Written evidence from Engineering and
Machinery Alliance (EAMA)
A. SUMMARY
1. UK mechanical engineering is very export oriented
(70% of sales). It's a powerful net contributor (£3-5 billion
annually) to the balance of payments and has been for many years.
2. Our five top export markets are USA, Germany,
France, Singapore and China. Sector trade associations play a
major role in many export activities including trade shows, missions,
and in-country market support through their own offices.
3. The sector is dominated by SMEs. Selling capital
equipment into a new export market generally takes three to six
years.
4. Trade shows and missions are vital to SME
exporters. But UKTI support for these activities has been cut.
5. Today trade shows receive £8 million
in support out of a UKTI activity programme of £100 million
and an overall budget of £350 million.
6. Budgetary pressures could force BIS and UKTI
to become too introspective, when they should be engaging with
partners. Some trade associations could help in this if given
the chance, but it would require a more open sharing of information
round export activity.
7. BIS needs to be a strong voice for competitive
business inside Government, promoting an export oriented vision
based on good evidence, not industrial fashion or solely on internal
management information systems.
8. UK export finance and guarantee support is
weak compared to most of the UK's competitors. It needs a radical
overhaul.
9. UKTI has achieved much particularly when its
budget restrictions are taken into account. It needs to have the
freedom to act more flexibly to meet different sectors different
needs.
B. BACKGROUND
TO THE
ALLIANCE AND
THE SECTOR
10. The Engineering and Machinery Alliance (EAMA)
represents the following trade associations:
- Agricultural Engineers Association.
- British Automation and Robot Association.
- British Paper Machinery Suppliers Association.
- British Plastics Federation.
- British Turned Part Manufacturers Association.
- Confederation of British Metalforming.
- Gauge and Toolmakers Association.
- Manufacturing Technologies Association.
- Polymer Machinery Manufacturers and Distributors
Association.
- Printing Industry Confederation.
- Processing and Packaging Machinery Association.
- UK Industrial Vision Association.
11. They represent circa 1,700 firms in the mechanical
engineering sector with sales of some £8 billion.
12. Based on the Office of National Statistics
(ONS) new criteria for the sector they represent a quarter of
the UK's mechanical engineering output.
13. Using HM Customs' data, sector exports account
for about 70% of sector sales.
14. Typically, our companies supply "enabling
technologies" to other sectors (eg automotive, aerospace,
medical, power and food industries) in the form of machinery or
packages combining services and products.
15. In the UK much, but by no means all, of this
is carried out in small and medium sized niche or specialist companies
(SMEs) -- innovative, entrepreneurial companies pushing the boundaries
of factory performance, extending the envelope of the physically
feasible to new levels in terms of speed, precision and migration
into novel technologies and materials.
16. The UK market for these types of products
is small, hence the sector's strong export performance -- it runs
a positive trade balance for the UK year after year of between
three and five billion pounds Sterling according to ONS's Monthly
Review of External Trade. The only other UK manufacturing sector
to achieve the same sort of record is the chemicals industry.
UK MECHANICAL ENGINEERING IS A MAJOR EXPORTING
SECTOR AND NET CONTRIBUTOR TO THE UK BALANCE OF TRADE (£
BILLION)
| Year | 2000
| 2001 | 2002 |
2003 | 2004 | 2005
| 2006 | 2007 |
2008 | 2009 |
| Exports | 22.1 | 24.2
| 22.7 | 24.2 | 23.8
| 25.8 | 28.22 | 28.9
| 32.3 | 29.4 |
| Balance | 4.3 | 5.6
| 3.8 | 5.3 | 4.1
| 3.9 | 5.6 | 3.2
| 3.4 | 5.1 |
Source: Monthly Review of External Trade October 2010
ONE OF THE MAIN CHARACTERISTICS THAT SET MECHANICAL ENGINEERING
APART FROM THE OTHER MAIN EXPORTERS IS THE AVERAGE SIZE OF THE
COMPANIES INVOLVED.
