Publications on the internet
UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
This is an uncorrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.
Any public use of, or reference to, the contents should make clear that neither witnesses nor Members have had the opportunity to correct the record. The transcript is not yet an approved formal record of these proceedings.
Members who receive this for the purpose of correcting questions addressed by them to witnesses are asked to send corrections to the Committee Assistant.
Prospective witnesses may receive this in preparation for any written or oral evidence they may in due course give to the Committee.
Taken before the Business, Innovation and Skills Committee
on Tuesday 18 January 2011
Mr Adrian Bailey (Chair)
Mr Brian Binley
Mr David Ward
Examination of Witnesses
Witnesses: Ms Susan Ross, Chairman, British Exporters Association (BExA), and Dr Adam Marshall, Director of Policy and External Affairs, British Chambers of Commerce, gave evidence.
Q1 Chair : Good morning, and thanks very much for agreeing to attend this morning’s session. I apologise that it’s a little on the chilly side; I think it’s all part of the Administration’s efforts to cut costs. I emphasise that we’re all in this together. Can I just ask you to introduce yourselves, so that we can get voice levels for transcription purposes?
Adam Marshall: I’m Adam Marshall. I’m Director of Policy for the British Chambers of Commerce.
Susan Ross: I’m Susan Ross. I’m Chairman of the British Exporters Association, BExA.
Q2 Chair : Thanks very much. We’ll be asking you questions. If one of you feels the other has covered the answer quite adequately, don’t feel obliged to supplement it, but there may be particular questions to either one of you as appropriate. May I start with the British Chambers of Commerce? Your submission to us makes the comment that British industry needs to recover its "mercantile spirit". First, can you define what you mean by that? Secondly, how do you think we’ve lost it and, lastly, how can we get it back?
Adam Marshall: We define "mercantile spirit" as a willingness and an interest in exporting both goods and services overseas. We did some survey work during 2009, and a very large business sample suggested that only about 30% were exporting, and six in ten were doing so because they’d been approached from overseas. They had not proactively gone out to potential customers overseas and sought out business. Whilst some of our largest companies are indeed trading around the world and many of our mediumsized manufacturers, because of their particular businesses, are also trading around the world, there are many companies, especially in the SME sector, whose sights are not set on foreign horizons. We want them to look to those overseas markets in future.
Q3 Chair : Interestingly-we were just having a conversation on the subject before you came in-a relatively small proportion of SMEs export, and of those that don’t, a very significant number do not even consider exporting. What do you think are the reasons for this?
Adam Marshall: A lot of businesses will say to us that the home market is sufficient for them to grow to the size to which they want to grow. We don’t believe that that is setting the bar particularly high, to be honest with you. We’d like to see more businesses converted from lifestyle businesses or "big enough" businesses into fastgrowing businesses. In many cases, companies will simply say to us, "Look, I’ve got enough demand in the domestic market. I don’t really need to go overseas; it’s too much risk right now." What we’d like to see is a cultural shift to push businesses-and this involves businesses helping other businesses, in a lot of cases, to do so-to internationalise their operations and to look overseas for new markets. That also involves the Government. We think that, in this country, we need to see trade promotion activity on the ground with small and mediumsized businesses, not as a "nice to have" or a luxury, but as an absolutely core part of what Government does.
Q4 Chair : Thanks. Certainly I think there’s a considerable body of survey evidence to substantiate what you’ve said there. You’ve made the point that it’s a cultural difference. Government does have a role. Now, I have to say that I think that SMEs have an instinctive and, you could say, cultural aversion to having anything to do with Government. How do you think you could bridge that gap and what could the Government do to change this?
Adam Marshall: We want the Government to do three things. One is to reform and boost trade promotion services for SMEs, to which I referred before. It’s not necessarily about simply increasing the budget of UK Trade & Investment, for example, but helping companies in a variety of different ways to get to overseas markets or to think about exporting for the first time. For some it’s as small as a £2,000 travel grant to go on a trade mission. Those are the kind of very small interventions that can make a very big difference. Second is sorting some of the persistent problems with trade finance and trade credit insurance that businesses talk about as an obstacle, and that’s something I know Susan will come on to discuss in greater detail.
Chair : We’re going to go on to that in a moment.
Adam Marshall: The third one is around tax incentives and looking at ways to use the tax system perhaps to encourage exporting amongst those who are more reticent. There are certain ways you can use tax allowances, both on the corporation tax side and on the income tax side, to encourage both individuals and companies to look to export markets. Clearly at a time like this, money is in short supply and finding ways to pay for that could be difficult, but it is something that should be considered over the medium to long term.
Q5 Chair : That’s interesting. Have you actually put any proposals on that to either this Government or the previous one?
Adam Marshall: Well, we have commented on the withdrawal of quite a large number of allowances that favoured exporters over time. We haven’t put forward proposals for new forms of allowances or new forms of incentives. I think it’s a bit early and, in general, our companies are very supportive of consolidation of our fiscal position before we get back to that stage of the game, but it is something we would see as a medium to longterm priority.
Q6 Chair : What products do you think we could export that we’re not at the moment?
Adam Marshall: If you look at the UK economy, we’ve got manufacturers who tend to be the backbone of our export population, as it were. A great number of mediumsized and often very small manufacturing companies are exporting their goods around the world. A big chunk of the UK economy-75% of the economy overall-is services. We are the world’s secondlargest services exporter but, when you strip out financial services, where we are of course one of the global hubs, our service businesses don’t necessarily get out there as much as we would want them to. With everything, including professional services-for example, health and safety consultants, or lawyers-there’s more that could be done to help these people export their services abroad.
Q7 Chair : Have you put forward any proposals to do this?
Adam Marshall: The points that I made at the beginning were about trade promotion and helping these companies really realise that there are markets out there for their products, whether it is a nontangible product, as in a service, or a tangible product, as in a manufactured good.
Q8 Mr Ward: Without wanting to open too big a debate on the subject, it is quite topical at the moment with all the things that are happening. I’m quite interested in this "mercantile spirit" and the culture. Is language a problem? Most German, French, Italian, Chinese and Japanese businesses and companies will all have English speakers. It’s not the same with many small manufacturers in particular in the UK. Is that an issue?
Adam Marshall: I think it certainly is an issue. If you look at the outcomes of our educational system, unfortunately we are not good in the global league tables of speaking foreign languages. One of the things that businesses say to us is a big problem for them going into a new market is familiarisation with the local culture. Language plays an important role in that-in making connections, in building up the sorts of networks that turn into a new client pipeline. It is something that could be improved. Indeed, a past President of the British Chambers of Commerce some years ago spent quite a bit of time working on this, because she herself was in the language and translation business, working with a number of companies, both at home and overseas. She said that this was a deficiency that we needed to address.
Q9 Mr Binley: Let me talk about something I know a little bit about. I’m nonexecutive Chairman of a company that provides a databasebuilding service to businesstobusiness publishing. We’re now doing sizeable trade with the USA, sizeable trade with France, Belgium and hopefully with Germany, and with Australia. The point about it is that they all came to us; we didn’t go to them. That underlines your point. I want to make a point about outreach. To my knowledge, and I could be corrected on this by executive members of the company, we’ve never had an approach from UKTI. How do we deal with that outreach problem with the SME sector?
Adam Marshall: It’s a difficult question, because of course we have 4.7 million SMEs around the country, if I remember correctly, of which some 1 million are companies of an appreciable size that might have a service to export. That’s a lot of people to target. I’m encouraged by the pronouncements by the newly appointed Trade Minister, Stephen Green, who said that he will spend a lot of time on the ground in the UK working with small and mediumsized companies that have the potential to export. That’s very important. While of course you want a Trade Minister who’s going overseas regularly to bang the drum for businesses, it’s also important very important to work with SMEs at home. That’s useful profileraising of export possibilities amongst SMEs.
In a lot of cases, what businesses will say to us is it’s not about having an approach from UKTI; it’s about having some basic knowledge of markets. There’s a big role for businesses that are exporters to play here in working with those that are not yet exporting and-I hate using the word, "mentoring", at the moment, because everything is about mentoring right now and it seems to be getting devalued, to be honest with you. Exporting businesses can mentor nonexporting businesses and help them open their eyes to some of the possibilities. That would play an important role in helping where Government institutions have not been able to contact some businesses. Chambers of Commerce might play a role in that.
Mr Binley: Could I pass this briefly to Ms Ross and get your impression?
Susan Ross: The sales process is very difficult. We’ve seen advertising on billboards for UKTI, maybe a year ago, which was excellent. I don’t suppose it brought in too much, because I think from business we do tend to know our own world and we don’t search out. The first place you look though is the website. I do think, if we could somehow have a better, more coordinated, refreshed, uptodate, easytoaccess website, which pointed companies in good directions, they might search for information about Brazil and then realise actually there’s a trade mission going, realise if they’re small that there may be a grant for something. To me, accessibility is important.
On networking, you can’t just network; you have to have sponsored networking. Maybe part of it is for UKTI, or through the Chambers, to have events that bring in nonmembers of the Chambers, people who’ve never exported before, but I’m afraid to say they will have to be dug out; they will have to be invited. You can’t put a price on it, you can’t say that it’s £100, or that the commercial people have £1,000 to join a networking event.
Q10 Chair : Before we move off this issue, I could come back to a point Adam made earlier about small grants potentially for businesses to go abroad. I’m not aware of any Government scheme that disburses such grants. Has there ever been one and, if there hasn’t, could you recommend a model that would be appropriate?
Adam Marshall: There have been things like the Tradeshow Access Programme, which have been very successful for a lot of small businesses, which previously had no real incentive to go on a trade mission for the first time. Those provided small grants of around £1,000 to £2,000, literally to help cover the airfare, so that they could get out to a potential market and learn about what that market might offer them. This is the sort of thing where we spend considerably less, as a Government and as a country, than some of our foreign competitors and counterparts. Trade missions and trade promotion of that sort form a bigger part of the budgets of export promotion agencies in many other countries. Having a volume of support available that enables more companies to take that first step or go on that first mission is very important.
Q11 Chair : Have we got actually any sort of measurement of outcomes arising from such missions, to give some sort of valueformoney indicator?
Adam Marshall: I would venture to say that the only agency that might have access is UKTI itself, but you touch on a very big problem, a very big issue, for us overall, which is that it’s very difficult sometimes to measure the outcomes of trade promotion generally. From our perspective, we would like an emphasis on the measurement of outcomes whereas, now, we very often have an emphasis on outputs, so the number of companies that have been through the front door, for example, or the number of companies to which a chargeable service has been sold. Those seem to be the metrics against which our trade promotions agencies are judged right now, rather than "Business X got £5 million going out to China. Business Y did the same in Australia."
Q12 Nadhim Zahawi: How important do you think the effect of the British Business Ambassadors is?
