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Feeling insecure

 

UK exporters are becoming concerned about their competitiveness and profitability when faced with low cost competition from China and India, according to a recent survey published by trade finance consultancy Novus Initium. Mark Runiewicz explains further.

 

Novus Initium recently telephoned over 2,000 UK companies to examine exporters’ trading patterns, banking relations and UK government support.

 

Some 52% of companies surveyed reported that exports were growing with 35% of respondents stating that turnover remained static. A much higher percentage of companies with turnovers above £10mn reported higher levels of export growth activity while a larger percentage of company’s turnovers below £10mn remained static.

 

Many respondents report sales growth areas across all geographical regions, with many of the larger companies trading in many different markets and have spread of business from direct sales, joint ventures and subsidiaries. As one would expect the smaller companies are concentrating the bulk of their sales activities in Europe and North America.

 

Therefore, they are prone to market saturation and are more sensitive to competition and demand for products. We believe this is the reason that smaller companies have seen less sales growth in the last year.

 

Export performance of companies in 2006 by turnover band

 

Export turnover Increase Static Contracting
Up to £1mn 38% 48% 14%
£1 – £5mn 44% 40% 8%
£6 – £10mn 59% 31% 9%
£11 – £25mn 86% 14% 0%
£26mn plus 75% 19% 2%
Undisclosed 48% 24% 28%

 

Some 5% of respondents were closing their business or transferring their operations to locations outside the UK. We have calculated that nearly 1,000 jobs have been lost. Half of these companies were foreign owned and the owners have withdrawn from the UK market.

 

Many respondents have been faced with competition from China and India. Many exporters have been unable to remain competitive producing high volume and low cost items. However, on a positive note many companies are selling capital goods into these markets.

 

Exporters have reported increased business demand from Egypt, China and India, however the payment terms have been very competitive and extended credit terms were sought.

 

Brazil has been identified as a ‘low cost’s market and the exporters are actively seeking western technology to improve production quality.

 

We have been advised that many capital equipment manufacturers have lost business to Italian competitors who have been offering very favourable long-term payment terms of up to seven years at very competitive interest rates. On further investigation the Italian export credit agency, Sace, has been heavily supporting its exporters. UK exporters have not been able to compete against this level of support.

 

 

 

Banking needs

 

Recent surveys of companies by various organisations have been critical of banks. Although our respondents have not enthused about the services they have received from their banks they seem less critical compared to previous surveys. Some 66% of respondents rated the service they received from banks as average or better.

 

However the smaller companies still appeared critical with over 50% claiming the service they received was poor. The survey also identifies the regional strength of the main banks.

 

We should, however, listen to these exporter’s comments and question “how banks should or could meet customer’s expectations without the banks lending being put at risk”.

 

The in-depth analysis of the survey answers some of these questions.

 

Many respondents have stated that they are seeking information, closer relationships with their bankers and more accurate advice. Again, the level and sophistication of the advice required is dependent on both markets and levels of turnover.

 

Exporters are critical of the level of service and costs levied by banks. An ‘old chestnut’s centres around the length of time taken to receive payments from overseas and the costs charged by banks when processing these payments.

 

 

Delayed payments

 

Conversely, companies sending money internationally question the number of days taken before the overseas beneficiary receives payment. Value dating of payments is still a foreign language to many, including High Street bank staff.

 

Respondents are looking for a faster service from their banks in handling transactions but more importantly in decision making. Exporters need to respond to their buyers and many need the support of their bank to support their cashflow requirements or even more simply confirmation from bank agreeing to confirm a letter of credit issued by a specific overseas bank.

 

The survey highlights that many banks have structured their business models by turnover of companies and global corporates by industry segmentation. The bank staff supporting these companies tend to be more experienced and better trained than those managing small company accounts.

 

Unfortunately for small companies the international knowledge of branch staff has diminished and therefore the smaller companies appear to be struggling to get the answers they need when they need them.

 

This is not only restricted but is also evidenced in the survey with the government’s support for exports: only 2.5% of respondents are satisfied with the level of support they receive from the UK government. This is a major reduction in the level of satisfaction over the last few years.

 

 

Poor UKTI service

 

Some 25% of exporters do not receive any advice or information from UKTI. The smaller companies receive less with nearly 40% of respondents with turnovers below £10mn receiving no communication from UKTI.

 

The majority of respondents’s felt the level of advice and information they receive from UKTI is poor quality, fragmented and of limited use.

 

We have seen UKTI metamorphosed several times over the last few years and much of the department’s budget has been allocated to the regional development agencies. Therefore, UK Plc branding has been lost at many trade fairs. Many RDAs are now competing against each other for overseas buyers’s attentions and the Union Jack or Great Britain marque has been lost, causing confusion for overseas investors and buyers.

 

Smaller exporters appear to have been lost in these changes and have to rely on trade missions that have also reduced in number. Once again funding for overseas missions has been passed to chambers of commerce and manufacturing organisations and the like. It appears that many respondents are not aware of the UKTI’s website and the information that is available.

 

The survey has highlighted key areas of exporters’s needs, wishes and attitudes and these need to be balanced with what the service providers are promoting and providing and also the exporters attitude to business and risk.

 

The survey evidences that many companies fail to consider the investment both in planning and cost when developing, maintaining and growing overseas markets. Our further research has studied exporters’s attitudes and propensity for change.

 

The survey has highlighted major areas for complaints and frustrations among medium and small exporters, who have little ‘pull’s in demanding change. Most banks are providing a basic international service ie, payments and remittances. These exporters deal mostly with High Street branches, which now provide little more than a counter service. These companies need to be more proactive and request more support from their bankers.

 

This support is available but many domestic branch managers do not understand the request or do not know where to find the relevant information.

 

 
Gulf between customer and bank

 

The survey also flags up the conflict/differences between bankers and exporters. Few bankers have exported goods and many exporters have seldom considered the implications of a deal becoming badly wrong.

 

Most smaller exporters, by their nature, are entrepreneurial and do not believe that transactions will go wrong and have the potential to wipe out their business. Exporters voice their frustrations at banks and the UK government and many blame the buyers for intransigence and slowness to act but many exporters fail to take ownership for the huge percentage of letters of credit that are rejected on first presentation to banks and the costs associated with the discrepancies. Many branches have advised that much of this delay, cost and frustration could have been avoided if the exporter had shown more care and diligence.

 

The survey highlights many of the key areas that banks and government can address to improve the delivery and quality of service. The findings also show how exporters can help themselves and improve the service that they receive from their service providers.