Mapping the World’s Trade Connections

October 2010

1. Foreword

2. Executive Summary

3. Why Trade Matters

4. The Current Picture: Countries

- World Trade Today

- The Impact of the Recession on World Trade

- Re-emerging trade trends: Emerging Markets

- Country Trends

- The European story

- Mapping Export Growth

The Current Picture: Sectors

- Sector Trends

- Europe as a Platform to the World

- Mapping Europe’s Sector Competition

- Taking on the Global Challenge

- Where Developed and Emerging Markets Meet

- The Springboard to Growth

5. The Future International Opportunity

- Emerging Opportunities: the ‘Rising Stars’

- Barriers to Trade

- Mapping Future Success

6. Conclusion

7. Going International: Turning Insight into Reality

8. Appendix

Contents

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Alan KeirGroup General Manager, Global Co-Head, HSBC Commercial Banking

The future, it is often said, is global. And as an international bank, we know that ‘global’ isn’t something every business manages overnight. But the reality is that increasing numbers of companies, from more countries and sectors than ever before, are trading internationally in some form or other. Whether that trading means buying skills, innovation or goods, the concept of open borders for business has never been truer than today.

We believe the business world is standing on the precipice of a very different way of operating. We are already helping thinking businesses in countries far and wide capitalise on the opportunities that international trade can deliver. The stories that interest us are how different businesses are connecting around the globe and how we can help support them in conquering and capitalising on the international stage.

That is why we commissioned Delta Economics to draw together, for the first time, a report which maps the world’s trade connections. That identifies the emerging trends in who is trading what with whom and what that might look like in the future.

We want the businesses who read this report to use it as a starting point when they are developing their international strategies, a guide for growth. It has been written primarily for companies in Europe looking out, to help them understand how the world’s trading axis has shifted and how best they can mitigate risk and act to succeed. But because it is, by its nature, global – covering the 27 countries which make up 78% of the world’s trade flows- we hope it will be a useful resource for businesses in every country of the world.

At HSBC we are working closely with businesses across the world to help them shape their future success. Our presence in more emerging and developed markets than any other business bank means we are ideally placed to help businesses understand and act upon the opportunities revealed in this report.

We look forward to talking, discussing and debating what this report unveils with companies

01Foreword

looking for the next international challenge and in turn welcome your views on how we can all get the business world better connected internationally.

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02Executive Summary

Trade matters. It has played a huge role in the global economic recovery and while international trade has been affected by the downturn, it is already climbing and building on trends established in the last decade. For businesses operating across the globe this is important. It is becoming increasingly evident that trading internationally provides more opportunities for growth, development and success than remaining as a solely domestic player. But while many companies are aware of the fundamental need to internationalise their strategy, understanding what the world’s trading ‘map’ looks like and where opportunities lie has remained a challenge.

For this reason HSBC Commercial Banking Europe commissioned Delta Economics to develop Mapping the World’s Trade Connections, the first report that compiles how the world is trading today to help businesses understand where the opportunities may lie tomorrow. Bringing together views from leading authorities on trade from across the globe, with trends data on the ‘what’ and ‘where’, this report provides a unique resource for European businesses.

Mapping the World’s Trade Connections demonstrates where the key changes are taking place, where markets and sectors are emerging across the world for European businesses and where interesting developments will be in the next five to 10 years. While every business is of course unique and will have its own route to internationalisation borne out of its own experience and specialisms, the aim of this report is to help companies understand the opportunities the world presents and how they can become a player in the global supply chain.

For the European business the report makes two central assertions about the world ‘trade stage’:

1. There are new opportunities arising around the world, with continents and countries emerging as ‘rising stars’ beyond India and China and Brazil – including Africa, Vietnam and Kazakhstan – that may particularly benefit from the strengths that European companies offer

2. Europe has the opportunity to play a fundamental role in world trade going forward, playing on its strengths to become a lynchpin of emerging market growth as well as continuing to develop in its own right.

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The Global OpportunityThe report, of course, highlights the rise of Asia as a key opportunity, but also identifies other markets with huge untapped potential. Brazil in particular is seen as offering great opportunities for European businesses. Looking further ahead, the report predicts that other nations are on the ascendant and outlines some new rising stars.

Rising StarsThe excitement around emerging Africa is propelling it into the spotlight. Countries with young, entrepreneurial and well connected populations like Ghana and Ethiopia have particularly strong commitments to change and therefore big opportunities to pursue speedy growth. Chinese agricultural investments in Ethiopia are fuelling the modernisation of the sector while infrastructure development is a high priority, creating opportunities for indigenous businesses to work with international businesses and for inward investment into the country.

Less integrated into the world’s financial system and with strong revenues from the mining sector, South Africa navigated the global downturn well. The World Cup provided a welcome boost to both infrastructure investment and morale, and although data suggests that trade has yet to fully pick up post downturn, its future strength is not in question. Demand for its commodities are increasing and it is favouring trade opportunities with emerging economies which suggests a role as a gateway to partnerships with in particular, emerging Asian nations.

Vietnam was identified consistently as a country to watch, particularly by commentators and businesses from the Commonwealth of Independent States (CIS) and eastern European nations. While its trade data suggests a short term decline in fortunes, expert opinion contradicts this pointing to emerging skills in the production of, for example, clothing and footwear

where it is becoming a major competitor to countries like Turkey and China. Meanwhile countries in central and Eastern Europe are already exploiting strong historical and political links to develop opportunities there in heavy machinery and mining.

Eastern Europe is highlighted as a high growth area with international trade in Poland and the Czech Republic rocketing. Equally while the growth of Kazakhstan is heavily influenced by Oil and Gas, the report highlights that experts see the rapid growth in commodities exports as heralding the entrance of this country on to the ‘world stage’ most notably for businesses looking for a partner to access CIS countries and the Middle East in particular. But beyond this, consumer demand is growing quickly in the country and infrastructures and distribution networks are improving. This means Kazakhstan will offer new opportunities to businesses over the next five to 10 years, provided the government and businesses can use oil revenues to create real trade growth.

Europe’s StrengthMuch has been made of the opportunities and threats that the emerging markets pose to European businesses but this report establishes a new philosophy: we’ll all be stronger if Europe is part of the growth. It finds that as fantastic as the emerging markets’ growth is, it is the thinking business that capitalises on both developed and emerging markets’ strengths to facilitate success. With ‘trade’ no longer about cheap labour but focused on establishing a global supply chain, Europe’s role is critical.

The report finds that the developed markets of the world – and in particular Europe – will continue to have a critical role to play on the global trade stage and moreover will facilitate emerging nation’s growth.

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While European companies are being urged by commentators globally to ‘look out’, there are still opportunities close to home. The report finds that businesses face a ‘paradox’ choosing between slow and sustained growth in intra-regional European trade and faster growth and greater opportunities through trading with emerging markets. Equally, it challenges emerging markets to ‘look in’ to Europe, and capitalise on the opportunities that developed nations can deliver.

The Power of Experience Developed markets undoubtedly benefit from centuries of trading experience and it is from this that emerging markets can learn so much which can inform their own strategies for growth.

Europe currently accounts for 34% of world trade, a dominant force in total against the likes of the US (12%), China (10%) and Japan (5.5%). Within Europe, the developed nations of UK, Italy, France and Germany account for nearly 23% of the trade, but it is the European emerging markets that are seeing the most significant growth – in the last 10 years, the share of world trade from the Czech Republic has gone up by 111% and in Poland has gone up by 92%.

This experience is setting the tone for some of the emerging markets’ own business models. The report finds that India and China are becoming increasingly similar to Europe in terms of their trading strategies, meaning that although these markets will be more directly competitive in terms of the types of sectors in which they are trading and their structure of trade, there are also likely to be more partnership opportunities.

The Knowledge CentreOver time, Europe in particular has become renowned for its leadership in cutting edge research-led sectors such as biopharmaceuticals and pharmaceuticals and high value manufacturing and design.

Europe’s strength comes in part through its established research bases in countries like Germany, the UK, Italy, France, Belgium, the Netherlands, the Czech Republic and increasingly Poland, enabling high-value added, innovative production across all areas of industry. The report highlights that the region is likely to remain highly competitive in this area, offering both invaluable insights for countries looking to enhance their own high value

production capabilities, but as China’s population gets older and labour costs in emerging Asian economies increase, Europe’s strength as provider of these specialist services will reassert itself thus creating a new centre for investment. It represents access to ideas, networks and innovations as well as a source of potential resources and advice.

The Link in the Global Supply Chain The report outlines that Europe should also be seen as an attractive option for emerging nations as a strategic partner and link in the global supply chain. Its openness to trade is growing, its commercial innovation base is strong and will strengthen, the skills levels of its workforce is high, its governments are broadly committed to raising standards across the continent and it has access to some of the best research to create leading edge products and services in the world.

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1. Take time completing the right research: A business’ success in a new country will depend on the level of research conducted at the outset. Gaining knowledge of a wealth of factors, about the country (its culture, customs and government policies) through to its economic and trading conditions (its import and export regulations, its tariffs etc) and at a granular level, the extent of competition in the target country and the overall suitability of a product for that audience is key

2. Consider if the business is ready to trade internationally: While there is myriad opportunities for businesses to explore across the world, these need to be developed at the right time. Ask yourself when an international move can best fit into your business’ overall strategy. For example, do you have sufficient production capacity to meet new demand? Do you have the resources available, or potentially available on the ground? Can the management team devote the necessary time required to research and establish an international operation?

3. Mitigate the risks: Mapping, and therefore mitigating the risks early is key.

Consider the bigger picture – is the country’s political instability a factor?

Investigate the reputation of your trading partner – can you speak to other businesses they are trading with to establish their credentials and payment history? Have you agreed appropriate payment terms and the process for transfer of goods?

Consider the impact on cash flow that international investment will require – how can this be managed?

Address how you are going to transport your product or service to its new audience and how you can remove the risk. Do you need insurance to cover storage in ports?

Exposure to foreign exchange risk arising from volatility in the currency markets can have an

impact on profitability and needs careful consideration and planning.

4. Financing Trade: The disparate payment objectives of buyers and sellers where buyers want to defer payment as long as possible and sellers want to receive payment as soon as possible can put a strain on a company’s cash flow. Careful planning is required to ensure that working capital facilities are in place at every stage of the trade cycle and companies should engage with their bankers at an early stage to determine the level and structure of facilities to finance their international trade.

5. Seek expert advice: The right advice will lead to the right decisions for your business. Many organisations are experts in providing the latest information which will lead you to the development of an effective international strategy. Aside from banks, Government organisations, Chambers of Commerce, Customs & Excise, Trade Associations and Insurance Brokers are well placed to help.

The report concludes that with world trade having been less impacted by the global recession than expected, the world as a whole presents a wealth of opportunities. While the power houses of Brazil, India and Asia in general will continue to exert considerable impact in the coming years, there are a new series of ‘emerging nations’ which will change the shape of the world trade map further, supported – even driven – by the experience, skills and integrated supply chain that developed markets provide.

Above all, the report demonstrates that trade is so much more than imports and exports. It is about international networks, relationships, innovation and creativity as well. In the words of Stuart Nivison, HSBC’s European Head of Trade and Supply Chain, “We can’t afford to ignore these fundamental changes in international trade - they will result in both opportunity and risk. It is the businesses that understand and adapt to such changes that will survive and thrive over time.”

