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EXPORTING:THE CHALLENGEFEBRUARY 2014

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Chambers of Commerce are recognised across the UK and around the world as leading supporters of international trade. Chambers deliver trade support and advice, as well as a range of specialist services, to businesses of all sizes in Britain’s exporting community.

NI Chamber of Commerce is the only private sector business body to have developed an extensive range of export-focused services. These include the Danske Bank Export First programme, NI Chamber Connections, Gateways to Growth and an export documentation service.

A key aspiration for NI Chamber is to contribute to Northern Ireland’s economic recovery by helping businesses particularly SMEs to move successfully and profitably into export markets.

In our day to day activity and through research carried out over the last two years it is clear that there are still many challenges regarding export growth.

This brief report summarises the findings of a base line study into Northern Ireland’s Business and Export Base carried out on our behalf by the Economist Maureen O’Reilly. It also includes the results of a UK wide export survey conducted by the British Chambers of Commerce (with 8,000 respondents across the UK); the results of a number of NI Chamber Surveys including our Quarterly Economic Survey (500 respondents quarterly), the Growing Something Brilliant Conference (attended by 500 delegates in September 2013) and via roundtable discussions with new and experienced exporters on an ongoing basis (Exporters Forum).

Northern Ireland Chamber of Commerce (NI Chamber) is the network for business in Northern Ireland which enables members to grow their organisation both locally and internationally and drive the development of the economy.

NI Chamber is the largest independent business network in the region and one of the fastest growing in the British Chambers of Commerce (BCC) network. Formed in 1783, we have represented the interests of local business and commerce across for over 230 years. We now have a large and active membership of over 1,200 businesses from sole traders to the largest multinationals across every area of business with in excess of 100,000 employees.

NI Chamber is an award winning, quality assured, customer focused organisation and has achieved the following accreditations and awards.

ACCREDITATIONS

• British Chambers of Commerce Accreditation (achieved 2010)

• Investors in People Silver Award (achieved 2012, original standard achieved 2009)

• Customer Service Excellence (achieved 2011)

• ISO 9001: 2008 Quality Management (achieved 2011, retained 2012 and 2013)

AWARDS

• CIM Marketing Excellence Award UK and Ireland 2011 – Best Traditional Sales Campaign

• CIM Marketing Excellence Award UK 2012 – Best Sales and Marketing Campaign Not Profit

• British Chamber of Commerce Chamber of the Year 2012

As an accredited member of British Chambers of Commerce we are part of a wider network representing the interests of 104,000 business members which collectively employ almost five million people. This network also links us into the world wide Chamber network in support of our export development activity. NI Chamber also works on an all island basis with the Chamber Network in Republic of Ireland to develop all island trade.

PRESIDENT

Mr Mark Nodder, Wrights Group

VICE-PRESIDENTS

Mr Kevin Kingston, Danske Bank

Mr Stephen McCully, Power NI

CHIEF EXECUTIVE

Ms Ann McGregor MBE

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Northern Ireland’s business base is relatively small…

• 113,000 private sector enterprises in Northern Ireland, 2.3% of the UK’s business base.

• Smallest across the 12 UK regions - 4th smallest relative to its size (adult population).

• 44% or just under 50,000 Northern Ireland businesses are unregistered.

• 99% employ less than 50 people.

With the smallest private sector employment base across the UK regions…

• Northern Ireland’s enterprises employed an estimated 503,000 people at the start of 2013, 2.1% of the UK total.

• Enterprises with no employees make up 18.5% of private sector employment in Northern Ireland (UK 16.6%).

• Medium/large enterprises (50+ employees) make up a comparatively low share of private sector employment vis-à-vis the UK regions (Northern Ireland 40% vs. UK 53%).

• Large firms make up a much lower share of private sector jobs here compared to many other UK regions (25% vs. UK 41%).

Strong expansion in the good times but largely “one-man bands”…

• In 2001 Northern Ireland had just under 90,000 enterprises.

• By 2007, at the peak of the “boom”, this had risen to just over 132,000, up 42,000 businesses or by almost 47%.

• The scale of increase in sole traders is striking, up 63% over the period or just over 36,000 enterprises.

• Gains in the number of SMEs were modest by comparison (just under 6,000).

• The number of large firms increased by 50% over that period but from a very low base.