Adam Marshall: I think I’d start by saying that it’s a positive idea on several fronts. It does help to increase the brand recognition of a number of British companies abroad. You’ve heard comments from the Chinese in recent weeks, for example, saying, "French, German and Italian brands: we recognise them more because they’ve got more people travelling abroad and because our consumers are interested in their brands." These people can play a role in boosting the profile of British business and British exports. However, if you look at the list of Business Ambassadors, they are almost all drawn from the very large companies and the very notable and recognisable companies we have here in this country. A lot of SMEs with which I come into contact from my membership or even just from the wider SME community would say to me, "I don’t see how this person can help me represent my interests overseas, because actually I manufacture mechanical parts for combine harvesters and this person is the managing director of a fashion company," for example. There is a bit of a disconnect there and I don’t think that the programme yet has got the SME bit of the market taken care of.
Nadhim Zahawi: Ms Ross, do you want to comment on that question?
Susan Ross: I think they need to be active and visible.
Nadhim Zahawi: Have you met any of them?
Susan Ross: No. I’d like to.
Nadhim Zahawi: Have you, Adam?
Adam Marshall: One or two.
Q13 Nadhim Zahawi: Looking at the list, I counted companies that could be classed as SMEs, but none from the manufacturing sector. You mentioned, Adam, that there are 4.7 or 4.8 million SMEs. How would you envisage getting that sort of representation among the Ambassadors?
Adam Marshall: I think it’s a very good question and a very tough one. Business organisations like my own might be aware of a number of very dynamic SME owners or managers who might be interested in helping or taking part in the programme. I’m constantly surprised, going up and down the country talking to our members, about the number of small businesspeople who are worked off their feet, but who are still willing to give up their time to help others, whether that’s through local economic development partnerships and things like that, which are emerging, or doing something like this. Quite a lot of them say, "I will do this. I would get involved, but I don’t know what the mechanism is. How do I get into it in the first place?" That’s the principal barrier, but I think that business organisations would be very willing to work with the Government to identify more SME Business Ambassadors and SME export champions.
Q14 Nadhim Zahawi: In the last couple of years, there’s obviously been a focus on the emerging markets. We’ve all heard of the acronym coined by Goldman Sachs-the BRICs. Less well known is CIVETS, which includes Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa. Is this the right approach and targeting or should we concentrate on more established markets?
Adam Marshall: I’m thinking through the acronyms! Effectively we need a focus on both established and emerging markets when we talk about trade promotion. I would say that, wouldn’t I? Very large numbers of firsttime exporters will want to go somewhere familiar, and that means generally Europe or North America, because they’re seen as the easiest markets, in many cases, to start out in. They’re often looking for a bit of support, a bit of advice or a bit of help to move into those markets for the first time. That said, however, these are markets whose economic growth levels are relatively stagnant, whereas the BRICs, the CIVETS and any other number of emerging markets are the ones where we’re seeing 6%, 7% or 8% yearonyear growth and the potential for new markets opening up. If I was sat in UKTI right now, I would probably defend a focus on the emerging markets because of the potential returns from their growth to British exporters. At the same time, I’d be saying, "I wonder how we could unlock more resource or more money so that we could actually help businesses get into established markets if they’re firsttime exporters."
Susan Ross: I think there should be a focus on markets where our UK products will go down well. We sell leadingedge technologies in a whole range, from fashion through to engineering, service industries and project management. That’s not going to go down so well in some countries as it is in others. Let’s concentrate on where it will go down well, where perhaps trade might be a stepping stone for diplomacy, so there might be a good reason to go there and, lastly, where either there are commercial ways of helping with the risk of nonpayment under the trade finance, or where ECGD can come in and supply that-a targeted, focused, smart view on how to get there.
Q15 Nadhim Zahawi: Are you saying that UKTI and UK plc need to segment better-i.e. there’s no point in having a broadbrush approach and running around the world after the CIVETS, the BRICs or whatever acronym? It’s much better to think of what we are good at and what are we good at exporting, and then target those towards those countries that have those needs.
Susan Ross: It could be for example that South America is more attuned to North America than to Europe. Where do British products go down well? In the Middle East, the Far East, so perhaps the "V" rather than the "C".
Adam Marshall: I agree with Susan. At a time of limited resource and limited capacity, we need to target our efforts on what generates the most returns. However, I would caution against a retreat from highergrowth markets where we currently don’t have a presence, because that effectively leaves the territory open to our major international competitors, when in fact we may have something within a very short time period that we could be selling into those markets. It’s a question of being a bit omnipresent, but being smart when you’re investing major resource.
Q16 Mr Ward: Something we are trying to do in Bradford is to take advantage of the large amount of immigration and harness that. To some degree, latterly, East Europeans have come in, but of course there is a big Indian community in this country. Have we done anything strategically to build on that natural advantage that we have to get into markets such as India?
Adam Marshall: The trade mission that’s going to India at the moment and the Prime Minister’s prioritisation of India as a market are recognitions of the importance of those links. We’ve got two things that we need to consider. One is historical links to a number of countries that are either members of the Commonwealth or excolonies, where the trading links survived long after the British departed. The other thing that we have to think about is those countries from which we have had recent immigration. You don’t necessarily think about a country like Poland, for example, where we’ve seen recent emigration, as a major export market for the UK. That’s a cultural problem. We’d like to say we’ve now got a large number of Polish people in this country; we actually do have good economic links with Poland now. Why isn’t it a bigger export market for UK companies and what can we do to make it so?
Q17 Nadhim Zahawi: Can I now move on to thinking about UKTI? Following the announcement of the budget cuts for BIS through the Comprehensive Spending Review, which services would you be most worried about losing at UKTI or being cut back? Mr Marshall, your own research survey showed that most companies that you spoke to felt that UKTI needed rationalisation and a more joinedup service. Can you expand on those comments? What does UKTI need to do more of, stop doing or scrap altogether?
Adam Marshall: I think I indicated earlier in my evidence that trade promotion and promotion of exporting as a route to business growth is our absolute top priority. In many cases, this needs to be done with small and mediumsized business in the regions, rather than necessarily large businesses in and around the capital. UKTI is having significant cutbacks. What we’d like to see protected is frontline advice to businesses wherever possible. Now, that also needs to be done in the context of a reform of how UKTI does business. I mentioned earlier a focus on outcomes rather than on number of businesses seen as being extremely important. Also, there are possibilities for UKTI to work with other providers of support for exporters-Chambers of Commerce is one of many-to deliver a better service over time. What I don’t think we’ve taken into account here though is the fact that UKTI’s budget, or the trade promotion budget of UK plc, as it were, was very small to begin with. When we went into the Spending Review, we said there are only two things we need to protect in this country in terms of budgets. One is our infrastructure budget and the other is our trade promotion budget. Certainly there are ways to reform how we spend both of them and spend them both better, but those are the two things that will help our economy grow.
Susan Ross: My view is that, as companies get bigger and merge, they tend not to keep the same HQ functions duplicated in the individual companies; they tend to cut down on staff numbers in central functions, such as human resources, IT and finance. I suggest that perhaps the same could be achieved in order to keep plenty of frontline staff, but just be a bit wiser about how the budget is spent.
Q18 Nadhim Zahawi: Thank you for that. Do you think that diplomats can make good salesmen?
Adam Marshall: This is a question that’s been doing the rounds for a number of years. I think we’ve seen a number of successive Governments say that they want to use our embassies better as shop windows for potential exporters. The current Foreign Secretary is no exception to that. He’s gone at it with a good degree of zeal and zest, which is very welcome. We need the reality though to match the rhetoric. That means that we need qualified businesspeople, often in these overseas posts, who understand the needs of a company, whether it’s an SME or a large company, coming to try to develop a new market. I think our members would say there’s been significant improvement in very recent years in the quality of local, ontheground staff, both of UKTI and the FCO, in those overseas posts, but that that quality could still be significantly higher. You’d like to see more seasoned businesspeople, after a 30year business career, perhaps becoming our representative in Delhi, in Beijing, in Seoul, etc, rather than someone who’s spent a 30year career within the diplomatic service.
Susan Ross: My view is yes, I think they are important. I think overseas posts, though, should not be trying to earn money out of making their premises available for meetings or gettogethers, particularly from SMEs, which are the ones that don’t have a local presence. If those embassy commercial staff were to spend time working on secondment in business, they would get a much greater understanding of what businesspeople need when they come to them overseas. The reports that we’ve had back from members are that some overseas embassies and consulates are fantastic and others are not so good.
Q19 Mr Binley: I’d particularly like to follow that up. We’ve made a number of visits to important potential export areas as a Committee, and we’ve found exactly that: the point that you’ve just made that, where we’ve got good people it works very well; where we haven’t, it’s a pretty bureaucratic operation. The fact that you concentrate your remarks on process and not outcomes is very much a bureaucratic way of looking at the world and certainly not a business way of looking at the world. While the quality has improved, it is very patchy. How do we ensure in practical terms that we get people involved in UKTI out in those countries who know about business? How do we get them? It’s not happening; it’s accidentally happening. When you get somebody, it’s almost by accident and not by design. How do we do that?
Adam Marshall: The first thing is to recognise that career diplomats are not market makers, and that is something that UKTI, BIS and the FCO need to agree between them. This is a classic Whitehall thing, isn’t it? The money comes from three separate sources and there are three separate sets of personnel involved, three separate sets of initial priorities, etc. On the ground, overseas, it’s FCO personnel very often and FCO money that’s gone into that. I think that secondments into business of FCO staff, over the long term, are one way we could get around this. Another way is to bring people into the diplomatic service later in their careers, on the express premise that they’re there to perform a commercial service rather than to be wellrounded diplomats who are doing consular work, political representation, etc.
Q20 Nadhim Zahawi: Do you think there’s a cultural issue here? On a recent allparty group visit to the Kurdish region of Iraq, some of the evidence we got back was that, to compare and contrast us with the French, the French Foreign Service would lead with business questions or business development and then follow with the political questions when meeting leaders of those countries, whereas we do the reverse. Also, they are not shy about using their president. We had direct evidence of two or three major contracts won because President Sarkozy actually very directly led not just a general trade mission but a very specific mission to win a contract or to deliver an agreement for Carrefour or France Telecom, whereas we culturally are more reticent about going out and actually selling specific companies.
Adam Marshall: We must not be shy about banging the drum for our businesses, and we mustn’t beat about the bush if the principal reason for us going overseas is to generate income for UK plc, generate turnover for our businesses. The Prime Minister in his first months has been positive on that front, in the sense that he has been on a number of serious overseas visits with the express recognition that his top priority was commercial relationships. That’s quite positive. What you need to see is that across the system, across the variety of encounters that we have over time. Whenever any politician goes overseas and, indeed, whenever any senior official goes overseas, those commercial interests need to be front and centre.
Susan Ross: I don’t think there’s a recognition, in the diplomatic side, of the value of commerce in winning over the hearts and minds of people. If you see your products overseas, definitely you start to have an appreciation of the tie between the countries.
Q21 Chair : Could I just follow up this argument? It has been put to me that, valuable though these headlinemaking trips are by senior politicians and so on-and yes, certainly when we visited the Gulf area it was emphasised just how important it was for top people to be going there to represent industry-there was a certain feeling that, in effect, they were highlighting only deals that would have happened anyway; and that there is a need for business and Government to be engaged, if you like, at a level that would enable, as Nadhim has just outlined, our senior politicians-Government members-to go out and help prepare the ground abroad at an earlier stage for the realisation of successful contracts. I’m not sure if that culture, as opposed to the headline PR coronation culture, if you like, has really been developed. I’d welcome your comments on that.