Turning Insight into Reality While it is essential to map the trends and influencing factors which will help a business to decide where best to maximise international markets, it is equally critical to create a strategy which enables a business to turn insight into reality. The experts interviewed for the report provided their tips on making a success of trading internationally:

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• The face of trade has changed irreversibly in the last 10 years

• Trade is driving economic growth, economic development and competitive advantage

• Businesses that succeed and thrive will be those which embrace a global platform

Irreversible ChangeOver the past 150 years trade has fuelled significant economic growth and development, widened choice for consumers and businesses, increased access to new markets, driven innovation and prompted the development of new skills. The most significant trade development has been the creation of free trade areas during the last 50 years1 - areas with no internal barriers to trade between member states - which have boosted output and national income.

While barriers to trade are still an issue between trading blocs and nations - hence the World Trade Organisation’s General Agreement on Tariffs and Trade (GATT) and the Doha round of trade negotiations2 - the face of trade has changed irreversibly.

“Openness of borders is vital. Businesses remain passionately pro free-trade.” Senior business leader, UK

There are more countries trading now than 20 years’ ago and with enabling communications technologies such as the internet which reduces costs, the pace of change is set to accelerate.

Over the last 10 years, the nature of doing international business and trade has been transformed. Trade is no longer just about the import and export of goods or cost reduction and international business is no longer simply one which sells its products in overseas markets. Instead, operating internationally is as much about accessing markets for talent and innovation as it is about

accessing international markets for products.A business’s international credentials today may well include joint ventures with overseas organisations, dealings in foreign currencies, a parent company or subsidiary based abroad or an internationally employed workforce, as it seeks to take advantage of global opportunities.

To the business with a global mindset, location decisions are no longer about what can be produced most cheaply and where, or even about where market demand is biggest. Rather, it is now about combining different research or innovation potential in one country with technical skills in another country and marketing and sales somewhere else. The world is a platform for businesses to accelerate growth strategically.

The Impact of TradeTrade matters beyond individual companies thinking about going international, it forms an integral part of countries’ economic make up and increasingly, a nation’s identity on the global stage. Understanding why trade matters at a macro-economic level can help business understand why getting international trade right at a company level is so important.

At its simplest, trade fuels economic growth. When merchandise trade flows3 increase, so too does Gross Domestic Product (GDP), individual wealth and domestic demand. The inward investment seen when a country opens itself up to international trade helps to create wealth, employment and domestic demand, while simultaneously encouraging innovation and growth in the local supply chain.

Trade also drives the economic development of nations. Fifty years’ ago the key motivator to trade internationally was to take advantage of low cost production elsewhere. Now competitiveness goes far

03Why Trade Matters

1 From the Association of South East Nations (ASEAN), through the North American Free Trade Area, to the European Union (EU) and the European Free Trade Area

2 The GATT was first negotiated in 1949 by the United Nations to ensure that negotiations on trade between countries produced outcomes that were fair and non-discriminatory. The GATT has been subsumed into the World Trade Organisation which is now the platform for negotiations on tariffs and trade between countries. The Doha round of negotiations (first set up in 2001) is to ensure that decisions made by the developed world do not unfairly affect emerging economies so that trade can build economic growth through exports as well as imports and FDI.

3 That is trade in goods, not services

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beyond price and ‘going international’ is about accessing talent, innovation, ideas and infrastructures. This in turn drives national governments and businesses to invest in education and skills training, research and development (R&D) and business and transport infrastructures to ensure they can compete. These then create jobs and fuel the economic development of that country.

“Every country is hunting across the globe for talent, entrepreneurial spirit and intellectual property. These are the drivers of the future.” International trade deal maker, UK

Finally, trade produces advantages for companies themselves. The competitive advantage for businesses of trading internationally, which for global corporations includes greater access to markets, improved economies of scale and access to capital, allows a company to gain the edge in an increasingly competitive global business environment.

Equally at the smaller end of the business scale, a recent survey conducted across 33 European countries found that while just a quarter of European SMEs had undertaken international business relationships or transactions in the last three years, those who did trade internationally were more innovative and grew faster in terms of employment and turnover than those without international reach.

This competitiveness also has an advantage in harder times, with evidence showing that companies who have internationalised during the downturn have helped to shield themselves from the severity of the recession by reducing their dependency on one market 4.

AvidTripsGlobal Operation, Local ExpertiseSanem Erucar’s company, AvidTrips is a US-based start up business focused on providing adventure holidays and adventure travel. It has had to operate internationally from the outset and works directly with local operators in foreign countries.

Being a global operator from the outset is a huge undertaking in terms of building up an operator network in some of the world’s most challenging environments. Dedicating time to understanding the local operator and their operating environment is a critical success factor for this business. A key challenge is identifying the right operators so that they minimise risk. Contractual and transactional relationships are important because liability for the holiday must rest with the consumer and not with the company. As it does not own operators, or operate any tours of its own, creating a network of leading brands and operators and building long-term relationships is key.

The second challenge is understanding the different environments operators work in and adapting its way of doing business, whether it is the liability insurance required by local governments or the political environments. Every country has its own obligations, registration and licensing requirements. Only by ensuring that these systems are tight and appropriately tailored to local operator provision does the business succeed.

The European ChallengeMany domestically-focused companies can see the potential advantage of trading internationally and yet they are not primed to do so. But if European-based businesses don’t start to think beyond their borders, they stand the risk of being overtaken by those who will.

4 HSBC, 2009: Going international; UKTI (2008):”International Business, Strategies and Awareness Survey” 2008; European Commission (2010): “Internationalisation of European SMEs”

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Take, for example, the fast growing power of Brazil. Between 2000 and 2009, Brazil’s exports to China grew by 1,760%. And, while the developed world was languishing from the effects of the sharpest downturn in trade in living memory between 2008 and 2009, Brazil’s exports to India grew by over 200% in just that one year. It would be disingenuous to suggest that Brazil, or any other emerging world economy for that matter, was unaffected by the global downturn which produced a 12.2% contraction in world trade generally 5. But the speed with which the emerging world has bounced back compared to the developed world is striking.

This is because there have been two irreversible changes evolving over the last 20 years:

• The emergence of more trading nations with specific pools of talent, creativity and innovation as well as natural resources and abundant labour and each with its own unique advantages as a trading partner

• The transition in perceptions of trade by businesses and governments alike: 20 years’ ago we may have spoken simply about imports, now businesses actively search to maximise their competitive advantage by locating globally to take advantage of skills, innovations and market niches or opportunities in other parts of the world.

In the words of Stuart Nivison, Head of Trade and Global Supply Chain at HSBC, “We have seen a paradigm shift in the balance of global trade. The economic centre of gravity has moved to the emerging world and the businesses that survive will be those who embrace a global platform.” For the European business, the opportunity is clear: understand the way the world is changing and use it to your advantage.

Why Now?As the world emerges from the financial crisis, it is imperative that businesses, banks, investors and governments appreciate just how much the trading world has altered. It has thrown into sharp relief the trends that have been developing over the last 10 years and more. We can never go back to where we were before the financial and economic crisis and in fact, it may be better to view the crisis as a temporary aberration. Certainly the growth in GDP that we have witnessed during the latter part of 2009 and first two quarters of 2010 would support this. The fact that it affected the developed

world more than the emerging world is significant: trends that we saw developing before the crisis have re-established themselves very quickly with economic and trade momentum increasingly with emerging countries.

And it is not just the nature of trade that has altered: increasingly countries within the emerging world are trading with each other. This is fuelling economic growth and development at a breathtaking pace, offering businesses a route to growth that can no longer be achieved by operating in a domestic base alone.

According to our experts, “We have to trade our way out of the downturn” which means, not just looking at where we can export more, but looking at where openness can be enhanced through increased investments from abroad alongside the creation of niche markets and expertise. In fact, the arguments in favour of more rather than less trade are particularly compelling in the current environment:

“Trade and investment have an important role to play in firmly anchoring the economic recovery, promoting job creation and helping to lift the world’s poor out of poverty. Trade and investment offer a sustainable scale of growth and development.” 6

Looking ForwardThe future climate for trade is positive and there are real reasons to be optimistic about the opportunities ahead. Rapid growth in the emerging world, alongside trade growth between emerging nations, presents traders from across the world with boundless new market opportunities. One perspective voiced by our expert panel was that each country, regardless of size, has the opportunity to develop its own niche skills and specialisms, which will allow it to develop an advantage that is not solely centred on price.

“I’m hugely optimistic. The global trading system has survived the downturn and lots of countries have entered it; that will make the system more vibrant and extend opportunities “ Senior trade official, UK

Patterns of trade developing now between countries like Turkey, Australia, Poland, South Africa and Africa, alongside emerging markets such as Mexico, Vietnam, Kazakhstan and Brazil will accelerate and become more sophisticated, fuelling real high-value growth through

5 World Trade Organisation (2010): World Trade Report . http://www.wto.org/english/res_e/publications_e/wtr10_e.htm6 WTO-OECD-UNCTAD (June 2010): Joint Summary on G20 Trade and Investment Measures. http://www.unctad.org

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trade. It will be the thinking business that will take advantage of these trends and forge ahead.

The experts interviewed for this report agreed that the opportunities for businesses to take advantage of international trade developments will be determined by where the company is currently located, the sector it operates in, its growth requirements in terms of talent and innovation, the opportunities for market growth and its ability to reduce future costs. There is no “one size fits all” and what a business does will depend on its strategic view of the importance of international markets. But one thing came out loud and clear from the case studies: “Do your homework before you go. Don’t just put up a flag and expect to start selling straight away or be successful overnight.” With this report, we aim to demonstrate where some of the emerging opportunities are and what different companies in different settings and with different strategies have done to take advantage of them.

“In an increasingly competitive market, you have to think outside of the box. Identify the sectors of the market where the niche is and then identify what you do that is different.” Sales and marketing director, Australia

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For any business considering internationalising, or for international businesses considering new markets, identifying where the opportunities lie is critical. This section of the report looks at how the world is trading today, how trade patterns are changing and who is trading with whom. For the European business reading this section, the aim is to provide an understanding of the current situation and influencing factors so they can identify where international trade opportunities lie.

World Trade TodayFigure 1 shows the percentage of world trade that the 27 countries in this study by themselves account for. The largest trading nation is the USA, followed closely by China and Germany.

Figure 1 presents the data (where it is available) for 2009. But behind this picture are some interesting changes which have happened over the last 10 years:

• The Chinese share of world trade increased from 8.2% to 10.3% between 2008 and 2009

• The USA’s share of world trade fell dramatically at the start of the decade when it represented over 16% of all trade. It now represents 12.32% of world trade, an increase of 1.3% since 2008 alone

• As a whole, Europe accounts for 34% of world trade. This decreased by nearly 5% between 2008 and 2009. However, in Germany, France, Italy, Ireland, the Czech Republic, Malta and the UK the share of trade increased during the same time period, suggesting that these member states are recovering more quickly than is average for the EU7

• Argentina’s trade has grown since 2000 by over 10% and Brazil’s by over 50%. Mexico’s, however, has shrunk between 2000 and 2007 mirroring the pattern in the USA, its major trading partner.

04The Current Picture: Countries

7 NB – the data for Poland and Spain for 2009 was not available on a comparative basis

• Europe accounts for 34% of all World trade today,compared to the USA (12%) and China (10%)

• Pre-recession trends are growing with emerging market growth rising significantly

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Figure 1: Percentage of World Trade taken by each country in the study (2009)Source: Delta Economics interpretation of Tradesift/Interanalysis data

Percentage of World Trade by Country

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World Exports

Argentina

Australia

Brazil

Canada

Czech Republic

France

Germany

Greece

India

Ireland

Italy

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Value ($US m) Q4 2009

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Figure 2: World Exports Q4 2009 by country and top export partnerSource: Delta Economics analysis of IMF/Direction of trade statistics 2010

Kazakhstan

Malta

Mexico

Poland

Russia

South Korea

Saudi Arabia

South Africa

Spain

Turkey

UK

US

Value ($US m) Q4 2009Value ($US m) Q4 2009

Germany USItaly

Switzerland9193.595168.553952.63

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The Impact of the Recession on World TradeWorld trade – measured by value – peaked in July 2008 and then was hit noticeably by the economic downturn. But during 2010, trade has recovered and overall, the patterns we were seeing pre-recession are re-emerging.

