Is too much golf really the cause of the UK’s poor export performance?

The problem with UK goods exports is not to be found on the golf course –performance will only improve if business and government work together.

UK exports: a consistent story of failed ambition and declining market share…

In picking up on Liam Fox’s recent comments,  Andreas Whittam Smith is right to question the quality of the UK’s export performance. It has certainly fallen below aspirations. In 2012, in setting out his ambition to double UK exports to £1 Trillion by 2020, the then 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: the EY ITEM Club summer forecast suggests that £660 Billion is the likely level of 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.

…but the average hides the true story: the UK is world class at exporting services…

Liam Fox and Andreas Whittam Smith are wrong at least in part: the UK is a world leader in services. UK exports of services have grown impressively in recent years as the UK has been successful in selling to the world’s largest and fastest growing markets. The UK has world leading capability in financial services and business services but is also able to generate a positive trade balance in a number of other service sectors. By contrast, although there are pockets of success, the UK has found it much harder to succeed as an exporter of goods.

…because we have a very strong domestic services industry…

One stand out difference between services and goods is the stronger domestic position of UK based services companies. The UK has a thriving services sector and UK companies are strongly represented in the domestic market with a lower import share of final output than for goods. This provides companies with more direct control over their operations, pricing and supply chain and appears to be important in driving stronger market performance.

By contrast, UK manufacturing has declined domestically for two or more decades. EY research shows that the UK has off-shored a greater share of its manufacturing capability than the USA, Germany and France since 1995. UK manufacturers today import around 60% of the final value of their products compared to US manufacturers who import around half this proportion.

We also found that UK manufacturers have tended to contract out their off-shored manufacturing rather than either build or buy facilities in other countries. Between 2010 and 2014 for example, German companies invested on average in 165 manufacturing and 54 logistics projects a year compared in the rest of Europe to 29 and 10 respectively from the UK.

German companies have taken a different approach to offshoring than their UK counterparts and this has allowed them to retain more control – greater agility – over their extended value chain

…partly because this is what Government policy has supported…

The UK services sector is competitive on a world stage and this reflects the strength of the UK domestic industry. However, it is also true that UK Government policy has favoured the services sector. Regulation has been light and the focus on lowering the rate of corporation tax rather than either increasing capital allowances or reforming business rates has favoured services over goods. Even more significantly, a failure to invest sufficiently in infrastructure, skills and R&D and constantly changing energy policies have all contributed to the declining competitiveness of the UK goods sector.

In addition, the focus on recent years by the UK in driving exports to the BRICs has been of little benefit to the goods sector. EY ITEM Club research shows that export success depends on having the right product and market portfolio. It was incredibly optimistic to think that after years of neglect of UK manufacturing, it would be possible to penetrate successfully new markets which were demanding goods that the UK doesn’t make. There has to be more rigorous analysis of capability to compete rather than a top down identification of relative market growth rates. The UK’s relatively slow growth in the BRICs is no surprise.

…and change will require more collaboration between the public and private sectors.

There is a great deal to do if the UK is to break the trend of consistent decline in our world market share for trade in goods. But the change in the world economy means that there is currently a unique opportunity to change the UK’s performance in goods. Modern manufacturing is increasingly reliant on technology rather than labour costs and the UK’s experience with services shows that we can be competitive and successful in such environments.

If the UK is serious about improving its performance as an exporter of goods then we must develop an integrated trade strategy that clearly defines the roles of: exports; attracting FDI; supporting Overseas Direct Investment by UK businesses; and import substitution activity. This should also set out Government’s role as the orchestrator of activity bringing public and private sector resources together.

A sector and product focus is required with an explicit industrial framework identifying the work required to build the capability to support highest value trade sectors.  In particular the role of technology and the potential to rebuild a manufacturing base to enable the UK to compete in the market for industrial products should be defined in detail. A more ambitious strategy for Reshoring should be a key element of this approach.

The approach must also include a realistic plan for developing key supply chain capabilities in key sectors identifying the resources, skills, infrastructure and research investment required to build these. Alongside this is the need to identify the investment in infrastructure that will drive real and sustainable differences in export performance.

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