Adam Marshall: I think unfortunately that goes back to the shorttermist nature of our political system in this country, where shortterm outcomes are often valued over the patient longterm work required to make some of these deals a reality. I wouldn’t put the blame for that on any single politician or any single party, but really on the system itself. Any Prime Minister who goes abroad is going to want to come back with a clutch of contracts in hand, and I can understand that because that’s what our newspapers are after. Otherwise, the trip is a failure in media terms. We would not see the trip as a failure if a Prime Minister, a Foreign Secretary, a Business Minister indeed, went abroad and simply patiently met a wide variety of companies to open markets. The two go hand in hand.
Q22 Chair : In effect, what can you do to ensure that there is engagement at a level that would enable that to take place?
Adam Marshall: It’s a difficult question. We would certainly make that point to senior Ministers and senior politicians in our conversations with them. What we would also do is use the Chambers of Commerce network itself; with a front door in towns and cities across the world, you can also begin to make markets for SMEs without involving Government. You’ve got loads of ‘Bilateral Chambers’, we call them-Chambers of Commerce between Britain and single countries overseas-whose effective job is to create those links between companies on the ground. That is something that both the Chambers of Commerce here in the UK and those Bilateral Chambers abroad will continue to do.
Q23 Margot James: Just before I ask my question, I wanted to follow up on the conversation about diplomats and our embassies abroad. I’d just like to put on record, if I may, that on my recent trip to Japan at the end of last year, I really was very impressed by the commercial savvy of our diplomats in Japan whom I met. The British embassy in Japan is a huge draw for local businesses, because it is such a beautiful historic building of such renown, and our ambassador there is thinking about business for much of the time. In the evidence presented to us, it’s been suggested that the lines between the various Chambers, trade associations and UKTI that are all charged with a mission to help exports are rather blurred, and that businesses don’t really know who to go to for help. Do you see any truth in that? If so, what do you think could be done about it?
Adam Marshall: I think the business support landscape for SMEs in general is extremely crowded, though becoming less so day by day, as the number of services are cut and as particular branded organisations close their doors. Some competing routes of advice are starting to fall away. SMEs want to be able to walk into a local institution, where they have a certain level of trust, in order to ask first questions about how to export, how to get overseas, how to meet embassy staff in Japan, a commercial advisor in Delhi or whoever else it might be.
Not to paddle my own canoe, as it were, but I think Chambers of Commerce are those front doors in many places around the country. They’re the sorts of places where local business can feel confident walking through the door and not feeling like they’ve possibly gone to the wrong place. The Chambers of Commerce that have international trade staff, which are the vast majority, have experienced staff who can either help them directly or signpost them to the right type of assistance. We also provide quite a lot of training for inexperienced exporters and for companies thinking about going abroad for the first time. I think there is a role there for organisations like the Chambers of Commerce in the private sector to do more of this and to take on more of the role of helping SMEs get into exporting. There are other organisations as well that could do that.
Susan Ross: I think that the Chambers do a great job. I think UKTI does a great job in broad terms. I’d like to see UKTI getting to understand what commercial solutions are out there. For example, export trading houses can pick up and run with an export. Let’s say you want to develop the Libya market; you’ve never been there before. You go to UKTI or you could go to a trading house that says, "Yes, now then. Let’s work it through. This is what you need. This is the type of approach you need to make. This is what you’ve got to put in your bid. This is going to tick the boxes." UKTI can offer so much, but somebody who’s got an office there on the ground, who knows how to collect money, who knows the system, will take a commission but get the job done; they’ll get the export done. I’d like to see UKTI understanding better what’s available commercially and, dare I say it, making it available, or more accessible, through their system for new exporters to find those sorts of solutions.
Q24 Margot James: What do you think about the addition of the Foreign Office in their responsibilities on the export side now? Do you think there’s a danger that that might confuse businesses further or do you see it as a wholly good thing?
Adam Marshall: I don’t think that the Foreign Office is doing anything particularly different from what it did before. It’s just emphasising more the export side and the commercial side of their role. I don’t think they are visible or tangible to most SMEs on the ground as a player in that provision of advice. Businesses would be more likely to think of UKTI, Chambers of Commerce, Regional Development Agencies, local banks, accountants, etc. They’d be looking at a wide variety of far more local systems of support and wondering who to go to.
Q25 Margot James: Moving on to the UK brand, you’ve suggested that inward investment has been quite successful in recent years, but has there been any dilution of the UK as a country that all potential investors see, with the RDAs promoting their own regions in different markets?
Adam Marshall: I remember giving evidence to an inquiry on exporting out of recession about a year and a half ago, and one of the topics that we brought up at the time was that there was too much ontheground competition in major foreign markets looking for inward investment. We wanted there to be a single front door to the UK in a major overseas capital like Beijing, Delhi, Brasilia, wherever it may be, for foreign inward investment into the UK; competing missions, for example, of differing RDAs, UKTI or the devolved nations’ institutions makes us look a bit fragmented. We did campaign quite hard at the time and continue to believe that we should not have that level of fragmentation overseas, when it comes to inward investment.
Susan Ross: The British Exporters Association is less involved in inward investment, except that it’s worth noting that some of our biggest exporters are international or multinational companies. Therefore, as a separate but related issue, inward investment is important.
Q26 Margot James: Adam, just following up on that, I think you’ve answered the question I was going to ask you, which was: should LEPs have a role in place of RDAs with trade and inward investment? I presume from what you’ve said about the form of fragmentation that you wouldn’t be in favour of that, but what would you say to LEPs, which want to maximise inward investment into their regions? What advice would you give them on how to maximise the inward investment opportunities?
Adam Marshall: Let’s remember that LEPs are nonstatutory partnerships. They do not have significant budgetary resources, so I seriously doubt any of them will be creating their own inward-investment missions and sending people over to foreign markets in order to try to secure inward investment. If they do that, that’s probably a mistake, I would suggest. What I would like to see Local Enterprise Partnerships doing, and particularly the business heads who are leading those Local Enterprise Partnerships-not necessarily the local authorities-is, when a foreign investor does come calling in a city or town around the UK, to take that investor by the hand, show them around the area, why it’s dynamic, why they should be there, etc. It’s really the service on the ground here in the UK where the LEPs may have a role in making sure that a potential investor has seen the best of an area. That’s something that can be done both on a voluntary basis, i.e. businesses getting involved and trying to get other businesses in to create a critical mass in a particular area, and also using resources from the local authorities where possible in order to provide data, etc, about the attractiveness of the area.
Q27 Margot James: Is there a danger that inward investment will revert to London and the south-east as a default, now that we don’t have this regional representation abroad?
Adam Marshall: This is a difficult question. Company location decisions, when they’re looking at inward investment, are extremely complex. You have things like land prices, cost of labour, etc, which go into a really complex set of calculations. Companies that choose to locate in London and the south-east know they are locating in one of the highestcost areas of the world, and will probably be different from companies that would locate in other regions of the UK, where that cost base is lower. I don’t intrinsically see this as a competition between the south-east and the rest of the UK for inward investment; I see this as a competition between UK regions and provincial cities, and those on the continent and further afield. What we need to be paying attention to is how Birmingham, for example, competes with a city like Bordeaux-or Bari in Italy, just to keep the theme of the "Bs" going-rather than how it competes with London for inward investment.
Q28 Chair : The Committee has asked this question at various inquiries, and I received correspondence from BIS advising me that UKTI will shortly launch a procurement to identify a contractor to deliver the necessary support. This procurement will seek to appoint a single organisation to support the delivery of foreign direct investment within England. Were you aware of this? Is BCC involved at all? Do you know anything about it?
Adam Marshall: Yes, I am aware of it. I wouldn’t like to comment on ongoing tenders.
Q29 Mr Ward: Just to bring this bit together, we’ve been talking, in Margot’s previous question, about blurring, and various organisations being available to support a business that wants to export. I want to go a stage before that. Take the example of a small manufacturing business in, say, Bradford East-who takes the lead in going to that business and saying, "Have you ever thought about exporting?"
Adam Marshall: Quite often, actually it will be the Chamber of Commerce. Bradford Chamber, for example, might be the very first to contact that business and say to them, first, "Are you a member?", and second, "Are you interested in learning more about export opportunities? Are you interested in getting trained up so that you can go out into potential export markets?" Sometimes it will be UKTI through its regional teams. The answer is that there are various routes, and various people who may be the first callers to ask that particular question. The thing that we hear more than anything else, to be completely honest with you, is it’s the first time that that firm receives a telephone call from an overseas market and someone interested in buying their products; then they spring into action and other players become involved.
Q30 Chair : Before I go on to the next section, which is basically export credit finance, we’re getting into a very arcane area with financial instruments that are not totally clear to laypersons. In particular, we’re told the UK does not offer bond support. I wonder if anybody could clarify exactly what bonds are in this particular context. Fixedrate export finance also I think would be useful. Before we get to the detailed questions, would you like to give a summary of what these particular instruments are and perhaps what role they could play?
Susan Ross: Bonds first: bonds are used to support export contracts. For capital and semicapital goods, there’s a little bit of development work usually going on. The customer overseas has had to write quite a complicated specification of what it needs, so it’s put an investment in just for the tendering process. It wants to be sure that whoever it chooses, number one, is going to turn up and do the job and, number two, is going to do it properly, so they ask for a bond. They ask for a bid or tender bond to cover the tender and make sure that, if they’re selected, that company will do the job. For the contract, once it’s won, they require a performance bond. More often than not, the exporter will say, "Look, I’m doing a lot of work here. I’d like an advance or mobilisation payment." The customer says, "I’ll make that advance payment to you if you give me a bond." That’s called an advance payment guarantee.
Q31 Chair : How, in other countries, are these bonds financed?
Susan Ross: For an exporter to have a bond issued, it goes to its bank and says, "Could you arrange for a bond to be issued to this overseas entity?", which might be private sector or public sector. The bank says, "Yes, of course I’ll arrange it for you, but I’d like a fee and I’d also like some security." In other countries-France, Germany, Canada, Australia-you can go to your export credit agency, the equivalent of ECGD and, although the fee is still there, the export credit agency solves part of the security issue, so you’re not having to take some of your fixed assets and put them as security for the contract bonds.
Q32 Chair : Thank you, that was very helpful. Fixedrate export finance, would you like to do a quick explanation of that?
Susan Ross: Usually overseas Governments, if they are putting out a tender for a big project, say, "I’d like to have a fixedrate interest. I’d like to pay over five years and I’d like it to be at a fixed rate of interest." When we bid, we need to provide a bid that shows we’ve got a fixed rate of interest. If we don’t provide the bid with a fixed rate of interest, the bid goes in the bin. Nobody’s going to open it and look and see if the goods and services are right or perfect for the job; the bid goes in the bin before it’s even looked at. The overseas customer will require the fixedrate export finance, FREF, to come from the export credit agency. It’s a demonstration of the Government’s support for that project.
Q33 Simon Kirby: You’ve been kind enough to explain some of the differences between the ECGD and other countries’ export credit agencies. Can you expand on that and compare the service offered in this country with our competitors elsewhere?