The World Trade Organisation in its Joint Summary on G20 Trade and Investment measures8 expected world trade to grow by 9.1% during 2010. Total world trade increased by 25% in the first quarter of 2010, and although this was a slight decrease on the previous quarter, the momentum of trade is still upwards. That said, forecasters are modest in their assumptions about the rate at which trade will return to pre-2008 levels.9 10 This is mirrored by similar fluctuations in the Baltic Dry Index11(BDI), which closely proxies world trade overall, as illustrated in Figure 3.

The two lines in Figure 3 are both recognised indicators of world trade, although they cannot be compared directly with one another as one represents prices and volume of goods across 28 shipping routes and the other is all merchandise trade across all countries in the world. However, what the figure quite clearly shows is the scale of the drop in trade between Q2 2008 and Q2 2009. There has been a pick up in trade in the third quarter of 2009 which is reflected more strongly in trade flows than in the BDI but even so, the latest trend is upwards, even if not yet to the scales seen in 2008.

The business world has been rocked by the scale of the financial crisis and suggesting taking an additional risk into international markets may seem extraordinary given that companies are still reigning in costs and restructuring their operations. But as one expert said: “Overall trade is growing and this growth is sustainable over the long term if companies look beyond their immediate markets to emerging markets. Entering into international markets does not need to be expensive and as world trade picks up, now is the time to start to expand.”

Quickstart GlobalA Global Mindset from Day OneFounded in 2006 Quickstart Global provides supply chain support to businesses seeking to operate on a global basis. It was founded on the principle that the new era of globalisation based on information and communications technologies enables businesses to adopt a global mindset from day one. The business provides office space, recruitment, HR support and facilities and IT management to companies to whom otherwise the costs of setting up in an international environment would be prohibitive.

The business now has an annual turnover of £12m and has 700 people operating in 11 countries across the world. It attributes its success to meeting demand. It builds relationships rather than using existing partnerships in the belief that operating internationally has to be a strategic choice and therefore must be strategically managed. Communication with the global workforce is essential and staff will put substantial time and effort into ensuring that employees are kept informed at all times and trusted to do the best job they can even if they are not immediately visible in an office.

8 WTO-OECD-UNCTAD (June 2010): Joint Summary on G20 Trade and Investment Measures. http://www.unctad.org9 International Monetary Fund (April 2010): World Economic Outlooks: http://www.imf.org10 The CPB trade monitor tracks monthly changes in world imports and exports by global region, http://www.cpb.nl/eng/research/sector2/data/trademonitor.html.11 The Baltic Dry Index is based on the prices of moving weights of products around the world across 28 shipping routes. It therefore is effectively a proxy for trade volumes in the major shipping routes.

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Figure 3: World Trade trends June 2006-2010Source: CPN Netherlands Bureau for Economic Policy Analysis and Baltic Dry Index 12

12 http://www.cpb.nl/eng/research/sector2/data/wtm_archief/trademonitor_juni2010.pdf - the CPN Netherland Bureau for Policy Analysis’s World Trade Monitor is recognised as the most reliable indicator of aggregated trade patterns monthly and is used by organisations such as the Economists Intelligence Unit to form their forecasts. Similarly, the Baltic Dry Index (also called the Baltic Shipping index is seen as one of the most important proxies for world trade (www.bloomberg.com/apps/quote?ticker+BDIY:IND#chart).

Baltic Dry Index

World Trade

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Re-emerging Trade Trends: Emerging MarketsOver the last 10 years, the emerging world has begun to take a lead through its rapid growth in trade, even if it has not yet achieved the overall levels of trade of the USA or the EU. This is illustrated in Figure 4.13 14

“The BRICS are going so fast that you can’t see the bumps in the road – and bumps were all the downturn was to them.” CEO of US business based in China

The figure shows the change in share of world trade rather than actual share of world trade but illustrates quite clearly that the emerging export economies are Kazakhstan (although much of this is driven by oil and gas), India, China, the Czech Republic, Russia, Turkey and Brazil. Clearly these countries do not have the absolute share of world trade that countries like the US have, but it nevertheless shows key countries to watch in the future.

Figure 5 shows the exponential growth in exports to the emerging world from Argentina, India, Japan, Brazil, the EU, Turkey and Canada in the first four months of 2010. While care should be taken in interpreting this because it is just over a short period of time, it is consistent with the previous 18 months and suggests substantial activity during a time when exports slipped back slightly.

Figure 6 illustrates the change in exports over the first four months of 2010 for all the countries in the report.

• Within Europe, French companies have increased their trade to emerging economies by 14.7% and, although not shown here, to CIS countries by 42% between January and April 2010. French exports to African countries grew exponentially from a very low base at the beginning of 2010, and interestingly trade with Argentina was up by 57% and with China was up by 33.5%

Figure 4: % change in share of world trade, 2000-2008 and 2000-2009Source: Delta Economics interpretation of Tradesift/Interanalysis

13 We have covered some countries to the end of the second quarter 2010 in individual country summaries. However, this data, based as it is on IMF datasets, is comparable for all countries in the study rather than relying on different, non-harmonized data from national data sources.14 A note of caution should be sounded on looking at the existing 2010 data and the fully harmonised data up to the end of 2009 since:1. The internationally harmonised 2010 data is aggregated and therefore cannot be broken down in detailed analysis of sectors and export/import destinations. 2. In order to get round this problem, we have looked at individual countries but the data is based entirely on the first four months of 2010. It is therefore only showing a very short-term shift in trade and cannot be seen as an indicator of overall long-term trade performance. Rather, it is indicative of the speed with which an economy may be adapting to a post-crisis world.

2000-2009

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Changes in Share of World Trade

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• The UK increased its trade with emerging economies by 31.5% in the first four months of 2010 while for Italy it was 38.9% and Germany it was 21.4%

• Germany’s exports to emerging markets are focused on China, but trade with Vietnam (although not shown in the chart) grew by 98% in the first four months of 2010

• Italy’s fastest growth export partners in the first four months of 2010 were Saudi Arabia (88.0%), Indonesia (87.5%) and Russia (65.2%)

• Poland’s trade with Brazil grew by 249.8% and, albeit from a low base, grew by 73.7% to Kazakhstan and 70.7% to Estonia.

Figure 5: Exports by selected country to Developed world and Emerging world, % change January-April 2010Source: Delta Economics analysis of IMF/Direction of Trade Statistics

This all suggests that the recession should be seen as a blip from a trade perspective. There are some big opportunities out there, especially in emerging markets which have recovered more quickly. For example, during the first four months of this year, Brazil’s exports to China grew by 237% and to Turkey by 188%. Similarly, Argentina’s trade with China grew by 111% and with Russia by 90% over the same period.

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• “Globalisation is a mindset, but there are some very real changes out there. Given the rate at which the balance is tipping towards growth in other countries, and given that the costs of doing business internationally have gone down while the speed of accessing international talent and markets has increased, it’s really hard to understand why people continue to slug it out in their low growth domestic markets.” CEO, Spain

“Since the downturn, the trends we have seen over the last ten years have re-established themselves very quickly. The most important thing is that there are now so many more trading actors than there were, say, 20 years ago and many of them are becoming major trading nations. This isn’t just about a few emerging economies. We are seeing a real upturn in trading volumes and actors. No-one knows who will come out on top.” Senior UK trade official.

Figure 6: Changeinexports,January-April2010Source: DeltaEconomicsinterpretationofIMF-DOTStradedata

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Country TrendsFigure 7 shows the rate at which percentage shares of world trade in each of the countries has changed between 2000 and the end of 2009. This is broken into two time periods to show the effect of the drop in trade in the early part of 2009, as this impacted on some nations more dramatically than others.

Analysing data from across the world, it is clear that over the last 10 years there are individual nations which are outstripping the rest of the world in percentage growth terms.

Overall what this analysis shows is that the emerging world, over the last 10 years, has begun to take a lead through its rapid growth in trade, even if it has not yet achieved the overall levels of, say the USA or the EU. It also shows that for some of these selected countries (India, China, Turkey, Switzerland, Brazil, Australia,

Figure 7: % change in share of world trade, 2000-2009 of selected countriesSource: Delta Economics interpretation of Tradesift/Interanalysis data, 2010 and Data, August 201015

Indonesia, South Africa, South Korea and Argentina) they have recovered between 2008 and 2009 very strongly, when compared with their percentage share of world trade from between 2000 and 2008.

“While the US, Germany and Japan are going to dominate trade volumes for the foreseeable future, the real growth is going to be in the emerging economies.” Senior Indian Business Representative

Looking at the EU specifically there are notable disparities in trade trends. So, for example, while the share of world trade from the Czech Republic has gone up by 111% and in Poland has gone up by 92.7%, ithas flat-lined in France and Italy and fallen in the UK. In Germany, the increase in share of world trade of 17.9% represents an overall increase in share of world trade of 8.5% in 2000 to just over 10% in 2009.

15 Care should be taken when interpreting Figure 7 as it is designed to show where trade is growing. It is not talking about absolute values of trade so it is not, for example, saying that Canada, the USA and Japan have lower and declining trade values relative to Kazakhstan, nor is it saying that Kazakhstan has higher trade values and volumes compared to any of the other countries. Rather, what it is saying is that Kazakhstan has grown proportionately quicker, even during the troubled 2008-2009 period compared to the rest.Similarly there are big differences within the EU. So, for example, while the share of world trade from the Czech Republic has gone up by 111% and in Poland has gone up by 92.7%, it has flat-lined in France and Italy and fallen in the UK. In Germany, the increase in share of world trade of 17.9% represents an overall increase in share of world trade of 8.5% in 2000 to just over 10% in 2009.

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For businesses considering trading internationally, there are several points to consider:

• Growth was particularly rapid in China, India and Kazakhstan, however in Kazakhstan, the growth in trade is from a very low initial base and is driven primarily by fuel exports

• The emerging economies’ trade grew in percentage terms rapidly between 2008 and 2009, at a time of significant economic downturn demonstrating both that demand in those countries was buoyant and that they were competitive in terms of price in developed world markets

• Australia and Switzerland have recovered from the downturn in terms of their trade performance relatively quickly. Australia has grown its exports to the emerging world (China and Indonesia) and is seen as a route to other markets in Oceania such as New Zealand. Switzerland, like Germany, exports high value-added machinery and pharmaceuticals which are sectors that have recovered well, especially because of their export potential in emerging markets.

The European StoryOverall, exports from the EU 27 have declined to all major partners over the time period and particularly severely between 2008 and 2009. The drop in exports to China in the recessionary period was less than it was for every other key partner, but at 11% was still very substantial. Arguably this was simply because there was a drop in overall demand during the recession and the re-emergence of exports as drivers of growth in Germany, Italy, Poland, the UK, the Czech Republic, Ireland, France and even Greece in the first quarter of 2010 suggests that this downward trend is unlikely to continue.

Imports into the EU were affected by the sudden drop in demand across the region. For example, imports from the US grew by 53% between 2000 and 2008, but, looking over the period 2000-2009, the picture was relatively static with growth at just 0.69%. Trade is however growing with emerging economies. With the notable exceptions of Norway and Switzerland, imports have grown most substantially from the emerging economies of China, Brazil, India, Turkey and Russia. Although some of the increase in imports from Turkey can be explained in terms of the Free Trade Agreement between Europe and Turkey and the increase in imports from Russia in terms of oil and gas, there is nevertheless a striking picture of strong trade, both imports and exports, with the emerging world.

