TM Finance Supplement 2013 by Optic Juice

FINANCE Financing exports: internal & external requirements

FINANCE 2013 PART III

What’s in this report? P4 Caffeine rush Explaining the strategy of coffee machine maker Fracino which started exporting in 2008 and now sells to customers in 50 countries worldwide

P6 Don’t dismiss Europe Despite pressure for new exporters to look to rapid growth and emerging economies, Automotive Insulations has targeted European markets and is seeing good returns on investments

P8 Pumping up exports Exports at pump manufacturer Hayward Tyler have increased 25% since it rebanked last year. What else is behind its international growth and where will it target next?

P12 How would you like to pay?: Why should exporters to China accept payment in renminbi?

P13 Measured risk for immeasurable reward Lombard, Royal Bank of Scotland Group, weighs up the risk and opportunity of becoming an exporter to emerging markets

P14 China – access all areas Royal Bank of Scotland looks at the market potential for UK manufacturers in a range of sectors across China

P18 Going global Santander explains when, why and where advice should be sought by companies new to exporting

Editorial

This report was compiled for The Manufacturer magazine by: Jane Gray, Editor j.gray@sayonemedia.com

Design

Martin Mitchell, Art Editor martin@opticjuice.co.uk

Sales

Henry Anson, Sales Director h.anson@sayonemedia.com In order to receive your copy of thec The Manufacturer kindly email g.gilling@sayonemedia.com, telephone 0207 4016033 or write to the address below. SayOne Media cannot accept responsibilty for omissions or errors. Terms and Conditions Please note that points of view expressed in articles by contributing writers and in advertisements included in this journal do not necessarily represent those of the publishers. Whilst every effort is made to ensure the accuracy of the information contained in the journal, no legal responsibility will be accepted by the publishers for loss arising from use of information published. All rights reserved. No part of this publication may be reproduced or stored in a retrieval system or transmitted in any form or by any means without prior written consent of the publishers.

INTRODUCTION Increasing the number of SMEs that sell overseas by 100,000 has the potential to add £30 billion to the UK economy.

his was the “extraordinary fact” shared by Prime Minister David Cameron during a 2011 speech in which he said it was time to start truly addressing the second of Britain’s two greatest economic weaknesses – “a deficit in our budget and a deficit in our trade”. While the first issue has been the obsession of Treasury during this parliament, the other has seemed to be increasingly swept under the carpet, with economic commentary focussing rather more heavily on measures such as the Purchasing Managers Index for its assessment of economic wellbeing. But the 2012 Budget set a challenge to see UK exports double in value to £1 trillion a year by 2020, and as David Cameron’s comment above indicates, government knows this cannot be done through simply encouraging existing exporters to do more of what they know. More companies need to join the international game, exporting to new destinations with ballooning middle class populations. But a year after this grandiose challenge was set, the response has been rather disappointing. Despite small increases in exports this year, the CBI termed the UK’s April trade results “unsatisfactory”. Continuing global uncertainty is largely to blame, but other barriers too, have hampered progress on increasing exports. At the beginning of June, Trade and Export Finance Limited published a report in conjunction with The Institute of Export which suggested SMEs are struggling to finance their export orders. The gap between the success rates of companies with a turnover of over £25m and those with turnovers below this level is widening as a consequence. The report found that two out of three exporting firms prefer to use their own funds to drive their internationalisation, rather than access support or international trade services offered by banks, and although there is increasing awareness of government support for exports, Trade and Export Finance and the Institute of Export found that awareness could be much improved. With a view to this, The Manufacturer has compiled this report, which includes case studies from exporting SMEs and contributions from financial institutions. The former give insight into the characteristics, internal infrastructure and management approaches of SMEs building lucrative export markets. The latter help plot the landscape for export aid and explain why expert advice is needed in certain markets. END

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rush Caffeine

Coffee machine manufacturer Fracino has gone from domestic trader to international sensation in four years. Here’s how the export business was built.

overnment’s desire for an export-led economic recovery – powered by a strong core of SME businesses – has been publically expressed and backed with numerous events, additional, targeted funding to UKTI and initiatives such the Open to Export network which helps SMEs collaborate and share information around market opportunities. But many smaller firms still struggle to understand how to formulate an export strategy and identify what business infrastructure and support needs to be in place in order to mitigate risk and profit from international expansion. But examples of SMEs who have gone from export zeros to heroes with methodical strategy are available. Birmingham-based cappuccino and espresso machine manufacturer Fracino is a case in point. Founded in a garden shed fifty years ago, Fracino this year scooped the EEF’s overall ‘Winner of Winners’ and Outstanding Export Award titles, and has been recognised by prime minister David Cameron for “selling coffee makers to the Italians.”

MD Adrian Maxwell, a former Rolls-Royce engineer who runs the company. Adrian’s wife Marion is the credit controller and their daughters Rebecca and Katrina are service coordinator and purchase ledger respectively. Fracino employs 42 people overall.

