EXPORTING will narrow our dangerously high trade gap – that’s the mantra. The UK Secretary of State for International Trade has admitted that the government’s goal to double exports to £1T by 2020 is going to be missed.
One reason for this is that smaller businesses do not have the tools, processes and resource necessary to trade compliantly and ultimately profitably – some only see risks in exploring outside their home market. Every international order in a new or existing market with a customer requires compliance to customs requirements, export controls, anti-fraud measures, 3rd party screening, etc.
Doing it profitably requires a firm grasp of the commercials such as customer due diligence, evaluating risk of delay, dealing with fluctuating exchange rates, getting finance or credit insurance and guarantees, or assessing working capital needs, agreeing pricing and payment terms, product market localisation. Traders, therefore, must organise themselves effectively.
Being organised to export confidently
Consider that many small firms under £2m turnover rely on an owner-manager or one or two key individuals. We surveyed this group revealing that 55% rely just on the CEO/owner to run the entire export process and a further 10% still have the CEO/owner working with others.
According to a study by Maersk in 2014, about 30 people and organizations are involved in the shipment of a product using a shipping container, resulting in over 200 separate interactions, each requiring a new set of documents
A typical medium to large enterprise organises themselves better to spread fixed costs across many transactions. As these organisations are often serving many countries, each full time employee can cover 4-5 countries according to industry benchmarks. These businesses get tailored support from banks and specialist service providers, and they have greater choice of available technology solutions. In this way larger entities are more able to withstand uncertainty in periods of change.
For a small organisation, carrying out an export can be an enormous drain on resources. According to a study by Maersk in 2014, about 30 people and organizations are involved in the shipment of a product using a shipping container, resulting in over 200 separate interactions, each requiring a new set of documents. Not to mention earlier communication to determine duties and tariffs, carry out certification and organise valuations. Involving financing and credit insurance adds a level of complexity that is often simply overwhelming.
What do smaller traders do today?
Well-prepared small businesses can be more nimble than badly organised large businesses. One approach is getting help from the many good service providers – training, finance, freight forwarders, inspection agencies, consular services agents, customs brokers, lawyers, accountants, translators and of course Chambers of Commerce – but as this long list suggests, the industry is highly fragmented.
Business are faced with the challenge of finding and selecting providers – starting with conversations to understand who is needed, then assess their qualifications, agree terms, manage their activities – all the while retaining ultimate responsibility for compliance. More often than not, every new market needs different providers with special capabilities to fulfil the order. When you must also find a buyer and secure the order in the first place, it is not surprising that many businesses regard international sales as a non-starter.
It is possible to create commercial export relationships by striking deals with distributors or dealer networks who can do much of the legwork. For example a North West based trader in sport equipment sells goods through a worldwide network of dealers across 6 markets. Large dealers pick up Ex Works, so the trader can manage with just 2 FTE in the export department shipping direct to worldwide dealers in this way.
This is an effective way to establish relationships and learn about the market, but there is a corresponding loss of control, brand recognition and perhaps profit. It also requires a whole layer of background checking and due diligence on these intermediaries, to protect the company from commercial and legal risks. Building this kind of effectiveness takes a long time – 40 years in this example.
Changing your business model is an option too. Many manufacturers have fallen into this approach by accident. De-emphasising big ticket but infrequent low-margin sales, and maximising after-sales support and parts business opportunities is an example. Some of these smaller but more predictable revenue streams can be financed more readily and are more naturally carried out with lower overheads through B2B eCommerce, where there are many new and maturing products and services that can assist.
External services are broadly welcome by small businesses – 25% want help with duties and tax, 25% shipping and customs documentation and 25% in both disciplines to give a fully costed quote.
Small businesses need to demonstrate they are not at risk of failing to fulfil their export contracts – both operationally and financially. Too many times we hear stories of businesses being ill prepared when applying for financing resulting in swift rejection, or losing money on contracts due to bad planning and avoidable mistakes.
A default answer is to simply expect all businesses, large and small, to develop in-house expertise and tools. Smaller businesses often require closer, more targeted support. Even though some business owners sometimes find it difficult to accept, our survey suggests external services are broadly welcome – 25% want help with duties and tax, 25% shipping and customs documentation and 25% in both disciplines to give a fully costed quote.
Export support services have traditionally relied strongly on personal relationships. Tomorrow’s small business leaders who have grown up on the internet will find this approach a little dated. It is also not scalable.
High street banks have struggled to support this delivery model in light of modern financial regulation and are pulling back from supporting smaller exporters. That leaves government and private sector service providers.
Government efforts are under scrutiny
Understandably current government work is focused around origination of the sale and promotion of UK plc, with less on the smooth execution. Work here is soft touch like ‘get yourself some training’ or ‘read this guide’. The emphasis is on the exporter to learn a new skillset.
As the MD of a small engineering company politely pointed out in response to a flippant politician ‘we do not have as much time as is sometimes necessary to find information and services’.
An opportunity presents itself to change this during Brexit. A key requirement for the British government is to negotiate bilateral trade agreements. In support of easing trade barriers could be a national-single-window solution, perhaps extending advances made by SITPRO. This enables cross-border traders to submit regulatory documents at a single location and once – a direct benefit to smaller organisations. Singapore’s solution, TradeNet, is an example that was referred to at UK parliamentary committee hearings in 2016.
Private sector to step up
Some good steps are being taken but they are at best repurposing existing web resources, like EU MADB which UK companies may not be able to use in future, or white labelled commercial solutions for larger organisations. They stop short of providing seamless support through to the fulfilment of the individual orders suitable for smaller businesses.
Technology plays a role in aggregating data and streamlining processes, but organisational culture and industry initiatives are also vital.
In the UK, there is an absence of readily available transaction level data on performance of export transactions and how well exporters complete orders and get paid. Tools to capture information in a standardised way and creating a repeatable process will assist exporters to pre-empt issues and help key stakeholders to continuously and improve export performance.
On the organisational side, well-prepared small businesses can be dynamic drivers of growth, as previous governments have identified. We believe that the existing networks of expertise and competence centres can be upgraded in a way that addresses the challenges of smaller businesses finding, selecting and managing their service providers.
We believe that the UK can achieve a quantum leap for the always-online generations and we are working on solutions to address the above challenges.