The UK’s decision to leave the EU has raised concerns over our future relationship with our nearest trading partners. But it’s also focused attention on other opportunities. Tim Smedley looks at the current situation and at how FSB members are responding
With one in five FSB members exporting products or services, and 93 per cent of those doing so within the European Economic Area, Britain’s decision to leave the European Union (EU) is an understandable concern for many British businesses.
Shweta Jhajharia, a small business owner and Founder of the London Coaching Group, argues that “the likely pressure for entrepreneurs will include the depreciating currency, possible inflation, adverse movements of asset prices, and labour market pressures”. In her experience, small businesses are at a disadvantage “when it comes to market information, cash flow and talent pool – all factors likely to be disrupted over the next few years”.
Europe is not only the preferred export destination, because of harmonised taxes and tariffs, but also our nearest neighbour geographically – and therefore easier to ship product to. A report issued by the Britain Stronger in Europe campaign before the referendum argued that Britain would be landed with £11 billion in new tariffs if it left the EU, although the Vote Leave website claimed the annual cost of EU regulation to the UK economy is in fact £33.3 billion.
So now the dust is starting to settle, what will happen? A report by delivery company ParcelHero predicts a rise of 30 per cent in costs on imported items, with 5-9 per cent added in duties plus 20 per cent VAT on shipping and insurance. “The average SME regular importer/exporter to the EU – excluding one-man bands – will be spending around £163,000 extra annually, including duties. A typical £150 purchase from the EU will now cost around £195,” it says.
However, Martin McTague, FSB Policy Director, warns that any such predictions have to be caveated with “we just don’t yet know”. For now, the UK remains a member of the EU, and nothing yet has changed. The fate of small businesses lies in the Government’s negotiations with the EU, on future terms and access to the single market’s 500 million consumers and 26 million businesses.
Export destinations of small firms
FSB will ensure the needs of small business exporters are heard, says Mr McTague. “We are calling for the UK to retain simple access to European markets, which includes duty- and barrier-free trade with 31 countries, and to EU talent pools. Smaller firms need to be able to hire the right person for the job, and sometimes this means recruiting from overseas.”
A recent FSB report, Destination Export, shows that being part of the EU has a direct influence on where small businesses decide to export to. One in five decisions to export to a country in the EU is, at least in part, driven by that country being in the EU. “The reasons centre on the stability provided by the single market, and more standardised business practices and regulations,” says Mr McTague.
However, six countries that are not members of the EU also appear in the top 30 export destinations for small businesses. Four of those – the US, Australia, Canada and New Zealand – are countries where English is the main language, which makes doing business easier. The US is, in fact, the number-one country we export to.
Emerging markets, too, are expected to become even more significant export destinations of the future. There are already signs that the average small firm exporting to MINT (Mexico, Indonesia, Nigeria and Turkey) or BRIC (Brazil, Russia, India and China) countries earn more of their turnover from export than the average exporter does by concentrating on the EU.
But less familiar territories and business practices can come with complications. “Our report shows that exporters that sell to emerging markets tend to use more intermediaries, agents, distributors and middle men,” says Mr McTague. “The market may be more challenging, and small firms will need to do more market research and work with agents.”
The majority of exporters already sell their products to multiple destinations. Of those exporting to Europe, only 18 per cent do so exclusively. Of those that export to regions outside of Europe, two per cent or fewer export exclusively to just one region.
Steve Peers, Professor of Law at the University of Essex and Editor of EU Law Analysis, says the UK’s exports in the past two years have risen by 33 per cent to India, 31 per cent to South Africa, 30 per cent to Australia and 18 per cent to Canada. The Government’s drive to double exports to £1 trillion a year and get 100,000 more companies exporting by 2020 could mean emerging markets increasingly become part of a small firm’s customer base.
However, Mr McTague points out that export is not a “zero sum game”, and predicts that Europe, irrespective of the outcome of Brexit negotiations, will remain the UK’s biggest trading partner. “Small businesses just want to be able to sell where the demand is,” he says. “The biggest demand is still from Europe.”
Seeking distributors: Andrew Stewart, Marantech and AVET Technology
Andrew Stewart, 65, runs two businesses: Marantech, focused on exporting security products to Central Asia and Latin America, and AVET Technology, a small company he bought this year that manufactures audio-video recording products designed for use in witness interviews, which he exports to Cyprus, Gibraltar, South Africa and the Turks and Caicos Islands.
Marantech could be positively affected by the “welcome exchange rate change”, he says. Previously, a potential customer in Central Asia was put off by the price caused by the exchange rate, despite liking the technology. “I have no doubt that the rate adjustment will be welcome news to them,” says Mr Stewart.