Innovation and marketing Fracino‘s export story started in 2008 when the company saw an opportunity to take advantage of a weak pound to explore the appetite for its products overseas. Today, Fracino’s export business spans more than 50 countries and five continents, with exports representing 28% of its £3.6m turnover in the year ending March 31, 2013.

Funding and company structure Fracino has entirely selffinanced its international business expansion, though it was helped off the ground by a £1000 grant from The Birmingham Chamber of Commerce to support exhibitions. The third generation family business comprises founder Frank Maxwell,

Innovation and new products keep Fracino’s appeal fresh in each of its markets, with product development reflecting local requirements and tastes. The company has invested millions in its R&D programme which hones both products and manufacturing techniques to be world class and relevant to its growing global customer base. Marketing with an appreciation for culture and the product user-base is essential. E-commerce and thoughtful investment in internet-based advertising and website design have been key to resource efficient market access while exhibitions and the formation of strategic partnerships have also been important. Fundamentally however, the technical expertise and commitment of Fracino’s dedicated export team – comprising 3 members of staff including Adrian Maxwell – has guided and driven international growth.

More markets, more growth Over the last 12 months Fracino has expanded its export horizons to countries including Australia, Russia, Peru, Spain, Finland, Romania and South Africa. The formula behind the continuing outreach into new markets harnesses the internet to pro-actively research, attract and retain a team of distributors from countries such as the UAE, Chile, Bulgaria, Australia, Cyprus, Germany, Indonesia, Istanbul and Japan. This network is now 40-strong. Fracino thrives on differentiating itself from a crowded market of well-established domestic appliance brands and artisan coffee machine producers and its approach to

FINANCE 2013 PART III Fracino

Fracino exports to 50 countries on 5 continents

top10 Financial management for exports: Fracino’s top ten tips

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Identify the risks of dealing in foreign currency Price your goods and services in the currency of the country in which you are trading Understand the importance of the dollar - particularly when dealing with in the Middle East Include any gains or losses resulting from foreign currency transactions in your profit and loss account Qualify all your leads very carefully – particularly those from China Avoid supplying products or services without payment up front (Fracino works on 30% up front and the rest on completion) Avoid sending free samples (you may never see them again) Select a bank experienced in dealing in foreign currency and letters of credit Steer clear of using notarised documents – they are expensive, unnecessary and can be fraudulent Seek advice from your local Chamber of Commerce regarding export documentation including EUR1 forms (Movement Certificates to support claims for preferential rates of duty in the country of importation)

Fracino re-invests profits in research and development, keeping its UK team busy on innovation in products and processes which will support its growing international business.

At EEF’S Future Manufacturing Awards 2013. L-R: headline sponsor Neil Cunniffe, Frank Maxwell and Adrian Maxwell, Fracino and Declan Curry, Compere.

developing distribution partners is central to that distinction. Rather than seeking out distributors who are experienced in the art of selling coffee machines, the manufacturer selects those who are new to the industry and trains them in Fracino’s ways of working and processes. These partners add extra value by assisting with local technical and regulatory advice to make sure Fracino can adapt its offering and processes for legislative and compliance purposes. Distribution partners also offer critical cultural advice. Frcacino has achieved double-digit growth over the last five years and revenues from exports are predicted to constitute 50% of turnover by 2015. This is based on the increase in inquiries and a continuing rise in the volume of leads/ inquiries being translated into sales – most of which currently hail from Australia, the Middle East (Dubai) and Thailand. New target markets include the US, Canada, China and India and growth will continue through investment and involvement in exhibitions - in particular

the HOST international exhibition for the hospitality industry in Milan this October where Fracino will launch a new bean-tocup machine. Enthusiastic follow-ups from previous exhibitions are paying dividends, proving the value of the upfront investment these shows require. More resource and expertise are being developed to support effective exhibition appearances.

Acknowledging challenges Starting an export division from scratch has not been a smooth ride. Securing key certifications which are critical to future export growth sometimes proved troublesome. Fracino has learnt to focus its efforts on the certification which will add most value and since 2011 the company has been working towards the CB Certification (safety tests for electrical equipment which are BSI accredited) which spans 44 countries worldwide and is the basis of all related standards. The manufacturer has also experienced a sharp learning curve regarding exchange rate fluctuations and their potential impact on cash flow. From the outset Fracino set up fixed exchange rates in euros and dollars in advance with its team of distributors, along with foreign currency accounts in euros and dollars. Having the facility for clients to pay Fracino in their own currency enabled the business to offer preferential rates to its distributors – particularly those dealing in euros. But fluctuation in exchange rates saw Fracino occasionally selling at a lower price than it intended to. And although the company has not experienced any major financial management disasters since embarking on the export route in 2008 MD Adrian Maxwell recognises that, as the international trade arm of the business conitues to grow, sales in foreign currencies are likely to grow the outweigh sales in sterling – potentially sparking volatile profitability. END