Key EU trade partnersThe largest trading partners in the EU are Italy, the UK, France and Germany who, in their own right, account for nearly 23% of world trade. This section highlights the trading patterns in these economies and then isolates a number of other emerging regions within Europe and the European Free Trade area which represent future growth opportunities for business.

Germany

Germany has emerged well from the crisis, driven largely by its strong export base. Latest forecasts suggest that Germany is growing at 2.2%, its fastest rate of growth since 1995, and the Bundesbank has recently raised its full year forecast for the economy to 3%. Germany’s share of world trade rose by 17.2% between 2000 and 2009, Germany by itself now accounts for over 10% of all world trade and its openness to trade has grown over the same period. Its fastest growing sectors over that

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time have been in the bio-medical, pharmaceuticals and printing and machinery sectors but other areas of traditional German strength, such as production of capital goods, automotives and automotive components are also strong and vibrant growing sectors in the economy and improving their competitiveness over time. Its key fast-growing trading partners are China, India and Russia although trade with Kazakhstan grew by 134% in the first four months of 2010.

“German exporters are positive about trade over the next six months. Germany is growing and there are major opportunities for German companies with a strong focus on technology. Germany is at the forefront of environmental protection and emissions reductions meaning that there are real opportunities here for businesses in sectors related to this.” Wulf Linzenich (HSBC Trinkaus Head of Trade and Supply Chain, Germany)

France

France has revised down its growth forecasts for 2010 to 2% on the back of concern about the French budget deficit. Like much of the rest of the developed world, trade has suffered and its share of world trade has stayed roughly the same over the past ten years at 4.8% of all world trade. Its openness to trade has similarly stayed roughly the same – exports and imports together account for 45% of GDP. Pharmaceuticals, beauty and cosmetics and cosmetic supplies are key sectors for the economy, although other areas of growth include wine and vineyard products, turbo and jet engines and aircraft. Competitiveness is improving in aircraft and aerospace, cosmetics and leatherwear sectors suggesting that these are the ones for the future.

Trade is vital to the French economy as a route to growth and its fastest growing trade partners are Russia, China, Singapore and Algeria while the fastest growth in exports in the first four months of 2010 were to Malta, the CIS trading bloc, Argentina and China. Interestingly and albeit from a very low base, France’s exports at

the beginning of 2010 increased dramatically to Oman, Ethiopia and Zimbabwe and although these numbers are small, it does suggest an emerging trade pattern with developing and emerging nations.

“French companies have been reluctant to go abroad but I am really hopeful about the upside. We have the capacity in France to be innovative and to provide support to companies that have really strong internationally focussed strategies. Things are really changing in France.” Herve Solignac Leconte (HSBC Head of Trade and Supply Chain, France)

Italy

Italian GDP growth is expected to go from -5.3% in 2009 to +1.1% in 2010 according to the IMF. Its percentage share of world trade has increased between 2000 and 2009 from 3.9% of all world trade to 4% of all world trade at the end of 2009. Its fastest growing export partners over that period were China, Russia and the United Arab Emirates and its fastest growing sectors were mineral fuels, pharmaceuticals and taps and valves for machinery and pipework. However, competitiveness has increased in leatherwear, silk products, paper, yarn and wool-based textiles and food and beverages and Italy’s strengths as an innovative and design-led nation are central to its export profile in engineering as well as in clothing and footwear. During the first four months of 2010, its exports to the world grew by 23.6% but the greatest increases were in exports to Russia (65.2%), Indonesia (87.5%) and Saudi Arabia (88%) suggesting that Italian businesses are taking advantage of opportunities outside of Europe.

“The Made in Italy” brand really means something. We have well-known strengths in art and high fashion and we are world leaders, but we are competitive with Germany in market share in the mechanical engineering sector. Where Italian exporters are really big, they combine the best of innovation and creativity. They are unique strengths and help us provide flexible solutions at a better price to quality ratio than elsewhere.” Alfredo Bresciani, (HSBC Head of Trade and Supply Chain, Italy)

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UK

The IMF forecasts growth for the UK economy in 2010 as 1.2% and its percentage share of world trade has fallen between 2000 and 2009 by 20.3%. However, this still represents 4% of all world trade, making the UK a key trade partner. The UK’s fastest growing export partners over the period 2000-2009 were China, the UAE and India and its fastest growing sectors were pharmaceuticals, organic chemicals and petroleum oil, although exports of motor vehicles were also important. Trade competitiveness is improving in many sectors including printed publications (books and newspapers), alcoholic beverages, pharmaceuticals, precious and semi-precious stones, cosmetics and lead products as well as transport equipment.

In the first four months of 2010, trade with the rest of the world grew by 12.7% and with emerging Asia by 34.5%. The fastest growing partners for exports at the beginning of 2010 were Chile, Senegal and Nigeria suggesting that UK companies are keen to take advantage of the opportunities emerging in some of the world’s growing regions and countries.

“We really need to take advantage of our strengths in the UK we have a knowledge based economy strong in high tech and certain industrial segments. The UK is still the world’s 6th largest manufacturer and 7th largest economy and the current competitive state of the pound gives UK businesses a golden opportunity to open doors to new markets. “However, the internet can also be a global distraction. We see so many accidental exporters - companies who receive an e mail from someone on the other side of the world who might be interested in buying their products and decide to chase the opportunity which is neither in line with their strategy or likely to be successful.” The key is to be pro active about globalisation: go to the markets where you can see real potential and build relationships. It’s much more than just getting an order. Ian Tandy (HSBC Head of Trade and Supply Chain, UK)

Turkey

Turkey has come out of the downturn well. From a low point in 2009 where GDP contracted by 4.7%, the IMF is now forecasting growth at 5% in 2010. The national income drop was accompanied by a dramatic drop in trade as well, but in the first quarter of 2010 there has been a 23% increase in trade. Turkey’s share of world trade has increased modestly since 2000 by 1.2% but, more interestingly, trade now accounts for 35% more of its GDP than it did then. Turkey’s export growth has been driven by its free trade agreement with the European Union and its exports are predominantly to Europe. However, although trade to Europe has grown over the decade by 202%, exports to Iran, the UAE, Libya and Egypt have increased far more rapidly. In the first four months of 2010, trade with India also grew by 106.5% suggesting that India is also a key emerging partner.

Turkey’s fastest growing export sectors are mineral fuels, gold and automotives but other strong and competitive sectors include women’s clothing, iron ore and carpets and textiles. Similarly, Turkey’s intermediate sectors, such as TV reception equipment or insulated wire and car components are also strong.

“Turkey will never be a competitor to China but we can create a niche by meeting right-price quality equilibrium and innovation driven by technology. We can add value to Chinese products. We are close to the EU and can therefore supply that market effectively. For companies in sectors where delivery time is key, this can be a compelling advantage. Though, Turkey is continuing its rally to increase its share in emerging markets and neighbouring countries.” Toygun Özmen (HSBC, Head of Trade and Supply Chain, Turkey).

Poland

Poland had a ‘good’ crisis. Its forecast GDP growth is 2.7% in 2010, up from 1.8% in 2009, according to the IMF, and its heavy dependency on international trade has integrated it swiftly into both the EU and the global trading system more generally. It is now the second largest producer of household appliances in the EU and has attracted substantial inward investments from countries like South Korea, India and China.

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International trade as a proportion of GDP has nearly doubled over the past ten years suggesting that it is really opening up as a trading nation, particularly through Foreign Direct Investment (FDI). The fastest growing export partners are China, Turkey and Russia and its fastest growing sectors are automotive components, structures and frames for prefabricated buildings and reception equipment for televisions. At the beginning of 2010 its exports grew most rapidly to Kazakhstan, Brazil and Estonia and the central and eastern European markets as well as North Africa and Sub-Saharan Africa are key emerging partners as well. It is highly competitive in transport equipment and mechanical engineering.

“Poland has a number of really important strengths. Its domestic market is strong, it is in the EU so it provides a gateway to European markets, the labour costs are low and the financial system is strong. The investment climate is improving more quickly than it is elsewhere. The balance of trade is really beginning to move towards Asia and Poland’s share of international trade is set to increase.” Andrzej Puta (HSBC Head of Trade and Supply Chain, Poland)

Czech Republic

The Czech Republic, largely because of its geography in the centre of Europe, is highly trade dependent. Some 80% of its GDP is accounted for by trade, and 90% of this is accounted for by its trade with the European Union. Since 1998 the Czech government has put a great deal of effort into stimulating inward investment into the country through tax incentives and a low corporation tax at just 19%. This has stimulated total inward investments (FDI) amounting to some Euro 84bn up to the end of the second quarter of 2009.

The financial crisis, some argue, has actually helped the Czech economy even though it did undoubtedly affect demand for trade finance. Although trade with the European Union has fallen, exports to the CIS have remained stable while exports to Asia and to the European Free Trade area (particularly Norway) have grown. Overall trade has doubled in the last two years and with the pick up in manufacturing output that the economy is now witnessing, there is every chance that the Czech economy will indeed achieve its forecast growth of 1.6% in 201016.

“The Czech Republic has been highly dependent on the EU but we have unique innovation strengths and our businesses are building growth through partnerships with German and French companies in places like Brazil and Argentina.” Tomáš Prouza, CEO Partners,Czech Republic

“I’m very optimistic about the future of trade in the Czech Republic, especially because companies are beginning to explore trade finance with us again. Markets are growing and so too are volumes of trade finance. The future is really positive.” Tomas Nymbursky (HSBC Head of Trade and Supply Chain, Czech Republic)

The European Trade ParadoxThe majority of trade within Europe is between European countries. This is understandable since the European Union is a free trade area and trade between member states is largely unrestricted since the opening up of the single European market to service sector trade at the beginning of this year (for merchandise trading this has been the case since 1992).17 18 The European market generally leads the world in terms of high value production and is easier for small businesses in particular to enter because it is close and familiar.

On the other hand, demand is slack in Europe still and although this may pick up, it will never be on the scale that demand is increasing in the emerging economies. While the challenges in trading with the emerging economies are arguably greater, so too are the opportunities for rapid sales growth.

This presents a paradox to the business looking to grow internationally: Europe is really strong as an innovation hub supplying high end, value adding products and services to the rest of the world but acting as a centre for mechanical and electrical engineering, pharmaceuticals, biopharmaceuticals, chemicals and, of course, the automotive sector as well. But equally, demand is saturated so where there may be opportunities to develop new products and services, there are fewer opportunities to sell.

So it is easier to trade within Europe but it is difficult to sell because demand is saturated. Companies need to understand that the nature of international trade is no longer just about exports but about strategic advantage. Europe is a platform for making internationalconnections: building partnerships, expertise and

16 Czech Ministry of Finance (July 2010): Macroeconomic Forecast17 The European Economic Community (EEC) created under the Treaty of Rome (1957) created a platform for economic agreements and cooperation between EEC member states. The Single European Act (SEA) was the first major amendment to the European Union’s Treaty of Rome and was signed in 1984. It created the European Union from the EEC and laid the foundations for the creation of an internal market with no trade barriers for Merchandise Trade in 1992. Not all sectors qualified immediately and the process has taken a long time to implement. Discussions on completion of the internal market for services were completed in January 2010 and will be rolled out subsequently.18 There are a number of sectors where the internal EU markets are still in the process of being negotiated

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AltaSpecialist Skills Provide Platform for GrowthFounded in 1991 in the Czech Republic, Alta provides engineering production and design services for the metallurgy and mechanical engineering sectors. The specialist nature of Alta’s business means that detailed research and understanding of its key markets and where the growth opportunities are likely to be is an absolute pre-requisite for success. As a result of this approach Alta discovered very early on the valuable growth available through trading internationally. It has always split its turnover 50-50 between imports and exports, with opportunities secured through providing specialist equipment, machine tools and mining and processing technologies in the fast developing countries of Ukraine, Belarus and Russia.