| Sector (2009) | Mechanical engineering
| Chemicals | Pharmaceuticals
| Motor vehicles | Air and space craft
|
| Number of companies | 9,175
| 2,702 | 461 | 707
| 439 |
| Turnover £ billion | 31.7
| 38.7 | 16.3 | 28.4
| 22.1 |
| Average firm sales £ million | 3.4
| 14.3 | 35.4 | 40.1
| 50.3 |
Source: Annual Business Survey 16 November 2010
17. But there are other important sector considerations too:
- Selling (large scale) capital plant depends on the company's
ability to establish its reputation for quality, delivery and
commitment to the market in question.
- Trade Shows are therefore absolutely central to exporting
in our sector, a factor amplified by globalisation which is tending
to promote global "super-shows".
C RESPONSE TO
ISSUES RAISED
IN THE
NEWS RELEASE
ANNOUNCING THE
INQUIRY
The Government Trade White Paper
From our submission for the White Paper the elements most directly
relevant to this Inquiry are the following:
18. A strategy to rebalance the economy, to produce jobs and
growth through industrial investment (in part) should be shared
by all Government departments so the cumulative effort produces
a comprehensive plan without conflicting spillovers and pressures
other than at the extreme margin.
19. Most potential investors coming to the UK will consider
a sales office if they are looking at the UK exclusively as a
market. It's only if they want to export competitively from the
UK into Europe or elsewhere that they'll consider something more
substantial and invest in manufacturing premises.
20. Successful exporting is not a straightforward extension
of home sales.
21. In capital goods, the three basics that differentiate
the economics of exporting from home sales are:
- The cost of sales in export markets is usually much higher
than in the home market (e.g. cost of delivery, translation and
maybe some local adaptation).
- The sales price is often reduced by the local competition
in the export market.
- Exchange rates.
22. This means that the margin on export business will almost
always be lower, but there are two very significant, boosting
benefits:
- First, more stable order income from sales in several different
markets: this helps iron out the volatile highs and lows that
inevitably apply if a company sells into a single (home) market;
- Second, increased volume through the factory: this allows
the manufacturer to spread the overheads across higher output
and therefore reduces manufacturing costs per item.
23. Access to finance, decent trade cover and encouragement
to invest for the long term are vital for exporters.
24. UK SME manufacturers won't outperform the competition
in export markets if their financing packages are uncompetitive.
The three priority needs are:
- Better access to finance for investment and growth so that
they can improve productive capacity and increase their market
presence.
- Customer deposits paid to confirm their order should be treated
as a source of working capital for the manufacturer/supplier not
the bank.
- Trade credit schemes along the lines of our competitors in
countries such as the USA and Germany.
The role of BIS in providing support for exports and investment
25. The current picture is blurred on several counts.
26. Trade associations and business chambers play important
roles in exporting - as did the RDAs. It's not clear, what role
if any LEPs are to take on in this area.
27. In the Coalition Government, the post of Trade Minister
has only been filled fulltime since 1 January 2011. In the previous
Government, there were 11 trade ministers in 13 years. The role
deserves better than that.
28. And it's noteworthy that although manufacturing's roles
in rebalancing the economy and helping to drive exports are generally
well recognised, specific new action in the UK to get exports
moving has been less conspicuous than initiatives taken elsewhere,
e.g. in the USA, the Obama administration's plan to double exports
in five years, including the creation of an "Export Cabinet"
reporting directly to the president with a strong focus on helping
SMEs.
29. In the UK, schemes such the Enterprise Finance Guarantee
were specifically targeted at firms selling in the UK. EU state
aid rules were thought to preclude exporters, but as the Business
Committee pointed out, referring to trade credit and ECGD, in
its report Exporting out of Recession: "since the
onset of the global recession, other Member States have been able
to get a time limited waiver from the Short Term Communication
(which bans support for intra EU trade and exports to certain
OECD countries). Several European countries have taken the opportunity
to extend the cover they offer their exporters."
