How one small company’s first Chinese order offers inspiration for Brexit

Gary Stevens has bought his first robot. It grinds and polishes brass switches twice as fast as human workers, and more consistently too.

The machine is not replacing people – he is hiring more of them as well, because he has just landed his first order from China and needs to ramp up production.

Companies building upmarket apartments and smart hotels in the world’s second-largest economy want to show off the finest interiors, and that includes the high-end light switches and electrical fittings designed and manufactured in Hastings by Focus SB, where Stevens works.

“We had to design a range from scratch, which is quite an investment. But the reason we did it is because China is a huge market,” he says.

More than 400 hotels are being built in the country, he says, including the MGM Cotai in Macau, an award-winning casino project which is using Focus SB fittings in its ultra-high luxury suites.

Exporting to China is not simple – the firm had to host inspectors from the country to check they met local standards. But now it has the seal of approval, the potential market is open to the company.

Now the biggest challenge is increasing production quickly enough to meet the new demand. Stevens hired five more workers and took on one new site this year, taking his total to more than 60 workers in three locations across the coastal town.

Another five staff will come on board in 2018. Its turnover of £4.5m a year should double over the next three years on the company’s forecasts, which it believes are relatively conservative. This is a big step. More than 90pc of its output historically has gone to the UK market.

Exporting to Europe has always been difficult as different countries have different standards across the EU. A few overseas markets such as UAE and Hong Kong use UK standards for historical reasons and so buy some of the supply.

But, despite this lack of EU sales, it was Brexit that prompted Focus SB to make this difficult new drive into China. “It was sparked off by the spectre of the Brexit vote. Although it wouldn’t directly impact us, we were fearful that the UK construction industry could be affected by Brexit in terms of access to labour,” Stevens says.

“If the UK construction industry slows down, then the market we predominantly supply into becomes more difficult. So that started the whole process.”

This East Sussex success story is a microcosm of the challenges facing the wider British economy. Businesses have spent the past 40 years growing in the knowledge that the UK is part of the EU, and now that is coming to an end on uncertain terms.

Initially, analysts and economists focused on the sectors that would be most badly affected by Brexit, analysing the depth of that impact depending on the type of deal negotiated and implemented over the coming years.

Just this month, Standard and Poor’s, the credit ratings agency, published a report looking at 16 industries and identifying the top three Brexit risks for each sector. Of those 48 risks, just one was positive – that a weaker pound would boost the leisure and hotels industry.

Growth opportunities are gaining more attention as companies seek ways to expand even as the political and regulatory ground beneath them threatens to shift. Financial services is one sector that is typically cited as a big potential loser from Brexit.

Banks, insurers, fund managers and others have come to rely on flows of business, people and capital across borders in the EU. The state of play afterwards is not yet clear and so firms are starting to implement plans to move staff to other EU cities including Dublin, Frankfurt and Paris.

Yet companies are adjusting their plans in a reminder that financial firms have always been flexible, adapting to the environment around them. It is what helped make Britain the world’s pre-eminent financial centre, and the giants of the City do not expect to simply skip the country the moment things change.

Take the London Stock Exchange as an example. It had 106 flotations in 2017, the highest since 2014. That does not give the impression of a firm struggling with Brexit, nor does it look like investors want to leave the UK.

Nikhil Rathi, the LSE’s UK chief executive, says the group is targeting a global audience, noting that British financiers have always adapted to the economic and political environment. His recent travels include India, China and Indonesia, winning business to make sure funds are raised in rupee, renminbi and rupiah in London.

“A big question for us is how to integrate the global emerging markets that are going to be the major source of capital flow and capital stock for the next 30 to 40 years,” Rathi says. “We have always been a global market. We have been building our business in China for years, but the noise around the UK and Brexit certainly means we are even more determined to continue to develop our global footprint.”

He does not expect to lose out even in European business post-Brexit, as investors from across the Channel still need to access Britain’s markets. EU firms need that capital too.

“Why would a European investor who thinks they can make money by investing in the UK market not do that? These are global investors who may also invest in the US, Hong Kong and other global markets as well,” he adds. “You need British, European, American, Asian, Middle Eastern capital – you look at the UK and European economies, the ageing populations, huge investment needs for infrastructure, where is that going to come from? I cannot see a situation where it would make sense for investors who can see attractive opportunities to somehow prevent their capital from flowing to take advantage of those opportunities.”

It is working. Recent listings in London include firms from Ireland, Cyprus and Austria. Beyond the EU, Israeli companies, in particular, appear increasingly keen on the British market – the number setting up in the UK rose by 28pc in 2017, according to think-tank BICOM, and 28 Israeli firms are now listed on the LSE with a market value of £11.5bn.

Certain domestic sectors other than finance are also performing strongly, particularly when serving global growth markets. “We are bullish on the UK aerospace sector,” says Jeremy Leonard at Oxford Economics. “Global demand for air travel is strong. Most of the demand is coming from Asia.”

As a high-value sector requiring specialised skills and kit and benefiting from economies of scale, it is hard to shift overseas too. Leonard anticipates growth of 2pc to 3pc per year over the next five years, which is twice as fast as the wider manufacturing sector. He also cites the creative services sectors as a crucial advantage for Britain, including advertising and marketing, as well as legal and accounting services.

As emerging markets become more advanced, businesses are demanding more of these specialised services. As Britain is a leader, companies here are among the best placed to make the most of this global growth. PwC’s Darren Jukes agrees, adding that services are often “borderagnostic”. He also believes the UK could have an edge in the latest hi-tech sectors where no rival country has yet built a lead.

“The government announced its industrial strategy and the sector deals that are looking to drive investment in artificial intelligence. If you’ve got organisations that can benefit from the use of those applications then potentially the next few years could see growth in opportunities,” he says.

It could even cover the automotive sector, which is largely worried that Brexit will ruin its supply chains by adding tariffs to cross-border trade. “The opportunity lies in organisations that are more focused on the emerging technologies in automotive, whether that is around connectivity, electrification, those types of applications,” Jukes says.

For anyone seeking advice on how to go global, Stevens has a happy story to tell about Chinese buyers. “They look at Britain as a flagship in terms of quality, and they seem to be very British-brand hungry.” he says. “I’m sure there are many opportunities for British manufacturers similar to us in different fields to take advantage of that.”

13 replies
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