Susan Ross: Yes I can, and I’m afraid it makes dismal reading. We produced a report in the summer, which set out where we are for UK exporters with ECGD, and we looked at 38 different export credit agencies. We picked 10 of the most important facilities that export credit agencies provide, and ECGD ticked five. Of the 38, it was in the bottom set. Some export credit agencies ticked all 10; some, nine; some, eight. France and Germany were eight and nine; I can’t remember which way round. We’re down at five. We then looked at something else; we looked at our world ranking for GDP and our world ranking for exports. It became very clear that those countries with effective export credit agencies actually had a better ranking in export terms than their GDP would suggest. Now, that might be circumstantial; we just make the observation.
Q34 Simon Kirby: I’m very interested in your answer to the question, because it clearly is an area where there’s considerable room for improvement. Can you be specific about what changes you would like? You mention 10 targets and only five being achieved in your report. If you were to tell us here, as a Committee, two or three areas that you think specifically could result in improvements, what would they be?
Susan Ross: I’ll go back to something that David Ward mentioned: India. A company that’s setting out to export, has Indian ties, wants to export to India and is selling something that is paid for normally at 60 or 90day terms-a shortterm export-goes to a commercial credit insurer and says, "I’ve got one contract. It’s for India." The commercial credit insurers will probably say, "I’m terribly sorry, but my minimum premium is going to make the purchase of my offering uncompetitive." We need ECGD to be able to offer shortterm covers where there are good risks, but it’s uneconomic for a commercial export credit insurer to provide. That’s the first thing: shortterm export credit insurance.
In theory, ECGD can provide it; they’ve been allowed to provide it for what’s known as ‘nonmarketable risks’, nonOECD risks, but they just haven’t been very active. If you look at last year’s financials to March 2010, 90% of ECGD’s business was aerospace. That’s fantastic for aerospace, a brilliant team, but the problem is we also need them to be there for other industries. Germany has an enormous SME customer base, and the turnover from Hermes Germany is way above ours.
Q35 Simon Kirby: Sorry, we’re having a conversation here, and I do apologise, Chair, because I will stick to a questioning format. Why do you think it was that the ECGD didn’t provide greater support to SMEs during our recessionary times, when clearly competitors abroad did? It doesn’t make any sense to me at all.
Susan Ross: There had been a general decline year on year. We looked at 10 years and there was a decline of 70% odd in ECGD’s business. At the same time, other European ECAs were improving by multiples-hundreds of per cent. To me, that points to a lack of political will. Maybe there are signs of change now, but I think more needs to be done. If I can mention bonds as well-I talked about bonds earlier-we really do need ECGD to be there for small and mediumsized companies that want to have bonds issued on their behalf, and for which they don’t want to hand over the security. We’re having discussions with ECGD at the moment about bond support, but they want a sharing of security. If you have some security, you pledge it to the bank; they pick up the calculator and give you-this is very basic, I’m sorry-they give you whatever in borrowings. If you take half that security away to give it to ECGD, what’s going to happen to the calculation? It’s the same percentage. You’re going to have a reduction in the available lending. We need ECGD to be there, as other ECAs are, to support the security aspect of bondissue support.
Adam Marshall: Our SME members say to us continuously that ECGD is not there for them and that its products, whilst they may work for some of our biggest exporters, our biggest name exporters and some of our biggest companies, don’t really help at the SME level. A lot of that is a structural problem because, since 1991, when ECGD privatised their shortterm trade credit insurance business, a lot of their capacity to help small and mediumsized businesses went away overnight. What you do have are some teams of very good specialists, who can do work for some of those big companies in particular markets like aerospace, as Susan mentioned, but you simply do not have the ability to help volumes of SMEs with a suite of products that gives them the confidence to say, "My national export credit agency is working on my behalf in the same way the Germans are, the French are, etc."
Q36 Simon Kirby: That’s very interesting. We’ve had a number of interesting sessions about the Enterprise Finance Guarantee scheme, and part of those discussions came up with the idea that a similar scheme might be useful for trade. Would you agree with that?
Adam Marshall: Absolutely. Our view on the EFG scheme generally was that, whilst it had a slow start, it has become increasingly important and has been very important to a large number of SMEs, both over the course of the recession and as we have entered into recovery. We’ve been pleased that the Government has extended it as well. What a lot of companies did say to us, however, was that it wasn’t adapted properly to enable them to export or to get the sorts of financing they needed for export-whether it’s bond support, as Susan mentioned, or some other very technical forms of export financing and export support. They would certainly welcome the introduction of an exportfocused variant of EFG.
The questions I would ask are whether the price and the terms are right and whether the Government and its partners are willing to take a sufficiently longterm view on something like this, rather than simply wrap it up in six months or a year if there isn’t high takeup right away. All too often we create quite a lot of support schemes, and Governments decide to stop them or to discontinue them on the basis of very small amounts of evidence. I think what we would like to see is the maximum portfolio of support schemes possible, so that businesses operating with particular problems or in particular niches can get the help that they require and always have those schemes open. That’s what the Germans do and that’s what others do as well to ensure that they’ve got this broad portfolio and that all their SMEs can get access.
Q37 Simon Kirby: If I may, Chair, ask a final question just to pick up a point made about having a suite of finance options, do you think that simplification is the way forward? Companies are there and they know what’s available, and it’s a straightforward process for them. Is that an important element of changes to the current regime?
Adam Marshall: Susan is better placed to answer on the complexity of the structured financing. All I will say is that companies will want to walk through a door and speak to someone who can advise them on a wide range of potential options that suit their needs, at a particular time. Usually a company will walk into a conversation like this and say, "I have a problem," and explain the problem in terms of their business. What they can’t do is walk in and say, "By the way, I need bond support for a nonmarketable country," etc. That’s what the specialists are here for.
Susan Ross: If there are new facilities, and I understand they are going to happen, they need to provide additionality. If you can go to the bank and borrow, the Government needs to be there. It needs to focus on what companies need. It needs to find out from the exporters what they need; talk to the exporters. ECGD, of course, is going to need a distribution method, because it hasn’t got innumerable staff on the ground, so use the banks for the administration of distribution, but don’t try also to use the banks’ decisiontaking and what they’re doing on security, taking pledges of security, because that’s not going to provide additionality. ECGD acts as an insurance company. It’s profitable. ECGD should start to think as an insurance company and to assess risk from an insurance perspective. It can outsource that assessment to credit insurers, for example, but it needs to think differently from what the banks are doing and not require this sharing of security.
Q38 Mr Binley: We’ve pretty much established by dint of your evidence that the Government could do much more to help the SME sector. Indeed, I talked to the Forum of Private Business, to your own organisation, as you know, Adam, and to the FSB, and they all said that much more could be done by Government to promote export credit guarantee schemes and other schemes to aid the SME sector. The whole argument is irrefutable and we need to make that point very firmly.
The Forum of Private Business gave me one example, which I’d like to read into the record. I apologise for doing so. It takes just a little time, but I think it’s very worthwhile. "One of our members had real problems accessing these guarantees; a company called Delta Design Systems Limited, near Clacton, Essex. They needed help over a contract in Iraq worth £57 million. They raised a performance bond of £1.27 million but, despite repeatedly trying, received no support from the Export Credit Guarantee Department, which told them that, if they were a company such as BAE, they would probably have been able to help." I think that comment absolutely makes the point you’ve been stating, and we need that firmly stated, I believe, in our report. Forgive me for reading that out, but I assume that this is not an isolated case.
Adam Marshall: Unfortunately, the number of members who have come to us reporting similar stories is far too large for me to mention in the limited time we have available. At the last inquiry of this nature, I talked about a wallpaper manufacturer from Lancashire who couldn’t get shortterm export credit insurance for Russia, and lost all its potential market to its German competitor. The number of stories like that, which I can tell you, is quite large. Unfortunately, what we come up against, time and time again, is a classic civil service answer, which is, "Unless you can provide me with evidence at scale of what the problem is, we don’t think it’s necessary to take action." That is what we’ve been fighting against for a number of years. We could simply say, "Look, I can provide you with anecdote after anecdote after anecdote."
When they get to the scale that I’ve seen and problems such as the one, Brian, that you’ve just described, it’s very obvious that there is a problem here. That’s why we’ve recommended a statebacked shortterm export credit insurance scheme. That’s why we’ve recommend that we always have something on the shelf, in terms of export credit insurance, to activate when times get tough for SMEs. Invariably they will get tough again, from the lessons of the last two years. Yes, the situation has improved in recent months, but that doesn’t mean this couldn’t happen again at very short notice, and we are not doing enough as a country to be prepared when those situations arise, so that we don’t get more horror stories like the one that you’ve just read out.
Q39 Mr Binley: That’s a pretty firm recommendation and I’m grateful that you’ve given it. Ms Ross, your figures show in that in 200910, and I think you’ve already touched on this, ECGD’s nonaerospace business declined by nearly 90%. Can I ask what you think the reason for that was?
Susan Ross: I think they got into a rut. They’re very good at aerospace, but they weren’t out there looking for other business. As I say, I don’t think the will was there to do other than what they knew they were good at. They also had the problem of their business principles, which were set up at the beginning in 2000 or 2001, and which meant that they had to have a consultation about anything new they wanted to do. They’ve cleared those; we’ve got a new set of business principles. I think, with help from folk such as you, we might see a change. I hope it’s going to be that the figures are not going to be so dismal for nonaerospace next year.
Q40 Mr Binley: Would I be being too robust by saying that the words that come into my mind, from both the evidence and your answer, is that they became lazy and complacent? Go on, push it.
Susan Ross: I think they lost the understanding of their role. They were covered in the problem of having always to explain to NGOs what they were doing, and gradually withdrew to things that were they tried and tested. They weren’t prepared to stick their necks out and say, "No, we’ve got good engineering businesses here. Why aren’t we doing enough of them? Why aren’t we taking a snapshot of all the capital and semicapital goods in this country and helping these companies to go abroad to new markets, such as Iraq, where surely the export credit insurers on the commercial side aren’t going to have acres of capacity?" I think they just didn’t have that vision.
Q41 Mr Binley: One of the things we’ve got to do is kick this Government into ensuring a greater diversification. You imply that privatisation could be an idea. To be fair, I think that you both say that a statebacked export trade credit insurance scheme can run through a private company. Am I being overzealous?
Adam Marshall: Yes, I would not characterise that as privatisation. What both Susan and I are looking for is the state to step in where the commercial market does not. The state can always work through a private company but, at the end of the day, it is the state’s guarantee.
Q42 Mr Binley: Thank you; that explains it for me. I’m grateful. One of the things we can do is highlight this matter very effectively and robustly, and bring it to the attention of the Minister and the Secretary of State, when we meet the Secretary of State, as we do on a regular basis. What else can be done to achieve the objectives you wish?
