Don’t waste time wishing the Eurozone mess will all go away. Wol Kolade writes that SMEs who run with it, may just turn a bad situation to an advantage.
The Euro was established amid great fanfare by the provisions in the 1992 Maastricht Treaty. Here was the answer to creating an economy to rival the mighty United States. A union of countries that would enable the freeflow of trade and people by removing the cost of currency fluctuations – one of the major factors that can hamper doing business.
To participate in the currency, member states were given strict criteria, such as a budget deficit of less than three per cent of their GDP, a debt ratio of less than sixty per cent of GDP, low inflation, and interest rates close to the EU average.
And for a while it all seemed to be going so well. Ireland boomed as did the Spanish property sector. Fastforward nearly 20 years however and it appears as though the wheels could be about to come off.
Hindsight being what it is, it is now so easy to see the model was unsustainable. As early as 2004, Greece admitted it joined the euro in 2001 on the basis of figures that showed its budget deficit to be much lower than it really was; that it had actually exceeded the 3 per cent per cent cut-off limit since 1999.
Now that Greece’s massive overspending and poor tax collection is threatening the stability of the whole Eurozone, there can be little hope that this issue will simply sort itself out in the short term. Indeed, with the likes of Portugal, Ireland, Spain and Italy at risk of being contaminated by the spread of sovereign debt contagion, this could be the start of years of currency shocks as ministers’ grapple with the crisis.
Could this be the beginning of the end of the Eurozone? If so, given that the EU is our biggest trading partner, what can an SME do to better cope with the repercussions? The bad news is that there is no one, simple solution that will bomb proof a small business should the Eurozone blow up.
However, there are things that small business owners can do now to mitigate the impact of the turmoil, chief of which is to plan for the long term.
A recent survey by American Express found that nearly three quarters (73 per cent) of UK SMEs believe in an export-led recovery. And yet over half, (56 per cent) also said that their confidence in international trade is diminishing because of concerns over the euro and the resulting currency fluctuations.
It is obviously not possible to avoid currency risk totally, apart from abandoning international sales and simply selling to the UK (not really an option with the realities of weak domestic demand) so, instead, think about ways of hedging against currency movements using mechanisms such as forward contracts which seek to ‘lock in’ an exchange rate – a bit like you do when you get a fixed rate mortgage.
So, having managed your currency risk, the next step is to look abroad for sales. Emerging markets such as Brazil, Russia, India, China – the so-called BRIC nations – have surged ahead in their growth while the West has struggled.
Could your products sell in these markets? Do some market research (are your competitors expanding into these economies, could you partner with a local firm, are there any supply chain hurdles you would need to address etc) and find out what measures you need to put in place.
If you need further support, the British Chambers of Commerce offer advice on overseas trade and have a number of export marketing research advisers to help you develop your own strategy when selling overseas while the UK Trade & Investment government department arranges forums specifically to help SMEs succeed in selling abroad.
As a private equity firm, growing overseas trading links is a core part of how we help our portfolio companies grow and we have developed strong links with partners around the globe who can help nurture that side of a business.
For a successful SME looking to get to the next stage in its development, the backing of a private equity firm might be the way forward. And, if you think talk of private equity backers and international sales strategies sounds the exclusive domain of big business, think again.
ISIS bought a High Wycombe-based business with 40 staff called Martin Audio back in 2003. The business was a leading player within the UK in the design, assembly and distribution of high-end speakers for use in the touring and theatre markets as well as stadiums, cinemas, bars and nightclubs.
By the time we sold the company four years later to a US buyer called Loud Technologies (note, an overseas buyer), the workforce had grown by half and was successfully working with more than 40 dedicated distributors, serving countries throughout Europe, the Far East, the USA, Australia and other growing markets around the world.
Ultimately, nobody knows exactly how the euro crisis will end. There are those that say that, in the long run, the Eurozone is doomed because countries inevitably look inwards when the chips are down, but I am slightly more optimistic. I think the Eurozone is still a prize worth pursuing but the reality is that it will take years to unpick the mess.
But while governments sort this out, don’t waste time wishing it would all go away. Run with it and you may just turn a bad situation to your advantage.