SMEs should have special incentives to encourage them into exporting. The advocate here isn’t the wistful recent creator of a small or medium size start-up, but exporter extraordinary Rod Taylor whose electronics manufacturing company has been a major North East of England seller overseas for decades now.
Up to 60% of its expected £15m turnover in the current financial year will probably come from sales to foreign customers. And Taylor has the right prescription, he feels, to motivate many more smaller businesses capable of selling internationally in a region already a top exporter.
Seaward Group, of which he is founder and managing director, sells its specialised test instrumentation in more than 60 countries, having recently broken into Japan, China and South American nations. All this, for the electrical, electronics, medical and solar PV industries, is masterminded from Peterlee.
Impressive? David Coppock, regional director for UK Trade & Investment in the North East, has described Seaward as a great example of the many North East firms that have already taken up the exporting for growth challenge.
Taylor believes, however, that whatever government is next in power should seriously explore introducing export tax credits to boost overseas selling. He explains: “Just as the R&D tax credit scheme gives effective financial support to activities directly related to investigating new products and technologies, there should be a mechanism giving financial incentive for businesses to tap into the potential of overseas markets.
“Selling into international markets,” he explains, “is much costlier than doing business closer to home. New financial incentives would help offset this cost, providing a major incentive for growth.”
Before he’s shouted down as an advocate of subsidy, it should be pointed out that he could see such a scheme being funded by reorganising current UKTI budgets – in particular, by reallocating a significant portion of the outlay from existing funds spent solely on activities linked to delivering export advisory services.
He’d like to see export tax credits linked to export sales actually achieved – and this could impact significantly, he feels. He observes: “While the level of support UKTI provides is generally good, there’s little evidence the overall spend is making a substantial difference to revenues generated from exports.
“Too often assistance from government is driven by metrics relating to inputs rather than outputs. This inevitably creates inefficiencies.” In the present government’s ambitious goal of doubling UK exports to £1tn by 2020, a lot would depend on stepped-up activity among SMEs. The British Chambers of Commerce has said exports would have to grow at 10% a year to meet this target – which, on export performance of recent years, almost certainly puts a doubling beyond reach.
Recently the Government’s own Public Accounts Committee has also urged better export support to SMEs, noting how less well they trade internationally than their French and German counterparts. Would Seaward have achieved its present export performance without UKTI support? “Probably,” he thinks. “But I suspect when support is there you decide to try it out. It helps minimise some of the risk.”
While stressing that the UKTI is always supportive, he feels the new UK target requires fresh thinking. “In many cases export success is based on the number of companies engaged. That may filter through to success in the end. But I think more aggressive targets could be set.
“If they were set much more to outputs for example, rather than inputs, I think that would sharpen everyone’s views. Production per head of a company, for example. When we claim to be the most successful region in exporting, that’s down to Nissan and some of the process industries on Teesside.
“Have we actually generated extra export business within the rest of the community? It’s almost impossible to detail if we’re not measuring outputs. If this was a business case, for example, serious questions would be asked about the investment which we couldn’t answer. I appreciate how difficult that is to come up with the necessary numbers. Basically we’re looking for trends.
“So even if you take some metric which may not in itself be precisely definable, you can still look at it over time and find the trend –perhaps through a metric telling us the return on investment. Nissan is the best thing that ever happened to the North East. The danger is that large organisations maybe shield the rest of local business from what could be achieved.”
Taylor’s no revolutionary in his thinking; export credits have long been around. “The Americans already do something very similar,” Taylor reminds us. “They’ll give certain tax credits in terms of minimising the amount of tax paid on export for certain sizes of businesses.”
His thinking is also driven by his conclusion that tax credits for research and development are already proving successful in this country. “So if it is a key and successful metric in that instance, why not also in exporting? It would certainly put it up on the agenda for board meetings if it has an impact on taxation.”
He concedes a risk factor, but thinks some practices in trying to encourage firms to export are like “taking a horse to water” and should be cut back. Why? “It’s like all things in business. People wishing to be successful must get out there and be doing things themselves. I’m a bit against nanny states trying to get people nurtured and moved along.
“So many activities exist to talk about export and the rest of it. Do we need them all? We all see and read the news and know what’s happening. If I haven’t the gumption to go into exports instead of going to a seminar where someone’s extolling virtues of a particular country… it’s a difficult one. I can’t say it’s of no value because the people who deliver it mean well.
“But if I look through the UKTI annual report I see the additional number of companies becoming involved and the supposed amount of additional exports. But that ain’t reaching the target. So change the recipe. How much, then, is there in the way of getting companies to do R&D? Is there an organisation?
“I know there’s Innovate. But seminars aren’t run in the North East every 10 minutes telling me to do more product development. If I don’t need it on R&D, what makes exports so peculiar they need that approach? I always think lots of governments don’t trust businesses. They want to put intermediaries in between them and it to show them what to do with their money.