Business base is contracting but not remotely as sharp as the preceding rise…

• Northern Ireland’s business base has receded by 14.3% since 2007.

• It is now one of only four UK regions where the business base continues to contract.

• Over the year beginning 2013 the number of private sector enterprises here has fallen by -1% (UK +2.2%).

Business “deaths” exceed “births”…

• Between 2007 and 2009 Northern Ireland experienced the largest fall in its business birth rate across the UK regions alongside the North East.

• At the same time the business death rate here increased, up from 6.5% in 2007 to 9.2% in 2009.

• As a result the business death rate in Northern Ireland actually surpassed the business birth rate in 2009. This has been the case across all UK regions.

• The business birth rate has risen slightly in 2012 (to 7% from 6.5% 2011) while the death rate has fallen (to 9.4% from 9.8% 2011).

• Northern Ireland’s active business base has continued to contract faster than any other UK region (-6.3% between 2008 and 2012 vs UK +2.0%).

The number of Northern Ireland’s goods exporters has been falling…

• Around 1,500 active goods exporters in Northern Ireland in 2013, just over 2% of Northern Ireland’s registered business base and making up a 2% share of UK exporters.

• The number of goods exporters here peaked at just over 1,700 in 2009 but, as with all UK regions, has fallen since then.

• However, Northern Ireland has experienced the largest fall in its number of goods exporters across the UK regions over that 3-year period.

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Northern Ireland Business Births and Deaths

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Northern Ireland’s future growth prospects as a regional economy are inextricably linked with its ability to grow the size of its export base. The benefits are profuse. It is one of the main ways in which Northern Ireland can start to reduce its over dependence on the public sector and address Northern Ireland’s low level of productivity vis-à-vis the UK regions. Trading internationally provides links to fast growing economies as well as improving the local skills and knowledge base and providing a more attractive environment for Foreign Direct Investment. Where internal demand is weak, as has been the case here for some time now, exports can help accelerate recovery.

Despite some excellent success stories and achievements in export markets Northern Ireland’s export base remains small. In 2012 goods exports were valued at £5.7bn, just under 2% of UK total, the lowest share across the UK regions. While exports as a share of the region’s value-added (GVA) is just below the UK average it is well below other small UK regions such as the North East and Wales. The Republic of Ireland’s performance in export markets has been striking by comparison helped in no small part by its low corporation tax rate and development as a multi-national hub for inward investment. In 2011 exports accounted for 107% of GDP in Ireland compared to 32% for the UK. The UK’s performance in export markets has in fact been weakening in recent years, in spite of sterling’s depreciation. The UK has been losing market share in global markets faster than most other EU countries.

Compared to other UK regions Northern Ireland has the greatest reliance on EU exports. 55% of goods exported from Northern Ireland in 2012 were to EU markets. This compares to 47% for England, 44% for Wales and 33% for Scotland.

This is largely driven by the fact that the Republic of Ireland is our main trading partner whereas the USA is the main export-trading partner for most other UK regions. Other major markets for Northern Ireland goods are the USA and Canada. France, Germany and the Netherlands are the main EU markets for Northern Irish exports outside the Republic of Ireland.

Despite the importance of the USA and Canada as export destinations, Northern Ireland has one of the lowest shares of non-EU trade across the UK regions. One of the areas where Northern Ireland differs most is in the share of sales to non-EU parts of Europe. This market accounts for 3.5% of Northern Ireland exports compared to 7.6% for the UK. Inroads are increasingly being made into a wide range of both emerging and developed markets albeit from a relatively small base. Growth has been particularly strong in exports to Asia, largely China, along with Latin America, the Middle East/North Africa and Australia. In the last year alone exports to the BRIC countries, the largest and fastest growing emerging markets in the world, have increased by 30%. However, the BCC has found that micro and small enterprises, which dominate Northern Ireland’s business base, are much less likely to have penetrated these fast-growing markets, or see them as a route to future growth.

Engineering and Food are Northern Ireland’s most important export sectors. Machinery & Transport Equipment alone accounts for two-fifths of goods exported. Northern Ireland is the only UK devolved administration to have Food & Live Animals among its top 5 exporting sectors. Other important exporting sectors are Computer, Electronic and Optical Equipment along with Chemicals and Electrical Equipment. Computer Services is Northern Ireland’s largest tradeable service.