Don’t dismiss

Europe I

t was welcome to hear Michael Fallon, Minister of State for Business and Enterprise acknowledge at the SMMT Annual Summit in June that he knows the EU market is still important to UK manufacturers. A straw poll from the audience certainly proved resoundingly that a political move away from the EU – as is being mooted – would be considered a negative in the automotive industry. Automotive Insulations, is a manufacturer of sound and thermal insulation components for the automotive and marine industries. We recently set up our first overseas operation in Sweden, with another factory due to open in Germany later this year. Having experienced a period of rapid growth in productivity and turnover we had been considering expansion abroad for some time prior to opening our first foreign site in 2012. Much of the assistance for establishing exports was focused outside Europe. But, as an SME, we found several compelling reasons for setting up closer to home. Despite the recession, they do still make things - and more importantly buy things in Europe. In fact, it’s often

Government rhetoric with regards to exports has recently focused on increasing trade with nations beyond Europe. Commentators have spoken derisively of the fact that Europe is still the destination for half of Britain’s overseas trade. But Jim Griffin, MD of Automotive Insulations, cautions against dismissing the market for both exports and overseas production.

easier to approach markets while they are in recession and looking for ways to cut expenses, replace inferior suppliers and improve quality without cost. Furthermore, British manufacturing has maintained its reputation for quality across Europe. As we ease slowly out of recession, it can only be a win-win situation if you have secured business on the low market. As European economies grow, sales will grow naturally with them. Having learned how to support new sales in Europe, you can then look to markets further afield with more confidence and less risk. If you work closely with your European partners, you may find that they too have ambitions abroad or are already there, offering the opportunity to move into new markets with someone you already know.

Learning from success A major reason for Automotive Insulation’s expansion abroad was the dilution of our dependence on

one market/customer. Through writing a business plan (with the assistance of the Goldman Sachs 10K Small Businesses Programme), we identified an over exposure in the UK automotive market and realised the potential to repeat our core business in European markets, particularly Germany. For Automotive Insulations, Sweden has proven a great place to start a business. It has a solid business culture and entrepreneurial spirit and the automotive industry is one of Sweden’s most successful growth sectors. With its own currency, the economy has experienced steady growth and is now 4.5% larger than before the global recession. Our enterprise in Gothenburg provides products for the Scandinavian market, as well as a place where we can transfer and warehouse products for the local market in addition to our current UK and imminent German businesses. We found that our products would sell

FINANCE 2013 PART III Automotive Insulations

tips

compared to the cost of flights to Europe to do our own, more qualified research. We were also concerned about the time lapse between starting to look and actually selling products into non-European markets. Cash flow is key to our survival, so the delay in return was unacceptable. After just six months of planning and preparation, Sweden began producing components in January 2013 and is already on two shift operation as well as moving rapidly into profit. Our German company is scheduled to begin trading during the last quarter of 2013 and this has been achieved at an even lower cost, having learned from setting up the Swedish operation.

for establishing an export business

The right business environment, the right business partner

Write a true business plan that you believe in and keep it live Speak to your bank about export markets you have identified – ask them about networking opportunities Speak to UKTI Understand the culture of the chosen market Don’t be afraid More information about Automotive Insulations can be found at www.autins.co.uk

Key to success has been finding the right local partners. In both Sweden and Germany, they were known to us for several years prior to setting up joint operations. Having a local partner has enabled us to learn about the culture which is vitally important; it also ensures that we have good networking in the area. Local knowledge and advisers are essential to ensure compliance with local laws and as well as enabling you to take full advantage of any local support and grants that are available. In Germany, they have been particularly welcoming. Local inward invest teams are able to assist in finding everything from property through to people and licences – in fact, almost everything needed to start a business. And best of all, it’s free. However, financing has been an interesting learning curve. Initially we chose the wrong German bank and had problems arranging the banking facilities we needed because they failed to understand our industry and had no interest in listening to us. Our bank in the UK stepped in and introduced us to Nordea Bank which has been excellent so far.

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better if we were actually in place in the local market with a manufacturing and warehouse base. We did look at further flung markets such as India and China. However, even the cost of starting research and due diligence was extremely high

Manufacture abroad? It can be difficult to decide when demand warrants manufacture abroad rather than exporting to local customers. If aiming for growth and longevity I would advise firstly ensuring that the day to day running of your UK business is sound - and if so, take a look at Europe now. However, you don’t have to manufacture there. We have good transport connections to mainland Europe with products moving quickly and at a relatively affordable price. Network with companies who export and have confidence in your product. If it’s the best and at the right price, it will find buyers. It’s early days for our European expansion, but performance so far has exceeded expectations. The

Local inward invest teams [in Germany] assist in finding everything from property through to people and licences – in fact, almost everything needed to start a business. And best of all, it’s free. Jim Griffin, MD, Automotive Insulations (pictured above)

Swedish turnover for the next 12 months should be in excess of £1.5 million from an investment of around £500k into the site and equipment. With profit levels better than the UK, the predicted turnover by the end of the third year is £4 million. Meanwhile, with the German operation due to open in a few months, customer offers of work so far are around £1.5 million pa. There are undoubtedly obstacles and pitfalls to setting up abroad, but the rewards offset the risks. Parts of Asia and South America may seem an attractive today, but I would urge companies looking to expand into new geographical markets to look a little closer to home first. END