30. At the very least this sort of tentative UK approach reinforces
the impression amongst overseas customers and UK exporters that
the UK isn't really serious about exporting. (If it was would
it allow itself to be bested in this way?)
31. At worst, it makes buying UK goods more difficult for
overseas customers and several companies tell us that they place
work with their factories in the USA and Germany rather than the
UK to overcome these problems.
32. We need a strong BIS department, less of the introspection,
which understandably comes with repeated reorganisations and cuts,
and more of the powerful vision and aligned policy framework deeply
furthering UK's international competitiveness across Government.
33. We earnestly hope that the current Departmental Business
Plan (November 2010), which summarises its goals for exporting
and inward investment as to "Promote open and fair global
markets, improve UK Trade & Investment's focus on generating
high-value inward investment, and strengthen the capability of
UK exporters", will have the necessary bite to deliver world
beating trade promotion.
How the Government measures success in its support for trade
and investment
34. UK exporters have to compete with the best in the world.
To create a confident exporting base the UK's export agency should
aim to equal or better the delivery of competing agencies and
measure its performance accordingly.
35. There is still a lot of confusion about the way UKTI is
funded and how its funds are allocated to trade promotion and
inward investment activities.
36. It is clearly important that Government should be able
to analyse how public funds are spent promoting exports and FDI
and the system used seems to be fit for that purpose as an internal
management information tool.
37. But it isn't as useful to interested external observers
seeking to encourage sector exports.
38. For example in Resource Accounts 2009-10, the total UKTI
budget is put at £350 million, £81 million of which
is staff costs (UKTI, BIS, FCO). £100 million is spent on
UKTI programmes (including £6 million from OMIS[21]
charges to users and £8 million on supporting trade shows)
and the remaining 50% goes on BIS and FCO administration. These
costs are then placed against some impressive outputs/outcomes
to provide some management measurement.
39. Trade associations and other organisations involved in
promoting export and developing links with UKTI would probably
find other information more useful, e.g. breakdown of companies
by size and sector, activity type and service rating. After all
as partners working with UKTI, their members are the exporters.
40. Mechanical engineering companies are successful exporters,
but according to a recent BIS publication UK trade performance:
Patterns in UK and global trade growth, British trade in goods
and services grew an average of 10% a year over the six years
up to 2008. In our sector exports grew 42%.
41. We need better information to understand what works for
companies and help UKTI ensure it delivers more of it.
The role of UKTI working with businesses both large and small
to take advantage of opportunities.
Support services for exporters
42. Budgetary pressure on UKTI has reduced its capacity and
limited its capabilities.
43. There's plenty of good work going on at UKTI and elsewhere
to help exporters, but unfortunately companies often say that
the paring back makes the UK presence look smaller, less professional
and therefore less competitive when compared to the likes of Germany,
France and Italy.
44. Their governments are investing heavily in support at
trade shows and on missions. Their ambassadors attend the shows
and extol the strengths of their countries' manufacturing capabilities.
In short they sell themselves very well.
45. HM Treasury pressure is forcing posts to dream up ways
of charging exporters for their services. While there may be some
merit in this (e.g. when it tests the seriousness of the information
or market enquiry), some initiatives border on the surreal.
46. Here are a couple of examples. "This week I came
across an extraordinary paradox from UKTI the organisation that
is there to assist small UK companies to do business overseas.
I was invited on a trade mission to the US to meet some senior
officials in NASA. To my amazement when I enquired the details
I found we are to be charged for the introductions being provided.
I quote 'The British consulate offices in Washington and Los Angeles
will charge a fee for making the connections within NASA and the
prime contractors, taking care of logistics and for aspects of
mission organisation that will be passed onto mission delegates.