Our largest manufacturers (250+ employees) account for around two-thirds of exports. In fact the top 10 exporters alone account for half of all goods manufactured for export here. Markets outside the EU, particularly North America, are most important to Northern Ireland’s largest exporters. Small manufacturing businesses are much more orientated towards the local market (making up 53% of their sales) but where they do export this tends to be much more “near market”. The Republic of Ireland accounts for 58% of small firm exports and 45% of medium firm exports.

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Strong export gains were made here over most of the last decade. In fact in the 10 years to 2008/09 Northern Ireland manufacturing exports increased by more than 50% in real terms. However, the fall out from the recession and particularly the collapse of the Irish economy has had significant repercussions. Export sales fell by 20% between 2008/09 and 2010/11 driven largely by a fall off in exports to Ireland and the rest of the EU. Much of this reflects just how important the Irish “boom” in Construction had been to local manufacturers. This impact has been particularly acute for Northern Ireland’s smaller exporters reflected in the fact that the share of exports accounted for by Northern Ireland’s Top 10 exporters increased from 45% in 2008/09 to 51% in 2010/11.

There are around 1,500 active goods exporters in Northern Ireland, just over 2% of Northern Ireland’s registered business base (UK 3.1%). The number of exporters here peaked at just over 1,700 in 2009 but, as with all UK regions, has fallen over the last few years. In fact Northern Ireland saw the largest decline in the number of exporters over that time. The number of EU exporters from Northern Ireland has fallen much more sharply than those exporting to non-EU countries reflecting again the fall out here from the Irish recession and wider EU economic crisis.

The latest Manufacturing export figures for Northern Ireland suggests no overall improvement in the export fortunes of Northern Ireland manufacturers. In fact manufacturing exports have fallen by 1.2% between 2011/12 to 2012/13 after having risen by almost 9% during 2010/11 and 2011/12. Much of the fall in exports was due to a fall in sales to the Rest of the EU, down 13.1% over the year. Trade with most other markets has stabilized or is improving. The HMRC figures,which includes all goods traded from Northern Ireland, have yet to register any consistent improvement.

The latest NICC quarterly economic survey suggests a very patchy recovery in export sales among local businesses. Although more firms are reporting an increase in exports compared to a decrease, the balance in both export sales and orders has weakened in Quarter 3 2013.

It is still a very challenging time for exporters. Issues remain over a recovery in global demand, particularly with the EU and companies’ apparent reticence to invest, particularly in terms of the costs associated with trading into new and unknown markets.

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The benefits of exporting are extensive and go beyond simply the potential for increased sales and profits. Research has found that firms engaging in international markets improve their skills, knowledge and management practices through what is termed an “export learning” effect. They are therefore less likely to fail. The ability to export expands the market available to businesses thereby reducing risks of relying on the domestic market alone, an issue of particularly importance in the current economic climate. Scaling up production can lead to lower unit costs bringing economies of scale as well as improving efficiency and product quality which can be associated with global competition. Exporting can help extend product life cycles and hone in on untapped markets for certain products.

But there are significant challenges both locally and nationally. The British Chamber of Commerce (BCC) has invested considerable resources in developing a detailed understanding of the issues faced by UK exporters. A major survey by the BCC in 2012 involving over 8,000 businesses showed a number of challenges, barriers and obstacles. These centre on issues around skills, red tape, costs, access to finance, transport connections and business planning.

Northern Ireland Chamber of Commerce has also actively engaged with business community to understand the issues that they face in trading products/services internationally. This included commissioning Economist Maureen O’Reilly to carry out a base line study into NI’s Business and Export Base and surveying NI businesses directly through the Quarterly Economic Survey; at the Growing Something Brilliant Conference attended by 500 delegates in September 2013 and via roundtable discussions with new and experienced exporters.

Some of the key findings from this extensive research suggest that:

• SMES are typically the backbone of any regional or national economy providing two thirds of employment and most of GDP but there is a structural issue regarding SME’s in Northern Ireland. It appears to lack (compared to Germany and Italy for example) a dynamic ‘middle strand’ of enterprises combining high-skill with high-quality products targeted at export markets(1).

• Our research also raised issues with Northern Ireland’s export support framework. Feedback suggests that is fragmented and programme rather than needs driven, varies according to region and is difficult to navigate. An effective support model is considered vital.

