Keep Calm and Carry On Selling

Despite the understandable concern on Irish shores about the UK’s decision to leave the EU, our nearest neighbour will remain a natural first market for Irish exporters. Enterprise Ireland’s manager for the UK and Northern Europe, Marina Donohoe outlines the opportunities.

 

Enterprise Ireland manager for UK and Northern Euurope, Marina DonohoeThe UK economy will still be the fifth largest in the world by nominal GDP, with a population of around 65 million— some 14 times the size of Ireland’s. It will still be our closest trading partner by geography— sharing a language and a similar business culture— and it will still have that openness to goods and services from Ireland borne of our strong cultural relationship.

While strategies to offset whatever consequences arise from the UK vote are advisable, businesses in Ireland would be missing a trick if they discounted the UK market.

In fact, Enterprise Ireland has identified seven key opportunities for Irish companies based on UK government initiatives and evidence of sectoral growth:

 

  1. The National Infrastructure Delivery Plan
  2. The Northern Powerhouse Agenda
  3. Scottish Government Investment Plan
  4. National Health Service’s ‘Five Year Forward View’
  5. Water market
  6. Financial services/Fintech
  7. Aerospace

 

National Infrastructure Delivery Plan (NIDP)

The NIDP envisages £503 billion of investment in 339 infrastructure projects across all sectors in the UK to 2021 and beyond. Irish companies are operating in these sectors already and there are huge opportunities such as:

 

Northern Powerhouse

The Northern Powerhouse is an initiative to address a constellation of issues surrounding economic growth and productivity in the North of England.

The UK government intends to spend £134 billion, 32% of which will be spent in Northern England. The goal is to rebalance the country’s economy and establish the North as a global powerhouse.

Cities include Liverpool, Leeds, Sheffield, Newcastle and Hull, as well as regions such as Cumbria, Lancashire, Cheshire, North Yorkshire and the Tees Valley.

The opportunity for Ireland lies in supporting initiatives in road, rail, freight, aerospace and skills development. Key deliverables include improving freight capacity, and road and rail infrastructure. For example, the HS2 high speed train network alone will cost £55.7 billion.

 

Scottish Government Investment Plan

Enterprise Ireland continues to have a strong geographical focus within the Scottish market. Holyrood has highlighted the strategic, large-scale investments it intends to take forward across a number of key sectors over the next 10 to 20 years. Key areas of investment which will provide opportunity for Enterprise Ireland clients include energy, water and housing.

 

National Health Service (NHS)

Despite the political and economic uncertainty the healthcare sector has remained strong over the last 12 months. An ageing population, improved diagnosis and an ever-changing world of assistive and diagnostic technologies have all ensured the sector’s appeal to client companies.

The NHS is rife with opportunities as the funding gap is set to widen to £30 billion by 2021. The NHS needs to deliver £22 billion in efficiency savings to try and offset this figure, with a lot of this being driven by a focus on digitising as much of the landscape. Our Digital Health and Health IT webinar provides expert insights into procurement pathways and winning business with the NHS, watch it here. Although the private healthcare market is also growing (currently around £4.5 billion) it pales in comparison to the £107 billion NHS budget.

 

Water market opportunity

UK water utilities are planning a total expenditure of £41 billion between 2015 and 2020. Enterprise Ireland is working with UK and global buyers who have access to this opportunity and could also prove to be a stepping stone to international projects. Our podcast on the impact of Covid-19 on the water sector and the emerging opportunities for supply chain companies is available here.

 

Financial services/Fintech

With over 250 foreign banks; expertise across retail banking; insurance; capital markets; bonds; equities; currency; payments; regulation; and sector-specific advisory, legal and professional services, the breadth of the UK financial services sector is huge. The sector employs 2.2 million people in the UK. It is a truly global centre of expertise and one that will continue to offer opportunity for Irish fintech companies after the UK exits the EU.

Opportunities will emerge as the negotiations get under way, particularly for legal, advisory, professional services and IT solutions providers, as UK firms may seek new structures around regulation, compliance, currency handling, money laundering and data handling.

This is a sector Enterprise Ireland has been working in for many years and, as new opportunities unfold, we are well placed with high level contacts to introduce our clients to key decision makers.