Adam Marshall: I think there are three watchwords in terms of ECGD or any export credit agency that you should be looking for, especially in terms of their dealings with SMEs. The first is agility. Susan touched on this when she said that, before, ECGD found it difficult to react in short amounts of time in order to help SMEs when business conditions changed. I think you should be looking for that. The second is responsiveness. We should not see cases where someone has proactively gone to our national export credit agency and been told that there is no help available for them. The third is capacity, at the end of the day, and of course that brings on the question of how you resource it. ECGD needs to be able to help SMEs in greater numbers but, unfortunately, it’s got a very dedicated but very specialist team that cannot do that at the moment. I would not like to say that they’ve gotten lazy in any way, shape or form; they’re just focused on a very specific segment of the market, because that is what they have the resource to do.
Q43 Mr Binley: Can I conclude, Mr Chairman, by asking about the importance of ECGD’s fixedrate export finance, and what the consequences will be of phasing it out for UK industry?
Susan Ross: The consequences of throwing out, I’m going to call it FREF, are that big business will not be able to have a Governmentsupported fixedinterestrate option on mediumterm projects and contracts, which means that when the bids are assessed by the overseas entity, only the fixedrate options will be looked at. The ones that are noncompliant, because they don’t have a Governmentsupported fixedinterestrate option, will be thrown out. We then cut ourselves out of these big projects. As you know, it’s very important to support big business with big projects, because a lot of the innovation that they have is brought in from SMEs. Take Airbus, for example. The Airbus wings business in Wales is responsible for about 10,000 Airbus jobs in the UK and 135,000 in the supply chain. The SME aspect is there. The other aspect about big projects is, further along the line, somebody’s going to need spares, support, training, services. If you’ve got the original project, 10 years down the line, the phone call comes, "Can you supply the replacement part for something or the upgrade?" If you don’t have the project, if the project’s gone to France or Germany, we’ve cut ourselves out of those followon orders.
Q44 Mr Binley: A final supplementary question: do you think the Government simply doesn’t understand that any form of growth, be it in the manufacturing sector or in the service sector, needs financing and that’s a major problem at this moment?
Susan Ross: I think the interest in cuts, the time spent talking about cuts, has prevented them from seeing the real world. You never get anywhere unless you invest. You can’t grow without investment.
Adam Marshall: I would simply say that we need to have the maximum portfolio of financing options available for businesses to draw on, when they are required. It does not cost the Government a lot of money to keep FREF going, for example. They cite low takeup as a reason to discontinue it. That’s because, at the end of the day, it’s simply a tickbox thing that is needed in order to get the contracts that Susan is talking about, but it is still needed. That goes for a range of other schemes, whereby there will be businesses that will lose out if they are closed.
Q45 Chair : Can I just conclude this section with, quite frankly, rather frightening figures? The ECGD reduced its staff numbers from an average of 366 in 200304 to 207 in 200910, so you’re talking about something like a 40% reduction in the last six years, which could have resulted in some of the problems we’ve just heard or been a consequence of them. It’s not altogether clear. What’s even more frightening is that it expects to reduce its staff numbers further over the lifetime of this Parliament, in compliance with Government policy to reduce costs to the public sector. This has enormous implications as far as I can see. Obviously we as a Committee can make representations. Is there anything from the business community that you can do or say that could, if you like, mitigate the potential consequences of these reductions?
Adam Marshall: We’ve said, and we will continue to say, that export financing is a bit like the National Health Service; it is a necessity, not a "nice to have". That is a position that we have taken for a long time. At the end of the day, jobs are dependent on exports; company growth is dependent on exports, and tax revenue is dependent on exports. What we have said to both the current Government and the previous Government, and will say to successive Governments, is that this may be a technical, difficult and longterm set of issues, but it requires their full attention from day one.
Susan Ross: It’s very scary. I wonder, in the figures that you quoted, what proportion was of frontline staff. What we’ve seen at ECGD is a lot of retirements of very experienced personnel, and that’s a great shame, and they’re not being replaced. Fair enough if it’s HQ staff merged with another Department, using somebody else’s HQ, but frontline staff are really important. I think ECGD has the potential to have a great role and I think it could outsource more, but it still needs proper frontline staff, who can help exporters to get where they want to with contracts and projects.
Q46 Chair : Arising from what you’ve just said, Susan, it would appear that possibly there might be a connection between the reduction in its role with SMEs and the retirement of longstanding and experienced personnel. Do you think that could be correct?
Susan Ross: ECGD sold off its shortterm arm in December 1991, so it doesn’t really explain what’s been going on in the last decade. However, we have seen a decline in turnover for the UK: in 200304, turnover was £3 billion; it was halved in 2009, but came up to £2.2 billion. Heavens, inflation must have run at some per cent over that period.
Q47 Chair : Do you know if the comparable organisations in countries such as France and Germany have had a reduction in staff?
Susan Ross: France in the last decade: up 258%. Germany: up only 37%. If I may quote you Italy: up 325%. Belgium is up 188%. There’s a list.
Q48 Chair : Yes, that could be very significant. Can I thank you for attending? That really has been very helpful. Obviously we will be following through the issues that you’ve raised rigorously with other bodies. If I could just conclude, Adam, I refer to my earlier question on foreign direct investment and you couldn’t comment on the tendering process. Is that because BCC is involved?
Adam Marshall: Yes. As I said, I wouldn’t want to comment on an ongoing tendering process.
Chair : Okay, thanks. We’ve got the information we want. Thank you very much anyway.
Susan Ross: Thank you. That was very encouraging.
Examination of Witnesses
Witnesses: Mr Paul Everitt, Society of Motor Manufacturers and Traders (SMMT), Ms Melanie Leech, Director General, Food and Drink Federation (FDF), Mr Graham Hayes, Engineering and Machinery Alliance (EAMA), and Mr Graham Dewhurst, Director General, Manufacturing Technologies Association (MTA), gave evidence.
Q49 Chair : Could I welcome you all and go through the procedures I went through with the previous panel? If you could introduce yourself for transcription purposes, that would be helpful.
Melanie Leech: I’m Melanie Leech. I’m the Director General of the Food and Drink Federation, which is the trade association for food and drink manufacturing in the UK.
Paul Everitt: My name is Paul Everitt, and I’m the Chief Executive of the Society of Motor Manufacturers and Traders, the trade association for the motor manufacturing industry in the UK.
Graham Dewhurst: I’m Graham Dewhurst. I’m the Director General of the Manufacturing Technologies Association, representing companies that supply into the major engineering end-user markets.
Graham Hayes: I’m Graham Hayes. I’m the President of EAMA, the Engineering and Machinery Alliance, which represents nine trade associations.
Q50 Gregg McClymont: May I address this first of all to Graham Hayes? EAMA’s submission states that the Government’s "tentative approach" reinforces the impression that the UK isn’t really serious about exporting. Can I ask you to expand and elaborate on the reasons you believe the Government to be tentative in its approach?
Graham Hayes: Yes, absolutely. As an organisation, we export 70% of the product, which is worth about £27 billion, and I think the support we get in the export market is very poor. The image we get into the market is very poor. You go to exhibitions and you see the German, French, Italian and American stands. They’re the ones that I would particularly point out. There seems to be more life to them than ours. That attitude has also got into the marketplace, where potential customers see the UK as tentative as well.
Q51 Gregg McClymont: I see from the evidence about mechanical engineering exports that they grew 42% in the last six years. Does that cut across what you’re saying? What’s the evidence for the notion?
Graham Hayes: In our particular sector, we have a lot of small companies. In fact, the majority are very small but they’re in very niche businesses. Their products allow them to export. When you’re breaking into new markets, that is particularly where you need help.
Gregg McClymont: This is an impression you’re gathering strongly from your members?
Graham Hayes: From our members, yes.
Gregg McClymont: Is there any way to measure that impression?
Graham Hayes: We do surveys on a very regular basis of our members, on all areas, and I guess we have done several surveys on export, and I’m sure we could give you the results of that.
Graham Dewhurst: Perhaps I could pick up on that. We have an office in Yekaterinburg in Russia, in the Urals. About 18 months ago, I was invited to the Urals by the Economic Minister from the regional Government. His main reason for doing that was that they had recognised that the UK companies were underrepresented in the area, and that what he wanted to do was find out from the UK exactly what we have to offer and what our capability is. I then went out there and met them and, at the same time, went to the Foreign and Commonwealth Office there, only to find that there was no relationship between the posts on the ground and the Economic Ministry of that regional Government, which I found appalling. I just felt as if I were in a foreign country with no way of having contact. That’s the point that we are making through EAMA; the MTA is also a member of the EAMA group. In the general knowledge of people outside the UK, the impression is that the UK is no longer a big exporter, with the exception of things like aerospace. It just isn’t true. What we’ve got to do is to dispel that by being very active in these areas and promoting UK capability. Only if an SME is going out there, into a friendly environment, is it going to encourage them to take that opportunity.
Q52 Gregg McClymont: Can I put the same question to Paul and Melanie?
Paul Everitt: I guess we would see it slightly differently. The UK motor industry is probably one of our leading exporters. We export 7075% of all the vehicles and engines we manufacture in the UK. For us, these are global businesses in the main that are operating here. For us, the key is the very strong signals that we’ve had, admittedly from both the previous and the current Administration, about the need to rebalance the economy, focus on manufacturing as a key part of a more balanced economy and, as part of that, the need for us to do more designing, developing and selling goods and services abroad. The strategic direction that we have is very clear. There are a range of issues about how that’s actually transmitted on a day-to-day level, and the various support measures that might be there.
Melanie Leech: I guess my take is, again, slightly different in that, although we are the largest manufacturing sector in the UK and the world’s eighth largest exporter for food and drink, we haven’t historically had much of a focus in terms of working with Government strategically on exports. I start from the position of there isn’t a long history of engagement and involvement. In that context, I would say absolutely there is a huge opportunity to do more to promote UK food and drink, and to grow export markets. Food and drink exports are growing, but it’s incremental growth and we see huge opportunity to do better.
Q53 Gregg McClymont: Are the differences in posture to do with the differences in markets? Would that be a fair explanation-that engineering has got smaller scale as well?
Graham Dewhurst: We’re selling capital goods anywhere from £100,000 up to multimillions of pounds per article-to be involved in those markets for an SME is a huge investment in time and energy, in gaining trust and being able to show your technological as well as your commercial capabilities.
Q54 Gregg McClymont: It’s not like bringing a car to the market; in that sense it is a longerterm process.
Graham Dewhurst: I think Paul would probably say it’s more difficult to bring a car to market. I think it’s a question of the size of the individual product. People take a lot more persuading on capital investment if they’re going to be investing £1 million. They take a lot more time to make those decisions. It’s a lot more technologically driven perhaps than the purchase of a commercial vehicle. We do have slightly different issues.
Q55 Gregg McClymont: What are your recommendations or suggestions? What would you like to see happen to improve the situation from an engineering perspective?
Graham Dewhurst: Basically, I think our members would like to feel that the Foreign and Commonwealth Office is adopting a much more commercial view in promoting UK capability. In the previous session, there was a discussion about the level of cultural influence versus the commercial influence. We would like to see the commercial side of things put to the forefront, and the cultural things will follow.
Q56 Gregg McClymont: How do you imagine that process could change?
Graham Dewhurst: I think it’s a question of language, of the posts in the field understanding what the capability of the UK is. I know that UKTI in Glasgow and in London has been working for the past few years to develop and understand that capability, so that it can translate it into the FCO. It’s a question now of delivering that.
