BREXIT: Exporters, Don’t Forecast Long-Term Decline

The Institute of Export has recently released the results of a survey of its members, post-Brexit referendum. There is one finding that has astounded me: 42% of respondents said that, in the event of removal from the Single Market, they expect their business to shrink in the long-term. I have one, provocative, question: what on Earth are these businesses doing between now (or, the recent past) and then?

First, some caveats and context: the membership of the Institute of Export, naturally, are going to feel the effects of Brexit more so than the economy at large – it is no surprise that there is a certain level of pessimism among these businesses. Furthermore, I recognise that there will be some businesses that trade exclusively with the EU, and whose fortunes are inextricably linked to it. For context, only 6-8% of British businesses actually export to the EU, and so this is quite a niche problem.

To the findings in full, as shown in the chart below: 40% would expect their business to shrink in the short-term, 47% in the medium-term (both understandable due to uncertainty and then the actual process of EU extraction), and, as previously mentioned, 42% expect to suffer this fate in the long-term.[1]

Source: Institute of Export Survey

SCENARIOS & MEGATRENDS

These findings are worrying, and the latter is especially so. The short- and medium-term can be understood; but the long-term gives businesses a chance to amend their strategies – strategic planning rounds are typically three or five years – and re-position themselves. No business should be forecasting long-term decline. Removal from the single market – a so-called ‘Hard Brexit’ – is one option that is firmly on the horizon, and one scenario that should be planned for. Indeed, as I write, it seems increasingly likely that this could be the outcome.

If 42% of exporters see this as a scenario that results in them shrinking, then they should already have been working to allay these fears, planning and re-aligning, and looking for alternative markets for growth wherever they can be found; rather than resigning themselves to shrinking in the long-term. I argued in a recent article that Brexit should provide the impetus for businesses to review and refresh their export strategies.

Shrink: 40% ST, 47% MT & 42% LT. Instead of resigning to LT decline, need 2b researching, planning & re-aligning NOW https://t.co/DeHtPXsWvA

— Challenger MI (@Challenger_MI) August 23, 2016

But, in reality, exporters should have been planning for this for much longer. David Cameron first promised an EU Referendum in January 2013, it featured in the Conservative manifesto in the run-up to the 2015 General Election, and was included in the Queen’s Speech in May 2015 – that definitive indicator should have triggered some planning a year in advance; but horizon scanning purists would advise that this had been on the horizon for many more years.

And, regardless of Brexit, exporters should have been looking at markets beyond the EU anyway, for it is beyond the EU where all of the serious growth in the world economy lies. The two charts below show how, firstly, the EU’s portion of world GDP has been declining for a long time; and, secondly, as has the proportion of the UK’s exports heading to the EU – these are long-run megatrends, that companies should have been reacting to already. It’s almost axiomatic: diversify risk, especially when that risk is so readily identifiable on the horizon. And it’s a point echoed by Allister Heath in The Telegraph recently.

MARKET INTELLIGENCE

At the centre of this process is market analysis – and, clearly, if these findings are to be believed, never has market analysis been more important for exporters than it is now. It should be an ongoing process of reviewing your markets; and, now, it enables the identification of global markets where exports of your product are growing, which yield the best future potential, and in what way you can re-align your business to capitalise on those and minimise exposure to the uncertainty of the EU. I have written previously on the subject of initial exploratory market analysis for exporters.

It’s an anecdote, clearly, and one that I have used in that previous article; but, when working for a client recently, we sought out growth markets for their export product (confectionery) and found that seven of the top ten opportunities lay outside of the EU.

WHAT TO DO NOW

The 42% of exporters that see long-term decline as a possibility can explore alternatives for growth as follows (there is more on this in another blog here):

Evaluate the various scenarios – Hard Brexit? Soft Brexit? Flexcit? Assess the likelihood of each scenario, and the impact of each on your business – what tariffs would you have to pay, what would it do to your competitiveness, what prices do competitors charge? There has been a lot of hyperbole around this referendum, so be pragmatic – remember that leaving the Single Market is not ‘game over’.

Evaluate your existing markets – Pore over your own sales trends, alongside the trends in total exports to your existing markets. This is an ideal time to re-evaluate these markets – are your key markets in decline anyway? Are you over-exposed to any particular EU markets?

Evaluate all global markets, identify targets – Which countries are the largest importers of your products? Which countries are the fastest growing? Where is there latent demand for UK exports of your products? Which countries are we likely to sign quick trade deals with?

Sugar Confectionery: Market Size & Growth

Produce a shortlist of target countries – The previous stage identifies a long-list of potential targets; now prioritise those and undertake more detailed research, both desk-based and ‘on the ground’. At Challenger MI we plot target countries on an adaptation of the GE-McKinsey 9-Box Matrix to clearly identify the best opportunities.

Adaptation on GE-McKinsey 9-Box Matrix - plotting target markets and determining strategy (circle represents market size; slice represents UK market share; arrow represents change in market attractiveness / business strength).

Re-align your export business – With the market analysis done, and the best opportunities identified, then exporters can set about all of the practical considerations required to enter these new markets and diversify geographically.

ONE IN FOUR ARE MORE OPTIMISTIC

The terms of our future trade with the EU are uncertain, but we know various scenarios, and a ‘Hard Brexit’ is certainly one among those – exporters should be assessing the impact of each scenario on their business, and planning accordingly. For 42% of exporters to think that they will suffer long-term decline in the event of leaving the Single Market is worrying; and no business should be forecasting such without working tooth-and-nail to identify the opportunities for growth that will arrest that situation.

Opportunities abound in the global economy, especially so after Brexit as it provides fresh impetus to UK PLC. Ireland (14), Gibraltar (30), Luxembourg (53) and the Czech Republic (67) are the only EU countries among the 75 fastest growing economies in 2015. It’s worth noting that the Institute of Export’s survey also found that 26% of exporters expect their business to grow in the long-term (against 7% short-term and 15% medium-term) – I would suggest that the 42% take the lead of that 26%.

But this figure is still chronically low. Seriously, only one in four of the Institute of Export’s members envision long-term growth if we leave the Single Market? I would like to work with any of these businesses on market analysis projects to identify your best opportunities for growth. Previous research has shown that 46% of SMEs find market intelligence a barrier to exporting – let’s work together to overcome that, and overcome this resignation to decline that, in most cases, I am confident we can reverse.

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[1] There may be something here about the definition of ‘long-term’. It is typically considered to be three years, or five years, plus – if it’s the former, then the UK may well be right in the middle of its actual moment of extraction, given that widely held opinion suggests that we will leave two years after Article 50 has been triggered.