 

Aerospace

UK Aerospace industry captures 17% of the global market and is considered the largest player in Europe and second globally after the US. Aerospace is vastly outperforming the wider UK economy with productivity up 30% over the past five years, compared with the national average of 2%. Though heavily impacted as a result of Covid-19, the Aerospace Growth Partnership (AGP), industry and government are working together to ensure the UK is well placed for future growth opportunities. Investment in skills, technology and the competitiveness of the UK supply base is supporting this.

 

Internet of Things (IoT)

Enterprise Ireland is reacting to opportunities emerging outside of these seven key sectors too. In particular, we are responding to the growth of IoT technologies. The UK has some of the best equipment (mobiles, tablets, computers) usage rate projections in the world. The main growth areas are artificial intelligence, big data, smart cities, connected homes, transportation, health, manufacturing and smart grid for electricity.

IoT is clearly a massive growth market and as a result a source of business opportunities for Irish companies.

 

For latest news on UK opportunities visit Evolve UK.

Customs Valuation

Determining the customs value of your products

The application of import duty is based on the customs value of the goods involved, and this is calculated by combining the invoice price with all freight, insurance and certain other costs incurred up to the point of import. This is called the Transaction Value method.

The costs that must be included are commissions and brokerage, except buying commissions; packing and container costs and charges; assists such as tools and dies and graphics and artwork used in the production that has taken place outside the EU; royalties and licence fees payable to any company as part of the sale; the cost of transport, insurance and related charges up to the point of importation.

This means that the transport of goods incurred for moving goods from one EU member to another following import is not included in the value for customs purposes.

 

Example using the Transaction Value method:
Irish Importers Ltd is importing 20 pallets of plastic bottle caps from China.
Irish Importers Ltd is responsible for all charges including duty.
Invoice Value: €60,500.00
Cost of Freight to the point of import into EU: €3,400.00
Cost of Insurance to the point of import into the EU: €550.00
Value = Invoice Value + Cost of Freight + Cost of Insurance
= €60,500 + €3,400 + €550
= €64,450

 

Alternative Methods of Valuation

There are cases where there is no invoice price, however, and a number of alternative methods have been developed for calculating the value of goods in these circumstances. This may arise where goods are being shipped from a subsidiary located outside the EU or which have been manufactured by an outsourcing partner outside the EU for subsequent sale in the EU.

Even if invoices exist in these cases, the transaction may not necessarily have taken place on an arm’s length basis and if the invoice price is not an arm’s length price, it will not be accepted as the basis for valuation for customs purposes.

The first alternative method of valuation is the Transaction Value of Identical Goods. This is obtained by finding the value of identical goods which have been declared recently.

If it is not possible to find identical goods, it is acceptable to use the Transaction Value of Similar Goods – not exactly the same, but similar enough to offer a good benchmark.

The next method is known as Deductive Value and, as the name suggests, involves taking the sale price of the goods in the EU and deducting the transport and other costs incurred within the EU post-import.

 

The Computed Value

The next method is possibly the most complex. It is known as Computed Value and determines the customs value on the basis of the cost of production of the goods being valued, plus an amount for profit and general expenses usually reflected in sales from the country of export to the country of import of goods of the same class or kind. In other words, it requires research into the cost of production of similar goods in the country of origin and the application of overheads associated with exports from that country.

 

 

The Derivative Method

Should all these methods fail, the Derivative Method is used. This sees the customs authority in the country of import determine a value “using reasonable means consistent with the principles and general provisions of the Agreement and of Article VII of GATT, and on the basis of data available in the country of import”. The valuation is usually based on previous experience of similar cases.

In the very rare cases that none of these methods work, the World Trade Organization (WTO) provides other ways of calculating a valuation.


Getting Your Valuation Right

Clearly, the most straightforward way of calculating valuation is the first method – the price on the invoice and all of the costs involved in getting the goods to the EU. There can be some confusion in relation to this method, however, and importers should ensure that they include all insurance and transport costs.

For example, there can be a mistaken belief that because insurance continues within the EU following import, the cost should not apply – this is not the case. There can also be issues relating to e-commerce, where the full postage or freight costs are not included in the value of the goods ordered from outside the EU. These issues can result in surcharges and costly and frustrating delays, and importers should do their best to avoid them.

Please note that the customs value can never be zero.

