Should UK SMEs boost non-EU exports?

Alice Murray
30 January 2014

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In the last two years there has been a spate of government initiatives aimed at increasing UK SME exports to non-EU markets. But is this the right strategy for economic growth and is the public sector best placed to advise? Alice Murray reports

The most recent UK Trade & Investment (UKTI) initiative took place last week in Staffordshire and saw a group of successful German managers fly over to meet UK business in order to share their recipe for success in exporting towards non-EU markets. The event was labelled "Meet the Mittlestand" and is one in a long line of events and initiatives focused on boosting SME exports outside of Europe.

These events follow George Osborne's Budget speech in March 2012, where he challenged UK businesses to double exports to £1tn by 2020. The Chancellor is worried that the UK is too dependent on neighbouring markets, and is in danger of becoming economically irrelevant if the country doesn't sell more into fast-growth emerging markets.

Of course, it is no bad thing for the government to lend a hand to improve UK business exports outside of Europe. These currently make up 17% of UK SME revenues, compared with 25% in Germany and 30% in Italy. In fact, Trade Minister Lord Livingston announced last week that he will personally write to every UK mid-sized business (those with turnover of between £25m and £500m), of which there are 8,900, to ask them directly if they want trade support from the UKTI.

According to the Confederation of British Industry (CBI), if these mid-market businesses "reach their full potential", they could generate a further £20-50bn for the UK economy.

The CBI believes the two most vital keys to unlocking global export markets are funding and knowledge of overseas markets. Coincidentally, both of these "keys" make up the foundations of private equity investing.

The UK government's objective to increase exports outside of Europe is surely underpinned by the best intentions – that EU markets are relatively flat compared with impressive growth figures witnessed in emerging markets. However, this situation has been turned on its head in recent weeks.

Reversal of fortunes
First, Europe is returning to health. According to new forecasts from the European Commission, the 28 countries of the European Union are expected see total GDP expand by 1.4% this year. While this prediction appears dismal when compared with GDP figures for fast-growth markets such as China, which recorded GDP growth of 7.7% in 2013, it is at least an improvement on the stagnation witnessed in 2012.

And, while emerging-market growth has been impressive in recent years, how long will it last? China's 7.7% GDP growth is well below the double-digit expansion seen in previous years. Meanwhile, global markets have been in a state of turmoil in recent days over concerns surrounding currencies in developing nations: Turkey and Argentina have seen the lira and peso fall to record lows this week, prompting emergency talks by respective central banks in an effort to curtail further drops.

Looking to China, one of the countries the UK government most wants to boost exports to, commentators have highlighted how much of the country's growth has been spurred by a wave of consumer credit, which has resulted in burgeoning levels of debt.

The impact of Federal Reserve tapering is also playing its part as much of the growth in developing economies has been a result of cheap debt. With the US now scaling back its outflow of discounted credit, the knock-on effect will hit emerging markets hardest, which have been using this capital to finance their growing consumption.

So, with all of this in mind, should UK SMEs and their private equity backers be targeting increased sales in fast-growth economies so aggressively, as the government would like, or would it be better to stick to trading with our well-known neighbours?

In his letter to investors at the end of last year, Terra Firma chairman Guy Hands expressed his reluctance to even look into emerging markets: "Terra Firma has avoided investing in emerging markets because we cannot get comfortable with the high level of government involvement in the economies of those countries... Without free markets and clear laws, international investors are likely to suffer disproportionately when economic activity goes in a direction the government does not like."

One thing is for sure: the CBI is on the mark when it notes that UK SMEs need access to advisers with deep understandings of export markets, whether they are in Europe or outside. This is where private equity comes into its own, as buyout houses are best placed to advise businesses on an individual basis on what is best for growth, and which overseas markets will be the optimal targets for export growth.