UK exports are a consistent story of failed ambition and declining market share.
In 2012, in setting out his ambition to double UK exports to £1tn by 2020, the Chancellor of the Exchequer threw down a gauntlet to British exporters. At the current time there appears almost no chance of the UK achieving this target. UK export values have remained relatively flat over the last three years and the July 2015 OBR and EY ITEM Club forecasts suggest that £630 to £650bn is the realistic range for exports in 2020.
The failure to achieve this target should come as no surprise. The story of UK exports is one of a continuing long-term decline in world market share. The UK accounted for 10% of world exports in 1950 but this had fallen to 3% by 2009. Yes, other developed countries have lost market share too, but not at the rate that the UK has done so.
Having the correct market focus is the key determinant of national export performance.
Over the last 2 to 3 years, the EY ITEM Club has undertaken a series of analyses of the UK’s export performance for both goods and services over the last two decades. The key conclusion is strikingly clear: export growth is achieved by being successful in the fastest growing markets.
In this context, the most important attribute is agility – being able to identify and respond quickly to growth opportunities provides the key to export success, this requires a mix of coverage and capability. In recent years, especially compared to our peers in Europe, the UK failed to move either its market focus or its product portfolio quickly enough to exploit the opportunity created by the growth of the BRICs.
The focus on the BRICs has not been successful.
The numerous calls for greater focus on the BRICs have not boosted UK export performance. The EY ITEM Club research clearly shows that the UK has lagged our peers in penetrating these markets. This should come as no surprise. Yes, these are markets with long-term potential in terms of absolute size and increasing average wealth, but the goods and services demanded are not those in which the UK has a competitive position, the key import sectors have been manufactured goods, intermediate goods and commodities. It was unrealistic to expect that the UK was going to struggle to be able to grow quickly in these markets. The focus of UK export activity should be on those markets where growth is in areas that the UK has a competitive offer for the market.
Now is the time for UK business to move on and play the ACE.
The published forecasts of country and sector teams and our EY teams in the market all identify the USA, China and Western Europe as the three largest markets in money terms over the next 1 to 2 decades, with India emerging towards the end of this period as the next opportunity. Although insufficient to reduce China’s dominance of global growth, the slowing of growth in China together with the return to more normal monetary policy in the USA will squeeze demand and capital flows to emerging markets, with the result that the emerging countries will grow more slowly than we expected a decade ago. In similar vein, recent research by the Pew Centre indicates that the rise of the emerging market middle class is also happening at a slower rate than was previously forecast further reducing the attractiveness of emerging markets.
The BRICs were always going to be difficult markets for UK business, demanding a product set we were not particularly strong in. Of course, this may change in future but the UK needs a different approach to start to move the dial on export growth. In geographic terms, the acronym ACE better describes the opportunity for the UK: America and China offer the greatest absolute growth in markets and America and Western Europe offer the best levels of income per capita, important for the UK’s relatively high value goods and services.
We will have to pick winners.
Sector wise, technology, life sciences and financial services are expected to grow at the fastest rate over the next two decades but industrial products and professional services will also grow at a healthy rate. In absolute terms, real estate, retail & wholesale and government will exhibit high levels of growth but may be difficult sectors to grow exports in as they tend to have high levels of domestic content and buyer power. Media and life sciences, two sectors prominent in much of the discussion on UK exports are relatively small in global terms, although both offer sizeable niche opportunities.
Industrial products leaps out of all our analysis as a very large growth area and one that is undergoing huge change as geographic rebalancing and technological innovation change the economics of the industry. The UK is dramatically under-represented in this sector as we have heard for years that we can’t compete in low labour cost sectors. However as technology changes the outlook there are clear opportunities of major scale for the UK to consider.
Now is the time to act.
The world economy is in the midst of a transformation. There is a clear rebalancing of corporate activity across geographies underway with risk weighted analyses now favouring more exposure to developed markets. This is impacting sector economics and creating opportunities for UK exporters.
The key to export success is being in the right markets in geographic and product terms, The UK needs to be clear on where its priorities lie and that these may be different in future to the emphasis we have seen in recent years, certainly the focus on the BRICs as a group should be reduced, while the way in which the UK approaches the technology and industrial products requires review. I will return to the way to go about this in future blogs.