FINANCE 2013 PART III Hayward Tyler

pumping

exports

Luton-based SME Hayward Tyler won commendation for its confidence in exports during the UKTI’s Export Week in May. CEO Ewan Lloyd-Baker gives insight into the enabling factors behind its international success.

ayward Tyler makes pumps and wet-wound and dry motors for critical applications in a number of global industries. It’s fastest growing market is oil & gas, where it supplies motors for top-side and subsea applications, but it also has the necessary accreditations to supply the nuclear power industry and has a weather eye on renewables – “That business segment only accounts for five per cent of our revenues today, but is an important future prospect,” says the company’s CEO Ewan Lloyd-Baker. As with many UK-based players in the oil and gas industry, the majority of Hayward Tyler’s revenues come from exports, with double digit market growth mirroring regions with strong GDP performance – where economies are growing there is a need for power explains Mr Lloyd-Baker. Also like many manufacturers making critical products and systems with long lifespans, Hayward Tyler is not just exporting physical products, but services too. Last year Lloyd-Baker says that

around 70% of revenues came from after-market activities, though he hopes that next year the balance will be more in the region of 60% services and 40% original equipment with a view to gaining a stable 50%-50% balance in the long run. The split between exports and domestic trade is 85% versus 15%, and the company attracted special commendation from Lord Green, minister for trade and investment, for its confident export operations in May this year when he visited the firm to officially open its refurbished work shop. But while Hayward Tyler’s internationalisation has been progressing for some time, it is only in the last year or so – following a management revolution at the company that it was able to start optimising its value-add offering in the global marketplace and capitalise on the opportunities available. LloydBaker highlights a few factors that have changed the company from a dabbler in international markets into a competitive globalised player:

Refinancing: Lloyd-Baker’s decided in 2012 to pay down debt and raise money on the market – via an Indian EPC which now holds a 43% stake in Hayward Tyler – so that the firm could re-bank with Standard Chartered. This was an important move from an exports perspective explains Lloyd-Baker: “Our previous bank was not interested in supporting our exports. Without that supportive relationship we could not qualify for the financing available from UKTI via the Export Finance Guarantee.” Since re-banking exports have grown by more than 25% for Hayward Tyler.

Leveraging EFG: The benefits of accessing the Export Finance Guarantee are twofold says Lloyd-Baker. “Firstly, it allows us to reduce our exposure or increase our lending on the bonding side. Secondly, it gives us access to working capital finance. We are just beginning to tap into this facility and it will help immensely as BCPs [boiler control panels] can have a 40-52 week lead time. Sometimes there are no staged payments attached to such order so you can be left with the need to fund two or three months of working capital. The provision of this working capital finance is a welcome sign that the rhetoric about making UKTI more accessible to SMEs is becoming tangible.”

FINANCE 2013 PART III Hayward Tyler

Understanding different payment practices: There are cultural differences in dealing with different markets, says LloydBaker, but there are also more tangible differences in business practice. Taking China and India as examples – since these countries represent two of Hayward Tyler’s largest installed bases – Lloyd Baker observes, “In India – where we deal with BHEL, the largest boiler manufacturer in the world – things have become very transparent, but the payment terms are challenging. Deposits on orders are uncommon and this means funding a lot of working capital. In China, we find it easier to negotiate payment terms – perhaps because we have been there longer and our relationships are more established.”

Local trading in Chinese RMB: Hayward Tyler started trading in Chinese renmimbi (RMB) last year for local business (p12). “We still use US dollars for most international trade – which means the original equipment business,” says Lloyd-Baker. “But it has proven very beneficial to deal in RMB for our Chinese after-market and service business. It gives our general managers in China much more autonomy to run independent, profitable business units.” Lloyd-Baker says that although integrating financial transactions in RMB into overall financial reports is not simple today, it has not required investment in new systems or significantly altered its banking relationships. “It will only become easier in the long run,” he sums up. Finding the right people: Hayward Tyler’s first foray into China took the shape of a wholly owned foreign enterprise. “This was set up before my time,” says Lloyd-Baker. The facility was originally run by a UK sales manager who went out to become general manager for the new Chinese site. But it became obvious that Hayward Tyler needed someone local to run the facility says the CEO. “With the help of a local search agent we found an ideal candidate. She was interviewed by the incumbent GM and our Mandarin speaking sales manager – having language skills in place really helps. In the course of three years the local GM has tripled the size of our Chinese business – all be it from a small base. But recruiting is a hard science to master – especially abroad.” Lloyd-Baker says the company is yet to find the local leadership it wants for its Indian base.

