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HSBC - A prosperous new year?

5 February 2013
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Roundtable-default

The Business Magazine and HSBC invited sector experts from the Thames Valley region to Green Park to gain opinions from the business frontline about the current state of the UK economy and to discuss the opportunities for 2013. Giving his expert overview of the current state of the UK economy, HSBC economist Mark Berrisford-Smith provided heartening news couched with caution. “2013 has got off to a relatively bright start, but so did 2012 and 2011 and it didn’t last. Certainly in 2013 investors are feeling a lot better than they have for some while.

“I’m more optimistic because the Europeans have got on top of the debt crisis. They haven’t fixed it but they’ve shown enough commitment that they won’t let anyone leave the single currency, which is the main thing that has been frightening the markets. Countries such as Spain, Ireland, and Italy can now borrow money affordably. A lot has been done, and provided a grip is kept on the debt crisis then a global recovery, albeit an anaemic one, will get back on track.

“The two and a half year Eurozone saga now appears to be in the background, as you can see by the tone and level of media coverage nowadays.

"There were two other encouraging aspects:

The Americans have averted some of their ‘fiscal cliff’ and the US economy should deliver modest if unspectacular growth,

Evidence of a re-acceleration of the Chinese economy and other emerging nations.

“Last year was tough not least because of a distinct slowdown in global trade, but that has now turned, which has a direct bearing on expectations for the UK economy.“

For the UK he pointed out, 2012 had been a year affected by several one-off factors –Olympics, Jubilee, record rainfall, etc. “If you believe the official figures, and I do not, then our economy did not grow at all.

“It’s possible they will report a triple dip in the fourth quarter, but I wouldn’t get over-alarmed. We will have to wait till April before we get a ‘clean’ quarterly readout for comparative purposes.

“Performance remains puzzling because we have created a lot of jobs, which should be good for the economy. But, it doesn’t yet seem to translate into economic growth. Don’t get obsessed with the GDP numbers. I think the true economic situation lies somewhere between the employment statistics, and GDP.”

David Murray asked the Roundtable if it thought triple-dip problems were on the horizon. The consensus was: "We are not heading for another a crisis, but the future doesn’t look great."

Arnold Levy: “We are flatlining, bumping along. We will have a slow laborious recovery, but we will have a recovery.” He still saw risks in Europe, particularly France with its new government. The US and Chinese economies were not yet firing on all cylinders. Although increasing employment was a welcome sign, UK wage growth is low so consumers’ disposable income is falling, he noted. “Employment is coming from companies trying to protect market share, deliver better service and keep customers happy, rather than through true growth.” The result was squeezed profit margins.

Automotive manufacturer Kevin Lowen was upbeat: “Frankly, coming back to work from Christmas in the last four years has been tortuous, but there is good news around now and I’ve genuinely been able to say ‘Happy New Year’. Aspiration levels are low simply because we know it is never going to be as bullish as it was.”

HSBC’s Jon Stradling felt there was a general ’cautious optimism’ about the economy. “Most barometers indicate that things are slightly better now than 12 months ago, but it is all around the margins. Global uncertainty is here to stay, and we have to accept that and get on with it. I am slightly concerned from a national perspective what impact a statistical triple dip may have on the mindset of the consumer and the markets.”

Don’t be too hard on ourselves

Berrisford-Smith: “We probably beat ourselves up a little too much about not doing well at exporting, because we do it in a different way. We are more likely than foreign companies to set up businesses abroad, so that the benefit to UK PLC takes the form of profits and royalties, but not perhaps from extra jobs.”

He also highlighted the waning support of traditionally high performers for UK plc – pharmaceuticals and aerospace – brought about by factors such as relocation and ownership outside the UK, plus demand changes caused by global spending cutbacks.

Be proud of our UK ‘mittelstand’

From his client overview (£30 million -£4 billion turnover), banker Stradling felt there was a 50:50 split among UK companies. Half were like the Roundtable representatives –positive and looking for international growth opportunities – the rest “hunkering down and managing costs”.

Investment adviser James Austin agreed that the UK’s export track record should be better. “Although I am increasingly meeting energetic well-managed companies keen to grow internationally, that is not the norm. There is a big gap between the two different types of businesses.”

Stradling considered there was too much media emphasis on large FT100 corporates and the startup sector and “not enough collective energy around supporting the core middle-market companies that are the engine of the UK economy”.

Simon McMurtrie agreed: “We already have a successful German ‘mittelstand’ in the UK, but we are not proud of it in the same way as they are abroad.”

