Trends Among British SME Importers & Exporters.

A HiFX Research Publication - 1st Quarter 2011

Executive Summary
Volatility in the foreign exchange markets over the last 12 months has left currency developments. A range of political and economic pressures across Britains small business importers and exporters struggling to keep track of the globe created major fluctuations in many currencies during the year, before the credit crunch.

with no sign of stabilisation to the predictable levels that were common

Small and medium-sized firms trading with global partners remain HiFX set out to discover just what challenges Britains smaller exporters

particularly exposed to shifts in currency value. As 2010 came to a close, and importers had faced during the year, how they had managed their companies against the backdrop of ongoing exchange movements, and businesses and the foreign exchange facilities that serve them. what their hopes and needs were for the future, both in terms of their

Many of the results painted a surprisingly positive picture. Most SME bosses are confident about the prospects for their business for the coming year, though almost half admitted that exchange rate volatility had a

negative impact on their operation. The greatest worry amongst business owners for 2011 was reduced demand for a firms goods or services, currencies. followed by concerns about the strength of the pound against other

What is clear is that business owners are very busy and have limited time considering using any foreign exchange facilities, people running small and

and resources to keep up-to-date with currency movements. When medium businesses say that they most value getting competitive rates via transactions easily online.

a medium that is quick and simple to use, with the ability to carry out most

Chris Towner HiFX Plc

Director, FX Advisory Services

Introduction
A range of global factors influenced foreign exchange in 2010, with the result that the three main currency units of primary interest to UK businesses Sterling, the US Dollar and the Euro - each took it in turns to be the whipping boy of the currency markets throughout the year. US Dollar Despite the Federal Reserves efforts to inject liquidity into the US system, growing unemployment in the United States meant that the economy there failed to make any significant recovery and the dollar weakened against the pound in the second half of the year. Sterling The political uncertainty around Britains General Election in May and the resulting Liberal Democrat-Conservative coalition, the announcement of swingeing cuts to the UKs public sector and, latterly, feared exposure of the British banks to the Irish debt crisis saw many investors steering clear of sterling at different points in the year. Euro The Eurozone saw particularly dramatic change throughout 2010, with sovereign debt crises in Greece, Ireland and other key states knocking confidence and undermining economic stability, leading some alarmists to predict the demise of the European currency itself. Certainly, the Euro suffered during the year, looking weak against both the pound and the dollar at key points throughout the year. Such volatility defined foreign exchange in 2010 and looks set to continue into the new decade. For business owners the challenge is to keep up with fluctuations in key currencies while minimising the impact on the economic health of their operation. The issue is one that cannot be ignored by many SMEs some estimates suggest that as much as 60 per cent of the UKs international trade is still conducted with the European Union. Trade certainly remains of vital importance to a great many UK-based businesses.

The World Trade Organisation estimates that Britain is the worlds second largest exporter and third largest importer of commercial services.
The greatest proportion of businesses are exposed to the Euro (76 per cent). The US dollar is the second most common currency with which UK businesses have contact (68 per cent).

British SME Foreign Exchange Exposure

The average British SME with exposure to foreign exchange has a turnover of up to 500,000 (36 per cent) and an FX exposure of less than 250,000.
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 0 to 500k 501k to 999k 1M to 5M 8M to 10M 11M to 30M 30M + 61% 39% 23% 23% 12% 92% 35% 33% 38% 1% 1% 23% 1% 1% 15% 2%

7%

10% 24% 10% 13%

35%

12%

18%

25% 10%

24%

12%

Less Than 250k

250k to 999,999

1-4,999,999M

5-9,999,999M

10-19,999,999M

20M +

The UK also ranks as the globes tenth largest exporter and sixth largest importer of merchandise. The HiFX research sought to create a snapshot of UK importers and exporters, how much they earn, in which sectors they operate and how great their exposure is to currency changes. Unsurprisingly, manufacturing and engineering are the sectors most engaged in import and export and, therefore, foreign exchange, with 13 per cent of those polled operating in these fields.

48% 65% 29% 51%

Key Findings

of UK SMEs have been negatively affected in the past 12 months by currency fluctuations

SME Import / Export by Industry Sector

13% 32%

of business owners are confident about their companys prospects in 2011 despite the ongoing uncertainty about the economy at home.

8%

8%

of companies reported that currency shifts had had a positive impact on their profitability in 2010.

4% 7% 4% 13%
Financial and Professional services Media and Marketing Leisure Services Construction Retail Engineering / Manufacturing Property Telecoms & IT Other

11%

of UK based importers however stated that exchange rate movements had negatively impacted their business during the last 12 months.

1 in 10

importers have cut imports in order to reduce their exposure to exchange rate volatility.

Importing and paying suppliers is the most common reason for businesses engaging in foreign exchange transactions 58 per cent use currency services for this purpose. About 43 per cent give exporting or repatriating foreign income as their reason for using foreign exchange.

Almost half of firms (48 per cent) have been negatively affected in the past year by currency fluctuations...
...with those operating in banking and financial services particularly badly hit. Other sectors upon which foreign exchange has had a negative impact in the past year include construction, media & marketing, telecoms & IT and finance & professional services.

Impact of exchange rate volatility on SMEs by industry sector?