About Hayward Tyler: Established: 1815 Locations: Luton (HQ); East Kilbride; Colchester, Vermont, USA; Kunshan, Jiangsu Province, China; Faridabad, Haryana, India Products: Pumps and wet-wound and dry motors Markets: Oil & gas, fossil fuelled power generation, nuclear, renewable Revenues in 2012: £300m Employees: 310 globally, 200 in UK

Hayward Tyler’s installed base in India As urbanisation and attendant demand for power in the developing world continue apace, Lloyd-Baker says export growth shows no sign of slowing. As oil depletes and becomes less accessible, Hayward Tyler is also confident of growth in demand for its products targeted at enhanced oil extraction. It also expects diminishing oil supplies to spur a rise in global nuclear new build markets. In all, the global market has appetite for Hayward Tyler’s products and services. With a robust internal financial infrastructure in place – supported by Epicor ERP – and a supportive banking relationship established, a profitable export-based enterprise looks sustainable. END

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FINANCE 2013 PART III Western Union

UK manufacturers exporting to China should offer to take payment in renminbi say financial experts.

In the aftermath of the global financial crisis the Chinese government was made uncomfortably aware of the dependence of its massive export market on the US dollar. Accordingly, policy makers set in motion a strategy to internationalise its currency, the renminbi (RMB). Getting off to a relatively slow start as a global currency, China’s strategy for internationalisation of the RMB has now gained significant traction. Figures from Royal Bank of Scotland, published earlier this year, showed that the foreign exchange market volumes of RMB traded daily are now worth around US$5-6 billion. This is double the volume seen at the start of 2012. On the trade settlement side, 47 countries now use renminbi for at least 10% of their payments with China and Hong Kong. RMB is now the 13th most used currency in the world, having recently surpassed the Russian ruble. It has moved up seven places in just over a year. While China’s initial strategy may have been spurred by a desire to protect its export market, its significance to the wider world is growing every day as China’s volume of imports swells. China is set to become the world’s largest trade market for both imports and exports in the near future. A May report from the European Commission showed that the largest source of Chinese imports is the EU and export news is full of statistics about the size and appetite of

the new consumer middle class in China. In the next five years, the number of new additions to the Chinese middle class will exceed the entire UK population. The export opportunities associated with this demographic phenomenon are immense – not just for consumer goods manufacturers, but for suppliers into energy generation markets, infrastructure and transport. The Chinese government has a serious and well defined five year plan to establish the business and living infrastructure that its population will demand.

prefer to trade in their own currency. As exporters however, Heald says Western Union’s research found that many Chinese companies are reluctant to ask for RMB payments and so there remains a big communication and education challenge about the preference. In 2011, Western Union Business Solutions became the first non-bank organisation to offer the ability to make direct renminbi payments between Chinese and foreign parties through its GEO Global Clearing network. Heald says that in addition to a growing awareness of customer preference for RMB settlement, a realisation that it also reduces risk exposure to exchange fluctuations – both for UK and Chinese firms – is driving uptake of the transaction service. More generally, with the UK government driving a strong case to make London a major global centre for off-shore trade of RMB (Hong Kong is the primary location), British exporters should find themselves at a long term advantage in the stability and ease of exchange services for RMB to sterling. END

Customer is King But while China’s relatively new appetite for imports puts the power of opportunity into the hands of manufacturers in developed economies, the all-important power of the consumer now lies with Chinese businesses and buyers. And this, says Gareth Heald, vice president and regional finance director EMEA at Western Union Business Solutions, means exporters to China need to realize the value of offering to deal directly in RMB from a customer perspective. “The attraction of being able to buy something in your own currency should not be under estimated,” says Heald. “It’s an easy way for exporters to China to make sales of their products that bit smoother.” According to research among 1,000 Chinese companies, conducted by Western Union Business Solutions in early 2012, a third said they would

The attraction of being able to buy something in your own currency should not be under estimated. Gareth Heald, Western Union Business Solutions

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FINANCE 2013 PART III Lombard

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91860.004_Manufacturers Cup Cake 196x276 aw2.indd 1

UK’s leading producer of commercial glasshouses, retail structures and associated equipment. This year they anticipate that their export business will make up 80% of their sales and they have, perhaps surprisingly, found a strong market in the Middle East. When the company bid successfully for a $13m contract in Qatar, they turned to their RBS for financial solutions. Working with the Transaction Services team, Cambridge Glasshouse was able to secure support under the Bond Support Scheme and also gain a Letter of Credit with a deferred payment period and document preparation support. Applying for these schemes can be complex, banks such as RBS are experienced and have refined an application process that works. Steve Hinch, Financial Director, Cambridge Glasshouse, concludes, “The Qatar contract is the biggest piece of work we have ever won. Without the support of our bank we would never have accessed the working capital needed to deliver it.” While international trade has always been more difficult than the domestic market, there are greater potential rewards, particularly in the current climate. There is also a wide array of support and solutions available to UK manufacturers. We would encourage businesses to contact the UK Trade & Investment (UKTI) or speak to an export finance expert such as those found in most major banks. Your bank is also likely to be able to put you in contact with other customers that have been through the process. The sooner you engage with

Mark Ling, head of trade & supply chain finance at the Royal Bank of Scotland Group acknowledges that exporting presents greater complexity and risk than sticking to domestic markets. But it also opens up a world of opportunity and, he assures, support is available to ease the way for UK companies seeking reward in global markets.