However, for AVET Technology, retaining access to the single market is important. “We have sold into the peripheries of the EU, but I am conscious that we will need to push into the core,” he says. “With that in mind, and with the Brexit timescale unsure, I am looking for continental EU distributors to take our products into the single market. This seems a practical response. It keeps costs containable, and ties in with our strategy of a strong export ethos within the single market.”
But he’s not unduly concerned by Brexit. “Any export sale should hopefully be counter-balanced by the current lower exchange rate movement,” he says. “We are also focused on global exports rather than a bias toward Europe, including entering the Latin American and Australian markets though local partners.”
Fears of a recession: Sofia Charalambous, Bathroom Origins
Sofia Charalambous has worked in the bathroom industry for more than 23 years, having co-founded Bathroom Origins – a distributor of high-end European bathroom accessories – when she was 25.
When the EU referendum result came in, her heart sank. “My first thought was: what now for my business?” she says. “The immediate impact on the Friday morning was the plunging pound. If it doesn’t stabilise, it will leave us with no alternative but to put a surcharge on our pricelist.
“My main concern for the short and medium term is a downturn turning into a full-blown recession. Big-ticket spending will be the first to stop if people are worried about their jobs. While we’re in limbo, my business, like many others, will hold back on future plans and investments.”
Ms Charalambous believes it’s still early days to see the effects on consumer confidence. “Some retail customers with showrooms say they’ve seen a drop in footfall, and others say they’re busier,” she says. “It’s a different story with commercial customers. We saw a slowdown on quotes months before the referendum, and a week after the result we had a hotel contract cancelled for which we’d already delivered 30 per cent of the goods.
“Our future trading relationship with Europe will be the make-or-break situation for many importers and exporters. Importers will be asking: will we incur tariffs and duties, what extra red tape will we have to go through, and how will the pound fare? We need reassurances.”
Looking further afield: Jane Malyon, The English Cream Tea Company
Jane Malyon, 59, founded The English Cream Tea Company in 2011, selling picnic hampers, jams and teas. She believes Brexit could pose opportunities as well as problems for her business.
“Oddly, Brexit day on 24 June was also National Cream Tea Day,” she laughs. “I helped to run a Twitter event about #NationalCreamTeaDay, and some tweets were ‘what the heck are you talking about cream teas on a day like today for?’
“In the short term, we immediately run into a problem. Our tinware (cake tins and gifts) come from China, so we have currency issues. We’ve had to delay orders in the hope the pound will bounce back. As we’ve future-sold based on a set price, we have to absorb that difference.
“Where Europe is concerned, there are likely to be less favourable conditions ahead. We’re already a premium brand, and if tariffs are added it could make a big difference to our appeal in terms of purchase price.
“However, the main appeal of our gift products lies even further afield, in the US, Japan, China and Australia. We hope that exporting there may be improved by the currency change. We also expect to receive more attention from overseas buyers.”
Ms Malyon even hopes Brexit might be positive for her business. “The appeal of super-English brands like ours may actually increase,” she says.
“If we can still trade with ease in Europe, so much the better. If not, then our company will focus on further afield for export.”
Changing the business model: Sidonie Warren, Studio B and Papersmiths
Sidonie Warren runs two companies from the same building with her partner and co-founder Kyle Clarke: Studio B, a design studio specialising in interior and graphic design for businesses, and a stationery shop called Papersmiths. They are both aged under 30, and celebrated their fifth year of trading in June.
“We import 99 per cent of our products from all over the world, and are extremely concerned,” says Ms Warren. “Brexit means we’re considering changing our business model entirely.
“Current membership of the EU makes importing a breeze and we pay no import taxes. It’s easy and cheap for us to hop on a plane to Berlin to source products and meet suppliers, whereas the US is further away, requires a visa, is more expensive to get to, stock takes longer to arrive and we have to pay import taxes. Our product range would be severely weakened if we limited our sourcing to the UK,” she says.
“The weakness in the pound has had an impact on the supply cost of our products. We’re bearing these costs for now, but that’s a short-term solution.”
So the partners are planning to adapt their business model. “We’re seeking permission from our landlady to become more of a lifestyle/concept store that offers food and drink,” says Ms Warren.
“However, I’m sure all businesses that started up during the recession will agree that we have extra resilience. We’re not going to sit around – we’re already planning to adapt.”
On the agenda
Mike Cherry has asked the new Prime Minister to ensure that Brexit negotiations retain and provide:
Easy access to European single markets
Ability to hire the right people
Impact on EU-funded schemes
Clarity on the future regulatory framework