Q57 Gregg McClymont: Can I ask Paul and Melanie for their thoughts?
Paul Everitt: Perhaps we’re looking for the focus that the Government and its agencies bring to the task and the priorities that they set. You can’t prioritise every sector or every size of firm or every commodity; you have to work out what the strategy is going to be and then you have to try to find the most impactful measures that you can deliver. For the best of reasons, what tends to happen is that there’s a limited amount of resource, and it’s spread as widely as possible to keep as many people as possible happy, which is a strategy, but not necessarily the strategy that’s going to deliver the most economic growth and the most prosperity and jobs in the UK, which is where we would want to be focused.
Q58 Gregg McClymont: That sounds to me, as we have heard often over the years, as if we have to get better at picking winners. Would that be a fair way to put it and, if so, how do you go about picking winners?
Paul Everitt: Picking winners becomes very difficult, because there are certain areas where we’re not looking for Government to say, "This particular business is the one we want to support and not that particular business". There are ways and means of saying that there are some successful sectors in the UK; there are clearly sectors that are internationally competitive and which, if they are successful, will generate a huge amount of business not just in their sector, but across sectors. As an automotive sector, we are successful in exporting. If we were to increase the level of exports from the UK, the demand that we would provide, for a whole range of other sectors, would be quite significant. I’m not saying that it’s only the automotive sector that should get priority, but you understand: there are some key sectors that can generate a wide level of demand. It’s in our interest, as a nation, if we can be successful, to be more successful in those areas.
Q59 Gregg McClymont: From the food and drink point of view, what can be done to improve performance?
Melanie Leech: I completely agree with what Graham and Paul have said. For our sector, we are currently world-class in the UK in food and drink, in all sorts of areas. Partly that’s because we’re a very mature market, so we’re a demanding market. Tastes are ahead of the global norm, so people have to invest here if they want to stay competitive in the UK. That brings all sorts of strengths and creates a virtuous circle, because that then creates a valueadded proposition, which is attractive not only to the UK market but, increasingly, to overseas markets. If you think about the global trends in food consumption, that gives us an edge not only in mature markets, but in emerging markets, where the diet is changing and the appetite is growing exponentially for the western diet. There are absolutely huge opportunities there. Although I agree with Paul’s point that it shouldn’t be Government’s business to pick winners, you can clearly see that there are sectors where the opportunities are there, where the capability is there, and there needs to be a strategic approach, which is a joint Governmentindustry approach, which says, "Okay, we have the capability. How do we keep the capability and how do we harness that, not only for the UK market but also overseas markets?" We think that’s the right approach.
May I just give you one anecdote? I don’t know if it helps to illustrate the points that Graham was making. As well as all this grand strategic stuff, we’re missing opportunities day in, day out, and letting ourselves, as the UK, down. I was given one anecdote by a colleague overseas. This is not a European Union political point. There was a food fair in Brussels last autumn, the EU 27 On Your Plate food fair, and each member state had a stand to promote its food and drink industry. There were 26 bustling stands, dragging people in, showcasing the best of their products. There was an empty cardboard box on the UK stall. We are missing opportunities. It wouldn’t have taken a great strategic push by UKTI or the local embassy to have just been there, had a presence, promoted the UK. Someone had written on the cardboard box, "UK n’est pas dans l’Union européenne."
Q60 Mr Ward: I ask the two Grahams to be pretty frank, because the "whys" are as important as the "whats". I think we’ve got some idea about what the position is, but "tentative" is a strange word. It suggests there’s a willingness, but we may be unsure. I don’t get the feeling that’s what you were saying-unwilling, unable?
Graham Hayes: I think they’re capable of doing it. I don’t know what it is. They seem to be frightened to fly the flag. Getting it right is like anything in this world; it’s getting the detail right, isn’t it? It is making it look right, having the right people visit an exhibition, doing the work before the exhibition, making sure people know you’re going to be there, getting the right exhibitors there. I go to some exhibitions and I see, for example, a guy trying to sell Sellotape in America, and I think, "Christ, it’s like taking coals to Newcastle. He’s got no hope of doing that." You have to make sure that you’re going to get on a stand the companies that will attract the visitors. As they attract the visitors, the visitors will look at other things on those stands. It’s a whole host of things. It’s professionalism, let’s put it that way.
Graham Dewhurst: There are four or five international machine tool shows around the world every two years. One is in Beijing; one’s in America; one’s in Japan; one’s in Europe at EMO. At each of those, over the past four years whilst I’ve been in this position, and in previous years when I was actually out there exporting machine tools, I’ve watched the Swiss delegation have support from their Ministers. I’ve watched the Germans have full support from their Ministers with ministerial visits, and similarly with the Spanish and the Italians. We have had, I think in the past four years-so that would be about ten of these shows-Lord Jones at EMO, and that was the only ministerial and/or FCO presence that we’ve had at those shows. Bearing in mind that the machine tool industry is at the heart of every engineeringbased manufacturing country, I think that’s really a question of what you want to do, rather than what you are doing.
Q61 Mr Binley: You’re collectively making a very, very important point. I recognise the supply chain element of the car manufacturing and assembly industry, but it’s a relatively easy industry to get at, very easily identifiable, with a small number of major players. You say you’re getting a sizeable amount of attention from Government, and I’m delighted. The food industry, of which 99% is made up of SMEs, seems to have little connection with Government on promoting, exporting and so forth, and EAMA seems to be quite concerned about the lack of quality support it gets. We’re back to that differential between UK plc and the SME market, aren’t we? That’s what’s emerging from all this. Can you tell us how we can get Government and the bureaucracy that supports Government to recognise that they really need to take a more vigorous, more creative and different approach in outreach terms to dealing with the SME sector? Can you help us in that respect?
Graham Hayes: I think in the earlier session-I came in at the end of it-they talked about getting professional people in the right places. I think that’s what it is; you need commercial people. They talked about career diplomats in some of the areas where there should be commercial people. You asked where we get those people from. I would have thought at the moment, with so many unemployed in this country in some sectors, you could very easily get people who would go into those jobs. It’s a nice job; you can be abroad. These people will know the sectors they’re in. It’s no use having somebody there who’s got too wide a knowledge. In some of the overseas places that you go to, the guy has far too much-he probably looks after aerospace, maybe automobiles and engineering as well. Many sectors have engineering in them, but they’re very different things you’re selling and very different things you’re trying to market. If someone’s phoning a company or talking to a company in a particular country, if they can’t get to the basic questions and the basic understanding of what they’re trying to discuss, they won’t get the answers back that say that company is one that should be visited, or that agent is the type of agent that we should be talking to. It’s back to having the right people. It’s true of anything in life: having the right people in the right place.
Q62 Mr Binley: Ms Leech, if you might respond?
Melanie Leech: I agree with that. I should slightly qualify my portrayal of my sector as neglected, in the sense that it would certainly be true for UKTI, but we had our own dedicated Food From Britain, supported by DEFRA until about three or four years ago. So there was a place where SMEs in the food and drink sector could go to get advice, help and be part of a bigger grouping that could then market UK food and drink. It was a matter of regret to the sector, I think, that the decision was taken to stop that support. Really that left the food industry a little bit high and dry because, having had our own dedicated organisation, understandably at that time we weren’t a priority for some of the broader effort and have never recovered from that position. I guess I would start by saying that I’m not here at all to argue for replacing a quango; I don’t think that would be sensible. However, I think it would be worth looking at the functions that that organisation provided and asking: how can we make sure that that valuable support continues to exist? Some of that was picked up by the RDAs, Yorkshire Forward being a good example. There are strong RDAs that have focused on food and drink, and made a success of that. There were others where, understandably, there were other competing priorities and that didn’t happen.
I think it’s about going back to see what worked, to the extent that that is still there, and building on that. I don’t think that’s a lot of money, but I think it’s a lot of, as has been said, people in the right places understanding. It’s about the language. That has to sit within a bigpicture framework. We have some concerns about the impact of the localism agenda, not just because there aren’t huge opportunities there in terms of LEPs to build the kinds of partnerships we’re discussing, which are essential to promote locally. It needs to be within a framework that has some common language and some common understanding of big objectives for UK plc. I think it’s about stitching the narrative together, from the UK plc central-Government narrative right through to LEPs and very local activities and partnerships, making sure we’re also pulling in the same direction.
Graham Hayes: I think it would help to let you know that I ran a business in Germany as well as the UK and America. I used Germany to find out an awful lot of information about other markets to which I was exporting.
Q63 Mr Binley: I take that point totally. Can I ask you about piggybacking as well? It seems to me there’s a real opportunity. I know Volkswagen piggyback quite well with smaller companies, helping to introduce their suppliers to a wider market.
Paul Everitt: That is very true. I just wanted to pick up on one point, which goes back to how things can be improved. It’s very hard for organisations to improve, if there’s not a very clear strategy with a clear set of objectives and a way in which you monitor success that actually means something. One of the issues we might talk about in relation to UKTI is that their measure of success is how many people turn up, not how much business is done. Unless you’ve got a clear strategy, you won’t know who the right people are, whom you need to employ in the right places. It means taking a step back and saying, "This is something we want to do and want to do well. Therefore, we should have a clear strategy as to how or what it is we want to do." Then you’ve got a chance of being able to deliver something.
Q64 Margot James: You say that trade shows are essential to your industries. Would you all agree on that? Why is Government support required for trade shows and delegations? We heard from the evidence in the previous session that trade shows were felt to be very important, and that, particularly for small businesses, Government help was important. What about for the larger companies?
Paul Everitt: From a vehicle manufacturing point of view, clearly when we run shows at a vehicle manufacturing level, these are consumer events. That’s a different market. For companies in the supply chain, the B2B trade shows are important, and certainly being part of a UK presence is seen to be very productive and beneficial. Colleagues will also comment, but for us, it seems to be a very strange set of circumstances, whereby there is support for a limited number of companies, which are in the early stages of perhaps trying to break into a new market and therefore there is some funding available, which is good, but once they’re familiar with the territory, if you like, there isn’t a great deal that can be offered in help and support to ensure that they can progress their business. Whilst I don’t think I would underestimate the importance of trade shows, they are one part of a mix that we need to look at in order to generate longterm growth and jobs here in the UK. We have to think about not just welcoming people to a particular market, but what the strategy is for those companies and businesses, or what we need to do as a country to support those businesses over the longer term.
Graham Dewhurst: Perhaps I could give a bit of context to our particular kind of trade shows. The EMO trade show in Germany, for example, is around 150,000 square metres, and it runs across 26 different halls with 2,000 exhibitors. Over a week, they will get about 125,000 to 150,000 visitors, each of whom is going there because he wants to buy something. In terms of SMEs and even larger companies, which are taking anywhere between a ninesquaremetre stand right the way through to maybe 100 or 200 square metres, it is vital that they are able to get some recognition as UK capability. Otherwise, you become lost in this huge village that descends for a week.