We have agreed with the consulate offices on a per company charge
of £480 + VAT for the mission.'
"I would end by making the point that these guys are the
very same ones who regularly contact me asking for names and introductions
to various contacts that I have around the world. Can you imagine
them ever paying me/ us for such information?"
47. "For me this comes on top of recently having to pay
the Consulate in Taiwan £500 to validate an electronic signature
on a UK Export Licence - because the new electronic signature
had not been agreed with the countries to which it applied. Our
customer, the Taiwanese Government, wouldn't believe the signature."
48. Overall UKTI has done a pretty good job promoting UK exports
when allowance is made for its vastly reduced expenditure on support
activities such as the Trade Show Access Programme (TAP), which
particularly affects SME exporters. As stated earlier, trade shows
are vitally important for companies selling capital goods overseas.
Prospects need to have seen the goods and get to know and trust
the company behind the product before they will spend £300,000
or more on a new piece of machinery for their plant. The process
can therefore often take time (three to five years) as commitment
to the market as well as technical competence have to be demonstrated.
49. BIS needs to do more to ensure that UK participation doesn't
compare unfavourably with our major competitors. That doesn't
necessarily mean having contingents of a similar size. But we
do need to show that the UK has the depth of supply chain and
manufacturing to match others. Key sector events are one route
to achieving this and may be under threat of further budgetary
cuts.
50. We would like to see:
- (a) Clear and consistent guidelines about charging and
the levels applicable. The guideline ought to be to ensure the
best quality result, not to raise revenue.
- (b) An export policy framework flexible enough to:
- (i) Encourage different sectors (eg consumer, investment
and industrial goods producers) to tackle what they see as their
most prospective markets.
- (ii) Task the export agency with delivering a high profile
British branded presence at prestigious trade shows around the
world.
- (iii) Provide sensible exhibition and seminar support,
advice and guidance (ie no open cheque book), so that firms taking
advantage of Government support are vetted to ensure that they
are able to make the most of the opportunities (eg at a trade
show).
- (iv) Ensure UK Trade has a range of alternative services
to create a wider and more confident exporting presence at exhibitions,
trade shows and missions.
- (v) Cut out prescription (eg three visits might arguably
be OK for a medium priced consumer goods exporter in a European
market, but it certainly won't do for specialist machinery manufacturers
establishing their credentials in a market like the USA or China.
That can easily take several years.
- (vi) Ensure that the agency works with trade associations
that are able to demonstrate existing export promotion expertise
or a willingness to develop it.
- The major trade associations know their industries.
- Some trade associations have their own overseas trade offices
to support their members (eg in Russia, China, Brazil and the
USA). These might be harnessed to strengthen the UK offering with
UKTI and the association bringing their specialist knowledge,
networks and information to help exporters.
The effectiveness of the Export Credit Guarantee Department
and the flow of trade credit
51. It is increasingly apparent, despite HMG's intention that
exports and manufacturing will play major roles in getting the
UK out of the recession, that the problems for the exporter begin
back in the UK when it comes to how to supply the order, because
the UK is simply uncompetitive when it comes to putting finance
in place around export orders.
Using the customer's 30% deposit confirming the export order
52. In mechanical engineering it is standard practice for
a customer to pay a 20-30% deposit to confirm their order. It
happens all over Europe and in the USA. In return for the deposit,
the customer expects to receive a guarantee, normally from a bank,
that they will either receive the machine they have ordered or
their money back.
53. If the company making the machine is any good, this is
all very low risk, for which the banks make a charge.
54. The difference is felt particularly by SMEs: whereas French,
German and US governments have bond support facilities that enable
banks to provide the guarantee for a small charge, UK banks take
the deposit as security or allocate it against the company's overdraft
and still charge for the guarantee. The result is that the manufacturer
is no better off for having received the deposit in the first
place. There's no benefit to company cash flow.