 

If you would like to learn more about valuation, register for the Customs Insights Course. Further information can also be found on Revenue or the European Commission websites.

 

Brexit and managing currency risk

Although the final outcome of Brexit is uncertain, the sterling and euro volatility remains a key concern and challenge for Irish businesses

 

Enterprise Ireland’s Brexit Unit is supporting companies to better understand the financial implications of currency fluctuations on their business and take the necessary actions to mitigate against this risk. The following questions cover the key issues related to the management of currency risk and are addressed by John Finn of Treasury Solutions.

 

I’m an Irish company exporting to the UK. How can I analyse the impact of movements in sterling/euro on my business?

For Irish companies exporting to the UK, the Enterprise Ireland Currency Impact Calculator can help you understand the effect of movements in the sterling/euro exchange rate on your business. This online tool is freely available and demonstrates what an adverse change in exchange rates would have on your business profitability.

 

Will my bank permit me to hedge my foreign currency exposures?

For an exporter to hedge its currency risk, in the first instance, it must first have a foreign exchange line of credit from the bank. This must be formally sought in advance prior to its use and, from the bank’s perspective, it is the equivalent of making a loan application i.e. it requires credit approval.

 

What instruments will the bank permit me to use to manage foreign currency risk?

For the most part, this is restricted to either spot or forward transactions. The former implies selling sterling at the current market rate.

As a general rule, spot deals settle in two days’ time ie agree a rate on Monday with funds transferring on Wednesday. In the case of forward foreign exchange contracts, a rate can be agreed today to apply to receipts on a future date.

The advantage of this instrument is that an exporter can bring certainty to the amount of euro that it will receive in return for a specified amount of sterling at this stated future date.

The primary disadvantage is that there is no opportunity to share in any upside in any currency movement.

In order to achieve that objective, it is possible to purchase an instrument known as a foreign exchange option. However caution is urged; it is an extremely useful instrument to utilise in managing foreign exchange risk, but it needs to be constructed appropriately. In essence, it is an insurance product for which the purchaser pays a premium and which protects it against a worst possible (defined) outcome whilst permitting full participation in the upside should it arise.

Some banks sell a combination of an option and forward contract called a participating forward. This allows participation in a fixed percentage of the upside. However it does have a cost. Again, these should not be purchased without full knowledge and understanding of what is involved.

 

How far forward can I hedge?

Most banks will have a maximum time period for which they will sell forward contracts to their customers. This needs to be ascertained now. In general, most banks will not provide forward contracts for periods beyond 12 months.

 

What terms and conditions apply?

In some cases, the banks may require security to be provided in the form of charges over assets or guarantees. If the exporter is already a borrower, it is probable that the bank would simply extend any security that it already had over the foreign exchange line. It may also monitor the extent to which the currency contracts are showing a “profit” or “loss” at a point in time and either limit this or seek some collateral, which may include cash, if the loss – although only theoretical – extends beyond the defined amount.

Finally, some banks may require the completion of what is known as an ISDA agreement. This is quite a complex document to complete for the first time, and proper advice should be taken in its construction and prior to signing it.

One final point to note in hedging foreign currency risk is that there are non-bank providers of such services who tend to be less prescriptive in their dealings. However, many borrowing agreements now specify that the borrower may only conduct foreign currency transactions with the lender.

 

What are the wider financial implications associated with currency risk?

The obvious effect of weakening sterling is adverse consequences for both profitability and cash flow. Immediate actions that could be taken include:

  • Calculation of the exchange rate at which UK sales are no longer profitable
  • Rerunning financial forecasts at current exchange rates and assessing the projected outcomes
  • Where financial covenants are part of your borrowing agreement, ensure that adverse foreign exchange moves do not materially and negatively impact on compliance with them

Please note that where companies with material amounts of UK exports intend to refinance their banking facilities in the coming months, a significant amount of sensitivity analysis will be required in any financial projections provided to banks.

I would strongly urge paying close attention to the terms and conditions attaching to any new borrowing agreements, as I would expect banks to tighten up significantly in this area as a consequence of the UK vote to exit the European Union.

Email BrexitUnit@enterprise-ireland.com with your queries on currency fluctuations.

 

SBCI Brexit Loan Scheme

SBCI Loan Schemes: Open for Applications

 

The uncertainty triggered by Brexit is a significant concern for SMEs. While the final outcome of the process remains unclear, it is likely that, in responding to the challenge, many firms will require extra resources, be that in the form of people, capital equipment, materials, or access to increased finance.

