Identifying and capitalising on sectoral strengths to exploit export potential
“My impression is that UK businesses tend to rely on the US and continental Europe as their main export markets, so maybe they don’t feel they need to go to emerging markets. Why take the risks when they have huge established markets in their own backyard?”
Indian banking executive
Significant export opportunities exist in the BRICs for the UK in the next decade
Global growth in the coming decade will be driven by continued rapid expansion in high-growth markets. The IMF predicts GDP growth to average 9.4% and 8.0% in China and India respectively up to 2016 (Exhibit 7), against just 2.8% and 1.4% in the US and Germany – our traditionally favoured markets. Despite recent near-term concerns about slower global growth, this overall divergence between the growth rates of the BRICs and the advanced economies is likely to remain largely unchanged. Even a downgrade in prospects for the large high-growth markets will not change the fact that they will outperform developed economies significantly and will account for a much larger proportion of global GDP by 2020.
The UK has not been able to match its export output to the demands of the BRIC economies over the last decade. A good example of this is machinery and transport equipment – which make up a large chunk of the BRICs’ imports – and has been the foundation for Germany’s success in penetrating these markets. In the short to medium term, it would be unrealistic to expect the UK to compete like-for-like: Germany’s mixture of a strong skills base, high productivity levels and lower unit labour costs currently outstrips the UK’s capabilities in this area. Nevertheless, as the BRICs evolve structurally, changes such as rising consumer incomes, a growing middle class, urbanisation and developments in infrastructure will result in changing demand for imports and will offer more accessible opportunities for UK business. The UK must up its game to ensure we are well-positioned to exploit these changes.
In the coming decade, consumer spending growth in the BRICs is expected to average 13.5% per year in value terms.8 As living standards rise, this demand will be increasingly channelled towards goods and services more traditionally associated with consumers in more mature economies. The increasing alignment of UK supply and BRIC demand can help the UK to re-orientate its exports towards high-growth markets, if we can capitalise on our comparative advantages.
Longer term, the UK should also look beyond the BRICs
Strong growth, rising incomes and rapid development in the BRICs mean that they clearly offer the most favourable exporting opportunities in the years ahead. However, UK business should not remain static. In trying to break into the BRICs and establish a strong foothold, we are playing catch-up – our commissioned research showed the poor penetration of the UK in these markets compared to Germany and the US. Our competitors are upping their game so we need to look even further ahead. It is important that UK business and policymakers identify the markets that will provide opportunities to exploit our comparative advantages in the future. This will enable the UK to capture new growth dynamics as they arise, rather than lagging behind. Longer term, this approach should allow for greater diversification of the UK’s global export presence across a series of high-growth markets, rather than being overly dependent on a select few.
Identification of new growth markets is a comprehensive process which should take into account several measures of competitiveness, wealth and growth that complement the UK’s main areas of export. They should have sufficient market size and depth, and ideally favourable demographics and rising productivity. Based on these criteria, Goldman Sachs has pointed to the ‘Next Eleven’ countries: Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, Philippines, South Korea, Turkey and Vietnam as potential high-growth markets.
“In my view, [Africa] is a competitive environment and [UK companies] shouldn’t expect to be able to compete successfully in every area. But they should decide which areas they can compete in and which they can’t, and target those areas in a more focused way.”
Senior African banking executive
Looking more widely at emerging regions, the African continent as a whole offers tremendous potential. Africa is starting to capitalise on its large and expanding workforce, abundant natural resources and, in many countries, growing political stability. Strong investment from other high-growth economies – China in particular – is also boosting the rise of the continent. Natural resources have so far led this boom, with China now sourcing almost half its imports of alumina, copper, iron ore and oil from Africa.
As well as growth in consumer demand, trade is also increasingly driven by the location of production. With supply chains having become increasingly global, businesses seek to increase efficiency by relocating production to low-cost regions. To date, this reorientation has concentrated in countries such as China, due to their low labour costs and specialisation in low-end manufacturing. But this set-up will come under increasing pressure as China moves up the value chain and labour costs rise. As this happens, competition will intensify from lower-cost areas like Bangladesh, Vietnam and parts of Africa – possibly pointing to future clusters of trade around these locations.
The emergence of new growth markets is, like all the forecasts in this report, subject to developments in the wider global economy. However, these predictions do give the UK an idea of the opportunities that lie beyond the BRIC economies. At the moment, the UK’s export market share destined to these potential future high-growth areas is extremely low: exports to Mexico, South Korea, Indonesia and Turkey combined amounted to just 2% of total exports in 2009. Likewise, the proportion of exports captured by Africa as a whole stood at just 4%. It will not be sufficient to concentrate on the BRICs to boost the UK’s export performance in the long-term – business and government need to stay ahead of the curve.
Areas of comparative advantage should be exploited to access high-growth markets
The UK has a portfolio of world leading sectors that can demonstrate comparative advantage and are aligned to the future needs of high-growth economies. Chemicals and financial services are two that have already been highlighted as export beacons, consistently posting a trade surplus and accounting for a larger share of export growth than the size of their domestic sector would suggest. However, sectors such as electrical and optical and high-tech goods can also demonstrate strong export performance and will play a key role in future growth. The challenge is to build on these front-runners and to identify other areas where the UK could build competitive positions.
If UK business can move quickly and establish an early market presence, there is much to be gained. Forecasts for our leading sectors predict a positive trend. In total goods exports, the share made up by chemicals is set to increase from 23.3% in 2005 to 26% in 2020, while the share of optical and high-tech goods should increase from 4.1% to 4.7% in the same period. In services exports, the forecasts predict the areas of particular strength for the UK will maintain or even increase their exports share. Financial services exports in particular are expected to hit just under 30% by 2020 – although this forecast could be downgraded subject to future difficult market conditions.
Using a forecast of the average annual percentage change in growth of various sectors, the Ernst & Young ITEM Club has calculated where the areas of growth sit in the next decade and has quantified the impact of UK exporters shifting supply to meet emerging demand by boosting the share of exports accounted for by high-demand goods and services. If the UK is successful in this realignment, it could be worth a 1.2% rise in GDP, or £18bn, on baseline 2020 forecasts.
According to these forecasts, illustrated in Exhibit 8 the top five fastest predicted growth areas for the UK are construction services, electrical goods, financial services, optical and high-tech goods, and communication services. To capitalise on this growth potential, we must ensure that these sectors can attract sufficient investment to meet external demand and that the rest of the world knows that the UK is a leader in these areas. We cannot afford to be complacent: current success does not guarantee future wins.