K manufacturing has a real opportunity to capitalise on the growing export opportunities found within emerging economies, the largest of which are China and India. There continues to be strong growth in these markets, particularly when compared with the traditional Western markets and there is also a strong interest in UK products. However, the financial terrain can be challenging so it is important that businesses going into the export market do so with their eyes open and that they take advantage of the support available to them, engaging with partners as early in the process as possible. In doing so it is possible to mitigate the risks and capitalise on the opportunities available. UK Export Finance and the UKTI have made some step changes in the support they provide to the UK banks and UK exporters over the last couple of years

Securing a record contract One business that has done just this is Cambridge Glasshouse. The company, which is based in East Yorkshire, is the

12/04/2013 10:47

these resources, the better equipped you will be to take advantage of the available exporting opportunities. END

Tops tips for export beginners:

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Know your overseas market (potential opportunities and competition) Tackle one new market at a time Get to know your potential customers Understand the documentary requirements in the country you wish to trade in Consider the different ways of selling your goods (distributor, sales agent or joint venture routes) Think about additional protection that may be needed to copyright your products Reduce the risk of customers not paying for goods (letter of credit or upfront payment) Customise your marketing and promotion materials Select appropriate transportation methods and ensure goods are insured at every stage Build strong relationships

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To find out more, please contact Mark Ling, RBS Head of Trade and Supply Chain Origination Transaction Services UK Tel: +44 771 1005417 Email: mark.ling@rbs.co.uk www.rbs.co.uk/international

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ACCESS ALL AREAS Peter Russell, head of manufacturing, UK Sector Coverage, at Royal Bank of Scotland, considers how British firms might access or increase their share of attractive Chinese export markets.

egardless of how faltering the road to economic recovery, the UK’s manufacturing sector is likely to rely increasingly on exports to sustain growth. Indeed, an RBS survey entitled Business Export Research found that 19% of UK manufacturers anticipate significant increases in export activity over the coming five years, against an average of 8% across all sectors. Soundings we’ve taken from customers at RBS suggest that a larger proportion of UK manufacturers anticipate exports to China to increase even more over the coming five years. But almost half (46%) of those manufacturers say difficulty finding international customers presents a barrier to successful exporting. And since nearly three in five (57%) expect trading with Asia to become more important, activity and know-how must be improved to satisfy these markets. That means understanding which activities represent opportunities for significant business growth. UK exports to China grew by an annual average of nearly 18% between 2003 and 2010, and more than 20% in 2011 according to HM Revenue & Customs. But ONS/IMF data indicate that, as a share of our total export trade, China makes up just 2% of UK exports. With Chinese GDP forecast to grow at an average of 9.4% between 2011 and 2016, China is a market that UK manufacturers must stay in tune with.

Made in Britain: a marque of distinction For many Chinese customers, traditional hallmarks of British manufacturing – such as quality, reliability and service – underpin the appeal of UK-made products. “British manufacturers enjoy a positive reputation for design, technology and production innovation,” says Alastair Morgan, Consul General at the Guangzhou branch of UK Trade & Investment (UKTI), the government body promoting UK plc overseas. “Their business ethics and the high standards of support and aftercare are greatly admired.” Such high regard is what makes China so appealing to UK exporters who initially fear being priced out the market. Vince Cunningham, a Business Adviser at the China-Britain Business Council (CBBC), which assists UK-registered companies trading within China, says, “It’s not unusual for UK manufacturers to explore markets for, say, automotive equipment, industrial machinery or building materials, and discover similar products being made in China at lower prices. But that needn’t cut them out; their products may well still be highly sought-after.”

Be bold and focused But is British reserve holding back our potential? “There’s a reticence among many UK exporters,” says Morgan. “They need to promote their products’ USPs more vigorously and widely.”

Cunningham believes the most successful British exporters to China are those who take time to understand their customers’ often highly specific needs. “Research thoroughly, focusing on specific demands you know you can meet, or which could be met by refining existing products. It doesn’t matter if you produce nuclear power plant valves, flight simulator testing kits or shower unit brackets; if it has something special, there’s likely to be a market here.” Many UK firms have established production facilities and supply chains in China. Janet Ming, head of the China desk at RBS in London, says, “The government encourages foreign investment; they’re incredibly keen to meet British manufacturers and provide them with support to facilitate investment in property, plant and jobs, such as securing planning permission or trading licences.”

Untapped potential: growth opportunities for SMEs and MSBs Both UKTI and CBBC are highly proactive in China, helping British companies with information and, crucially, introductions to all the right people. These well-developed support structures means successful trade with China is by no means the preserve of large multinational manufacturers. SMEs and mid-sized businesses (MSBs) are increasingly capitalising on export opportunities. Recently, a British firm making machine tools for the diamond industry displaced a Swiss competitor as top exporter to China in its field. “It was a classic case of UK manufacturing entrepreneurship,” recalls Morgan. “Senior management came over; they met potential customers, they took on board what they’d need to do to fine-tune those products which had generated the most interest, and they identified a local distributor they could trust.” He continues, “We’d like to see more SMEs and MSBs make similar inroads. Yes, they might have fewer resources to dedicate to finding markets in China, especially if they’re struggling to protect

FINANCE 2013 PART III Royal Bank of Scotland

GO EAST THEN WEST

Export and production growth opportunities in Chinaâ&#x20AC;&#x2122;s emerging regions: -sector snapshot of the coming five years 6 3

1 2 3 4 5 6 7

Guizhou Yunnan Gansu Jiangxi Guangxi Xinjiang Qinghai

Where to?

