UK SMEs increasing international activity entering into 2015

13/01/2015

Western Union Business Solutions

Latest research from Western Union Business Solutions released today following survey of 1,000 plus UK-based small and medium-sized enterprises

  • A third of UK businesses expect to grow in their international activity in the year ahead
  • Europe remains the largest export market for UK SMEs; China is the biggest export growth opportunity
  • One in three businesses check the currency markets regularly, but a tenth of businesses don’t know what to do with unforeseen FX costs

LONDON, UK – 12 January 2015 – Western Union Business Solutions, a leader in global payment services, today announces the latest research-based findings of the Western Union Business Solutions International Trade Monitor (ITM), the quarterly economic confidence survey of over 1,000 UK small and medium-sized enterprises (SMEs) engaged in international trade.

The survey reveals that 83% of SMEs said they felt confident about the UK’s economic climate, increasing from 81% the previous quarter. Significantly, the proportion of businesses saying they are ‘very confident’ about the UK’s current economic climate has increased to 15% this quarter – it was just 7% for the same period last year.

The findings show that UK SMEs are likely to increase their international activity in the coming year, with the average number of countries that British businesses typically trade with rising from 2.1 to 2.3 countries over the last two quarters.  In addition, nearly half of respondents (47%) say they have increased the number of countries they do business with in the last 12 months.  This growing trend looks set to continue into 2015, with more than a third (34%) of UK businesses saying they are confident that their international activity will grow over the next 12 months.

Export trends

The International Trade Monitor also demonstrates the importance that UK-based SMEs place on export markets for their business. A quarter (24%) of UK SME business revenue comes from exports, far more than that of other Western economies, such as the US (18%) and Canada (12%). Additionally, more than a third of SMEs (38%) say that exports comprise a greater percentage of revenues than 12 months ago.

Of the SMEs surveyed, 43% expect exports to account for a greater revenue proportion in the next year, up from 40% the previous quarter.

Half of the SME business owners anticipate export trade to be driven by mature northern hemisphere markets (51%), whilst a third of respondents (30%) expect export demand to be driven by emerging markets and the BRIC nations.

Europe remains the largest export market for UK SMEs, with 80% exporting to the Continent, an increase from 66% 18 months ago (Q3 2013); demonstrating that British businesses have successfully strengthened their trade relationships with European counterparts. Significantly, China is an increasingly popular export market, with the proportion of UK SMEs exporting to China having increased from 9% in the first quarter of 2014 to 16% in the fourth quarter. Furthermore, China is the country that represents the biggest opportunity market for small and medium-sized enterprises in the UK (29%), and these perceptions are gaining momentum with 25% having said so last quarter.

Given the rapid decline of the Rouble in recent months, it is unsurprising that Russia’s attraction has an export market has fallen dramatically in recent months – just 4.4% of businesses are exporting to Russia this quarter, compared to 22% in the second quarter of 2014.

Tony Crivelli, Managing Director, Europe at Western Union Business Solutions, said:

“This research highlights the UK’s reliance on having a healthy, robust export market compared to other developed economies. SME revenues are intrinsically linked to the success of the domestic export market, and exporters need to ensure they remain as internationally competitive as possible.

“It is encouraging to see that, for the second quarter in a row, over a third of SMEs have seen business revenues increase as a result of their international trade activity, with many anticipating further growth in this space in the coming months.

“China represents the biggest export growth opportunity for UK SMEs. However, Europe is consistently regarded as the largest trade market, both for UK importers and exporters, and this should not be ignored.”

SME Challenges

According to the International Trade Monitor, one in three UK businesses (33%) say they check the currency markets regularly. Whilst this proportion is similar to USA businesses (30.5%), just one in five Canadian businesses check the FX markets regularly. A tenth of UK SMEs (12%) do not know what to do with unforeseen FX costs, with many respondents saying they will ‘just figure it out’, despite multiple risk management options being available to them.

Crivelli continued: “Having an understanding of foreign exchange markets is crucial for the success of any business that sends or receives money internationally.

Compared to businesses based in the US and Canada, it appears that British SMEs are generally well-informed about the foreign exchange markets. However, more education is needed so that business owners are fully-equipped to make the best decisions for their companies and to best manage FX risk.

Unforeseen foreign exchange costs can harm the profitability of importers and exporters. Businesses that trade internationally should consider implementing risk management strategies and currency hedging tools in order to manage revenue streams and remain resilient in an increasingly competitive market.

The International Trade Monitor paints a worrying picture of challenges faced by UK importers and exporters. The overall health of the global economy continues to be the major concern for 69% of UK SMEs. However, this figure has fallen from a high of 79% in Q1 2013. Issues that are increasingly important include cash flow, late payments/debt recovery and currency volatility. In summary:

  • Cheaper competitors represents the second biggest concern for 62% of SMEs
  • Cash flow is an increasing concern for British SMEs, rising to 58% from 55% the previous quarter. Late payments and debt recovery was also a concern for 58% of respondents
  • Currency volatility (52%), was the next biggest concern

In addition to these concerns, UK SMEs are finding it more expensive to operate. 44% of businesses say that their costs have increased by an average of 5.4% over the last year. By contrast, just 9% of UK SMEs say that costs have fallen.

Furthermore, intentions to add to headcount appear to be tapering. Less than a third (33%) of businesses plan to recruit more staff in the next six months, down from 38% the previous quarter. Worryingly, one in ten businesses (10%) plan to reduce staff numbers, by an average of 9%.

In a move aimed at combatting increasing costs whilst remaining internationally competitive, almost two fifths (39%) of businesses plan to lower their prices in the next 12 months, by an average of 7%.

The key points of the International Trade Monitor are summarised below:

  • 42% say international trade will improve in the next 6-12 months
  • 87% are confident about current international trade conditions generally
  • 83% have confidence in the UK economic climate
  • 96% say the domestic economy has improved or stayed the same in the past 12 months, compared to 93% the previous quarter.
  • Nine out of ten businesses (89%) are either very confident or confident in the sustainability of this domestic improvement. Just 4% are not confident.