Seven reasons for SMEs to do more business overseas

Recently I wrote a report for JCDecaux Airport on the SME market and particularly SMEs doing business overseas. It was launched at Coq d’Argent in the City of London.

To write it I did extensive desk research, interviewed six SME businesspeople around the country (Sheffield, London and Edinburgh) and conducted research with Millward Brown amongst 500 SME business people who regularly fly on business.

Within the report I identify seven reasons why doing business overseas is becoming more attractive or necessary to SME businesses. They are outlined below. Incidentally, the fieldwork pre-dated the Brexit vote but impending Brexit only magnifies some of the seven reasons.

 

ONE: Improving Financial Performances

Businesses with the potential to do business overseas might be encouraged to do so because financial performances are improving.

The proportion of SMEs in profit has increased since the downturn. According to the BDRC SME Finance Monitor 80% of SMEs interviewed in Q3 2015 reported making a profit in their last trading period. This was unchanged from Q2 2015 but has increased steadily over time. It was just 69% in Q3 2013.

The economic climate is less of a barrier to doing business overseas for SMEs. BDRC report that, “From a peak of 37% at the start of 2012, the proportion of SMEs seeing the current economic climate as a major barrier has declined steadily and was 13% in Q3 2015. This means that ‘legislation and regulation’ is now just as much of a barrier as the economic climate (13% overall)”

It has led to some optimism. 86% of the business flyers responding to the survey conducted for this research agree that any UK company with the opportunity to do business overseas would probably be wise to take it.

Most SME’s expect their businesses to grow or not to contract. Research amongst SMEs by The Daily Telegraph and Easyjet found that, Slightly more than a half of those questioned (56%) expect their businesses to grow in the coming 12 months.” The Albion Growth report gives a slightly higher figure (61%) for a slightly longer time period (2 years). Albion found that only 4% expected their business to contract.

However, optimism is cautious.

The Telegraph continues, “almost a third of the sample put their business growth estimate at less than 5%, and a further 23pc expect to grow by no more than 10%.

The net balance for both sales and orders are still positive but have fallen. The recent figures from Lloyds’ Business in Britain report shows a dip in the total sales and orders balances over the last six months in 2015 for SMEs.

The same report also pointed to a decrease in the positive net balances for total exports – and especially exports to Europe.

 

TWO: Spreading costs, risks and customer bases across markets

Against this backdrop of cautious optimism another reason for SMEs to do business overseas is to spread their costs, risks and customer bases across markets.

Goldman Sachs reports that SMEs improve productivity by spreading risks and costs across markets.

Alastair Morris, Sales Director of Pryor Marking Technology described the importance of spreading risks as follows: “Today our business is about 40-50% export with product going to over 60 countries around the world and in fact we have distributors or partners in around 60 countries where we have regular sales that we’re shipping product to every month… If some markets are struggling you’ve usually got enough business in other markets that are OK, it brings a lot of stability to the business, spread across different markets”.

His thoughts were echoed in the following advice from a business flyer who completed our online survey, Pay considerable attention to the currencies you will be working with, consider how big movements in those currencies will impact your business. Try to divide a bulk of your overseas income between major currencies, like Dollars and Euro’s. Regardless of how well your business is doing in any given region, currency fluctuations will have a big impact, by hedging your currencies, you should find that as one currency goes down another goes up, mitigating your losses”.

Barclays found the main reason SMEs do business overseas is to spread their customer base. They also found that over a quarter (28%) of SME firms that do business overseas do so to reduce the effects of UK market conditions and to overcome limited domestic opportunities. 18% said it was necessary to help them remain competitive.

The Lloyds’ Business in Britain report also concluded that weakening demand in the UK is seen as a big threat to business for SMEs with one in three identifying it as the main threat to business.

 

THREE: Trading further afield than traditional markets

Spreading costs, customers and risk is all the more possible as new markets open up.

The government are keen to point SMEs to the opportunities in new markets. The following is from the government report Exporting is Great; Export Guide.

While the USA and the EU remain the UK’s largest trading partners, high-growth countries such as China, Brazil and India are becoming increasingly important export destinations. Characterised by rapidly rising populations and GDP levels, all expect significant import growth between now and 2018.