Other Media and Marketing Leisure Services Retail Property Construction Engineering / Manufacturing Financial & Professional Services Telecoms & IT
0%
17%

23%

19%

58%

36%

32%

32%

36%

7%

58%

36%

14%

51%

Positively affected by exchange rate volatility

35%

30%

35%

Not affected by exchange rate volatility Negatively affected by exchange rate volatility

29%

17%

54%

29%

24%

47%

25%

31%

43%

25%

53%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

It was not all bad news, however, and for some companies currency shifts worked in their favour in 2010. For almost a third of firms (29 per cent) swings in foreign exchange had a positive effect on their operations in the last year- 41 per cent of companies engaged in retail and 28 per cent of those in engineering and manufacturing. When comparing the respective worries of importers and exporters, the strength of sterling was of almost equal concern to both groups over the last year, with 52 per cent of importers and 40 per cent of exporters preoccupied by the pounds value against other currencies. A proportion of both groups had been positively affected by exchange rate volatility. Almost a third (28 per cent) of importers and 35 per cent of exporters say that exchange rate volatility worked in their favour . More than half (51 per cent) of those who import into the UK say that currency movements have negatively affected their business during the last 12 months, compared to 43 per cent of exporters. Worryingly, more than one in ten (11 per cent) of importers have cut imports in order to reduce their exposure to exchange rate volatility going forward and to cut costs on international payments. This compares to just two per cent of exporters who have taken such drastic action. Amongst both importing and exporting firms, about one company in five (19 per cent) instead preferred to cut costs elsewhere in the business to mitigate the effects of currency movements. Exporters proved more likely to have taken no action at all to reduce the impact of foreign exchange on their operations four out of ten had made no moves to reduce their exposure to shifts in currency. Just over a third (34 per cent) of importers had been similarly lax in their approach, though they were more likely to compare the exchange rates offered by different providers than their exporting peers.

Business confidence and expectations for 2011

Despite ongoing uncertainty about the economy at home and currency fluctuations further afield, most business owners retain a largely positive attitude.

More than six out of ten bosses (65 per cent) are confident about their companys prospective business performance in 2011...
...with 11 per cent being very confident. In contrast, 19 per cent are not confident for the year ahead in business terms. Those in manufacturing and engineering have a largely rosy outlook, with 71 per cent being confident. Financial & professional services are not far behind, with 69 per cent of firms operating in this sector describing themselves as confident about prospects for the next 12 months. Those working in the retail sector are less certain, with 58 per cent confident and a fifth (20 per cent) not confident for 2011.

SME confidence for the year ahead

1% 18%

5% 11%

Very confident Confident Not confident Very unconfident Neither confident or not confident

65%

The most common concern amongst business owners when looking forward is a possible reduced demand for their firms goods or services in the year ahead. After this, 45 per cent are worried about the strength of sterling, 43 per cent are concerned about winning new business, and 31 per cent are preoccupied by the cost of banking and business services.

When considering the potential impact of further currency fluctuations in 2011, about a third of firms (30 per cent) expect to benefit from foreign exchange shifts in the coming 12 months, while 43 per cent are less positive and anticipate that any currency changes will have a negative effect on their operation during the year ahead.
Comparing importers and exporters, the same proportion anticipated that currency fluctuations would set back their operations in 2011, about 44 per cent in each case. What SME owners want from foreign exchange and how they mitigate currency risk Despite almost half of bosses claiming that currency shifts had already made a negative impression on their businesses, more than a third (37 per cent) had done nothing at all to mitigate the risks posed by foreign exchange. However, a third of companies now shop around to see the rates offered by different providers, 17 per cent use an online international payments service, while 14 per cent have introduced cost cutting measures elsewhere in their business to counteract the cost of foreign exchange exposure. About 12 per cent have sought advice from a currency specialist to get tips on hedging their risk.

Measures taken by SMEs to mitigate the effects of FX rate volatility

40% 35% 30% 25% 20% 15% 10% 5% 0%

% using measures to mitigate FX volatility

None Compare the exchange rates offered by different providers Use an online international payments service Sought external advice from a currency specialist Reduced imports Reduced exports Other cost cutting measures

More than half (56 per cent) of SMEs turn to the facilities offered by the bank where they keep their businesss account when looking for a foreign exchange service. About 14 per cent compare their banks offering with an external currency broker before doing business, and 11 per cent shop around between banks to get the best deal on rates. Only six per cent use the service of just one currency broker and another six per cent compare the rates offered by a number of currency brokers before settling for a deal.

Key Findings

45% 37% 14%

of business owners are worried about the strength of sterling in the next 12 months.

How SMEs manage their foreign exchange requirements

6% 6%

5%

1% 57%

of SME bosses had done nothing to mitigate the risks posed by foreign exchange despite almost a half claiming that currency shifts had negatively impacted their businesses.

11%

have had to introduce cost cutting measures as a result of losses due to negative exchange rate movements.

56%
14%

of UK SMEs do not compare the exchange rates offered by their bank with those of a currency specialist.

48%
want the facility payments online to

make

international

We only use our bank We compare the rates offered by my bank with those of a currency broker We contact a number of banks to compare the rates We contact one currency broker We compare the rates offered by a number of a currency brokers We use an online international payments specialist Other

When choosing a currency service, cost and convenience came out as the most important factors for business owners. More than six out of ten (62 per cent) think that excellent exchange rates are very important. Almost half want facilities to be simple and easy to use.

48 per cent most want to be able to make international payments online.

About four out of ten (41 per cent) put not being charged for making payments as their top priority, and 28 per cent are most keen on having 24-hour access to a currency service.

SME foreign exchange service requirements

Simple and easy to use

Access to a team of analysis who provide market information tailored to your business

No fees or charges for making payments

1 - Not important at all

Access to a range of products

2 3 4 5 - Very important

24 hour access

Ability to make international payments online

Excellent exchange rates

A reactive service - they only act on my instruction

A proactive service - my eyes and ears in the market and contact me pro actively

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

HiFX commissioned market researchers Opinium Research to question 535 key financial decision makers within SMEs that have exposure to foreign exchange. The survey was conducted from late November until early December 2010.

For more information please contact: Mark Bodega

01753 751776

mark.bodega@hifx.co.uk