No time for standing still
The prime Minister regularly refers to Britain being in a “global race” for export success. The EYITEM Special Report on Exports confirms just how competitive this race is. Despite growing export volumes by 17% since the middle of 2009, the UK has seen its share of world trade fall: Germany by contrast has increased its share, growing export volumes by 34% in the same period.
The EYITEM report clearly sets out the challenge: successful exporters target the right markets with a very competitive product offer and are supported by world-class infrastructure and services. All of these pieces have to come together to enable export success.
A review of the drivers of export performance between 2006 and 2012 is very informative. According to the analysis by EYITEM, the UK export sector:
- Improved its labour competitiveness relative to competitors such as France, the Netherlands and Sweden but fell further behind the USA and Germany despite an improvement in the sterling exchange rate;
- Adjusted its geographic focus to sell more to the faster growing markets such as China and Brazil, but again with less success than others, the UK’s main competitors grew share faster than the UK in all of the BRICs except Brazil where the UK had stronger performance; but
- Continued to suffer from structural weaknesses such as skills, education, access to finance for SMEs and infrastructure.
The report analyses tends in labour costs to illustrate how competitive and dynamic the battle for exports is. Germany and the USA have driven competitiveness relentlessly and continue to grow their advantage on labour costs relative to the UK. As UK business battles to adjust to this threat, recent data shows the Eurozone periphery responding to their economic challenges by improving productivity. The result is that UK exporters find themselves under pressure from both strong and weak economies.
Business needs to pick its battles carefully
The global race for exports is very competitive and there are no easy wins. UK businesses need to be very clear on the areas where they should compete. The key steps in making this choice should be:
- Identify the markets with the best growth prospects:
- Assess the competitiveness of individual goods and services for these potential markets;
- Evaluate the scope to differentiate the offer, it is clear price alone is often insufficient to guarantee success;
- Review the potential to mitigate any structural weaknesses impacting the offer.
Potential actions in each of these areas are described below.
- Identify markets: It is important to drill down to the prospects for products and services within individual countries. Without doubt, countries such as China and India are growing faster than western economies but the rate of growth in demand for specific products will vary by country and by segment and geography within countries.
The USA is returning to growth but it is clear this is a competitive market and so plans must reflect competitive realities and the possibility of reduced scope to generate significant margins for example.
As the EY Capital Confidence Barometer identified, UK businesses are looking beyond some of the more popular high growth markets and are actively targeting markets in Africa and the Middle East where there may be more opportunity for profitable growth.
- Assess competitiveness: The EYITEM Report identifies strong growth potential for UK exports of Chemicals, certain Manufactured Goods and Machinery and Food and Beverages. In addition, we know from the EY Global Investment Monitor that the UK is a magnet for investment in Software, Financial Services and Business Services. UK business needs to draw on its strengths to identify the market entry opportunities offering the greatest chance of success.
- Evaluate scope to differentiate: price competitiveness alone does not guarantee export success and it appears that it is at best a transient advantage as competitor nations respond. It is critical therefore to look at sources of competitive advantage. “Brand UK” and our reputation for quality and design seems a potential opportunity especially for consumers in certain fast growth markets.
Another option might be to consider how to leverage the flows of investment into the UK. As both the EY Capital Confidence Barometer and Global Investment Monitor demonstrate, the UK is a destination for inward investment from many countries. There may be scope to use this investment to generate access to inward investor markets on a reciprocal basis. partnerships or alternative models might create new sources of competitive advantage.
Business should continue to lobby government to invest and act to address structural weaknesses but this takes time. In the interim, it is important to see if business can address some of these weaknesses themselves. Skills for example may be improved by industry led initiatives absent concerted government action