Rebalancing the Economy: Trade and Investment

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 (£3-5bn 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 (e.g. 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)

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.

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 [1] 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 (e.g. 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 (i.e. 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 (e.g. 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 (e.g. 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 (e.g. 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 ten 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 5. Five scored 5 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