With uncertainty in European markets after the Brexit vote, small to medium-sized enterprises (SMEs) are keen, now more than ever, to break into new worldwide markets,” says Lindsay Whitelaw, founder and chairman of URICA.
Ambition, especially in the face of uncertainty, should of course be commended, but it’s worth remembering that, although we’re leaving the EU, Europe isn’t going anywhere, and will remain our biggest market.
At the top of the Euro-pile is Germany – our single biggest export market outside the US, and our largest within the EU by some pace. “Germany, as the largest economy in Europe, is an obvious choice as an export market for UK companies,” says Rupert Evans, managing director of TranslateMedia. Some 10.7 per cent of our exports ($46.4bn) make it to German shores, the bulk of which are heavy industrials such as British-made aircraft parts and nuclear centrifuges.
Another reason to consider Germany is that its economy is thriving, and set to grow at its fastest pace in five years in 2016. Germany is fortunate in being one of the few developed market economies to have emerged from the economic crisis largely unscathed.
The opportunities for UK SMEs are many and fruitful, but even without the shadow of Brexit looming, there are still challenges to breaking Germany.
The deeply ingrained pride Germans have isn’t just a stereotype – the country has hyperlocal industries and a preference for local products and services. Like the UK, the German economy is characterised by its SMEs – some 99 per cent of all companies are in that bracket, with most family owned and passed from one generation to the next.
Germany has many so-called “hidden champions”, or Mittelstand. These are larger medium-sized companies that, although relatively unknown, are often global market leaders in niche specialised sectors such as prosthetics and conductive adhesives.
This can be a challenge for British SMEs trying to break into Germany with a new product or service. If one already exists, convincing the market a British alternative is superior is hard without validation or endorsement from a respected native. “German companies have always been quite difficult to export to,” says Simon Hill, co-founder and chief executive of Wazoku: “Germans like to buy German.”
Wazoku creates management software, and Hill says that “where possible, there is a genuine preference to buy from a German company or from a partner company in Germany.” His company deals with a lot of data, and one restraint that he has found when dealing with the country is that they are highly protective over data, and where it is hosted.
“Often having EU hosting is not sufficient, it needs to be hosted in Germany. In terms of doing business in Germany, we have built out our German presence, have German partners we do business with, and who represent us on the ground there.”
Having a native representative will go a long way, if only to convince buyers that your product is worthy. Paul Paling, financial director at FSi, found that “operating through a local distributor was key to our success in the market” due to German perception of foreign inferiority of quality. “The German market has been driven by its own set of standards based around Deutsches Institut für Normung (DIN), which they consider are greater than the current British Standards,” he says.
Since the EU member states constitute a single European market, deliveries to and from Germany do not qualify as imports or exports. In the wake of Brexit this could change, depending on the trade deal we secure with the EU.
Although we presently trade to the same EU rules, German business culture is totally different to that of the UK. It tends to operate in a far more mechanical, structured and consequently, efficient manner. Hill has found that German business is typically micromanaged through a very clear process. “From our experience the sales process is tightly managed and it is very difficult to build a sale outside of the process they have put in place. This isn’t a bad thing, but it is different to how it works on the whole in the UK.”
Germany is the EU’s biggest economy, and will have considerable sway in any trade deal with the UK. Following the triggering of Article 50 it will be mutually beneficial for both countries to maintain good trading relations – the Germans had a €51bn trade surplus with the UK last year.
For SMEs the impact could be felt even harder. Steve Box, international chief executive of Bibby Financial Services, warns that “a rise in import duties would hit these firms hard and could prevent new entrants altogether.”
Brexit, and the subsequent adjustment of sterling, has provided many UK SMEs with an opportunity to flourish in the German market – TranslateMedia is one of them. Evans says that “in the last couple of years, the strong pound has made it difficult to compete with local providers. But since Brexit, this has changed in our favour and we’re receiving many more requests from German businesses.”
Clearly this position is one that should be maintained. Emma Jones, founder of Enterprise Nation, adds that “there’s no doubt that the Brexit turmoil has done nothing to dampen down the small business appetite to export to Europe’s strongest economy, but what is clear is that they need much more help, much more advice and support to do it because it’s undoubtedly more complicated from here on in.”
Box says he is “confident that the Prime Minister will be only too aware that the backbone of the UK economy is made of SMEs. We only have to look at Germany’s Mittelstand to see this. If the UK is serious about developing our own ‘Brittelstand’, we need open borders to encourage trade.”