Less talk and more action, please!

McMurtrie felt time spent speculating was time wasted. “Businesses are always being asked for opinions on where the economy is going, and frankly my response is: ‘We haven’t got time for all that, we have jobs to do’. I have absolutely no idea what’s going to happen. Governments and recessions come and go; we just need to get on with improving our businesses, making our products and service better, planning to execute well, and so on.”

He exampled the efforts that John Lewis had made in recent months to enhance its customer service, resulting in outstanding performance results, while Morrisons, he felt, had “taken its eye off the ball” and results had suffered.

“Those companies that really focus on what they are doing – product, service the proposition – are winning; those who sit back and wait for everything to magically improve are not.

“Just do what you know how to do, and do it really well.”

Build on a fragile confidence and do the donkey work

Paul Lindley raised the topic of confidence. “Both consumers and businesses need stability and trust to make them brave enough to use their money to purchase or invest. These days so many things can come in from left-field to effect the economy, but if our government was to move away from its stated economic policies that would cause all sorts of uncertainty and instability. Consumers and SMEs are not getting much to give them the confidence to spend more, and many are relying on cash as their safest route.”

Stradling: “There is a confidence dichotomy at the moment. We are seeing more evidence of management teams feeling more optimistic and willing to invest but at the same time corporates also want to keep more cash on their balance sheets.”

Berrisford-Smith: “Normally, firms start to re-invest about two years after the recession reaches bottom, but this time we are coming up for four years since that point and there’s no sign of anything happening – probably largely down to the eurozone debt crisis and the government’s austerity at home. That resurgence of spending and investment by businesses often does a lot of the donkey work in getting the economy back to the starting point. If you believe the numbers, we are still 3% down on where we were in 2008 and that’s because businesses don’t feel confident enough to invest.”

Murray asked if downbeat UK headlines were influencing business confidence.

Lowen: “You reap what you sow. If you provide quality products and performance then you can be positive. Volumes are down 10% in the French car industry, but they are up 5-6% in the UK. India is booming, but the UK is growing too, so we are very optimistic.”

Go out there and sell to the whole world!

Export finance adviser Andrea Walker said businesses could buffer themselves from the effects of one particular economy by broadening their markets, thus spreading the risks while increasing opportunities. “A lot of SMEs are looking to expand into international markets, but they are not easy markets, and they are not looking to Europe so much because of the current financial situation.”

McMurtrie derided the UK focus on European markets: “We need to kill this notion that Europe is an easy market – it’s not. I constantly remind people that Britain’s exports to Ireland are basically the same as its exports to Brazil India and China all put together. After Ireland, come Holland and Germany, again virtually our nearest neighbours. It’s humiliating and disappointingly unambitious.”

Stradling: We all need to ensure that we do not get distracted by short term economic data. The recent trade figures did however show UK exports stalling to the faster growing/emerging economies. This is not a statistic we can afford to let develop into a longer term trend.

Berrisford-Smith: “Monthly trade figures can be terribly misleading. They really should not report them, because you need to take a longer view on such hugely volatile figures.”

McMurtrie: “Surprise surprise, the commercial opportunity for companies wanting to make money is in countries that are expanding. When you go there it is amazing. Within three hours drive in any direction from Shanghai you encompass 230 million people. So has the Chinese market started for British businesses yet? It’s up to each of you to decide to get a piece of the action.”

Lindley pointed out that 161 cities in China have over one million population, and Europe has only 34. “Most of those Chinese cities have the infrastructure of an American city in the 1890s, so there are huge opportunities for business there.”

International trade? It’s never been easier

Lowen stressed that exporting was still a daunting challenge for most SMEs because the emerging economies are geographically so far away, with different cultures and languages to overcome.

Having taken on that daunting challenge Lindley was optimistic for more potential UK trade in such regions. “But, we have to bang the nail on the head about why we don’t do better when we have so many in-built advantages. ”Far more countries speak English as a business language than our foreign language competitors; we operate in the time zone where there is the most amount of trade; and culturally we are a trading nation. For an SME it has never been easier to trade internationally. You can do your research and communication for free online before you go, and even arrange cheap travel to get there.”

McMurtrie dismissed fears about ‘trading with the great unknown’. Many foreign graduates now working ‘back at home’ have studied in British universities. “Some of our people are now meeting up with their graduate mates dotted all around the world.”