• A series of challenges were put forward around Northern Ireland’s future export success. For potential exporters the biggest challenges are in relation to finding/understanding overseas customers; the fact that their business is too small; finance requirements (access, cashflow, currency); having the right management/staff skills and export costs including logistics. For existing exporters the biggest challenges are inadequate market intelligence; developing/maintaining necessary skills to export and finance requirements.

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The Economic Strategy highlights that it ‘prioritises export led growth’ but is this really enough? The scale of the export challenge needs to be recognised and government should lead on the development of an explicit Export Strategy/Action Plan for Northern Ireland which includes:

• a review of export data sources to assess the true extent of NI exporting

• a review of the entire export support system

• an assessment of business capability regarding exporting and growth

• a series of action points which engages both the public and private sector in maximising the opportunity to promote Northern Ireland exports

The action plan should deliver for business no matter what stage they are at in their export journey. It should be consistent across all parts of Northern Ireland; recognise that every business looking to export has different requirements and that the system needs some flexibility and also recognise the skills of other partners including the private sector in delivering trade support to business.

Potential actions might include:

Re-Introduce an export graduate training programme for Northern IrelandExporters believe there is an immediate need for a graduate training programme which focuses on export development. Many of those involved in the NI Chamber roundtable have either been participants on the ‘Explorers’ programme or companies that have employed an Explorers graduate, and agree that is was an excellent way of training effective sales people for export.

Local universities/colleges and businessIt was clear from the Exporter’s Forum that there is scope to substantially improve connections between businesses and universities/colleges. Research should be undertaken to identify where successful links have been forged and to understand the reasons behind that success. This will help shape future policy direction in relation to university/business links here.

Harness the experience within the Chamber network

There is a wealth of exporting experience across not only the local but also national/international Chamber network. NI Chamber has a network of individuals/businesses experienced in exporting to specific countries/sectors globally. These businesses are willing to provide practical advice and guidance. NI Chamber is also linked to the world wide chamber network through the International Chambers Initative (UKTI/BCC).

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Better target support for exporters to address the size and sector divides in accessing the fastest-growing markets

InvestNI and its partners, including Chambers, must work together to address the reticence of some sectors and size groups to consider trading in new markets. Chambers of Commerce as a leading source of private-sector trade support, must help local companies to build up international skills and the confidence to trade in new and unfamiliar markets.

Consider More Direct Targeting of Potential Exporters

The need for a support framework specifically targeted at potential exporters should be explored. Enterprise Ireland introduced a Potential Exporters division in March 2012 to support Irish companies wanting to start exporting. The programme of support offers workshops, a help desk, access to advice from successful export companies, and mentoring and advocate support. The division includes two members of staff that are London-based.

Improve the visibility of support for international transactions

There is a strong need to ensure that new support mechanisms under UK Export Finance, including the separate Enterprise Finance Guarantee for Exports (ExEFG), are better marketed and more accessible to SMEs. It is clear that many businesses are still unaware of these products. Export finance support must have clearer channels to businesses through their intermediaries and brokers with the additional resourcing needed to make this happen. This should include support to Northern Ireland’s Regional Export Finance Adviser. Chambers of Commerce stand ready to act as the key route to market.

Educate businesses on the costs on doing business internationally

Perceptions around the significant costs involved in exporting are one of the main deterrents for businesses considering making that first step. Business must be helped through this process to assuage concerns. This might include guidance on pricing strategy as well as advice on factors such as currency conversion, additional costs associated with foreign trade which may impose higher costs (fees, licenses, etc.), translation costs and potentially higher costs of money.

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Skills

The BCC research shows that one in five UK businesses believe they lack the in-house skills, managerial capacity and/or knowledge to export. This is particularly acute among micro and small businesses and acts as a very real deterrent to potential exporters.

A dearth of people with good business development skills presents a real challenge. Local exporters believe that there is a lack of understanding of the importance of sales/business development skills to the economy at all levels of education from schools, colleges and universities. Businesses also need to be educated to understand the importance of training staff in how to develop both internal and external markets for local goods and services. China is quoted as an example in addressing this issue by tasking students not only with developing products but with selling those products as well. Invest NI’s recently announced Skills Accelerator grant, offering 50% contribution towards export training costs up to £10,000, has excellent potential for smaller companies that are exporting or ready to export.