Enterprise Ireland has worked with the Department of Business, Enterprise and Innovation on the introduction of two €300 million loan schemes, to help eligible Irish companies secure the resources they need. Both schemes, operated by the Strategic Banking Corporation of Ireland (SBCI), will provide SMEs with the support required to implement changes as they prepare for Brexit, enhancing overall business resilience, whatever developments may occur.

The Brexit Loan Scheme can be used to support new working capital requirements and the development of business plans to mitigate Brexit-related risks. With Brexit preparations also presenting opportunities for Irish business, the Future Growth Loan Scheme can be used to fund longer term investments, such as, the purchase of new machinery, buildings and process innovations.

Loans cannot, however, be used to refinance businesses in financial difficulty or for the refinancing of existing debt.

 

Brexit Loan Scheme Features

The fund offers SMEs access to affordable lending, with rates comparable to those available across Europe. Here, SMEs are defined as independent businesses with turnover of less than €50m, and fewer than 250 employees.

Loan amounts of between €25,000 and €1.5 million are available per eligible enterprise, with terms ranging from one to three years. Companies will be interested to learn that, for loans up to the value of €500,000, security and personal guarantees are no longer required, previously a barrier to accessing finance.

The maximum rate of interest on loans is 4%. In some cases, optional interest-only repayments are available in the early stages of the loan.

For an overview of the scheme, including details of all key features, visit the SBCI website.

 

How to Apply for the Brexit Loan Scheme

The application process for the scheme involves two stages. During the first stage, the SBCI will perform an initial eligibility check. If deemed eligible, enterprises progress to the second stage, which involves a credit assessment by the participating lending institutions (currently Bank of Ireland, Ulster Bank, and AIB).

Companies must provide a separate business plan when applying for a loan under the scheme. The process is straightforward and the SBCI has a very useful template with tips on what should be included.

 

Future Growth Loan Scheme Features

The Future Growth Loan Scheme helps SMEs and Small Mid-Cap enterprises to access loans between €100,000 and €3 million with a term of 8-10 years. Loans can be used to support strategic long-term investments, such as business expansion, R&D or the purchase of assets.

This is a variable rate loan scheme with a maximum interest rate of 4.5% for loans between €100,000 – €250,000 and 3.5% for loans greater than €250,000. Security and personal guarantees are no longer required for loans up to the value of €500,000. For further information on this scheme, visit the SBCI website.

Note that due to the demand for the Future Growth Loan Scheme, there is limited remaining capacity. For more information on the scheme click here.

 

How to Apply for the Future Growth Loan Scheme

Similar to the Brexit Loan Scheme, the application process for the Future Growth Loan Scheme comprises of two stages. An eligibility application form must first be submitted to the SBCI. The SBCI will then confirm eligibility with the applicant in writing. For the second stage the applicant will bring this eligibility confirmation letter to the relevant financial institution when applying for a loan. There are currently four participating financial institutions, Bank of Ireland, Ulster Bank, KBC Bank and AIB. Applicants must produce a business plan for all applications for loans greater than €250,000.

 

Interested companies should note that the eligibility application forms for both schemes requires a declaration on state aid. If you would like help in defining the state aid received from Enterprise Ireland, please contact your Development Advisor or the Brexit Unit can help you to find the right point of contact.

It is important to note that confirmation of eligibility from the SBCI does not guarantee eligibility from the banks. The participating banks have their own assessment criteria which must be satisfied, such as the ability of the applicant to repay the loan.

Letters of offer from most banks are valid for three to six months from date of issue. Therefore, the applicant does not need to draw down the loan until it is required.

Enterprise Ireland encourages all interested companies to first undertake a thorough review of your funding needs and to prepare the financial and business plan you will need to present to participating lending institutions. When considering choice of lenders, SMEs should review all of the options in the market to ensure that they get the best rate available, remembering that the interest rate offered cannot exceed the maximum rates stated above .

 

Keep Forex to the Fore

Brexit has highlighted the risk of currency fluctuations for businesses. Irish SMEs should learn the  basics of foreign exchange to see how it can affect their business and act to ensure that they have a plan in place to mitigate any risk associated with fluctuations in foreign exchange rates.

