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Businesses shift trade routes in preparation for economic recovery
Mid-market firms using international supply chains have faced significant disruption and headwinds as a consequence of the war in Ukraine, the long tail of COVID disruption, and wider geo-political tensions. However, despite ongoing economic uncertainty, many international business leaders continue to see international trade, and particularly exports, as a key driver for growth. According to data from the IBR, Grant Thornton’s global survey of mid-market companies, 45% of mid-market firms expect to increase their volume of exports over the course of 2023. This represents a slight increase from the first half of 2022 (+1%), and continues the trend that expectations have been rebounding strongly from the lows of the pandemic.
Percentage expecting a rise in global exports
Grant Thornton’s latest research shows how many businesses are innovating and adapting by reshaping their international supply chains, as they look to reduce risk, embrace opportunity and deliver value. Businesses have taken a variety of steps [i] to increase resilience, from building inventory, to diversifying their suppliers, to setting up local manufacturing hubs and ‘friend-shoring’ – striking deals in sympathetic countries that are more politically palatable to shareholders and customers.
Firms that develop a sound understanding of their risk environment and plan ahead, will create sustainable value in their supply chains and be well positioned for growth as economic conditions improve and trade picks up from the current levels.[ii]
“Many firms are striving to enhance their resilience through the implementation of several supply chain reconfiguration solutions. These include supply base diversification and exploring localising operations, for example through nearshoring or re-shoring. Overall, the impact of these approaches will depend on a variety of factors, including sector, resources, and the regulatory environment.
"However, by investing in the right strategies and evaluating their options, firms can enhance their supply chain resilience whilst maintaining a focus on costs.” - Elaine Daly, Partner, Head of Business Consulting, Grant Thornton Ireland.
Mid-market firms turn stumbling blocks into stepping stones by rerouting supply chains to boost value and resilience
Business leaders have had some difficult decisions to make on supply chains as they contend with global issues beyond their control. Product costs have always been a key consideration but firms must also navigate fluctuating transport costs, trade restrictions and the reliability and security of trade routes. As a result, international trade has become more strategically complex and increasingly requires a multi-lateral solution.
“Historically, one of the major drivers for offshoring into India or China was the low cost of labour. But over time, labour rates have increased in these countries and, with the added transportation costs, the equation for business leaders has changed.
“Prior to the pandemic or the war in Ukraine, many clients were already reconsidering how to optimise the value of their supply chains. These events have led companies to assess risk and look with more urgency at diversifying or relocating production.” - Alexander Griesmeier, Partner, Grant Thornton Germany.
International trade was unexpectedly rocked in 2022 by war in Ukraine, with the resulting spike in energy and certain food prices and higher transportation costs. But those initial shocks have eased and businesses now expect to get back on an even keel, with global shipping costs returning to pre-pandemic levels.[iii]
“Trade opportunities may not be immediately obvious. For example, if you run a company within the UK you wouldn't necessarily expect to increase exports given economic conditions. However, for firms sitting in the United States, with the exchange rate at the level it currently is, the UK is looking like a much more attractive option. Now an American company can buy from the UK far cheaper than you ever used to be able to. The circumstances may be more favourable than you’d initially thought.” - Oliver Bridge, Operations Consulting Partner in Business Consulting for Grant Thornton UK.
Trade offers route to growth
Effective supply chains enable businesses to deliver value and drive growth. As such, mid-market leaders are adapting their export planning to respond to opportunities to optimise in international trade.
According to Jonathan Eaton, Principal, Grant Thornton US, every chief executive should have three main considerations when optimising their supply chain:
Firstly, what makes most sense strategically? Where are the markets, channels, and customer segments that offer sustainable growth and support the overarching growth objectives for the business?
Secondly, what will be most effective operationally and financially? How can we minimise costs in our supply chain while maximising profit and mitigating risk at the same time?
And thirdly, what is the most tax efficient solution? Are there tax benefits to be had from the way we structure the supply chain, the trading partners we use, and the supporting flow paths to get products to market?
Jonathan adds: “Those businesses that can triangulate these three points successfully and adapt their supply chain execution quickly are the businesses which will thrive and take market share. If you can shift your mindset to think more long term, you’re going to continue to grow trade, and you’re going to do it profitably.”
Regional breakdown: Expectations of increase in revenue from non-domestic markets; increase in number of countries sold to
Expectations for exports remain strong among mid-market firms, even though wider economic indicators are more subdued. Two in every five firms (40%) expect an increase in revenue from non-domestic markets in 2023. A similar proportion (41%) were planning to increase the number of countries they sell to this year.
“New markets can be an appealing option for many, regardless of market conditions. Exports are particularly attractive for firms whose home markets are mature, but teams need to be well researched to capitalise on this.
“The good news is that quality exporters, particularly in food and pharma, have continuing high demand in growing middle class markets, for example in India and China. Well-known brands, be that finished goods or inputs into manufacturing, bring confidence to buyers. Maybe we are seeing a flight to quality and reliability in uncertain times, driven by more discriminating purchasing decisions.” - Jamie Downs, Partner, Grant Thornton Australia.
Differences in export growth expectations by major regions
Scenario planning for success
In the second half of 2022, mid-market firms saw a slight decrease in the ratio of their employees who were focussed on non-domestic markets. These figures were skewed by a major fall in the oil and gas industry, but not reflected across all sectors and regions. In Latin America and Africa the ratio of mid-market firms’ employees focussed on non-domestic markets increased. The top three markets to benefit are China, Germany and the USA, which are primed to increase supply from external markets. In China 26% (up from 25%) of companies report an increase in this activity over 2023. Meanwhile China’s latest export figures show a near 15% jump in this activity, defying expectations, with some analysts having predicted a contraction of 7%.
Top destinations for global trade
“Business leaders must plan for the long term. They need to think about where they export, where they import, should they reshore or should they not reshore, and how can they create competitive advantage and differentiate themselves in the market in such a way that they do it profitably.” - Jonathan Eaton, Principal, Grant Thornton US
Global events have made it a tough time for trade. The outlook from the WTO and others was that trade would slow in 2023, with rising interest rates and financial instability adding to geopolitical tensions. In April, the WTO expected export volumes to grow by just 1.7% this year,[iv] well below the average level for the past decade of 2.6%. Firms that plan ahead and are prepared to innovate will be able to make the most of their exports, helping them to stay one step ahead of the competition, despite current economic headwinds and a number of threats on the horizon.
i. www.weforum.org - From chip disputes to the EU's carbon border tax: 6 things to know about international trade this month - 10.01.23 ii. www.ft.com - WTO warns surge in borrowing costs set to hit exports - 05.04.23 iii. www.economist.com - Global shipping costs are returning to pre-pandemic levels - 09.01.23 iv. www.ft.com - WTO warns surge in borrowing costs set to hit exports - 05.04.23