“Up to 70% of all the investment is consumed in the mechanism. If people can develop new products using methods we have, why put all this money into telling us there’s opportunity to be had somewhere?
“I was on the board of Go Global and came off because metrics included: ‘How many companies would you contact in the next six months?’ What had that to do with exports? I’d say, stop all this namby pamby bottom line support, and put support into the top – where winners will be in the end. Instead of a shotgun approach, accept that if there’s a good business, and there are opportunities for it, that business will find them anyway.”
Seaward is a textbook example for SMEs of acorn to oak. Taylor, working full time in the South at the time, bought a micro-business from a Jimmy Seaward in Billingham, who was running it in his garage. Taylor moved the business into his own coal shed at Waldegrave, Maidenhead.
He chuckles as he recalls. “I always say to people, ‘you need a stimulus to move you on.’ My wife bought a freezer and put it in the coal shed, which then forced me to move out. So that pushed things along. I ran the business part time for a year or so. Then I started doing it full time, making testing instruments.
“I’d make a product in the morning, go out and sell it in the afternoon then put out a press release or invoice a customer in the evening. Then I had two people working for me initially.
We managed to get quite a good contract. We were licensing technology from some big companies and ICI was important to us. We started making test instrumentation for them. We then commercialised it and started selling it.”
When more work space was required, Taylor decided to move to a development area and Peterlee won over Washington. “I wouldn’t say we benefited tremendously from grants then. There was always the thought we would, but it was more the general support we got.”
The workforce grew from two to 11 and today stands at 150-plus, with a regular lookout kept for talented software engineers, design and development specialists and proven sales and marketing operators.
Says Taylor: “We’ve always been very product focused, trying to identify where we can to produce something a bit different. So I think most people would regard us as innovative in producing instruments for specialist applications.”
Seaward gained recognition and reputation working for BT, utilities power and offshore oil companies. British power utilities were developing power systems abroad then also, partly through the British standardisation they carried. So openings arose for Seaward, particularly in Commonwealth nations like Malaysia, Hong Kong, Singapore, India and Australia. This was opportune since Seaward, as it specialised more, had to look beyond the UK for bigger markets.
Taylor recalls: “We received a lot of support then from UKTI – BOTB, as was – and we embraced trade missions and exhibitions, built up distributor networks and the business prospered on the back of that. Three acquisitions helped us to stick to our knitting but move into complementary technologies. Today, of those businesses, our biomedical work has been particularly successful in exporting. About 70 to 80% of its business is export.”
Most export earnings come from the USA, via many different customers. The German and Australian markets respectively come next. Opening sales offices in the USA, Malaysia and France has been a major factor in success. From Kuala Lumpur, for example, not only Malaysia but also Taiwan, Korea, Philippines, Indonesia, Singapore and Thailand are served.
The company looks at turning between 8 and 10% of annual turnover to research and development. “You have to watch, though, that you’re not just pumping money in, hoping that something will come out.” Seaward is regularly looking for possible acquisitions to widen the business. “But nothing that will diversify away from its core strengths,” says Taylor. “We’re looking, rather, to support them.” That means particular interest, presently, on biomedical.
Six steps to easier exporting
Rod Taylor’s advice to firms thinking to export?
Think foreign. “If you want to be an international business you must be able to produce international products. Whatever you do must be from an international aspect throughout, instead of saying, ‘let’s do it for the UK and do what we must to tweak it for foreign markets.’ If our company develops a product now it must be something with an international application. Because we work with Health and Safety and standardisation, we have people sitting on international standards committees so we can see where things are going and can produce products accordingly. Our products and services are better through having demanding customers abroad. That forces us to raise our game.”
Culture counts. “Cultural change is essential throughout the business. If a customer, say, in Australia sends you a communication today, because of time differences unless you reply promptly it could be two or three days before your answer is seen. Also, whereas a despatch to London might go out on a palette packaged in cardboard, send that to Malaysia and it ends up soggy. Products must turn up suitably for their market.”
Quality care is vital. “It can be expensive having something sent back from Thailand just because you forgot to put in a mains cable or something.”
Don’t expect instant profit. “Getting ourselves well set up in America and turning out a profit has taken us most of eight years sinking cash into it. Demonstrating perseverance is very important. Many international customers will be looking for that because if you haven’t got staying power, and are going to leave them high and dry, they won’t want to continue dealing with you.”
Work flexibly. “That’s the key to competing with bigger rivals. An owner-managed business can move things much faster than a bigger business where one or two layers of the board might have to be involved.”
Ride fluctuations. “There’s always controversy about fluctuating exchange rates. But if you recall, when the yen was very high Japan was one of the world’s biggest exporters. Exchange rates ultimately are just one of those things you have to deal with. You may need to cut your margins, but that’s nothing more than an entry cost.”