It also looks to build relationships with countries, like Vietnam, which are not only presenting demand for their products but which share historical political similarities with the Czech Republic.

Despite a downturn elsewhere in the world, 2008 was the company’s most successful year in its history and although 2009 was hard, it used the time while the market was slack to develop new projects internationally, reduce costs and acquire a new business.

innovations as well as transport links with regions like the CIS or southern Europe and North Africa. Sales growth is not something that happens overnight, especially in unfamiliar territories like China or India. But sales grow if the first steps are taken carefully and Europe is a world class starting point for that process.

“Fabulous things happen if you partner and collaborate. We use the European Strategic Programme 7 and Marie Curie funding to find the best partners and then use these to access global markets. “ CEO of science-based business, UK

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Mapping Export GrowthTo now look more specifically at where the opportunities lie and where the growth in trade is coming from, we’ve mapped the fastest growing export destinations across the world by domestic base and export destination. The

Figure 8: Fast growing export destinations by key regions Source: Delta Economics analysis of IMF/Direction of trade statistics 2010

Fastest Growing Export Destinations by Regionmap shows global regions and, quite clearly illustrates real trade growth is between emerging regions and the BRICs. Europe’s growth is rapid to geographically close areas like the CIS and South East Europe but is relatively modest beyond that.

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What this shows is the growth regions which have emerged over the past 10 years: the CIS countries, South East Europe, South and South East Asia and Oceania in particular. This does not mean that trade is not growing in other parts of the world – as was suggested above, the values are large, meaning that percentage changes are inevitably smaller. But what it does show is that trade is really accelerating between emerging regions and countries.

While we would have expected to see that trade between emerging economies is increasing rapidly and at a pace that will leave the developed world behind, the importance of the CIS countries, India and China as key export destinations is growing very quickly. Yet there are two additional key observations worth making:

• With the notable exception of countries from Sub-Saharan Africa, exports from the rest of the world to Latin America and the Caribbean have not grown substantially over the period. However, Latin American countries, and Brazil and Mexico in particular, have substantially increased their exports to the rest of the world, and in particular to Asian, European and African countries

• Africa has been increasing its exports substantially over the last ten years and there is no reason to suggest that this will not continue. For example, albeit from a low base, trade within North African countries has grown by 462% while exports to South Asia and South East Asia have grown by 512% and 529% respectively. Similarly, South African exports to the CIS countries have grown by 628% while Sub Saharan Africa generally has increased its exports to South East Europe by 613%.

Even though we are talking about relative growth, all of this suggests that while the “usual suspects”– China and India in particular – have trade that is growing very rapidly, there are some less reported areas of the world emerging as well. The CIS and African countries have increased imports, but, trade from them is also growing rapidly as well while the Latin America and Caribbean region generally is increasing its exports to the rest of the world at a very rapid rate across the board.

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In historic terms, it is perhaps unsurprising that ‘trade’ was primarily in commodities and food because they are fundamental to both survival and production. But as times are changing, so too is what is being traded.

Sector TrendsWe have looked at what the fastest growing sectors, in absolute terms, are internationally covering off both exporting and importing. The data included in Figure 9 here runs to 2008 as the 2009 figures are distorted because of the downturn.

What it shows is that the sectors where growth is the highest are very broad: the largest changes by volume are in commodities such as ores and fuels while ‘secondary’ sectors which input into the supply chain like iron and steel also fare well.

The second point to note is the differentiation between growing imports and growing exports. For example, motor vehicles do not count in the top 10 fastest growing sectors in absolute terms for imports, but rolling stock for railways does. This is because rolling stock is needed as new transport links are being built in emerging markets to create the support for industries, such as motor vehicles, which are in turn being built there.

For a business thinking about going international or diversifying into new international markets, Figure 9 suggests that if that company is already in a sector, or can create an opportunity within this sector, there may well be demand for its products. It also means that where there is a sectoral expertise or niche already present, there will be infrastructural support in place in the form of distribution networks, innovation resources and appropriately skilled labour. In other words, because the market and structures to support that market exist, there are already competitive advantages there.

• Increased global demand has meant:

Electrical machinery and equipment exports nearly doubled its volumes between 2004 and 2008

Exports of motor vehicles has increased throughout the decade but most rapidly since 2005

Exports of optical and photographic equipment have grown steadily through the decade

Pharmaceutical exports have more than trebled over the period with particularly rapid growth since 2006.

• Exports of nuclear reactors has been growing steadily over the 10 year period and although it dropped off in 2009, was particularly strong between 2004 and 200819. Many countries see nuclear power as a lower cost renewable alternative20 and are expanding their nuclear power generation capacity e.g. China and the UK. In OPEC countries and North Africa there are joint plans to build nuclear reactors to ensure fuel supplies.

04The Current Picture: Sectors

• Europe remains highly competitive in high end value sectors

• Opportunity to use this competitive advantage to fuel emerging market growth

• Strategic partnership opportunities with emerging markets lie in becoming part of the global supply chain through exploring skills and innovation.

19 While the world is moving toward renewable energies and countries like Germany are putting enormous effort into developing wind and solar power, they have recently also committed to maintaining their nuclear power stations simply because nuclear can generate more electricity than renewable energy.20 Reuters, July 22nd 2010: http://www.reuters.com/article/idUSTRE66L1AC20100722

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Europe as a Platform to the WorldThe EU is exporting in some, but not all of these fast growing sectors, as shown in Figure 10.

Europe’s expertise at the high value end of the fast-growing export sectors is clear from Figure 10 which shows growth across the time period in biomedical products and only a modest dip in pharmaceuticals and medical and surgical instrumentation, despite the world downturn. Europe’s top exports also include chemicals, petroleum fuels, engines, cars and car components and data processing, all of which are important sectors in the world economy and some of which are fast growing.

“We are constantly reminded that China has five million engineering graduates while Germany only has 300 thousand. At the moment, it’s possible we are not comparing like with like, but this won’t last – the skills are developing very quickly in emerging economies and we have to be prepared to compete for value in ever tighter markets.” Senior German Business Representative

Niche expertise and technical specialisms are developing at a country level too:

• France is increasing its competitiveness in aircraft and aerospace sectors, wines and vine-based beverages, cosmetics and leatherwear but its fastest growing sectors are in pharmaceuticals and beauty products. What this means is that France is at the leading edge of technology and is growing its exports quickly, but is still retaining competitive strengths in its more traditional sectors

• Germany’s competitive advantages are in mechanical and electrical engineering, automotives, pharmaceuticals, railway vehicles and rolling stock and tooling/machinery, but its fastest growing export sector is bio-pharmaceuticals. In other words, Germany is rapidly moving into the newest and high technology areas of medical products and instrumentation but is also maintaining its competitive edge in its more traditional sectors

• Italy’s fastest growing sectors are in mineral fuels, pharmaceuticals and taps and valves for machinery, but it is highly competitive in leather products, silk, textiles and food and beverages which are traditional areas of strength. The economy is therefore also

Figure 9: Absolute change in imports and exports in fast growing sectors for all 28 countriesSource: Delta Economics interpretation of Tradesift/Interanalysis data 2010

UNIS Building Relationships Across BordersTechnical solutions provider, UNIS, made the decision to go international when prices increased dramatically domestically.

The business took a systematic approach to the international challenge. The initial focus was in Iraq and the Middle East where there were more cultural similarities than with other western European countries and where the reputation of Czech business was already strong.

UNIS took its business model based on personal relationships overseas and spent significant time investing in building relationships on the ground and investing in understanding the local context in which the business is operating.

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rapidly increasing its exports in both high tech and intermediate products while maintaining and increasing its competitiveness in more traditional sectors as well

• The UK’s fastest growing export sectors are pharmaceuticals, chemicals and petroleum products but it has increased its competitiveness in printed books, alcoholic beverages, pharmaceuticals, cultured pearls and precious stones, cosmetics and transport equipment, suggesting that it is highly innovative and has export and locational strengths across the industrial spectrum

• Turkey is competitive and is strengthening its position in textiles, industrial supplies, fuels and capital goods although its fastest growing export sectors are mineral fuels, gold and automotives. It is developing its intermediate technologies to reflect its emerging position as an innovative gateway to the EU

• The Czech Republic is an innovative economy with increasing competitiveness in transport equipment, capital goods and consumer goods and this is

reflected in the fastest growing export sectors of the economy which are in electrical wiring, printed and print machinery and automated data processing.

European businesses operate at the high value end of the fast-growing sectors in the world and in primary and intermediate sectors are integrated into the global supply chain by providing innovative tooling or equipment, for example to mining or infrastructure companies. Many smaller businesses, say in the Czech Republic, work with multinational companies on developing their outreach beyond Europe in these fast growing and high value operations.

“For me, the issue of local doesn’t exist any more. Europe is the gateway to the rest of the world.” CEO, UK

Figure 10: Top 10 export sectors in the EU 27, ranked by absolute growth, 2000-2009Source: Delta Economics interpretation of Tradesift/Interanalysis data 2010

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Mapping Europe’s Sector CompetitionFigure 11 looks at the major players in terms of volumes in the fast growing sectors. As we have stressed, European supply chains are highly integrated throughout the 27 countries and particularly in fast growing sectors it is very difficult to identify where trade is originating. For example, is a German owned car manufacturing outlet in the UK contributing to UK or German trade figures? Equally, there are research partnerships that underpin biopharmaceuticals through research parks in Groeningen, Manchester and Munich all linked into European multinationals so identifying sectoral strengths has to look at Europe as a whole rather than its individual countries.

What it shows is that Europe is well placed to be competitive but, as illustrated in Figure 10, particularly in its core export sectors, it has some stiff competition. It ranks the top five competitors for the top ten sectors where Europe competes. Where Europe is itself one of the major competitors, its ranking is given.

What is striking about this table is that in its key sectors, the EU 27 dominates in all except electronic integrated circuitry and electrical telephone apparatus. For example, the EU has twice the value of exports of its nearest competitor, Japan, in motor vehicles, a third higher value of exports in aircraft and five times the value of exports in automotive components. In the words of one panel member, “this is certainly not the time to be writing off Europe”, but it is vital that international trade is developed within Europe (for example through strategic partnerships and joint ventures) as a platform for increasing access to global markets.

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Export Competitors in EU Top Sectors

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Figure 11: Export competitors in EU top sectorsSource: Delta Economics interpretation of Tradesift/Interanalysis data 2010

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Kordsa GlobalLocal UnderstandingKordsa Global is the world’s leading producer of nylon and polyester yarns, cord fabric and single-end-cord and it provides services to the tyre reinforcement and mechanical rubber markets. Since 1973, the year Kordsa began its operations in Turkey, the company has grown thanks to strategic acquisitions made in collaboration with powerful business partners. With its 11 facilities, located in nine countries over five continents, and a 4,500-strong workforce, the company has maintained its position as a global leader. Kordsa Global recorded sales of US$ 656 million in 2009 and with its head office in Istanbul, operates across Turkey, Indonesia, USA, Argentina, Thailand, Brazil, Germany and Egypt.

The international business model is built on two key premises: firstly, flexibility in production so that capacity and schedules can be adapted and secondly adjusting assets to fit local circumstances. Kordsa puts its success down to effective management of its international operations through good local partnerships and understanding of local markets, especially in China. A strong and profitable domestic base is essential to provide a springboard, and cashflow, for growth, but in this sector staying ahead of the innovation game is equally important in ensuring that you are competitive in overseas markets on quality as well as price.

