Global trade after Brexit: Say hello wave goodbye?

Jim Thomson has just arrived in Zurich from St Moritz, the luxury ski resort and Swiss Alpine playground of the rather rich and frequently famous and has been FaceTiming his son Ewan, Hawico Scotland’s managing director who is in Seoul and his daughter Philippa, head of product development and design and based in Milan.

It all sounds like fun, but for Thomson, who has been commuting to such elevated destinations for as long as some of us have been taking the 7.30am to Glasgow or Edinburgh, it’s very much business, for all the family.

The chairman of the Borders cashmere retailer depends on 80 per cent of its business from export. Initially, he says, this was to other brands, such as Chanel, Dior and similar big names, but for the past 20 years the company has developed its own brand in retail outlets in the UK and overseas.

Over £750 million is generated every year by Scottish fashions and textiles, which have long been highly regarded by a client list that includes Gucci, Louis Vuitton and YSL, so taking on these names was a bold strategy for Hawico – as was the decision to start up independently in Japan rather than expand via a trade partnership with a local company.

Thomson agrees that this was initially a daunting proposition. “The reaction when I told some people was that I was mad to take such a risk – with predictions that we would go bust in six months. Some of the main issues that we faced were the initial cost (it involved massive deposits on rent) and staffing, as the customer service expectation levels in Japan are way ahead of Europe; where we expect two people in a shop, they want five.

“Nevertheless, it was a fascinating learning curve. We made a very small loss in the first year but got through it and the challenge now is taking it to the next level, which will involve further investment.”

Knowing when to persist in a market and when to strategically retreat, he says, is something that is only gained through experience. “What we do is essentially quite simple but we have built it up over two decades,” says Thomson, pointing out that you can’t turn up at a trade show on a whim and hope to strike a deal or open a shop overseas.

“We run some eight companies under the Hawick Cashmere umbrella and accountants, lawyers and employee obligations all differ from place to place.”

Despite the challenges he agrees, though, that with the FaceTime calls plus improved – and – cheaper transport links, the potential for smaller companies entering the export market is always improving. “We’re in transit a lot of the time but communications are dramatically different and you can now fly to places for hundreds rather than thousands of pounds. The cost of a British Airways shuttle from London to Edinburgh was £250 25 years ago; now we can fly directly to Milan for that.”

Neil Francis, International Operations Director at Scottish Development International, which has offices in some 20 locations around the world, concurs, saying that the agency has worked with more than 4,000 Scottish companies to help them start exporting or developing their business overseas. “SMEs have been encouraged by the trends which have come from globalisation, including the internet, which can mean that making those first contacts is easier than ever for smaller companies,” he says.

“Historically, Scotland depends for its international sales on high export sales from a relatively low number of companies: around 100 companies account for 60 per cent of Scotland’s export sales so it’s important to both keep growing overseas sales and help more companies participate in exporting.”

There have, he adds, been positive changes. In 2015, export sales grew 3.6 per cent from the previous year to an annual total of £28.7 billion, excluding oil and gas, with an increase in the number of exporters.

Scottish Enterprise, says Francis, has one-to-one relationships with more than 2,000 growth companies with SDI trade advisers being members of the account team of advisers and specialists brought together to support these businesses.

“Their involvement varies depending on what the company requires, but support on exporting will always be available to an account managed company.”

He emphasises that SDI supports any Scottish company which wants to explore exporting – or increase its overseas sales or profitability.

One of these is Pinnacle Business Solutions, a company founded in Nairn 22 years ago and which provides software solutions to the global engineering and construction sector and protects the intellectual property (IP) assets within the business. It has focused on the Middle East Market, says director Eric Cordiner, who noting the decline in North Sea oil and gas activity looked for expansion in the Gulf states.

Cordiner enthuses about the prospects for companies such as his in the region: “The Middle East is a great place to do business and for us it was the gateway to the rest of the world. It’s very accessible. The people are extremely easy to deal with and there is far less red tape than you’ll find in some other parts of the world in terms of getting business.