 

1. EUR/GBP trends

Not surprisingly the foreign exchange rate has been quite volatile and for companies with their cost base in EUR, a reduction in GBP sales of €100,000 is a reduction in profits of €100,000. Geopolitical trends, changes in interest rates and the inevitable rise in UK inflation are making are making currency forecasting more difficult. Higher interest rates tend to support a currency: so where will rates rise first?

 

2. Attitude to currency hedging

Have I seen a marked increase in a structured approach to currency hedging? The short answer is “No”. What I saw was a lot of panic when the rate hit EUR/GBP 0.9000 but as soon as it eased back to EUR/GBP 0.8500, not only did the panic ease, the urgency to manage the risk quickly disappeared. Why? Sounds like EUR/GBP 0.8500 is a rate which a lot of exporters can live with. If that is the case, then structure your hedging around it – don’t leave it to chance.

The last number of years should clearly highlight that those with a common sense structured approach to foreign exchange (“FX”) hedging have a competitive advantage. An advantage which they can achieve without leaving their desk and which they cannot be stopped achieving by their competitors. So why ignore it? If you had a product that you sell to your customers at €10 thereby making a 10% net margin, would you sign up to a contract that states the price paid will be what the customer wants to pay on the day and that price could be anywhere between €8.50 and €11? Or would you let employees decide whether to be paid €10/hr or €15/hr when manufacturing a product? The answer to both is no, but those examples give the same outcome as not hedging FX exposures but leaving it to the spot market on the day. This element of business is a controllable.

 

3. Education

Most companies are at the low (and some at the very low) end of currency hedging knowledge. Again, this is controllable. Investing time in upskilling in this space is exactly that – an investment. What you learn will benefit your business for years. So, focus on it. And watch “conventional” thinking. One company told me that they were invoicing in EUR to UK customers so they had no exposure. However, when questioned, they admitted that the customer was looking for a price decrease in EUR (to counteract the fall in GBP). And as a price taker this was inevitable. They also admitted that getting a price increase if GBP strengthened would prove very difficult. So not only is that not really a hedge, it could be viewed as a ratchet. And it is not (for the most part) a controllable!

 

4. Strategic issues emerging

While it is going to be difficult to anticipate all implications, the need to react quickly is inevitable. So, a few suggestions of matters that require attention in the coming months as the negotiations are started:

  • All new finance applications will require a Brexit evaluation. So even if you don’t want to formally address it, your banks will require it
  • Tariffs – Ascertain now where your products sit and what UK Global UK Global Tariffs might/would apply under those rules
  • Assess how far GBP would have to strengthen to counteract the cost of the tariffs (assuming that you are a price taker)
  • If your main competitors are based outside the UK then they face the same situation as you. If not, UK competition must be your focus. Undertake a UK competitive SWOT analysis. This may give some indication on your ability (or that of your market) to bear some of the tariff costs as price increases
  • Understand the dynamic between price and demand for your product – you may be able to force an element of price increase on customers but if it has an adverse impact on volumes, then you need to watch your fixed cost base and try to drive down the break-even volume
  • Understand the dynamic between rising interest rates and demand for your product. The UK could find itself in a situation where economic growth is poor but interest rates are increased to curb inflation, thereby decreasing disposable incomes. This is especially true for people with mortgages as UK interest rates have been flat since March 2009. Is your customer demographic exposed to rising interest rates more than other segments of the population? Could you target a demographic that is less susceptible to such trends?
  • The above may require more GBP costs/UK presence, but it could also be an opportunity (see below)

 

 

5. Issues for the Island of Ireland

  • Cluster approach to informing exporters – they will all face similar challenges
  • Emphasis on education – better informed exporters will trade better
  • Cluster approach to provision of UK support – shared logistics, warehouses, even admin and support services
  • The common travel area may be very important. Instead of the Celtic Tiger era where Irish people were buying UK property at rapid rates, the ability to travel to the UK and own UK operations may become crucial (and a competitive advantage) for some sectors. Looking for new markets is now probably inevitable but the UK will remain a core market for many (and may become more important if non-UK competitors are squeezed out).

Yes, there are plenty of challenges ahead, but there are also plenty of opportunities. Visit Evolve UK for up to date insights and opportunities in the UK market.