Taking on the Global ChallengeThe EU 27 countries have become more open to trade, but the trend towards greater trade from, to and between the emerging economies started 10 years ago. It is driven by an overall expansion in demand which fuels trade. This increase in demand is the product of industrialisation and economic development – itself an inevitable consequence of increased trade and, hence, economic growth. This is a virtuous trade-led growth circle which all companies in all countries across the world can use to their advantage as more countries emerge and existing countries make their growth sustainable.

“Globalisation is a mindset, but there are some very real changes out there. Given the rate at which the balance is tipping towards growth in other countries, and given that the costs of doing business internationally have gone down while the speed of accessing international talent and markets has increased, it’s really hard to understand why people continue to slug it out in their low growth domestic markets.” CEO Global business, UK

What this means for a business that is seeking to enter into markets abroad is that there are opportunities everywhere. While Europe has been popularly regarded as a low growth market and emerging only very slowly from the downturn, as a business in one of the key high value and high growing sectors such as aerospace, electrical engineering, pharmaceuticals or cars and car components, it makes sense to look at building relationships in Europe as well as beyond.

The two biggest decisions a company ever has to make are deciding to go international in the first place then deciding where to locate. There are opportunities everywhere.” CEO, Anglo-Indian software business

Where Developing and Emerging Markets MeetIt is clear that the emerging markets are creating a new world order when it comes to trade but how are they operating and what opportunities does this present to European businesses?

“Europe will always remain the reference point for technology and intellectual property.” Senior German business leader

To understand this further, we’ve analysed the similarity between the BRICs and Europe in terms of trade structure. The trade similarity index is called the Finger-Kreinin Index (FKI) and the closer to 1 it is, the more similar trade is between the two nations, in other words, the closer the competition is between the two. So, if 10% of Brazil’s trade were in automotive components and 10% of the EU’s trade was similarly in automotive components, this would make the two countries have a similar trade structure.

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What Figure 12 quite clearly shows is that China and India, although still dissimilar in terms of their trading structures, have been becoming more like the EU 27 over the period measured. China has trading patterns most like Europe; India, although less like Europe, has increased its trade similarities in the last few years to 2008. Interestingly, Brazil has become less like the EU 27 suggesting that it is actually specialising in different sectors.

Figure 12: Trade Similarity between the EU27 and the BRICs (2000-2008)Source: Delta Economics interpretation of Interanalysis/Tradesift, 2010

Brazil

India

Russia

China

Trade Similarity - EU 27 and BRICs

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This information provides two key insights for European businesses:1. China and India are becoming more directly

competitive with the EU 27 in terms of the types of sectors in which they are trading and their structure of trade. What this means is that, if a business is looking to locate in either India or China, there are likely to be more similarities in terms of skills and infrastructures than there would have been say eight years ago. This potentially reduces the costs of operating in that environment and also opportunities for strategic partnership

2. Brazil is becoming less like Europe. This is not necessarily a disadvantage because although it means the specific sectoral support may not be there for European businesses locating in the country, there is less direct competition in terms of trade. This means that creating partnerships or directly exporting there would offer a strong way of building a business. With a less similar marketplace it is critical companies do their research first.

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The Springboard to GrowthTrade competitiveness does not happen overnight – it takes time to build, not least because it is not just about being a low cost location any more, it is about having potential for real sectoral advantage and trading with fast growing countries so that revenues increase. Figure 13, then, shows how far down the springboard has been pushed before it propels the country into trade led growth.

The map shows pictorially where the fastest growth has been and therefore the sectors and countries to watch and consider as potential opportunities for businesses.

Figure 13: Fast Growth countries by export growth, trading partners and sectorsSource: Delta Economics 2010

Mapping Country Trade Patterns

Canada

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Switzer land

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Italy Turkey

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ArmeniaIsrael

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There is no ‘one size fits all’ approach when entering a global market. Whatever the sector, supply chains are increasingly integrated across the world. The business that will succeed knows which countries have niche specialisms that add value and will be working out how to take advantage of that expertise. Critical to success is matching strategy with location. This is as much about understanding the geography, economic and political conditions and culture of where you are locating as about understanding the sector you are in.

For the European business, the experts and businesses agreed that taking on board the “global mindset” is a competitive imperative for survival. In the words of one, “This change is happening whether we are involved with it or not. If we don’t get on board now, we will be left behind.” As a business, having the right international strategy in place is crucial. This section uses the insights from the trade flows analysis and the panel to help inform that strategy.

Everyone we spoke to believed there is a huge opportunity for developed markets. Our experts pointed to the fact that it is still Europe, the US and Japan that dominate world trade by volume. Although trade has slowed in these countries since the peak in July 2008, there are signs that it is picking up, especially in Europe, and there is no reason at all to suggest that in the next five years these countries, with their infrastructures and years of experience cannot maintain their strengths as world leaders - particularly at the high-value end of the market.

However, the real challenge for Europe is in capitalising on the fact that both demand from, and production in, emerging economies are increasing. As one expert said: “The US, Europe and Japan are vital, but their demand is picking up very slowly and over the next 10 years at least, the real growth is going to be in the emerging economies.”

“There are still significant economies of scale to be reaped by these countries trading with each other and as they grow, they will set their own quality standards for their own markets and compete with the developed world because they are distinctive, not just because they are cheap.” Stuart Nivison, (HSBC Europe Head of Trade and Supply Chain)

Looking at the rates at which change is happening in the emerging world, European businesses ignore this new reality at their peril. But they should also recognise that they have a huge opportunity and role to play in fueling emerging market growth.

This section takes the insights from the previous sections and matches them with the insights of our panel to predict and investigate the emerging hotspots. While there is no one approach, we can take to this data, as every company and sector is different, the intention is to provide guidance on where growth is likely and where opportunities may be found.

Emerging Opportunities: the ‘Rising Stars’The report, of course, highlights the rise of Asia as a key opportunity, but also identifies other markets with huge untapped potential. Brazil in particular is seen as offering great opportunities for European businesses. Looking further ahead, to create a picture of where the key growth opportunities lie we asked all of our panel and case study businesses about where they consider the most important regions to be for trade over the next five years and created a tally-based ranking accordingly.

Figure 14 shows all the responses, irrespective of country and it is of course interesting to see just how homogeneous they are. However, a note of caution when reviewing the data; a point made time and time again by our experts was: “Where the key sectors and where the key countries are going to be depends on

05The Future International Opportunity (Rising Stars)

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the sector the business is operating in and the extent to which the country is operating within a global supply chain. India trades a specific type of semiconductor component with Thailand, for example – that is a niche and that is how the world economy is going.”

What is really interesting about Figure 14 is not the fact that India and China are so strongly represented, but rather that other countries and trading blocks are seen as growth areas too. As one interviewee pointed out, “It’s not just about China.” Our experts were asked to respond to this question unprompted, so it is perhaps unsurprising that they talk about ‘Europe’ rather than specific nations – the only two that were name checked, as represented above, were Poland and Germany.Below we’ve outlined and explained the ‘rising stars ’ - including Africa, notably South Africa, Vietnam and Eastern Europe over the next five years.

South Africa and Africa

Africa as a continent received a lot of positive mentions by panel members: the mantra, “Trade not Aid” was seen as an emerging reality, not least because of the strong role that China is playing on the continent. Africa, because of its lack of integration into the global financial system has been relatively insulated from the financial crisis as a continent. Improvements by African countries in the World Bank “Doing Business” rankings have centred around making regulations tighter and banking and transactions more transparent.

Figure 14: Tally chart of panel mentions of particular countries or regions as “high growth” over the next 10 yearsSource: Delta Economics interviews, August-September 2010

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Countries to WatchAll countries listed were highlighted by experts as ones to watch

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But it is the excitement around emerging Africa that is propelling it into the spotlight as a future opportunity. One commentator said, “Africa is a young continent. There is a younger generation of people coming through who are highly motivated, wired into the international system through the internet and want to be able to consume and work in the way they see the developed world working. They reject violence and corruption.”

“Africa,” said another, “has worked to different standards and timescales to everyone else. But the younger generation are changing things. They are still really family-minded and this is the African way of doing business. But they are skilled, often educated in the developed world and bring their experiences back to home in order to build their lives through economic activity.”

Businesses moving into Africa have an opportunity to fuel their own and the African continent’s wealth creation and growth by taking advantage of the energy that is there.

Of course, Africa is not a country it is a continent, but South Africa, less integrated into the world’s financial system and with strong revenues from the mining sector, has survived the global downturn well. As shown in Figure 13, its trade has grown by over 32%. The World Cup gave it a boost and, although our data suggests that trade has yet to fully pick up, its future strength is not in question.

Our evidence suggests that South Africa has grown over the last 10 years but that its trade, because it is so dependent on commodities and motor vehicles has actually been hit by the downturn quite severely with a severe drop in the first quarter of 2010, as illustrated in Figure 13. However, experts felt that it was bouncing back now that demand for commodities and cars was increasing and there was a “feel good” momentum developing in the country.

The historical links with India are important in building trading relations and again, the country is taking advantage of the emerging economies’ growth and trading with these rather than developed nations suggesting that it could be a gateway, especially to partnerships with Chinese companies who are strongly investing in infrastructural projects at the moment.

Vietnam

Vietnam was mentioned successively as a country on the rise, particularly by commentators and businesses from the CIS and Eastern European countries. Its trade data has not been going in the right direction recently, largely as a fall-out from the financial crisis. The future though is likely to be based on its emerging strengths, particularly in footwear and clothing.

It is growing as a major competitor to countries like Turkey and China in this sector while Central and Eastern European and CIS countries are exploiting strong historical and political links to develop markets and investments over there in heavy machinery and machine tooling as well as mining equipment.

Kazakhstan

Equally, our analysis of emerging countries and sectors over the past 10 years suggests that, on top of the countries isolated by experts above, we should also be looking at Kazakhstan where exports have grown exponentially, albeit from a low base. Figure 13 presents the summary of change in share of world trade, rapid export growth in the first four months of 2010, the top three fastest growing trading partners by exports and the key export sectors for each of the fast growing countries identified.

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Experts saw the rapid growth in commodities exports as heralding the entrance of Kazakhstan on to the world stage as a future partner for businesses who wanted to work in CIS countries and the Middle East in particular. Companies need to know the markets and the customers well and develop local partnerships while maintaining a clear sense of the strategic reasons for entering the market. But because demand is growing quickly and infrastructures and distribution networks are improving, Kazakhstan will offer potential to business over the next five to 10 years as the case of RG Brands shows.

RG BrandsBeyond CommoditiesRG Brands is the leading food and beverage brand in Kazakhstan and central Asia. It was first established 16 years ago and its two founders are still involved with the business. In that time it has grown to be an international operation that turns over in excess of US$200m. And while it has had to contract during the downturn, it has done this by making itself leaner and fitter so it is more flexible to expand as demand picks up again.

It has always been an international business, starting first by importing brands from abroad and then diversifying into production and export of its own branded soft drinks. Because it operates in a highly competitive consumer market, competing with brands like Coca-Cola and Lipton, it has had to ensure that it is selling something unique through its own hot tea, water, juice and milk products to make itself distinctive.