This growth is in part due to the rise of the global middle class. The Organisation for Economic Co-operation and Development (OECD) forecasts that this will double to almost five billion by 2030, presenting a major opportunity for UK firms like yours to export the types of high-quality products and services at which we excel.

Trading further afield does have appeal for UK exporters. According to SME research by Albion Ventures, “15% [of SMEs] are looking at new markets within the EU, while an even higher proportion (19%) are looking outside the EU.”

Alastair Morris, Sales Director of Pryor Marking Technology has found the Indian and Chinese markets have increased in importance for them. Both are taking up more of his time. He says, “The BRIC countries have been a very important story for Pryor. We have a joint venture in India, which has become the market leader in the domestic Indian market, a very important market for us. Obviously having a joint venture there takes a lot of management time. China has also grown and developed very strongly and is now our second largest export market.”

Alistair Hill, CEO and co-founder of On Device Research is eyeing other markets. “Over the past two years we’ve opened up two other offices in Dubai and Singapore. After that we don’t have any plans at the moment but, as I’ve said, we have to be global and there are other territories we’re looking into particularly in South Africa in which we’ve got clients and its of interest and then afterwards we’d love to be in Latin America but it’s a push too far at the moment”.

There are big growth opportunities on offer. Iain Weir, Marketing Director of Ian Macleod Distillers Ltd points out the strong link between a country’s rising GDP and opportunities specific to his business.

“There’s been fantastic growth and that growth has been global. We’ve seen continued growth in developed markets such as Europe, North America but very excitingly growth in developing markets, the BRIC countries, in particular and other small developing markets… You tend to see a correlation between a growth in GDP in a country and a growth in aspiration and demand for Scotch whisky”

 

FOUR: ‘Inadvertent’ and ‘Born Global’ exporters

A fourth factor pushing UK SMEs towards doing business overseas is that they are being exposed to opportunities far sooner, more frequently and in more unsolicited ways. This is driven by developments in technology.

Barclays note that nowadays many SME firms “do not plan to export: they fall into it, or regard it as a part of their normal business”.

They report that 59% of these companies were approached directly by new customers from abroad whereas only 40% actively sought overseas customers.   Existing clients or suppliers introduced 25% of them to new overseas customers.

In fact, 41% of respondent to the survey carried out for this report said that one of the reasons their company does business overseas is that they get enquiries from abroad without really trying.

In his report on small business firms Lord Young writes, “Those firms that are trading online can become ‘inadvertent exporters’ by overseas customers accessing their site and becoming customers. In Growing Your Business, I reported that 25% of PayPal’s activity in the UK comes from overseas trading. 81% of SMEs on eBay export to five or more countries. Last year, eBay launched a new initiative to support UK businesses to sell overseas by allowing them to create a shop for other eBay sites across Europe.”

Lord Young’s report (the report concentrates just on small firms, not all SMEs) quotes a finding that “The internet represents a £19 billion business opportunity for small firms in the UK.”

Barclays believe this new trend means, Having a master plan is not considered as a pre-requisite to securing overseas customers.”

However, they also say that, “There is an argument that owner-managers could be missing out on valuable opportunities to do business abroad by taking a more reactive rather than proactive approach to exporting.”

Not only are SMEs being presented with exporting opportunities they are being presented with them from birth.

A recent Barclays report concluded that British SMEs are ‘Born Global’ these days. By this they mean that they were doing overseas business practically from the moment they were created.

Many of the respondent to the survey carried out for this report work for companies that had been ‘born global’ as 52% said their company had started doing business abroad within a year of being established.

Barclays note that of those SMEs currently exporting and set up during the period of 2007 and 2014, 65% started trading overseas within their first twelve months. This is a proportion that has grown through and after the economic downturn. Just 34% of businesses set up before the downturn had traded abroad within their first year.

Making this finding particularly poignant is the fact that the UK is ranked third out of 14 OECD countries in terms of the proportion of start-up businesses less than two years old in the business population. 21% of the UK business population is made up of business less than two years.

Diamond Dispersions is a company that launched towards the end of the noughties. Sue Wright, Director and co-founder of Diamond Dispersions

describes how they were ‘born global’. “The inkjet market is worldwide. There are three or four big players in the UK but mostly the market is overseas so we decided that we would go ahead and go abroad for the market so we export about 85% to 90% of what we make here and it goes all over the world”.