Lindley admitted that Brazil and China were his own company’s next target markets. “After all, the Chinese market growing at 7-9% means that it doubles every nine years, so you don’t need to steal market share there, you just create your own.”

McMurtrie mentioned how one Chinese wine buyer had told him: ‘Isn’t the usual expression about red wine in Britain that ‘a red before bed is good for the head’?’ Well, I told her I was glad she believed that – and, it is now!”

The ‘Made in Britain’ brand has global attraction. Use it

The Roundtable agreed that global coverage of the Olympics and the Queen’s Jubilee had been “a big tick in the box” for British overseas trade.

Lindley: “British goods have got a reputation for good quality. We have respected brands. Overall, ‘Brand Britain’ means something distinct now. We have a big advantage for anyone looking to grow their international trade and we need to do something about it.”

Levy’s company Medivet with 100 outlets in the UK is now beginning to trade internationally. With Chinese government approval, he went to China intending to develop a 500-branch group, but postponed the project because local expenditure was much less than expected. “They are about 50 years behind in the development of veterinary infrastructure, although they will get there.”

“In about five years,” quipped McMurtrie half-joking. Levy agreed there would be rapid progress, but pointed out that training vets takes five years. Medivet is now considering investing in British-standard veterinary training in China.

Israel has proved a better ‘westernised’ option for Medivet. “It felt like the UK market 20 years ago, so we have launched there.”

Lowen reported that the Indian automotive market favoured British brands too, but cultural, regulatory, bureaucratic and employment issues made it a tough market, despite Magal Engineering having its own factory there. “But, there are about 50 other similar plants in the area so there is money to be made there. One thing we have learned, however, is that low cost manufacturing is not necessarily low cost.”

McMurtrie: “Americans just love buying from a British wine merchant. It just fits their image of Britain.”

Send in the magicians!

McMurtrie said the way to crack international markets was to export British ‘magic’.

First, you have to understand the essence of the ‘magic’ that works for a business in the UK. Then export that to the world by sending out the ‘magicians’, the people who know your business and its essence. They may not be your senior managers, but they can amaze potential customers with the product and sales proposition, he explained.

“Why do we (Direct Wines/Laithwaite’s) sell £200m of wine direct to homes in the UK? It’s because we don’t just sell wine, we provide great wines and service in a particular way with a whole bunch of skills connected to that. And that’s the essence or the magic that we export.”

Levy agreed: “That’s what we are doing in Israel. Our UK success has been in out-competing our competitors by providing much better service and a one-stop-shop approach to veterinary care. We are not trying to create a different model for Israel.”

Lindley: “Our ‘magic’ is about our values. It is values associated with the product and manufacturing quality but also the values linked to the type of people we employ and why they will go the extra mile for us.” The challenge when trading abroad was to meld those ‘magic’ values with the cultural values of local employees, he added.

McMurtrie felt the ‘magic’ could often be lost by hiring a local country manager (usually perceived necessary to be close to the local market).

How do we help businesses do their ‘magic’ better?

HSBC’s Kevin Craven highlighted a core problem: “The reality is that UK plc isn’t as successful as the companies represented around this table. What we have to do is encourage a broader range of businesses to do the same as you.”

Murray queried if there was a different approach if companies were offering just a service or a product plus service. McMurtrie suggested everything a company offered was its ‘product’.

Levy: “Just be amazing. Let the client walk in and be blown away by what they get, and your competitors will find that hard to stand up to.”

Berrisford-Smith pointed out that UK plc did not fare well on actual goods sold abroad – for example, compared to the UK, Germany sells double the amount of goods to BRIC countries relative to its GDP. The biggest problem was the UK’s product range. “If you don’t make it, you can’t sell it, and as BRIC countries industrialise a lot of their demand is for kit, an area in which the Germans are much stronger.”

McMurtrie countered: “We don’t make much wine in the UK, but as a UK company we are still the most important player selling international wine into Australia, a great wine-producing nation. It’s all about our personal service connected with the product.”

Walker: “For small owner-managed businesses to go international may mean them taking their eye off the currently-difficult domestic market. It can be a long lead-time for them to get into exporting and at the moment it is difficult for them.”

"So, how can they be helped?" asked Murray.

“UKTI does help them with identifying and understanding the export markets, but banks need to ease up on liquidity,” Walker suggested.

Stradling disagreed: “From a banking perspective all the market surveys and other lead indicators now show that the lack of funding is not the primary issue. Overall, it is a demand side challenge rather than supply. We all have a collective responsibility to support UK plc by helping to get more UK businesses into a positive mindset.”

