Insight & Analysis

Keep calm… and carry on: international growing pains in the spotlight

Person holding globe with the city blurred in the background during sunset

Geopolitics continues in its turbulent fashion with no sign of sense prevailing any time soon. How does this translate for the average mid-sized business heading overseas? This survey provides insight into how mid-corporate fears and hopes play out.

Despite a number of international flashpoints, the German-based SME sector continues to focus on internationalisation. A bit too localised for most readers? Well, the results of the 19th survey by the Unternehmerperspektiven initiative – “How safe are the markets? Managing risks in international business” – identifies political and economic reasons for the changing internationalisation of the SME sector, many of which translate into the wider corporate community.

Of the 2,000 companies surveyed between November 2018 and February 2019, 52% are exporters, with most exporting into the Eurozone. Nearly half of surveyed companies say they fear negative impact from global trade conflicts. Geopolitical turbulence is changing trust in trading partners, with exporters moving to China, North America, and Africa.

Almost two thirds of those surveyed expect there to be less planning security in the next two years, and 61% expect a gloomier economic outlook. The reasons for this are political and economic uncertainty. Some 47% regard the increasing global trade conflicts as being negative for their own business activity, whilst 35% regard a ‘possible Brexit’ as negative. Companies in the SME sector currently assess China as being a more reliable trading partner than the USA or Great Britain (30% versus 17% and 8% respectively).

It appears that SMEs with an annual turnover of up to €15m are concentrating in their expansion on their core products (63%). For 44%, the focus is on the EU single market; just under half (48%) hedge against payment and default risks.

Companies with an annual turnover of more than €100m are stepping up their own innovation efforts (78%) and are digitising products and processes (79%). Some 67% of these companies hedge against payment and default risks.

The amended internationalisation strategies of exporting companies are impacting on the choice of foreign markets. New markets are to be found overseas, such as in India and North America, for 14%; 12% plan on expanding to China. More production facilities are being transferred most frequently to China (31%), also to countries within ASEAN (11%), and to Poland (11%).

The majority of demands when going abroad can be found operationally, with 77% stating that bureaucracy is a problem when doing business in new markets. Price fluctuations with raw materials (57%) and import duties (54%) pose additional hurdles.

Bank advice is expected when exporting, with nearly half of the respondents expecting an assessment of risks with international business, and 45% expecting the provision of information on foreign markets.

What treasurers can do next

The report offers advice on how to tackle the risks of internationalisation:

Consider hedging against currency and default risks.

Around 50% of companies exporting abroad hedge against default and payment risks. When it comes to hedging against currency and raw material risks the proportion is lower. Companies uncertain of how to proceed should seek the advice of successful exporters, with a higher proportion of large and successful companies using hedges to offset risk.

Seek support from chambers of foreign trade.

The comparison of exporting companies with those who are still hesitating, although they have potential, shows. The operational obstacles when doing business abroad are overestimated. Chambers of foreign trade are on hand to offer help and advice when it comes to country-specific issues. They can help assuage the concerns of companies at a practical level and provide assistance.”

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