The Chinese have recognised this and created, at their own show, a Chineseonly area. If a Chinese customer wants to buy from a Chinese company, he knows that he goes straight to the Chinese area. If he wants to import goods, then he knows to go anywhere else. If the Chinese have recognised this absolute need to promote their indigenous products, I think we have to recognise the same thing: that we should be promoting our products overseas for export. The only way to do that is by encouraging the larger companies to come under the UKTI/UK capability banner. The only way that is going to happen, if you want them to work to your agenda, is to give support of some kind.
Incidentally, the Italian pavilion at the last major show was 3,500 square metres. We did take a UK pavilion, but the most that we could manage to undertake was 500 square metres. Many of our larger companies chose not to go under the UK banner, because it wasn’t well enough supported to give the right image. If we had been able to bring some of those companies into our area, we could have been up at maybe 1,000 or 1,500 square metres. To our people, it is really very, very important that support is there. It’s often the best way into the market to show a working machine.
Q65 Margot James: Do you all agree that this would be a very good use of UKTI’s budget-supporting these shows and providing this UK plc umbrella?
Graham Hayes: I grew a small business into a £50 million turnover business by exporting; 80% of my output was exported. I couldn’t have done it without shows. Just as people who buy food want to taste, engineers want to see, touch and look at the equipment. Exhibitions are extremely important for putting your goods out on display. They can do that. People say that you only have to exhibit once, but you’re developing machinery all the time. You have to keep developing it and you have to keep showing your latest developments to the marketplace. You don’t just develop in developing markets, if you understand me, where you’re trying to look for new markets, you also have to look after your existing markets. They’re two different types of exhibits, two different types of approaches, but you have to do that, and they are absolutely the most important thing in our sector.
Q66 Margot James: Thank you, that was very illuminating. Could I just follow up, Ms Leech, with the evidence you presented? You said that, on a recent Chinese mission, the Chinese had said that Italian and French brands are much better known in China than British brands. Aside from what we’ve heard about the importance of trade shows, is there anything else you think UKTI and the various other bodies that represent British businesses abroad could do to make our brands better known?
Melanie Leech: I’m sure there is, from showcasing our brands within their own facilities to just awareness-it’s not a huge new strand of activity necessarily. It is just having at the forefront of the mind, the philosophy of asking, "Where are there opportunities to raise the profile of brands?" For the food and drink sector certainly, the huge potential is around brands, particularly in emerging markets. Because the retail market is so concentrated in the UK, some of the SMEs’ best opportunities to grow their businesses to scale and be competitive in the UK are overseas. There are some examples of companies that have done exactly that: they started very small in the UK, went straight to export, grew a sizeable business and only then became able to engage in the supply chain in the UK at scale, because they’ve now got the bargaining power and the commercial ability to do that. The brands for us are central, although there are other opportunities too, and I’m not denigrating those. Brand awareness is absolutely critical to us.
Paul Everitt: If I could reinforce that from a slightly different perspective, UK automotive brands are quite attractive, but in some of the fastergrowing markets like China and India, there is an awareness, but there doesn’t seem to be quite the same focus on trying to promote in those markets in the same way, and yet the opportunities are huge.
Margot James: Why do you think that is?
Paul Everitt: Again, I think it’s because automotive companies are perceived to be big companies that therefore don’t need any help. Bentley, RollsRoyce, Aston Martin, or Jaguar Land Rover are big businesses; they have infrastructure in those countries because they are trying to sell actively in those countries. There is a perception in some of the embassies and indeed in UKTI that, "It’s okay, they don’t need any help." Actually, what we want is not financial help but profile help with showing to the senior administrators or the senior business figures in those areas that British brands are exciting, interesting products that should be aspirational.
Melanie Leech: There’s a virtuous leap right back to inward investment, because the more you have that positive image for British brands, the more likely it is that the big companies will be saying, "Okay, this is the place we need to be if we want to be at the leading edge in this particular industry." It’s not only about exports and penetrating markets; there’s a loop right back to drawing in inward investment from global players.
Q67 Margot James: How important do you think the British Business Ambassadors are?
Melanie Leech: We haven’t got one for food and drink, which you might think was a notable omission given our size and our potential.
Margot James: A very good point.
Paul Everitt: I’m not aware whether there’s one for the automotive industry, so take that as you like.
Chair : Have you made representations to the Government about this?
Melanie Leech: We are making representations, yes. We’re in discussion with them about the growth strategy at the moment, and that is certainly one of the points we’re making to them.
Q68 Nadhim Zahawi: One of the things that Ministers tell us that we’re doing very well in is education-export of our universities. Some of our best universities have opened their doors in China, India and elsewhere. Do you link up with the educational sector to promote British brands?
Paul Everitt: From an automotive perspective, we’re very much focused on selling the services and expertise that we have. As a consequence, we link very heavily with the key centres of excellence in our industry and work with them trying to generate a presence in the marketplace, with a reasonable degree of success. There’s a slightly different market aspect though. For us, we’re trying to sell our services to those countries. I suspect that the universities and others are encouraging those students to come to the UK, or certainly they were-maybe not quite so much now.
Q69 Nadhim Zahawi: My thinking was the other way round-i.e. we’re told by one of our Foreign Office Ministers that Nottingham University, for example, has opened a campus in China. Are there links the other way around, i.e. you being in the campuses that are in those countries that you’re trying to sell to?
Paul Everitt: No, not that I’m aware of.
Graham Dewhurst: Our sector’s links have tended to be in the UK. They’ve centred on probably six or seven of the major universities, and some have been about putting equipment in; some have basically been about having relationships with the manufacturing technologies seats, so that we get the right students coming out with the right qualifications. It’s really been about the skills side of our workforce, rather than about marketing our product overseas. Maybe that’s a bit remiss.
Nadhim Zahawi: I was thinking that you’ve got a captive audience; you can brand build. Some of our best schools have opened their doors in those target countries, and perhaps your members should be looking at working with them. If education is one of our great exports, why are we not utilising it to brand build?
Q70 Chair : Could we go on to trade finance? I believe that you would have been present at the back when we had a lengthy discussion on this earlier, but I’m sure that you will want to make your own points on this. Can I just ask you, I suppose, almost the nobrainer question? Are trade finance providers holding back British businesses?
Paul Everitt: In general terms, finance is still tough for us as an industry and certainly for companies in the supply chain. As heard in your evidence earlier, as a sector I am not aware we have any use of ECGD. As we heard earlier, that’s because 90% of it is going to aerospace, very good for them, and because, by and large, the people who are likely to want to use it would not be necessarily the sort of companies that people like ECGD would do business with.
The financial situation and the approach of banks to manufacturers and to people accompanying the supply chain remain extremely difficult. It’s a cultural rather than a risk issue. We’ve been through one of the deepest recession that most of us can recall and not many supply chain companies in our sector went bust, mainly because they have been supported by the vehicle manufacturer, for which they are a key component, not because they found finance from elsewhere. The challenge is now, as we come out of the recession, that vehicle manufacturers themselves are under constraint, so they cannot continue to do that. It would be nice to see a more enlightened view from the finance community, which was taking a longerterm view of investments in businesses-about the longterm return rather than shortterm.
Q71 Chair : At the end there, you touched on an issue, I think, which goes far wider than export trade finance. There’s a financial cultural issue linked between banks and industry, and manufacturing in particular. I was very interested in your point that the SMEs in your sector wouldn’t deal with the ECGD, and the ECGD wouldn’t deal with companies in your sector. The phraseology was very interesting. Is that basically because you’ve got quite a successful exporting record? Most of those companies wouldn’t be bothered with ECGD because they don’t need them, they can succeed without them; or is there, if you like, an aversion within ECGD towards the motor industry supply sector and basically you’ve give up on it?
Paul Everitt: It’s difficult to comment. I can’t find anyone in our sector who’s had much or any contact with ECGD, nor have I had too much contact with ECGD wanting to get access to our supply base.
Graham Dewhurst: I was astonished when I looked on the website. They did £2.21 billion backings last year and, when you think that the mechanical engineering sector exports more than £30 billion, it tells me that ECGD is not fit for purpose. It’s not doing what it needs to do-and if 90% of that £2.2 billion is in aerospace, that leaves £200 million. They’re not interested. The other thing that I found really interesting was that division one was aerospace, and there was a nice picture of a gentleman; division two was civil and defence; and division three didn’t have anyone as a director. That again tells a story about being fit for purpose.
On a personal basis, I exported machine tools for 20 years in the 1990s and between 2000 and 2007. We had a lot of large bluechip companies as customers-people like United Technologies in the USA. When we approached the ECGD to find out how best we could reduce our risks in Russia and China, which were our other two big markets apart from the USA, they insisted that we insured all our turnover, which at the time was about £18 million, with them. All our turnover had to be insured with ECGD, although the contracts that we were probably taking in Russia and China, in the main, would have been around £3 million to £4 million of our turnover. They insisted on that, and the rates were so high at that time that we felt that, basically, we might just as well take the risk with the debt in the foreign country as pay all this money over to the ECGD. Whether that’s changed, I don’t know, but that’s how it used to be and this was after the privatisation, I think. We found other ways of insuring our debts. Basically what I’m saying is that ECGD wasn’t fit for purpose and still isn’t. That will be why there’s very low takeup.
Graham Hayes: We turned them down for exactly the same reason. We’re dealing with Unilever, Nestlé, and doing a lot of business with them, but ECGD insisted that they all had to come under the same scheme, so you had to insure everything. It’s just crazy. It meant an additional cost of 6%, I think it was at the time, on our overall business, which we didn’t need. That was the first thing. Secondly, their paperwork was designed for an aerospace job or a hydroelectric dam. To be honest with you, you needed to employ people to fill it out. It was absolutely ridiculous.
I’d just like to give you an example of this. We had a job in Russia, interestingly, for a tea company. It was about four years ago. It was a fairly large contract for us; it was five tea packing lines. Our competition was from Germany and Italy, and the customer liked our equipment best, but he required finance. We took it to ECGD for cover. They again said they wanted all our business, but they also said, "We’ll give you a quote." It took them ages to do the quote, and in the meantime we went to Germany. We used the Hermes bank and we got the order. We made it in Germany and we laid off the people in the UK.
Mr Binley: You shock me but, in a way, don’t surprise me. It seems to me that you’re simply saying the organisation doesn’t understand your market from a commercial perspective.
Graham Hayes: It’s not fit for purpose. It doesn’t work, and that’s why its business is dropping. I wasn’t surprised when I heard it was dropping. It just doesn’t suit anything under the £1 million-our orders were £1 million, maximum probably £2 million, and the lowest orders were down at £200,000 for equipment. Most of our members will be in a very similar situation, and you just can’t use ECGD. We would like to use it for some of the orders to some of the developing markets, such as Russia and China. The other thing we found was that it was very difficult to get a sensible credit rating on a customer. Again, on a couple of occasions we got turned down on the basis that the company that we were dealing with did not have credit worthiness and yet again, the German Hermes bank went ahead with it. Their way of assessing the credit worthiness of the customers we were dealing with is obviously not right, either. I don’t know how they do it, but it’s not right.
