The shifting balance of economic power away from the West and towards the emerging markets of South America and Asia has been one of the big stories of recent years. In particular, consistently high growth rates in Brazil, Russia, India and China (the BRIC countries) have been compared to the sluggish performance of a European Union still grappling with the fallout from the banking crisis and economic imbalances within the Eurozone.
The pull of emerging markets
The fate of Europe – so the story goes – is relative decline in the face of vigorous emerging economies. This doom and gloom prediction has led some commentators to conclude that businesses should be focusing on emerging, rather than mature, markets as the key source of export-led growth.
However, in reality, the 28 member states of the European Union – plus the EFTA nations of Switzerland, Norway, Iceland and Lichtenstein – collectively represent a more accessible export opportunity than the rather more difficult and distant emerging market economies.
According to the Office for National Statistics (ONS), Britain’s exports in goods to the EU amounted to around £150 billion in 2012, with sales to the rest of the world marginally below that figure. As the Economist magazine noted, although the US is the biggest recipient of UK products, seven out of the ten top export destinations are within the European Union. While the overall share of UK goods exported to the EU has been falling, Europe remains a vital market, particularly for smaller business.
In a survey of its members conducted in 2012 – Exporting is Good for Britain but Market Barriers Stifle Opportunities – the British Chambers of Commerce (BCC) found that larger companies are much more likely to export to BRIC countries and other emerging markets than their small and medium-sized counterparts.
The survey found that three-quarters of large exporters currently trade with BRIC countries, compared with only one-third of small exporters. Looking to the future, two-thirds of large companies see emerging markets as the platform for future growth, compared to half of medium-sized businesses and one-third of micros.
While the overall share of UK goods exported to the EU has been falling, Europe remains a vital market, particularly for smaller business.
The pros of exporting to Europe
For young businesses, the European market can offer a number of distinct advantages over countries such as China or Brazil. One pull factor is the access to a huge pool of potential consumers and businesses. According to figures published by the EU statistics agency Eurostat, the combined population of member states stood at 503 million in 2013. This figure is likely to grow, due to factors such as immigration and new member countries. Although there are significant economic imbalances within the EU, exporters are generally looking at a market comprised of affluent and/or aspirant consumers and well-regulated businesses.
The key to tapping into this pool of customers is the single market and, in particular, the benign rules governing import/export duties and VAT. The BCC survey found that UK businesses saw market barriers as the greatest obstacle to export success and the main barriers have been progressively dismantled within the EU.
For instance, goods exported from one EU member state to another are not subject to duty. In contrast, Brazil imposes import duties as high as 35 per cent to protect local manufacturers, which essentially means imported goods will be more expensive than locally made equivalents. Thus companies aiming to export must position themselves in the luxury market – a route taken by clothes retailer Top Shop – manufacture locally, or find a niche that isn’t served by domestic suppliers.
When it comes to dealing with VAT, this is relatively simple for business operating within the EU: when you sell to European consumers or VAT-registered businesses you can record the transactions on your own tax return forms. However, when selling to individuals or non-VAT-registered businesses, tax is charged at the UK rate. When selling to a VAT-registered company elsewhere in Europe, that company will pay tax at the local rate.
While the introduction of the Euro has undoubtedly caused problems, it has also arguably made things a little simpler for UK exporters, or indeed anyone trading within the EU. Currency fluctuations can cause immense problems for exporters but the advent of the Euro means that most British companies are managing exchange rate risks across a single foreign currency.
Going the distance
There are other advantages too. The largest export markets – such as France and Germany – are close at hand and are served by a good transport infrastructure. One of the key questions facing every exporter is whether the price charged for goods will justify the cost of shipping to overseas customers. The relative proximity of Europe’s largest economies, coupled with a benign duty regime and simplified shipping documentation, makes it easier to keep transport and administrative costs under control.
At a macro level, the UK’s main exports to Europe are chemical products, pharmaceuticals, machinery, aerospace products and electrical equipment, but the key for small companies is to find a niche or an untapped opportunity.
For instance, in its Export Manual: Exporting to Europe, an introduction, the Confederation of British Industry (CBI) noted major social changes in Europe that were in turn creating new market opportunities. These included the ageing indigenous population (creating demand for healthcare and financial products), a rising immigrant population (with a taste for different foods and products) the environmental agenda, rising numbers of one- or two-member households (creating the need for new products and services) and the greater financial independence of women.
Other consumer trends cited by the CBI were a desire for uniqueness, increasing health consciousness, a rising awareness of fair trade issues and a demand for convenience products. If there’s a common thread, it is simply that the social/demographic landscape and patterns of customer demand are changing all the time – an environment that suits agile, entrepreneurial companies.
Arguably the biggest disadvantage of entering a mature market such as France or Germany is the degree of competition from rivals selling products in the same market sector. Even in less mature corners of the EU there will be competition, not only from local players but also from businesses elsewhere on the continent.
Europe is a well-trodden path and trade is lubricated by single market rules, but there are still ample opportunities. Businesses need to thoroughly research the market and understand how their own USPs, pricing and positioning will work in their chosen overseas territory.
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