1 2

Which sub-sectors?

Why here?

Guizhou

Chemicals Pharmaceuticals Medical equipment Hydroelectric energy Coal power Bauxite mining Construction

Targeted to double GDP by 2016 1200km expressway under construction Ambitions as major tourism region

Yunnan

Healthcare equipment Rail

Strategic gateway to SE Asia RMB10bn investment in rail for next five years RMB2.5m budget for buying healthcare equipment and building hospitals

Gansu

Aviation High-tech Oil refining Wind and solar energy

Jiangxi

Timber and bamboo production equipment Automotive Minerals and natural resources Agriculture

Major producers of rice and freshwater products Three waterworks and renewable energy planned

Guangxi

Aviation

GDP doubled between 2005 and 2010 Main hub for expanding sea links with SE Asia General Motors manufacturing plant (joint venture with Shanghai-based maker)

Xinjiang

Natural gas, oil and coal production

Qinghai

Food Non-ferrous metals and chemicals Biochemicals Hydroelectric energy

Life sciences

Renewable energy

Road-building

Nuclear fuel

Automotive

Rail

Urban

Key hub, the focus of domestic and international flight expansion Designated economic and technology development zone

Gateway to Tibet Contains 90% of Chinaâ&#x20AC;&#x2122;s lithium, potassium and magnesium reserves Airport terminal and runway construction Designated economic and technology development zone Accelerated dam-building programme (12 over coming decade)

Source: UKTI, CBBC, Centre for International Business at University of Leeds

FINANCE 2013 PART III Royal Bank of Scotland

existing UK business. But for many, they can’t afford not to at least take soundings.” Reassuringly he adds, “Thorough research and a well-planned reconnaissance trip, including UKTI support and introductions, can turn a tentative foray into a solid platform from which to grow business here. We see it happening all the time.”

Pinpointing strategic high-demand locations UK exports to China may have been growing but the potential market for goods made or designed in Britain isn’t confined to indigenous companies. There are many foreign-owned organisations established in China, some (including British firms) operating under their own steam, others acting in joint ventures with Chinese private sector investors, from makers of FMCG goods to those producing plant equipment or luxury garments. “The speed at which the economy is growing and the increasing affluence and sophistication of the middle-class population means no one field of manufacturing can be singled out as the number one opportunity,” says Morgan. “But I’d suggest that the automotive, food and drink, precision engineering, healthcare, pharmaceuticals, highspeed rail and ICT sub-sectors will be amongst the fastest-growing over the coming five years.” Many UK manufacturers already enjoy brisk business exporting to China’s developed urban eastern and coastal cities. But new regional opportunities are emerging in providences that up until now have been less explored. The western and south-western provinces are the upcoming hotspots that are set to deliver significant growth opportunities within certain sub-sectors over the next five years. From aviation and high-tech in Gansu providence, healthcare equipment and life sciences in Yunnan to renewable energy in Guangxi, these represent just some of the opportunities with tremendous potential for UK manufacturers. (For full details on upcoming growth opportunities, see map on previous page)

TARGET CHINA

A checklist for UK manufacturers:

Identify your USPs: Determine which products will appeal most to Chinese customers, including changes that might be necessary. Tap into your warm leads: If your UK customers already operate in China, capitalise on your knowledge of their business; ask if they’ll make introductions for you. Check your Chinese competitors: Foreign competitors may be known quantities but don’t ignore domestic rivals, many of which are growing rapidly. Refine your sales and marketing tactics: Ensure your strategy is targeted specifically at Chinese customers. Be there, be visible: Invest management time and energy; consider partnering with symbiotic Chinese companies.

Few quick wins but plenty of sustainable business An enormous infrastructure programme is also opening doors. “China is building roads, airports and rail networks, linking its second-tier and third-tier cities, many of which are becoming specialist manufacturing centres,” says Janet Ming. An increasingly affluent population means these regions represent lucrative markets for exporters of everything from components and equipment to food, drink and fashion, already being snapped up in China’s eastern conurbations. “For forward-thinking UK companies, there are plenty of opportunities to carve out niches,’ says Ming. But she warns, ‘There are rarely quick wins to be had. Be prepared for the long run, building a solid foundation by talking to the right people and demonstrating your commitment to a demanding customer base.” END

To find out more about how RBS can support your Chinese export trade, contact: Peter Russell, Head of Manufacturing, UK sector coverage Tel: +44 (0)20 7672 1007 Email: peter.russell@rbs.co.uk