Europe and its Member States The panel talked about Europe as a bloc rather than individual countries within it which reflects on just how integrated trade and supply chains are. Many European-based businesses, they argued, can take their first steps to internationalisation by working within Europe

and this will be particularly important for emerging Europe. Europe’s strength in the future will be its strong established research base in countries like Germany, the UK, Italy, France, Belgium, the Netherlands, the Czech Republic and increasingly Poland, that enables high-value added, innovative production across all areas of industry, not just the ones where there are current strengths. As China’s population gets older, and as labour costs in some of the emerging Asian economies increase (they are doing so already), Europe’s strength as a fulcrum of innovation in services and manufacturing alike will reassert itself.

Demand and growth in Europe may be weak for the foreseeable future arguably making it unattractive as a location for exports from outside of the continent. But the strategic reasons for developing partnerships within Europe are obvious: Europe’s openness to trade is growing, its commercial innovation base is strong and will strengthen, the skills levels of its workforce are high and governments are committed to raising standards across the continent and it has access to some of the best research to create leading edge products and services in the world.

Further, growth in some of Eastern Europe’s emerging economies, such as the Czech Republic and Poland will gain momentum. These economies are building on the strengths and historical relationships of the past to create exciting commercial opportunities in the Middle East and emerging Asia, particularly Vietnam and China. They also have highly skilled workforces and innovative businesses, especially in instrumentation, machine tools and electro-mechanics, that service some of the sectors that are building infrastructures in the rest of the world. As such, their future role as an innovation gateway for European companies to access emerging markets in the Middle East, North Africa and emerging Asia makes them attractive as potential international partners.

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Germany will remain a powerhouse of the European economy and experts felt its strengths in the future rested on two things: its capacity to adapt to new emerging sectors (such as biotechnology or environmental technologies) and its sustained investments in its traditional strengths of manufacturing and engineering. Interestingly, German global companies will work with smaller businesses if those smaller businesses have niche technologies or products which enhance an offer to the client. This is a real opportunity to businesses, for example from the innovative engineering base in the Czech Republic, to work alongside familiar European colleagues in more challenging non-European environments.

Herrenknecht Manufacturing Excellence and Local ConnectivityHerrenknecht is an example of a company trading in one of Germany’s key sectors, and gives an insight into the principles of business which has served Germany’s export trading so well. Founded in 1977 by Dr. Martin Herrenknecht, Herrenknecht AG develops, manufactures and sells a full range of mechanical tunnelling machines around the world. The company has divided its activities into divisions: Traffic Tunnelling, Utility Tunnelling and Exploration (geothermal energy, oil and gas). The company achieved sales of 866m Euro in 2009, and had an export ratio of over 90%. It has approximately 3,000 employees, 54 subsidiaries and seven associated companies worldwide. It has a presence in China, India, Mexico, Malaysia, Russia, Singapore, Spain, Argentina, Venezuela, Chile, UAE, Thailand and several other countries.

Herrenknecht believes two things drive its business. The first is flexibility. Because of the large-scale and complex nature of the tunnelling projects, teams of local engineers and contractors work alongside Herrenknecht staff. This not only proves cost effective but negates the need to bring in staff, which would be impossible given the size of operations, and has a positive knock-on effect for the host country’s pool of skilled labour. The second is quality, which the company feels is absolutely central to its competitive advantage and which it ensures through its research and development strategy, applying the core research conducted in Germany to each distinct project to ensure that it is appropriately tailored to local needs. Above all, the company says that good local networks and good relations at all stages and at all levels are essential to ensure the success of projects.

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Barriers to TradeExperts were keen to stress that although there are many advantages to doing trade in different countries across the world, there are also some fundamental barriers, often in some of the fastest growing emerging economies. These are risks that have to be managed strategically as a business moves into a new market. Every challenge of course presents an opportunity for businesses seeking to invest, but key trade issues that will determine the nature of trade partnerships around the world for the next five years include:

• Energy and Resource Security: Africa is now China’s third largest trading partner and its share of export growth has doubled since 2000. Political instability in some of the African nations has, according to experts, dampened some of China’s enthusiasm for engaging whole-heartedly in Africa and uncertainty about transparency and regulatory frameworks as well as broader issues around infrastructural investments prevents companies from making long term investments in Africa at least until the risks of the current financial crisis have worked through the system

• Structural Shortcomings: Brazil is a major economic player in both Latin America and internationally and was relatively shielded from the financial crisis. Its growth has been rapid and its competitiveness, according to experts, stems from its “large, expanding and expandable domestic markets… natural resource abundance, macroeconomic stability, secure institutions and a business-friendly political environment” according to one of our experts. Because Brazil has discovered natural gas, it is now well positioned to grow rapidly across a number of sectors that will generate rapid income growth through trade. Trade itself means that Brazil does not need to borrow to the extent that other countries do in order to finance investments

in infrastructure. However, a large proportion of the population continue to live below the poverty line and this affects both the nature of demand and, of course, the long term development potential of the economy internally unless measures can be implemented to support education and training. One expert commented, “skilled labour is still a real issue in Brazil – most people train on the job.”

• Broadening Wealth: Indian and Chinese experts also commented that although much has been done to grow the economies by integrating them into the global trading system, there is still an issue of spreading wealth, especially to rural locations, and spreading education and skills as well that will persist in the future One expert pointed to an ageing population in China over the next 40 years and suggested that while India was well-placed to service the Chinese market as is population shrank, it would itself need substantial investments in health and education in order to make sure that it did not suffer from the skills shortages which are a function of under-development.

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Mapping Future SuccessThe future of the next five to 10 years is dominated by exciting opportunities across a range of sectors in China, India and Brazil. As one expert said, “The growth is already in these countries and will accelerate over the next few years.” But also Africa and some of the Eastern European and CIS countries like Poland and Kazakhstan are growing faster, albeit from a lower base and represent opportunities to develop new markets in regions of the world that have hitherto been problematic. Turkey also presents businesses with a gateway to the Middle East and, because of its increased focus on capital goods as well as commodities is emerging quickly as a more advanced economy.

What is exciting is the sense amongst the panel that the future is unpredictable. China, India, and Brazil are already on paths that ensure sustainable growth in the future. Other economies are growing from a lower base so their future potential is still to be realised but increasing on a daily basis. The risks with the newer markets, such as Vietnam, Kazakhstan, South Africa, Argentina or Mexico may be higher because they are less familiar to businesses and because their patterns of growth are likely to be less predictable. But the higher the risk, the higher the likely return.

There are two things for any business from this analysis though. The future will be determined by increased internationalisation by businesses but first, it is vital to make sure that the strategic reasons for entering the market are clear and that you have a clear sense of advantages and disadvantages of moving into a particular region. Three experts pointed out that many German companies had lost money because they had moved into China expecting to make money without undertaking the required due diligence to familiarise themselves with doing business there. This is to a large extent about finding out about cultures, but it is also about finding out about regulatory regimes, suitable business models (for example, the Chinese government increasingly requires

a subsidiary Chinese company to be established rather than a fully owned subsidiary of the parent company), and access to appropriate skills.

Second, each of these countries will do two things for a potential investor, exporter or strategic partner: provide a different way of doing things – perhaps access to innovations in processes or products or simply a different cultural perspective on business; provide access to new markets and opportunities that were not there before.

The future potential of these markets is not in question. The business of the future needs to take on board a global mindset and commit resources to ensuring that it can deliver that potential.

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06Conclusion

For a business operating in a global world, the myriad of choices can seem overwhelming. There are different languages, different cultures and different routes through into new markets as this research has shown and it would be disingenuous to try and suggest that there is one size that fits all businesses. At a very fundamental level, as the case studies have shown, due diligence and research are essential, finding the right people in a new location to work alongside others is key and, above all, the decision to internationalise has to be taken strategically.

But what the research has very clearly shown is that a new global paradigm is emerging. The developed world will be the benchmark for quality and high value production for the foreseeable future but this is no grounds for being smug. The countries and companies who have coped best with the downturn and bounced back through trade are the ones that have taken a long term view and looked to where the opportunities are going to be five, 10, even 20 years down the line.

That future is with us now and the emerging world has emerged buoyant from the downturn. Trade between countries in the emerging world is vibrant too and in order to be able to take advantage of the opportunities that the world offers, businesses need to take on board the realities of this.

The choices for small business are harder because they do not have dedicated resources or departments for internationalisation. That said, the European Union and member state governments all have organisations to support SMEs who want to trade and will provide support to the strategy formulation and research/due diligence process.

And businesses have to ask themselves, can they afford not to? In the words of one expert, “The bus is already drawing away. And it’s better to be on the bus than under the bus.” Two things are key to this:

1. Don’t write off Europe: For European businesses Europe is a logical extension of a domestic supply chain. It represents access to ideas, networks and innovations as well as a source of potential resources and advice. The barriers to trade within Europe are minimal and centre mostly around language and culture but, because Europe is a single market for services as well as merchandise trading, it represents a route to accessing an integrated global supply chain.

2. Use Europe as a platform to the world: Europe’s largest companies are world leaders in their sectors and take their smaller suppliers with them as they enter markets across the world. We uncovered businesses that had been led by their clients into the global space and this is an effective and lower risk way of taking the first steps to operate globally.

Above all, the research has demonstrated that trade is so much more than imports and exports. It is about international networks, relationships, innovation and creativity as well. The emerging world is rapidly catching up in developing its own networks and technological standards. In the words of Stuart Nivison, HSBC’s European Head of Trade and Supply Chain, “We can’t afford to ignore these fundamental changes in international trade - they will result in both opportunity and risk. It is the businesses that understand and adapt to such changes that will survive and thrive over time.”

Rebecca HardingReport Author.

Managing Director, Delta Economics

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07Going International: Turning Insight into Reality

1. Take time completing the right research: A business’ success in a new country will depend on the level of research conducted at the outset. Gaining knowledge of a wealth of factors, about the country (its culture, customs and government policies) through to its economic and trading conditions (its import and export regulations, its tariffs etc) and at a granular level, the extent of competition in the target country and the overall suitability of a product for that audience is key.

2. Consider if the business is ready to trade internationally: While there is myriad opportunities for businesses to explore across the world, these need to be developed at the right time. Ask yourself when an international move can best fit into your business’ overall strategy. For example, do you have sufficient production capacity to meet new demand? Do you have the resources available, or potentially available on the ground? Can the management team devote the necessary time required to research and establish an international operation?

3. Mitigate the risks: Mapping, and therefore mitigating the risks early is key.

Consider the bigger picture – is the country’s political instability a factor?

Investigate the reputation of your trading partner – can you speak to other businesses they are trading with to establish their credentials and payment history? Have you agreed appropriate payment terms and the process for transfer of goods?

Consider the impact on cash flow that international investment will require – how can this be managed?

Address how you are going to transport your product or service to its new audience and how you can remove the risk. Do you need insurance to cover storage in ports?

Exposure to foreign exchange risk arising from volatility in the currency markets can have an impact on profitability and needs careful consideration and planning.

4. Financing Trade: The disparate payment objectives of buyers and sellers where buyers want to defer payment as long as possible and sellers want to receive payment as soon as possible can put a strain on a company’s cash flow. Careful planning is required to ensure that working capital facilities are in place at every stage of the trade cycle and companies should engage with their bankers at an early stage to determine the level and structure of facilities to finance their international trade.

5. Seek expert advice: The right advice will lead to the right decisions for your business. Many organisations are experts in providing the latest information which will lead you to the development of an effective international strategy. Aside from banks, Government organisations, Chambers of Commerce, Customs & Excise, Trade Associations and Insurance Brokers are well placed to help.

While it is essential to map the trends and influencing factors which will help a business to decide where best to maximise international markets, it is equally critical to create a strategy which enables a business to turn insight into reality. The experts interviewed for the report provided their tips on making a success of trading internationally:

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The report looks at the world’s most significant trade flows across countries that by themselves, account for 71.3% of all world trade: Argentina, Australia, Brazil, Canada, China, Czech Republic, France, Germany, Greece, India, Indonesia, Ireland, Italy, Japan, Kazakhstan, Malta, Mexico, Poland, Russia, Saudi Arabia, South Africa, South Korea, Spain, Switzerland, Turkey, the United Kingdom and the United States of America.