55. According to a benchmarking report produced by the British
Exporters Association (BExA), Export Credit Agencies April
2010, Australia, Canada, China, France Germany, Italy, the
Netherlands, Spain and the USA all offer bond support schemes.
In fact within the OECD, the UK is in a very small minority not
offering such support.
56. But that's not all. It means that foreign companies based
in most of those countries, exporting into the UK market, are
actually at an advantage over a UK-based company using a typical
British bank. Thanks to bond support the foreign firms will get
access to the 25% deposit and use it as working capital. In all
likelihood, if a guarantee is required, the British-based company
won't. The deposit will probably be taken by the bank and held
against the company's overdraft.
Letters of Credit
57. Letters of credit are 'negotiable documents' in other
countries. That is, banks will advance proportions of the final
sum in the contract at certain stages as work moves towards completion
of the contract (e.g. at the start, completion of a specific module,
and then when ready to ship). So in other countries the letter
of credit is another important route to maintain positive asset-backed
and therefore cheap cash flow through the business. But it's not
available in the same way here. And foreign banks are catching
on to what this means for otherwise successful UK firms.
58. One SME reports being recently wooed by the Bank of China
to put all his firm's letters of credit through the bank's Hong
Kong branch to access the funds on more favourable terms there
than those offered in the UK.
59. The attraction was not enough this time. But you can see
where it's headed. Once the finance is taken up locally, why not
consider moving the production facilities too.
Export Credit Agency
60. There is a general perception that the UK's Export Credit
Guarantee Department does a good job on large scale orders, such
as the Airbus related business and medium to long term repayment
projects such as power stations and hydro electric type projects.
61. Now the Export Credit Guarantees Department's cover needs
to catch up to be at a competitive rate for exported goods starting
at £250,000.
62. BExA's benchmarking study mentioned earlier compared the
services offered by 38 export credit agencies around the world,
allocating a "point" for each service provided across
10 basic services from short-term export credit insurance through
bond support to letters of credit guarantee schemes.
63. The average score across all 38 organisations was 7.1
with Canada and the USA achieving 10 out of 10. Thirty-three countries
scored higher than five. Five scored five or lower. UK's ECGD
scored 5.
How other countries, similar to the UK, export to emerging
markets and what our Government could learn, if anything from
them;
64. One member points out that both the German Hermes Bank
and the US Ex-Im schemes are much more flexible, easier to apply
for, have better commercial risk assessment and are cheaper to
apply. In his opinion the current ECGD scheme is making the UK
uncompetitive in the world markets.
65. ECGD sold its short term credit insurance business to
Atradius twenty odd years ago and is therefore absent from that
business and is virtually unknown to SME exporters.
66. The closure of SITPRO (Simpler Trade Procedures Board)
in the cull of QUANGOs means that the UK is no longer represented
on electronic trade documentation in the EU as it once was.
67. Machinery exporters need to be able to offer customers
finance at fixed interest rates as a service that our competitors
tend to provide to help clinch the deal, even if clients decide
to do the business on floating interest rates. ECGD will be withdrawing
this fixed rate export finance offer in March 2011.
68. A study (2007) by the International Consultancy Group
for the Manufacturing Technologies Association (an EAMA member)
comparing the UK's support for exporters at international exhibitions
with French, German, Italian, Spanish, Turkish and Chinese practice
found that:
- (a) UK's competitors offer more funding and attend the
same number or more exhibitions.
- (b) The competition is very strong and more adept at involving
all "stakeholders". It is also growing fast in places
like Turkey and China.
- (c) Other countries don't restrict support to categories
such as "new to export", or SMEs. Unlike the UK, they
use their support to have a broad swath of industry represented.
- (d) France and Germany in particular have a range of schemes
that support companies under a variety of different scenarios,
for example encouraging prospecting in markets over time or supply
chain co-operation at exhibitions.
January 2011
21
OMIS = Overseas Market Information Service under which firms pay
for services supplied. Back
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