific markets, in the Near East and some in Asia, and that was hugely informative, and I got contacts, not only from the UKTI representatives on the ground in those country markets, but also their wider network of government liaison and other
Gilham: I’m really pleased to hear you say that because that’s effectively what we’re looking to do with Standard Chartered in respect of India, as well, to provide that information and that context; to use Standard Chartered, who will bring in their experts from the local markets to talk to our customers directly. This is a pilot, so we want to see how it works, see what their take-up level is, and then potentially look at ways of introducing people through to potential customers and clients in the relative markets such as India.
Keogh: And very much building on that, the goal is to test whether this is something that is valuable to the SME clients. If the feedback we get is positive, we will go well beyond India.
Moussavi: In terms of the bank’s role in all of this, I think the front-line staff, the relationship managers, they are key in being the first to know, so they can pass that knowledge on to their customers, their clients, if you like.
We learn an awful lot through our relationship manager about the latest developments at Lloyd’s and what’s available, and we’ve worked out better ways of financing some of our country market deals that way.
Keogh: When you are dealing with your bank, the conversation should not be, ‘can I help you on a letter of credit?’ The conversation should be a relationship about: ‘Help me understand your supply chain. Help me understand who the counterparties are that you operate with,’ because it’s not only financing that individual transaction, it’s in enabling you to grow your business. That’s our sole goal.
Partridge: The biggest problems we are experiencing as a small company, are, firstly, financing, and secondly, short-term credit insurance.
In spite of what we hear, we always find it is extremely difficult to get bank finance.
We have been offered additional overdraft facilities to finance individual transactions but those involve the signing of a personal guarantee, which I am now loath to do.
Secondly, we suffer from the lack of availability of affordable short-term credit insurance.
I know this is available from the private sector but for a small company like mine the basic cost of setting up a policy is a large expenditure. You then have premium for each transaction on top of that.
Realistically it is unaffordable for a company of my size. ECGD used to provide short-term cover, the price of their policy was very reasonable and their premium was very affordable. But that policy doesn’t exist now, although I believe discussions are currently going on about a possible re-instatement.
Gilham: Just to come back to the original question about whether we’re doing enough as banks, and as an industry, to support UK exports. The proof for me is in the stats. The HM Revenue & Customs statistics show this year growth in exports of 16%. Countries like India, which we are profiling and piloting an initiative with Standard Chartered, are growing at about 40% in terms of UK exports.
Again, exports to Russia, where we’re looking to work with Raiffeisen to support our customers leverage their capability and knowledge of that market, has grown about 70% year-to-date.
So, we are seeing a lot of growth in these fast developing markets. I think that activity tends to be customers who are already exporting and perhaps looking at new markets or looking at exports as being a greater percentage of their business. The key for me as to when we really deliver on this undertaking is when we start to see lots of new first time exports.
Dewhurst: You have got a big gap to fill, because when the wholesale markets collapsed, a lot of foreign banks left the UK in terms of being able to provide that kind of finance.
GTR: It also seems that there has to be a change of mentality on the side of the small exporters, in that they are used to using overdrafts and similar kinds of facilities, and now they have to be educated to use letters of credit and other traditional trade tools. Do you see that there has to be a change of mindset?
Dewhurst: There’s got to be an education. I think there’s a fear of certain instruments. There’s certainly a fear of foreign exchange; that is one of the biggest issues. You know, if you’re out there and you’re trying to negotiate, do you do it in local currency? Do you stick with the friendly dollar, which is still volatile?
The last thing you’re going to probably be able to do is go for a straight sterling deal. It’s going to be very, very difficult to do that.
So, somehow, you’re going to have to hedge, and you’ve got to understand that before you even go out there, you’ve got to know what your bottom line in terms of the value of that pound against the dollar or the yen or the Rmb or whatever it is.
Moussavi: Getting the foundations right for doing international business was our first concern. We trade in euros, everything we do, we pay our suppliers in euros, we take payments in euros. So, in terms of foreign currency exchange, we try and minimise the impact by keeping it in a single currency. However, the banks that we deal with routinely are helping us enormously and are hedging, if you like, on that side.
But you’re absolutely right; the education of the SMEs or the corporates in general could be improved. And I welcome the initiatives of reaching out and educating us, because we are always looking for ways in which we can reduce our risks, because by its very nature, export is a more complex business than working within a single country market, once you’ve overcome the regulatory issues of that market.