Alistair Hill, CEO and co-founder of On Device Research, another recently launched company, found his company needed to be ‘born global’ too. “The market is global now whether you like it or not and we can’t help that our clients are all over the world and, as a result, travelling is absolutely essential. If we were just focussed on the UK market we would probably not exist in a few year time because we wouldn’t be able to compete on a global scale so there is no option for us”.

 

FIVE: Move to a digital economy

Digital products like On Device’s cross borders far more easily than those of a company like Diamond Dispersions who ship product around the world. The move to a digital economy means an increasing number of start-up SMEs will find themselves doing business abroad, especially as digital solutions can be used throughout clients’ global operations.

One SME offering a global, digital solution is Showpad. Emma Acton, Senior Director of EMEA Marketing of Showpad notes:

“It’s a global solution. What we often find is that we start with one team or one department and then they start to see the value of the platform and roll it out elsewhere within the business. Sometimes the initial project can be for the entire salesteam straight off.

We might start in the UK and expand out to mainland Europe or vice versa so we might start in mainland and back into the UK or even the US, we’ve got a lot of global customers so they’re a customer of ours in Europe and they’re a customer on North America or Canada as well so sometimes we start with one department or one team and then expand out so travel is definitely on the cards for the salesteam and the sales management to go out and talk to those customers.”

 

SIX: Clients expect

SMEs are finding that clients increasingly expect them to be able to operate in different countries.

89% of business flyers responding to the survey conducted for this report said the sector their company operates in is becoming more global these days.

In fact, 33% said one of the reasons their company does business overseas is that their biggest clients expect them to operate in multiple counties.

Emma Acton, Senior Director of EMEA Marketing of Showpad says, Organisations, particularly the big guys that we’re selling to, the big customers, they expect you to be global; they expect you to be able to do it across the board.”

That expectation had a big implication for the ambitions of the business. They had to develop global ambitions very quickly. “Whilst we started small we’ve had to expand out and grow the business across Europe and North America.”

Alistair Hill, CEO and co-founder of On Device Research, a tech startup business describes the expectation of big clients as follows.

“A lot of our clients are big global companies and they only want to work with clients who work globally. If you only work regionally they don’t really want to know so its not a luxury to us its essential and that’s why we keep on pushing into these new markets”

He too felt the need to quickly develop a global strategy; It’s a deliberate strategy for us. Long term we aim to be a global company and as a result we have offices in different places in the world and clients all over the world. And really our clients buy from us because we are global as well so its an essential part of our strategy and therefore travelling to these places is a business requirement rather than an opportunistic event.”

He also described how the plucky SME with a willingness to enter other markets could steal an advantage over rival companies in those markets.

“We have local competitors in lots of different markets and they are snapping at our heels all the time. They do struggle though because they’re not global however the global companies who are doing what we’re doing, they are incredibly competitive and really we’ve learned from that, that these local companies although they have fantastic capabilities they don’t win the big contracts because they can’t do things globally.”

 

SEVEN: The size of the prize is increasing

As a result, risks and rewards are increasing. Alastair Morris, Sales Director of Pryor Marking Technology describes how the size of the prize is increasing.

“The aspect of internationalisation that is difficult is that customers are becoming more global, becoming more corporate, they’re connecting different manufacturing sites around the world so whereas a company manufacturing in the UK looking for an equipment supplier would be likely to buy it from a UK company the customer is now global and they want to source a single supplier for their global business.

It’s an opportunity for us because it means customers we’ve got we can now supply globally, into lots of different manufacturing sites, it’s a risk for us in that if that customer is a foreign customer that’s sourced a local supplier they then get the bulk of the business so there’s a definite shift towards global contracts which is both an opportunity and a risk.

It is ever more important that we are a global company, that we’re able to support projects in a lot of different countries and we see that on contracts we’re negotiating now”.

The business flyers who responded to the survey conducted for this report feel that risks and rewards are increasing. The majority see greater risks and rewards. Interestingly, more of them see greater rewards than risks.

Notably, 71% of them say their company is pitching for overseas contracts that are worth far more than the overseas contracts being pitched for a few years ago. Around three quarters expect overseas revenues to contribute more to the company’s revenues in the next few years (30% expect it to contribute a lot more, 41% expect it to contribute a little more).

 

 

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