Paul Everitt: There’s a point here about what the organisation thinks it’s there for. We’ve seen, because this organisation has been around a long time, that it’s gone through a number of different iterations. What should be there is a governmental institution to assist where there is clear market failure. What has happened over time is that it has seen itself as part of a competitive landscape with other organisations that are wholly in the private sector. Therefore, it has a tendency, one, to be highly riskaverse, because it’s public money and we don’t want to be lending public money to things that might go horribly wrong, but equally, it doesn’t have the same appetite as a commercial entity to bring some products to the marketplace that would be beneficial. It’s not really sure what its function is. It’s very clear that it’s understood that its function is, by and large, to support aerospace projects around the world. As a former employee in the aerospace industry, I think that’s a fabulous thing, but it could probably do a bit more for others as well.
Chair : It’s fallen between two stools and, if you like, they take the safest most riskaverse area to demonstrate they’re doing a job when we know they’re not.
Graham Dewhurst: One thing we wouldn’t want them to do is to say, "We won’t do aerospace now. We’ll go somewhere else."
Chair : This is not a complaint about their support for aerospace.
Graham Dewhurst: Absolutely not.
Q72 Chair : I was going to ask you whether ECGD’s Sovereign Star Trade Finance facility was used by your members. On the basis of the evidence we’ve got so far, I don’t think I really even need to ask. If there is any comment that you want to make, I’ll hear it.
Graham Hayes: It shows how active they are. We didn’t know about that until this week, when somebody told me about it. They’re obviously not very active out in the marketplace. Could we comment on bonds as well? It was mentioned earlier. Typically in our business our terms and conditions are 30% down with the order. That is obviously to make sure the customer’s committed, but also that money should be used to help you finance the early part of the machine, which is normally doing drawing work or buying in some of the boughtout items. That was the original idea of it.
Companies will say, even the bigger companies, "We’d like that 30% guaranteed." That is particularly common in recessions. You go to your bank and you get a guarantee from them and they take that off your overdraft facility, so you have no way of using that 30% for what it was actually intended for. Overseas, they do it of course, as the lady previously told you, through bonds. I think nearly every country in Europe does this. I talked to the BBA about it, and they told me that it’s something to do with aid. If we go down this route, we’re breaking the European state aid rules or something, and I don’t understand that. If other countries in Europe are all doing it and they’re not breaking the rules, are ours different from theirs?
Chair : I have to say that this is a conundrum that has exercised me, and I know that applies to other members of the Committee. We will be asking these questions in due course.
Graham Hayes: I know that some letters have gone from Angela Knight to this Committee about that, because I have copies of them.
Graham Dewhurst: We have companies that are refusing orders because they can’t actually finance the working capital.
Q73 Chair : Do you think we could adapt the Enterprise Finance Guarantee scheme at all to help?
Graham Dewhurst: To include export?
Chair : Yes, that’s basically it, because at the moment that is precluded.
Graham Dewhurst: Again, as I understand it, it’s a loan of last resort, in that you have to have put up every element of your own collateral to take that as a loan for working capital within your business. There will be very few companies that will have taken up every piece of their asset base, still wanting to expand into export markets, would be my view. There would be very few companies that would be so cashrestrained in terms of availability of finance that they would want to go to that point of putting every asset against these kinds of bonds to continue going into the export market. That would be our view.
Graham Hayes: I recently applied for an Enterprise Finance Guarantee scheme here in the UK, and I can tell you, again it’s very complicated. There seem to be more reasons not to give it to you than to give it to you. If we get on to banking, then we’ll be here all day.
Q74 Chair : There has been a significant takeup of this particular scheme. It’s generally considered to be successful, and of course the Government is actually putting more money into it, but it cannot be used for exporting. Again, there is a feeling that other European countries managed to do this and stay within the state aid rules. I was wondering if you felt there was any potential there.
Graham Dewhurst: Sorry, I may have misunderstood your question. I thought that you were asking whether it should be put towards export finance. If you’re talking about a company that predominantly exports and, therefore at the moment, is excluded from being able to get that aid-
Chair : That’s what I was talking about, yes.
Graham Dewhurst: In that case, I would say we should definitely extend it, because the fact that you are a predominant exporter shouldn’t mean that you can’t get state aid in these difficult times with working capital.
Q75 Chair : With the bonfire of quangos, the Simpler Trade Procedures Board was withdrawn. Is that going to have an adverse effect on your members at all, in any area?
Graham Dewhurst: I believe it will, because in the 20 years that I worked in a small company, I used the SITPRO documentation. It allows a small company to know that the documents that they’re completing fulfil all the requirements overseas so, therefore, you’re not going to get your documents refused at a bank when you’re waiting for an LC to be paid over. If it wasn’t taken up in the private sector, I think smaller businesses will have nowhere to go to get these best practice documents. They are very simple to use, but I think it should be taken up somewhere else, possibly in the private sector.
Melanie Leech: I think our members would have a similar view. Certainly I think that there is concern about losing a onestop shop, where you can go to find out what you need to know and that you think is independently batting on your behalf in terms of trade facilitation and so on. It is always going to be a matter of regret, I think, to an industry when something like that disappears. For us, the concern would be to make sure that the things that it did to encourage trade facilitation in particular, some of which we believe BIS is supposed to be taking on board, to make sure that actually happens and doesn’t get sucked into the Department and lost. That’s clearly a very important role. As Graham says, more realistically it’s going to look to the private sector to pick up that service function. I hope that someone will do that. Our concern would be around ensuring that those bits that have gone back into Government in terms of facilitation, and batting on the UK’s behalf in those discussions, don’t get lost.
Q76 Mr Binley: You can have the function without the Board, can’t you?
Melanie Leech: It’s not an argument necessarily for maintaining the status quo.
Mr Binley: Get rid of the Board and have the function.
Melanie Leech: The important thing is the function, not the structure.
Q77 Chair : The issue is how best that function is to be preserved. The FDF suggests that finance providers should distinguish between different manufacturing industries. The feedback I’m getting is that they do already. What perhaps is the opinion of the others here, SMMT and EAMA?
Paul Everitt: Again, as I’ve explained, our concern is that there is already a reluctance in the finance community generally to see automotive as part of the longterm future. We take a rather contrary view, and would certainly like to see how we can work with Government to try to change some views on how the sector is perceived. We see ourselves as being 1) successful, and 2) very firmly fixed on the future, particularly around the lowcarbon agenda and the success of ultralowcarbon vehicles and technology. To be as successful as we need to be, we need investment and that will require help from the finance community.
Q78 Chair : Can we move on finally to Government’s role in world trade negotiations? Just in very general terms, what do you think the priorities should be for the UK Government and BIS in world trade?
Paul Everitt: From our perspective, the motor industry is a global business, and a business dedicated to free trade. We think the highest priority should be on progressing that agenda, particularly restarting, and a successful conclusion of the Doha Round and the Doha activities. We have concerns that, in its absence, what we’re seeing are bilateral agreements between the EU and a variety of countries. Our experience of that process has not been a happy one.
Q79 Chair : In your evidence you said that you were very unhappy with the EUSouth Korea Free Trade Agreement. Can you just tell us what went wrong and what was the role of the UK Government in this, or what role might it have had to prevent it going wrong?
Paul Everitt: In our view, the Free Trade Agreement between the EU and Korea traded between sectors in order to arrive at the ultimate agreement with Korea. That’s to say, access to the European automotive market was made easier to ensure that other sectors got easier access to the Korean market. We did not get easier access to the Korean market. There were certain aspects of the arrangement, which are around a complex area-duty drawback and other things-that effectively mean that the Korean vehicle manufacturers operating in Korea can import parts from China and then send those complete vehicles to Europe, which is fine, except that, if we were to source from China and manufacture in the EU, then we would face significant tariffs for importing those same parts. Therefore, that puts us at a significant disadvantage, not that I’m suggesting that we should be importing lots of parts from China. I’m merely highlighting that we are allowing the goods and services into the EU at a much more advantageous pricing level than we would be allowed to do by manufacturing here in the EU which, in my view and our view as an industry, puts at risk our sector in a way that is not reciprocated by us being able to export more into the Korean market.
Q80 Chair : Which sector has benefited from the use of you as a sacrificial lamb?
Paul Everitt: We believe that finance and other services were the priority. Respecting that, this was a free trade agreement that was developed over a long period of time. I think it was developed in a world that was prerecession, where it was seen to be in the UK’s interest that financial services were better able to access this important market. Therefore, it was felt that it was an acceptable tradeoff. The danger is we are, in the UK and the UK auto industry, heavily reliant on inward investors. We are beginning to be quite good at winning inward investment from some of the fastemerging markets, but Japan would like a free trade agreement with the EU; India would like a free trade agreement with the EU; and a whole range of other countries would. If we go through the same sort of process, then something that is prized in the UK and in the EU will begin to be diminished.
Q81 Chair : Interesting, because you have an uncanny ability to pre-empt my next question. The EUIndia free trade negotiations, what can BIS do to prevent this happening?
Paul Everitt: It’s less to do with what they can do to prevent it, but it is about making sure that it’s an equivalent agreement, so that access to the Indian market for all sectors is improved in return for easier access to the EU market. We are intrinsically free marketeers, and that’s what we want to see: the elimination of trade barriers and an opportunity to compete on a level playing field. For us, that’s what’s important, and it’s very important from a UK perspective that they ensure that that’s what the EU does. Again, our disappointment was that there were a number of European Governments with concerns about the Korean Free Trade Agreement; the UK was not one of them and, therefore, some of the other major vehiclemanufacturing countries, which could have come together to have done something slightly more productive on that Agreement, didn’t have all the support that they might have required.
Q82 Chair : Could that have been because this country benefited disproportionately from the financial benefits?
Paul Everitt: I believe that that was potentially the thought process at the time when it was originated.
Nadhim Zahawi: Timing’s everything.
Q83 Chair : I appreciate, in effect, that these questions have been directed mainly at yourself but, just before I come to my final question, is there anything any of the other speakers would like to say in this area?
Graham Dewhurst: We partake in an organisation called CECIMO, which is the European machine tool and manufacturing technology industry. Because they’re responsible for 40% in Europe of the world production, they take a very strong view on the Doha Agreement and would prefer, rather than slicing and dicing with these individual nations, to see a proper level playing field from Doha. I know that that is what they’ve been driving for, for the past three to five years.
Q84 Chair : You too are anticipating. My final question, in conclusion: how important do you think Doha is for manufacturing?
Melanie Leech: From a food and drink perspective it’s absolutely critical. In general terms, in the UK food and drink industry, we want to buy globally traded commodities at a competitive price. We want to export valueadded products into global markets, so a multilateral trade liberalisation has to be the priority for us, so Doha is absolutely critical, certainly from our perspective.
Paul Everitt: I agree wholeheartedly with that; we’re in exactly the same position.
Chair : Good. Thank you very much for your contribution. This inquiry has got off to a fairly interesting and meaty start. We’ve got plenty that we can pursue. I want to repeat what I’ve said to other representatives in the past. If you feel that there is additional evidence that you would like to give because, for one reason or another, it wasn’t covered at this meeting, do feel free to do so. Of course, it may well be that we’ll think of a question that we didn’t think of before, and we’ll be in touch with you. Thanks very much again. I appreciate your contributions.
|©Parliamentary copyright||Prepared 24th January 2011|