GTR: There’s a lot of talk about exporting to the emerging markets, the BRICs (Brazil, Russia, India and China), yet, at the moment, it seems the majority of UK exports are still going to Ireland and the eurozone. Are small exporters embracing the emerging markets and, if not, why not?
Alcock: We are definitely embracing the emerging markets. Through UKTI we’ve had research done on Russia. One of our salespeople is there as we speak. It’s the second visit. Finding the right member of your team that is able to engage is very important.
We put together a list of potential customers. From those we selected an agent to support us in the new market. Now, agents are only as good as their last sale, and they only work for you when you’re there in front of them.
As soon as you get on a plane, they switch off to somebody else. You have to realise that. But if you work within those parameters, understanding their failings and their personalities, then you can get the best out of them.
Cook: I think there is a lot of interest in the BRIC market, but I think we also shouldn’t get too stuck on just Brazil, Russia, India and China.
There are a lot of other markets out there, as well, that are growing incredibly fast. I mean, if you look at Nigeria, that’s changed dramatically over the last several years, and there are big opportunities in those parts of West Africa.
Parts of the Gulf States are really interesting, going out further east, Indonesia, Malaysia, for example. The bulk of our sales are still, historically, to Europe and America. I think one of the challenges for us as a country is recognising that economic power, in a sense, has shifted a lot more towards the east.
Moussavi: The Foreign and Commonwealth put me onto Ghana. They struck oil and now that’s coming through and the country’s booming and we’re seeing rapid changes there. We’ve had the opposite experience with the Arab Spring. We had a lot of deals in the pipeline and the banks just closed the doors on the LCs, so we had to put that on ice, and that was a major direct impact of political circumstances on the economy of those nations.
So, things change rapidly. And we’ve found that, actually, we’re growing rapidly in those non-traditional world markets.
GTR: How are we going to inspire confidence in the SME market to venture into these new markets of Nigeria or Ghana?
Patridge: It’s not easy and it does require a lot of courage. The first port of call is the UKTI, who can give potential exporters to these areas a lot of information and, indeed, the banks. Then it needs a big leap of faith for new exporters to get on a plane to go and meet their potential customers.
Dewhurst: A lot of exporting into a particular country isn’t about the product that you’re selling, it’s about the culture of that country and how you manage the relationship at the beginning.
Moussavi: Our biggest limiting factor in terms of growth has been finding the right partners in the country markets, and we’re spending the majority of our time on that, researching the market and trying to find the right partners.
Alcock: That partnership usually involves us putting in the product and basically making the financial commitment. I think you can’t ignore that, you’re still taking a risk. You take all the insurances you can in the world and you do everything, but you still give this man your product and basically your money.
GTR: On a scale to one to 10, how confident is the SME sector at the moment regarding their capability to export?
Alcock: We have to take into account the global economy and we can only play as well as the global economy allows us to, and it’s still a struggle out there. The Far East, the BRICs – they are the economies that appear to be growing at the moment. I would only put it, I’m afraid, just above half, at six. It’s tough.
Moussavi: Our products are categorised as ‘premium’ or ‘super-premium,’ and we make no attempt to try and compete with local producers or, indeed, with the very big multinationals, on an economy basis.
And I think the UK has been through a lot of hard times in the past 30, 40 years manufacturing has had a lot of hits, so the companies that are in business today are leaner, and they’re producing very high-quality product, and I think there is demand in the world for those products. I would give it a six out of 10.
Cook: Certainly from the clients that we talk to, many of those that are exporting are doing well and are looking to expand.I think the challenge we’ve got is, how do we get them into more markets?
Gilham: Growth in the UK is more sluggish than we would perhaps like to see, and exporting offers a great opportunity to diversify the risk in terms of suppliers and buyers and also the opportunity. When we contrast the purchasing manager’s index in the UK, looking at manufacturing, it’s over 51%, it’s about 54% at the moment. If you look at the equivalent in the eurozone, it’s barely above 50%.
So, on a relative term, actually, we’re faring pretty well, with our immediate peers.
Dodd: To grow your business you have to invest, and whether you borrow money to make that investment or you invest your own funds, getting that balance right and that confidence to the point where people say, ‘I will make that investment,’ we’ve kind of got to make that mental switch.
Keogh: The countries that Standard Chartered are involved in, Africa and the Middle East, Asia, the demand is there. Those regions want European products.
If you look at what is happening in many of those regions, they’re developing a middle class society, and as that society develops, they want brands, they want labels, they want luxury. And, right now, Europe, Britain, is seen as the brand, the luxury, and they want that label. So, the demand is there, if we can just encourage UK exporters to export, people will buy. GTR