Walker accepted it was not just about cash; there was a ‘hand-holding’ role as well to help SMEs understand different financial procedures and trading risks.

Stradling highlighted HSBC’s Global Connections programme, which did just that for businesses, but stressed there was a collective responsibility to assist from a range of supportive stakeholders.

Austin and McMurtrie registered a marked improvement in UKTI support with greater expertise and a more user-friendly approach leading to better uptake by businesses.

Time – for an international change

UK businesses don’t plan far enough ahead said McMurtrie. “Their time-horizon has to change. We’ve got into a culture of ‘this week’, ‘this month’, ‘this quarter’ – that’s OK for short term delivery but we have to get people looking long-term to see the true importance of the international economic geographies.” (Laithwaite’s has just completed its long-range plan until June 2021.)

Craven and Lindley highlighted the difficulties of long-term planning for SMEs, particularly if not family-owned and so planning for succession reasons.

Lowen: “In our sector we are on five-year order books so we can be fairly certain what’s going to happen in the next five years.”

Levy: “We don’t have an exit strategy, we have a succession strategy. If we buy a veterinary practice it is for the long-term. As an LLP partnership we’ve been growing for 25 years, doubling our branch numbers every five years. That is our five-year plan.”

Austin reported more people adopting a longer term mindset, “lifting up their heads and planning five to seven years ahead”. Having worked in mainstream private equity, he welcomed the Business Growth Fund approach where “we can have a proper 10-year view discussion with businesses. Accordingly, we are seeing hundreds of companies that have never spoken to funding institutions before.”

Unfortunately, by nature, elected governments think short-term, noted Murray.

Finding funding for planned growth

Stradling: “There are many different funding sources nowadays and banks have their part to play in finding the most appropriate funding solution. This could include longer-term capital markets solutions or the Business Growth Fund. HSBC, along with a number of other banks, has invested £500m in BGF. ”

Levy: “All of our past finance has been provided on 20-year term loans, but now we are being cut back to five, and even encouraged to go to three years.”

Austin felt the long-term funding market was still suffering the aftershocks of 2008, and was not yet back to a happy medium.

Stradling reminded the Roundtable that Basle regulations had altered the levels of capital now held by banks, and with long-term funding being capital intensive its pricing was not always attractive to businesses. However, there is a variety of different structured products that can be better longer-term options for SMEs.

Craven: “There is recognition now in the banking industry that capital has to be used intelligently to make sure it is used correctly for clients and us long-term. Historically, HSBC has not been viewed as the most aggressive , but we have been consistent, remained open for all types of business and supportive of our customers through the cycle.”

‘Conservative’ was OK said Levy, but ventured that banks at times got ‘slightly paranoid’ which could become restrictive for businesses. “You need to draw the line for each individual business because we are all different.”

Austin felt ‘bespoke’ bank assistance was getting better.

Should we just support the winners?

Lindley threw a stone in the pond when he suggested that if the UK Government wanted to kickstart the economy, it should adopt an Olympic-style elite approach – identifying its UK plc top-performers and then supporting them adequately to bring home the gold medals.

With startups contributing little to the economy, and SMEs finding funding difficult to obtain, he queried: “Should public policy concentrate on medium-sized companies that have gone through the hard years, and are already contributing employment, exports and tax revenues to the economy? There is a great analogy here with what was achieved withour sports people. A lot of public money was spent on relatively few people, but it worked.”

Berrisford-Smith: “The problem is legacy. Our record on picking winners and losers from the 1960s to the 1980s was pretty poor, and it would be a very brave government that would go down that route again.”

Supporting Lindley’s Olympic scenario, McMurtrie also suggested that medium-sized companies should be given a level playing field by the government ensuring that foreign multinationals paid their fair share of tax to the UK. He was derisory of the token £20m repayment made by Starbucks to the Government. “Direct Wines pays over £100m of tax on £360m of sales. And, no-one from UKTI has ever contacted us with help, although we have had approaches from Germany and Belgium.”

Craven: “The metrics of success are different for sport and business. The Government has a responsibility to support the economy as a whole, but it should ensure support for the successful businesses as well.”

Levy wondered if elitist support would discourage those who failed to obtain it, or inspire them to achieve even more.

What are the key barriers to growth?