For access to key decision-makers via the China-Britain Business Council (CBBC), contact: Vince Cunningham, Sector Lead, Manufacturing & Engineering Tel: +44 (0)20 7672 1007 Email: vince.cunningham@cbbc.org

For in-country connections and advice from UK Trade & Investment (UKTI), contact: Alastair Morgan, HM Consul-General Tel: +86 20 8314 3019 Email: alastair.morgan@fco.gov.uk

Going global F

Despite difficult economic conditions there are still excellent opportunities for UK businesses to trade internationally, but it is important to have the right support in place before you make the leap. Martin Hodges, Head of Trade, Santander Corporate & Commercial, explains who to turn to for what help.

or businesses at a certain point in their lifecycle, trading internationally is a natural next step. Making the move overseas can seem daunting, but the benefits are clear: figures from UK Trade and Investment (UKTI) indicate that companies which export see a 34% increase in productivity within the first year of doing so, with 11% more likely to survive in the long-term1.

A world of opportunities Despite difficult economic conditions, there are excellent opportunities for UK companies to trade internationally, with British products and services in demand across the world. Whether you want to tap into established markets such as Europe and the US, or venture into new high growth markets including the BRIC Nations (Brazil, Russia, India, China) and the CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey, South Africa) - the benefits to your business can be significant.

Also, with the government working hard to encourage more SMEs to trade overseas, there is a range of support available to help you to overcome potential hurdles.

Prepare to succeed Before embarking overseas, itâ&#x20AC;&#x2122;s important that you assess if your business is ready. It can be useful at this point to speak to an expert, such as a UKTI International Trade Adviser, and to your accountant and bank to get an overview of your financial situation. They can guide you through one of the most tricky aspects of trading internationally - ticking all legal and regulatory boxes, including obtaining intellectual property (IP) protection. Once you have decided which market you want to move into, the next step is to establish trusted local relationships, with many businesses choosing to work with a partner â&#x20AC;&#x2DC;on the groundâ&#x20AC;&#x2122; who can manage liaison with buyers, suppliers and distributors.

1. Harris, R. and Q. Cher Li (2007), Firm Level Empirical Study of Exporting to UK Productivity. www.exploreexport.ukti.gov.uk

FINANCE 2013 PART III Santander

The average increase in productivity within the first year of exporting that companies see (Source: UKTI)

The right support As you begin to grow internationally, it is likely that you will need to make an initial financial investment and hire more staff. Also, issues such as shipping timescales and delayed invoice payment can begin to have an impact on your cash flow. By planning in advance and putting the right solutions in place, you may be able to enjoy a return on your investment sooner rather than later. Experts can be vital at this stage - helping to prepare an informed international business plan and providing valuable insight around foreign exchange, mitigating export risk and trade finance solutions. This could include information about the UK’s export credit agency, helping exporters and investors by providing credit insurance policies, political risk insurance on overseas investments and guarantees on bank loans.

Experts can help to prepare an informed international business plan and provide valuable insight around foreign exchange, mitigating export risk and trade finance solutions. At Santander, we are serious about boosting our Trade Finance offering to support UK businesses. Our specialists have an in-depth understanding and experience across the export and international trade markets. They offer real value by talking to customers about the whole trading cycle; conducting an ‘International Health Check’ to identify efficiencies and appropriate financing solutions which can help underpin your overseas success. Whichever point your business is at in developing its international focus, having an independent expert who knows which markets are best suited to which industries and can assess current and future priorities is invaluable. END

Breakthrough

INTERNATIONAL

steps

To further support UK businesses Santander has launched Breakthrough; an initiative that targets fastgrowth SMEs, helping them to unlock their full potential. A key pillar of the programme is International – this focuses on both education and supporting international growth.

to successful international trade

1 2

Research your market Implement an export strategy and review your capabilities Construct an export plan Choose your sales presence Promote your product Get the Customs side right Get paid on time Choose your distribution methods Transport goods effectively Have an aftersales policy

3 4 5 6 7 8 9 10

Source: UKTI: Exporting for growth. For more information go to: http://bit.ly/exportingforgrowth

One of the main elements of this initiative is Trade Missions. Groups of UK businesses are taken to visit key overseas markets, such as Brazil and the US; markets where Santander has strong corporate presence and links. This enables delegates to connect directly with successful local businesses and entrepreneurs and gain valuable insight into expansion and export opportunities. On return to the UK, the Breakthrough programme continues to support the delegates and input into ongoing international strategy. If you would like to find out more about Breakthrough and whether it would be suitable for your business*, please scan the QR code or go to: www.santanderbreakthrough.co.uk. * Requirements are turnover between £500,000 and £25 million and have demonstrated strong growth in turnover, profitability or employment over the last three years

To see what your local trade finance expert could do to support your international growth plans contact: Martin Hodges on 07827 872312 or martin.hodges@santander.co.uk http://businessinsight.santandercb.co.uk

FINANCE 2013 PART III

Elizabeth House, Block 2, Part 5th Floor, 39 York Road, London, SE1 7NQ T +44 (0)207 401 6033 F + 44 (0)207 202 7488 www.sayonemedia.com.