Language skills also act as a barrier. Almost half of businesses claim that language barriers influence whether, when and where to enter international markets. The BCC survey highlights that the extent of the language deficit in the UK is truly serious: up to 96% of businesses had no foreign language ability for the markets they serve. The largest language deficits are for the fastest-developing markets.

There is an immediate skills deficit in certain sectors in Northern Ireland including engineering and software. Local software companies are being forced to outsource work out of Northern Ireland because they cannot recruit locally. Trained engineers are also proving elusive for local employers. While the deficit in engineering students has been recognised by DELNI, exporters believe that sufficient sponsorship is not

available to Masters/PhD engineering students to advance their studies. Exporters also identified poor basic skills levels among non-graduates in Northern Ireland as a particular concern.

Research & Development

Investment in Research and Development creates new businesses and improves existing ones, brings highly skilled people into the job market, and attracts international investment.

The consensus by local exporters is that there are some excellent platforms of support available for businesses to undertake research and development in Northern Ireland including those offered by InvestNI. However, exporters have concerns over the timeliness of the government supported R&D application process along with the skills of those involved in that process. Particular challenges remain around the perceived disconnect between businesses and universities in how they work through the R&D process. Germany is known to provide excellent demonstration effects in their approach to R&D and exporting.

Market Barriers and Red Tape

Red tape can act as an unnecessary barrier to export growth. Needless regulation imposes costs on businesses, can create uncertainty and detract from business getting on with business. A quarter of current/potential exporters believe that UK regulation acts as a barrier to exporting. International regulation is also an issue. The most common cited obstacles were customs clearance, import regulations, tariffs and random and lengthy hold-ups securing export licences.

Local exporters have particular concerns around employment law including the early introduction of national insurance contributions for graduates, the need for exporters to pay VAT to then claim back and the timing of corporation tax payments.

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Finance and Costs

Establishing and growing export markets involve considerable upfront costs and managing additional risk. In particular there are significant sunk costs in exporting and this can act as a barrier for first time exporters, particularly small firms which dominate Northern Ireland’s business landscape. The BCC note that over a third of potential exporters say that resource levels and access to finance are ‘highly influential’ in deciding if, when, and where to export. Businesses that are actively considering exporting or recently engaged in international trade say they are less likely to start exporting if their cash flow position is deteriorating. Yet current exporters say they are more likely to seek growth in overseas markets if their domestic cash flow weakens. This suggests that where companies have the experience, the organisation and the contacts, offsetting weakness in one market by growing another is a strategy of choice.

Foreign exchange and risk management continue to prove challenging for exporters. Exporters view that banks are beginning to rebuild relationships with businesses which should improve the outlook for financing exporters. Production costs are also cited as a challenge for exporters, particularly in relation to energy consumption. Energy costs in Northern Ireland are viewed as higher that the rest of the UK and are a major concern going forward.

Planning

Exporters and potential exporters need to show a willingness to adapt their business offering to overseas markets. Encouragingly, the BCC survey shows that nearly half of businesses actively considering exporting were in the process of adapting their goods or services specifically to target markets abroad. However, the majority of exporters (nearly three quarters) have no formal export strategy. While even the majority of large exporting companies that responded claimed not to be working to a formal strategy, there is still a clear size divide: SMEs are less likely to possess one. BCC research identifies

a strategic approach to exporting as selecting overseas markets as part of a business strategy for new growth; taking one market at a time based on market research.

Transport Connections

Transport connections play a key role in international trade. They support supply chains and move goods to market, but also promote global social connections, collaboration between companies, and market research activities. Businesses across the UK perceive both the cost and quality of transport connections to be barriers to export. Goods held up in supply chains because of slow or unreliable connections requires businesses to hold more stock, which in turn hits their bottom line. Services companies looking to conduct business face-to-face overseas are hit with higher costs if the international connections to their target markets are poor. BCC note that concern about transport barriers is highest among potential exporters. Nearly half of non-exporters actively considering international trade see the cost of international connections from the UK as a barrier to export.

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NORTHERN IRELAND CHAMBER OF COMMERCE

22 GREAT VICTORIA ST BELFAST BT2 7BJ

T +44 (0) 28 9024 4113F +44 (0) 28 9024 7024mail@northernirelandchamber.comwww.northernirelandchamber.com