“Timing,” Levy suggested. “Banks cannot grow unless their customers grow, so banks need to understand their clients and be like business partners. It is not just about ticking boxes; it’s about getting growth timing right. Banks play such an important part for businesses and they can be a significant obstacle or facilitator depending on how they choose to be.”

“If businesses take the time to share, and banks the time to listen it can make a massive difference,” added McMurtrie. He mentioned that it had taken Direct Wines six months to get a bank account in India. Support from the financial sector or the Government on such aspects could greatly assist aspiring medium-sized companies to trade internationally.

Honesty and trust were also required, especially in the difficult times. “We always have our cards face up on the table at all times,” said Levy. He added that another funding concern was “worrying about the sentiment of banks from one month to the next.” “You need consistency from the banks, so that you have the belief and confidence to take your money out to invest and grow.”

Lowen believed that funding restrictions had been curtailing growth, particularly among SMEs, but agreed it was not the root problem.

Mentioning HSBC’s aim to play a much bigger role in business growth this year, Stradling noted that many successful businesses develop several different funding options. However, he suggested the key to funding supply was often good communication with an open and honest dialogue on both sides.

Craven echoed this communication requirement, and encouraged the sharing of knowledge and expertise to add value. “It works best when we pool our customer-bank intellect in partnership and talk about the range of support that can be provided.” He exampled how HSBC had multi-lingual credit controllers to help businesses collect invoice payments from around the world, yet customers didn’t use that expertise enough.

Stradling: “We are constantly challenging our relationship managers to develop a more proactive solution-providing partnership with our clients, whether that be for growth or international positioning or via a broader strategic dialogue.”

Levy mentioned businesses that want simplicity. “We only want to deal with the banks, not PE or VC funding. We have total confidence in our brand and ability to penetrate new markets, so the only issue we have is getting funding to keep growing.”

Lindley urged greater transparency, especially with regulatory compliance, 24/7 communication technology and social networking placing fresh demands on businesses.

“Transparency forms strong and trusted relationships. We shouldn’t be afraid to go to our bank to discuss a bad month during a five year loan.

“Culturally we are held back too, because unlike the US we do not have an American Dream, do not encourage success throughout the country, and the celebration of that success.”

Maybe the non-cynical celebration of British success at the Olympics was a sign that our culture is changing, the Roundtable hoped.

Lowen felt a manufacturing sector barrier to growth was that businesses had “cut into the meat” in order to become lean during the recession. “The banks have been silent for four years, and we’ve survived on profits from our good years, but been driven to invoice discounting to fund businesses long-term. We have let engineers and developers go and we are now struggling to grow. Also, in a bid to be lean, we bought cheap tools and now we have had extra operational costs to rectify and modify those tools.”

Lack of British incentives was another barrier. Often British businesses had set up operations in another country simply because that country gave more support than Britain.

What can the Government do to help?

McMurtrie: “Keep out and let us on get on with things. Avoid kneejerk reactions.”

Levy: “Reduce regulations. We employ foreign vets and UK immigration regulations are ridiculous.”

Berrisford-Smith: “Keep chipping away at that deficit. But, we shouldn’t over-estimate what the Government can do.”

Lindley: “Convince us that the economy is stable, by following through with its deficit reduction policies. Also, work out our competitive advantages – creative flair, innovation, for example – and build on them with incentives, tax breaks and so on. Co-ordinate the tax system and make it simpler.”

Stradling: “Keep improving connectivity between education centres of excellence and what businesses actually need. Too many businesses take on graduates and have to retrain them.”

Austin: “Depressingly, the things we have spoken about today have hardly changed in 20 years – red tape and regulations, for example. But what has changed is the complexity. What businessmen have to work their way through today has never been so difficult or technically complicated.”

Levy: “We have done well despite our governments.”

 

Participants

  • James Austin: Investment director, Business Growth Fund
  • Mark Berrisford-Smith: Head of economics, HSBC UK Commercial Banking
  • Kevin Craven: Director of corporate & global banking, HSBC Invoice Finance
  • Arnold Levy: Managing partner, Medivet Partnership
  • Paul Lindley: Founder and CEO, Ella’s Kitchen
  • Kevin Lowen: CFO, Magal Engineering
  • Simon McMurtrie: CEO, Direct Wines (Laithwaite’s Wine), Theale
  • Jon Stradling: Head of corporate banking, HSBC (Thames Valley)
  • Andrea Walker: Export finance adviser, UK Export Finance (South East)
  • David Murray: Managing editor and publisher of The Business Magazine, chaired the discussion

 

Resources: HSBC website

 

 


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