We have also looked at the EU as a trading bloc for some of our comparisons bringing the total represented by the countries in this study to 78% of all world trade. The EU as an entity by itself accounts for over 34% of world trade and, because it is a free trade area, the 27 countries within it and the additional countries who are in the European Free Trade Area can trade with one another without barriers. It therefore can effectively be looked at as a ‘country’ in its own right.

The research for this report was conducted by Delta Economics across 27 countries plus the EU as follows:

1. Desk research examining the major publications, documentation and statistics from international and national sources to provide a picture of trade, economic performance and international business strategies

2. Econometric analysis of trade data using the United Nation’s Comtrade database, alongside descriptive analysis of trends from the World Trade Organisation, the International Monetary Fund’s Direction of Trade statistics (DOTS), the World Bank statistical sources, Eurostat and national sources. The econometric analysis is sourced through Tradesift software(http://www.tradesift.com)

3. Global panel of trade experts: 50 individuals were interviewed to establish their views on actual and future trends in trade, emerging sectors and countries

and opportunities and challenges for businesses at a country and international level

4. 50 Case studies: case studies sourced by Delta Economics and HSBC. These give a picture of global business models and hints and tips for operating internationally from a broad spread of companies across the world

5. HSBC trade head insight: in-depth interviews were held with HSBC trade heads in key European countries in order to gain a country-specific picture of trade for each.

08Appendix 1: Methodology

AcknowledgementsDelta Economics would like to extend thanks to the following organisations who supported us in this piece of work:

IFF Research: Angus Tindle, Ben Davis, Steve Lomax, Flaurent Vauvillier, Emma Boggust, Kate DennisInteranalysis and Tradesift: Professor James Rollo, Dr. Michael Gasiorek, Dr. Peter Holmes, Sarah Ollerenshaw

The Delta Economics Team:Dennis Harding , Iris Beckmann, Jenny Hickey,Martina Hamingerova, Mayookh Lad, Nayani Bandara,Nandita Singh, Naomi Conrad, Olga Galeyeva,Praneeta Prakash, Rahul Mohey, Charles Harding,Rohit Murthy, Simon Harding, Renee Horne

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08Appendix 2: International Panel of Experts and Case Studies

Gerald Wolf (Germany) Head of Economic Affairs, German EmbassySanem Erucar (US) Founder and CEO, AvidTripslHerbert Quelle (Germany) Head of Economic Affairs,German EmbassyErik Andersen (US) CEO, Remedy InteractiveMark Mensing (Canada) CEO, Canada Export CentreBrian Raue (Australia) External Affairs Director, Barwick Wines Richard Brubacker (China) Founder, Handson, ChinaLu Song (China, EU) Lo-C IndustriesKristina Dryza (Japan, Indonesia, South Korea) Independent ‘futures’ expert, TokyoAlpesh Patel (EU, UK, India) Director, TIE- Indus Entrepreneurs and Praefinium PartnersIndio Urresti (EU) Senior Researcher, European CommissionLucie Navakova (Czech Republic) Finance Director, ALTAKairat Mazhibayej (Kazakhstan) Chair, RG BrandsJiri Kovár (Czech Republic) CEO, UNISReinhard Fesenmeyer (Germany) Head of Finance and Treasury, Herrenknecht AGMichael Marratche (France) Managing Director, Longue PorteeSue Uda (Ireland) Director, A Touch of IrelandCostantino Putzulo (Italy) Director, Ceti Pelletteria, Alex Falzon (Malta) Sales Manager, Progress Press, Edward Cassola (Malta) Director, Fortuna EnterprisesAntonio Fernandez (Spain) Hark Marmoles Sociedad LimitadaJuan Molero Durán (Spain) Extremena de Ajos Aceuchal ScoopTheo Camenzid (Switzerland) Technical Director, Josef Betschart AGDr. John Sandercock (Switzerland) Managing Director, The Table StableJonothon Tipper (UK) Financial Director, International Clothing Designs, LondonMehmet Pekarun (Turkey) CEO, Kordsa Global

Vicky Pryce (UK, Greece) Formerly UK Head of Government Economic services and Chief Economic Adviser to Department for Business Innovation and Skills Lord Digby Jones (UK) Independent, also adviser to HSBCRenate Hornung-Draus (Germany) Managing Director, German Employers FederationIsabella Moore (EU) Chairman, COMTEC (formerly Chair, British Chamber of Commerce)Ulrich Hoppe (Germany) Director General, German British Chamber of CommercePritam Bannerjee (India) Trade Director, Confederation of Indian IndustryAndrew Bainbridge (Saudi Arabia) CEO, BMI international, Dubai and Chair, IMF reconstruction fundNeal Ghandi (UK) CEO, Global QuickStartSir Andrew Cahn (UK, EU) Head, UK Trade and Investment (UKTI)John Whelan (Ireland) Head, Export IrelandHeather Booth di Giovanni (UK) Director, Economics and Evaluation, UK Trade and Investment (UKTI)Jonathan Potter (France) Senior Economist, OECDNeil Cooney (Ireland) Enterprise IrelandEmmanuel Berck (EU) Deputy Head of Enterprise, DG Enterprise, European CommissionScott Barklamb (International) CEO, International Employers OrganisationLia Vangelatos (South Africa) Head of investments, Anglo-Zimele VenturesKlaus Niederländer (EU) Managing Director, CDE InternationalGreg Evans (Australia) Head of Economics and Trade, Australian Small Business AssociationHelen Alexander (UK, International) President, Confederation of British Industry (CBI); Partner, Bain and CoVin Murria (UK) CEO, ElderstreetBobby Hashemi (UK, International) Founder, Coffee Republic and partner, Risk Capital PartnersClaudia Crawford (Germany) Director, London Office, Konrad Adenauer Stiftung

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Martin Bajer (Czech Republic) CEO, ALTAThierry Lerr (France) Financial Director, Sercel SABaudoin Van Robais (France) Finance Director, Alstom TransportElene Grdzelishvili (Georgia) Financial Director, GD InvestGeorge Chirakadze (Georgia) Director, UGT ltd,Aleksandra Zakrzewska (Poland) Treasury Manager, Pepco PolandDimitry Barkov (Russia) Head of Corporate Finance, SportmasterNikolay Komarov (Russia) Volga- Dnepr GroupIrakli Zambakhidze (Georgia) Deputy Financial Director, UGT LtdJose Fernandez Calvo (Argentina) Founder, Calvo Construction MaterialsAleksandr Barabanov (Kazakhstan) Executive Director, Zolotaya Melnica BreweryDr Galia Shunusalieva (Kazakhstan) Trade Representative, German Trade in Central AsiaAnastasiya Nazarova (Kazakhstan) Manager, Kazakhstan- Germany Association of EntrepreneursAsylbek Aldangarov (Kazakhstan) Marketing Specialist, Chamber of Commerce, Karaganda OblastSebastian Wisniewski (Poland) Germany-Poland Industry Chamber of CommerceProf. Jerzy Cieslik (Poland) Chair of Management, Kozminski UniversityJosef Solisch (Poland) Managing Director, Ommer Dr Tomasz Wesierski (Poland) Director, WesslingZbigniew Kwapisz (Poland) Director, Lutz BladesViktor Ermakov (Russia) Director General, Russian Agency for Small and Medium BusinessDr. Petr Král (Czech Republic) CEO, WebTrade CZOldrich Körner (Czech Republic) Director, Confederation of Industry of the Czech RepublicKirsha Carretero Rivera (Mexico) CSR Officer, Banco IxeFrau. J. Hamingerová (Czech Republic) Director, ForschnerRohit Aggarwal (India) Founder, Koenig SolutionsSanjay Jhunjhunwala (India) Founder, REI AgroGanapathy Subramaniam (India) Journalist, Economic TimesProf. Daniel Heymann (Argentina) United Nations Commission for Latin America Prof. Dante Aldrighi (Brazil) Economics Department, University of Sao PauloProf. Raúl Vázquez (Mexico) Economics Research Institute, UNAM Mexico

Alexandra Hass (Mexico) Promex, Trade and Investment Promotion MexicoAndrew Morris-Richardson (UK) Director, Abacus LightingKelly Merrick (UK) Marketing manager, Abacus LightingAnonymised (Ireland) Food Exporting CompanyNoel Corcoran (Ireland) Sales and Marketing Director, Carbery Food IngredientsAnonymised (Switzerland) Consumer Goods ImportersDeb Leary (UK) CEO, Forensic PathwaysPeter Dodd (UK) Deputy Director of Trade, Department for Business Innovation and SkillsTomas Prouza (Czech Republic) CEO, Partners CZStefan Georg (Germany) CEO, Bayern LandesbankEduardo Salles (Brazil) Investor Relations Manager, AMBEVDaniele Venturato (Italy) Arrmet Srl.Anonymised (Saudi Arabia) Utilities Holding GroupAnonymised (Saudi Arabia) Aluminium ProviderViviene Kleynhans (South Africa) CEO, African Roots WinesMartin Chesno (South Africa) CEO, Mulberry Silk CompanyReg Rumney (South Africa) Economist and Head of the Centre for Economics Journalism in Africa at Rhodes UniversityMike Spicer (South Africa) Business Leadership South Africa CEOSydney Mufamadi (South Africa) Formerly Minister of Trade and Industry of the Republic of South AfricaJ Maly (Czech Republic) SwobodaM Sedlacek (Czech Republic) Managing Director, MandsStuart Nivison Head of Trade and Supply Chain, HSBC EuropeIan Tandy Head of Trade and Supply Chain, HSBC UKHerve Solignac Leconte Head of Trade and Supply Chain, HSBC FranceAndrzej Puta Head of Trade and Supply Chain, HSBC PolandTomas Nymbursky Head of Trade and Supply Chain, HSBC Czech RepublicAlfredo Bresciani Head of Trade and Supply Chain, HSBC ItalyWulf Linzenich Head of Trade and Supply Chain, HSBC Trinkhaus, GermanyToygun Özmen Head of Trade and Supply Chain, HSBC Turkey

60 Business Report

08Appendix 3: Delta Economics

Contact Dr. Rebecca Harding+44 (0) 1323 419 924rebeccaharding@deltaeconomics.comhttp://www.deltaeconomics.com

Delta Economics Rebecca Harding, Dennis Harding , Iris Beckmann, Naomi Conrad, Mayookh Lad, Renee Horne, Nayani Bandara, Charles Harding, Praneeta Prakash, Rahul Mohey, Nandita Singh, Olga Galeyeva, Jenny Hickey, Rohit Murthy, Simon Harding, Martina Hamingerova Delta Economics would like to extend thanks to thefollowing organisations who supported us in this piece of work: IFF Research: Angus Tindle, Ben Davis, Steve Lomax,Flaurent Vauvillier, Emma Boggust, Kate Dennis Interanalysis and Tradesift: Professor James Rollo,Dr. Michael Gasiorek, Dr. Peter Holmes, Sarah Ollerenshaw

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Melissa JobsonMedia RelationsHSBC Commercial Banking+44 (0)20 7991 0652melissa.jobson@hsbc.com

Note:Whilst every effort has been made in the preparation of this report to ensure accuracy of the statistical and other contents, the publishers and data suppliers cannot accept liability in respect of errors or omissions or for any losses or consequential losses arising from such errors or omissions, The information provided in this report is not intended as investment advice and investors should seek professional advice before making any investment decisions.

Compiled by Delta Economics.