“We found that we’re dealing with some very large international companies through Dubai and we don’t have to go through any extensive tendering selection process. We’re winning work through our good references and demonstrating the ability to provide a good service.”

Pinnacle was introduced to Highlands and Islands Enterprise (HIE) through its Innovate Your Business Programme in 2014 – one which included advice on strategy and marketing, website and branding development to new product development, then benefited from an Extended Diagnostics Review offered by the Scottish Manufacturing Advisory Service which, Cordiner says, led to better customer relationship management experience.

Operating in the Middle East is, of course, not without its obvious challenges.

“The first is to recognise different time zones. You’ve got a three or four-hour time difference between the UK and the Middle East, depending on whether it’s summer or winter. Plus, it’s also a different working week. Most of the companies we deal with adhere to the Muslim week with Friday being the day off – and Sunday, effectively, is Monday – so be prepared to start work on a Sunday morning, rather than a Monday morning.

“The other thing of course is that a lot of the companies we’re dealing with in the Middle East are based in the United Arab Emirates, which is a tax-free zone. Therefore, as a company operating in the UK paying our fair share of taxes, we’re dealing with competitors in the Middle East who don’t pay taxes, so that’s an issue that we have to work with.

Meanwhile, the Middle East, Far East and US remain huge destinations for some of Scotland’s most popular exports – whisky and salmon, with sales of fresh salmon of more than £213 million in the US alone. Other Scottish seafood is also greatly sought after in export markets, as are products such as shortbread and jam. The value of Scotch whisky exports grew in 2016 for the first time since 2012, and increased by 3.3 per cent to £3.98bn.

These, like many other sectors of course, face two unprecedented areas of unpredictability: the prospect of export tariffs being raised by an increasingly insular US market following the election of President Trump and the as yet unknown outcome of the Brexit referendum, which is looming with the triggering this month of Article 50.

Hawico’s Jim Thomson makes the point succinctly: “I drove from Switzerland to Italy this week and sat at the border for 25 minutes. We’ve got used over the years to moving freely through borders and if the whole of Europe is now going to be like that for UK citizens it’s certainly going to make it more difficult moving products or people around – and that’s not good for business.”

However, all is not gloom in the current climate, according to Will McIntosh, lead partner, international, at major law firm Brodies. The fall in the value of sterling after the Brexit referendum, he points out, has seen clients seeking to increase their export markets.

Cross-border activity has included overseas companies and private equity funds looking to acquire companies. “Our own experience is that the bulk of our deals have involved international participants, with nearly 60 per cent by value of all corporate deals in 2016 involving overseas parties; the top 10 deals representing over 92 per cent of the value of corporate deals and 70 per cent of the top ten deals involving overseas parties/buyers.”

 The reasons, he says, include the value represented by the UK in view of the current sterling rate, and also the fact that most of the targets are largely unaffected by Brexit, as they either represent UK market-leaders or already serve an international market (i.e. their income stream is already diverse). It is also a reflection of the fact that valuations have got quite high in the main economic hubs including London, California and so on, whereas there remain better value deals in less chartered areas outside these hubs.

 He adds that the firm has seen a number of clients with strong international markets – in the life sciences and medical devices sectors – directly benefit from the fall in sterling, where the pound equivalent increase in earning has added over 10 per cent to the bottom line.

“Some have been increasing their distributor and agent coverage; others have been looking at setting up overseas subsidiaries, including within the rest of the EU.

“These are merely short-term drivers for exports and internationalisation; but our observation is that this is part of a longer-term trend, as Scottish companies mature in their international outlook and bring in the skills sets to help them reach export markets. The Scottish Government has put internationalisation at the fore with a view to growing Scotland’s economy and looking to build on that trend and the service sector (ignoring financial services) and technology-led sector are where there remains greatest potential for further growth.”

So while the challenges are clearly formidable – and with two thirds of Britain’s trade with the EU or countries that have some sort of preferential deal with the UK, Scottish exporters will be hoping that the UK government can reach the same free trade deals with 53 countries that it has at present as part of the EU.

As Jim Thompson says: “We have to use our brains and play to our strengths. Things will change but you have to face crossroads sometimes and make hard decisions.”