Making the most of US markets

Source: Economist Intelligence Unit

See how British businesses can capitalise on new aspects of the “special relationship”.

It’s best to pick one well-connected (US) location and establish other satellites after that.

The “special relationship” between the US and UK has acquired new momentum among Britain’s entrepreneurs recently. Over half (55%) of UK small and medium sized enterprises (SMEs) that export abroad count the US among their markets, making the US their top export destination, according to a 2014 survey.i

The UK’s Department of Trade and Investment (UKTI) calculates that in 2012, 17% of all British exports went to the USii and that figure looks set to increase. While the UKTI has no precise figures on SMEs, demand among firms receiving export help from the department during 2013-14 rose most rapidly among those seeking to trade in the US – an increase of 51%.iii So far in 2014, the sectors receiving the most help from UKTI were consumer and industrial goods, oil and gas, information and communications technology, and advanced engineering – with biotech and creative media firms following closely behind.

The economic and cultural factors promoting UK exports to the US are clear. The US is the world’s largest market, has the world’s biggest private sector, and poses few linguistic problems for UK exporters. “The barriers to entry compared to Asia, for example, linguistically and culturally – at the human level and in business terms – are very low,” says Ben Halford, chief executive of the British production technology company Surface Generation. “From that perspective, exporting to the US is a very easy step for UK SMEs.”

Surface Generation sells technology that improves manufacturing techniques, and an important part of its service involves training customers in multinational corporations to apply the technology in their home countries. While the company was able to do some of that training via teleconferencing, it found that many US customers wanted Surface Generation’s experts on site.

As a result, Surface Generation opened an office in Texas, which Mr. Halford says has a regulatory regime for the aeronautical, automotive and consumer electronics sectors that is similar to the one in the UK. He is planning to open a second US office, and is looking far afield of Texas. “You have to have a good presence in the States on both the East and West coasts to do well,” he says. “It’s best to pick one well-connected location and establish other satellites after that.”

As Surface Generation expands its presence in both the US and Asia, it has decided to quote prices in dollars in those markets, and to buy in dollars from its suppliers worldwide wherever possible. While invoicing its clients in dollars poses an exchange rate risk when the company repatriates revenues to the UK, Mr. Halford says the decision to purchase in dollars significantly reduces the company’s exposure to currency fluctuations when it sells in the US.

As for many other UK SMEs, the biggest attraction of the US market is its sheer size. “Investment in technology is done on a different scale in the US,” he says. “That requires UK SMEs not to think on too small a scale. We can be too niche at times. UK SMEs need to scale up and get on with it.”

The US market poses major challenges as well as big opportunities. UKTI says that typical barriers for UK SMEs looking to export to the US include strong competition, high customer service expectations, high cost of business insurance, and a cumbersome process for obtaining work visas. In addition, due to their smaller size SMEs are more burdened than their larger counterparts by technical and non-tariff barriers, according Allie Renison, Head of Europe and Trade Policy at the UK Institute of Directors (IoD). Those barriers can include complex customs procedures, duplicate safety testing of certain products – such as food and clothing – and complying with different EU and US product standards.

The proposed Transatlantic Trade and Investment Partnership (TTIP) between the US and the European Union may reduce such trade barriers by harmonising processes and reducing customs duty charges. The economic benefit to Europe could reach €119bn a year by 2027, according to research done by the Centre for Economic Policy Research on behalf of the European Commission.iv Of that amount, the Centre estimates that €25bn could come from lower tariffs, and the rest from reducing technical and non-tariff barriers.

According to the IoD’s research, UK SMEs in the textile, food and drink, logistics and pharmaceutical industries all stand to benefit hugely from TTIP. For example, small and mid-sized clothing manufacturers are leading a revival in niche fashion markets, but face import duties of up to 40% on some products. In the biomedical sector, UK SMEs include producers of innovative technologies which suffer from differences between US and UK safety testing requirements. As the UK and the US do not recognise each other’s testing procedures, these businesses typically must test their products twice to satisfy the separate requirements.

Such agreements could make the US an even more popular destination for UK businesses, Ms. Renison says. “There are entrepreneurs who have thought about exporting to the US and have decided it is too time-consuming and too cumbersome,” she adds. “TTIP could encourage many of those businesses to think again.”

i “US tops export destination list for UK SMEs,” Opinium Research for Barclays Business in August 2014
ii “Exporting to the USA,” UKTI, April 2014
iii “Firms receiving government support increases by 50%,” UKTI, October 2014
iv “Reducing Transatlantic Barriers to Trade and Investment: An Economic Assessment,” March 2013, Centre for Economic Policy Research

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