David Kuo talks to Dr Adam Marshall from the British Chambers of Commerce.
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David:
This is Money Talk, the weekly investing podcast from the Motley Fool. I am David Kuo, and we sail past the first one hundred days of the coalition government, how are the policies of David Cameron and Nick Clegg affecting businesses in Britain? We have already seen evidence that the UK economy is returning to growth, unemployment is on the way down, banks are making lots of money again, and exporters are flogging more goods to emerging markets. So is it time for Britain's small and medium-sized companies to break out the champagne, and drink a toast to the success of the new government? Here to tell us more is Dr Adam Marshall, Director of Policy and External Affairs at the British Chambers of Commerce.
Welcome to the Motley Fool, Adam.
Adam:
Hi David, thanks for having me.
David:
I'm delighted that you're in here, because the last time we met we were on CNBC, and I think we had a fairly good session there, didn't we?
Adam:
Absolutely.
David:
I wasn't too rough on you, was I?
Adam:
No no no, the inquisitor in full form.
David:
Next time I'll be rougher. So can we start by asking you just to explain a little bit about the British Chambers of Commerce, and what exactly do you do, and how does it fit into the British business landscape?
Adam:
Well, the British Chambers of Commerce really is the organisation that represents business in every corner of the UK. We're made up of 55 Chambers of Commerce, which have front doors in all of the towns and cities up and down the country, and over 100,000 business members. So what we can do is represent business not just here on the national stage, but also in town halls, and with local councils as well. We do for the smallest of businesses right up through to some of the big multinational companies that make our cities and towns their home. So we've got both the geographic and a wide sectoral spread as well. So we really feel that we can speak about the concerns facing business today, and try to act on them here in London.
David:
How do you come up with a policy that will be acceptable to the smaller businesses as well as the people up at the other end of the scale?
Adam:
Well, I think there's some really fundamental things that all business people want, and that all businesses share, in terms of what they want from a government. The first is a really solid business environment. That has both visible aspects and invisible aspects. The visible aspects – things like roads and rails, making sure our infrastructure works properly; the invisible aspects – making sure that people are ready to come to work and ready to get into the labour market, or something like regulation, which affects so many businesses. The number of businesses that come to me and talk about various bureaucratic requirements, red tape, etc – it's enormous. It's precisely these sorts of concerns that we try to address.
David:
So how do your members at the moment feel about this coalition government, the policy of the coalition government to address public finances? Do they feel that the plan to reduce the budget deficit is in their favour?
Adam:
I think that our businesses, and the business community at large, have been encouraged by progress in the first hundred days of this new government. They like the direction of travel, and I'll qualify that: they like the direction of travel, even though they know it may affect them negatively in the short term. A lot of them basically say to us, "Look – we need to take our medicine as a country, and deal with this budget deficit, because it causes us so much uncertainty as businesses. We don't know whether we can go out and start to invest again. We don't know whether we want to take on staff again. We don't know whether we want to grow our stocks again".
All of that uncertainty, they feel, is driven by an unsustainable public finances perspective at the moment. What they want to see is that brought under control, even though they know in the short term many of them will lose contracts, may lose business, or may suffer a little bit.
David:
So let's hope it's not a case of it being better to travel than to arrive, but if we have a look at some of the more specific things, like say the public sector wage bill – how can small and medium-sized businesses benefit from the freezing of the public sector wage bill?
Adam:
Well, I think there's two things here. The first is that the squeeze on the public finances will result in a big number of public servants actually leaving the public service. Some estimates say between 300 and 500,000 civil service jobs, public sector jobs, will be lost.
A lot of those people will need to end up in the private sector. Some of them will have great skills, which will be very useful to a number of small and medium-sized businesses up and down the country. Some of them will become self-employed, some of them will become suppliers. So there's some opportunities there.
In terms of wages, however, there is another issue here. Public sector wages have grown at a rate double, sometimes triple, the rate that private sector wages have grown in recent years. You've got huge, huge increases here, so we're encouraged to see the government taking action to say, hang on a second – it's not possible that wealth-creating businesses aren't paying people more, but we in the public sector are.
We've got to even that out, we've got to get the playing field a little bit more level here, so that people in places like, say, Sunderland or Barnsley or Liverpool, where there isn't a very very strong private sector base, don't automatically say, the best option for me is to try and find a job in the public sector.
David:
So are you saying that there is a possibility of somebody who has been in a cushy number in the civil service moving to the private sector? I can't really see that happening, though.
Adam:
I think it absolutely is the case, because the scale of the adjustment we are about to undergo is bigger than any of us probably have ever experienced in our lifetimes.
David:
But they're two completely different cultures though, Adam?
Adam:
Absolutely correct, but you have to cut your cloth. One thing business has learned over the course of the past two or three years is you have to cut your cloth to suit the conditions you're in – they have done so. You look at the number of businesses and their employers that have come to agreements on things like shorter time working, voluntary sabbaticals, longer vacations, unpaid holidays, etc, simply to keep things afloat – that hasn't happened so much in the public sector, but there is a sense that that is going to start to happen in the public sector, and that the mentality of the two sectors are going to get a lot more similar in the years to come.
The private sector's taken its first share of pain, and the public sector's now about to join it. So I think you'll see a lot of people thinking in the same way, going forwards.
David:
But what you're suggesting also is that, in order for that to happen, the private sector must expand, so therefore the private sector must have access to finance. Now isn't that one of the big problems at the moment? – and how can the government help these smaller businesses to access finance to allow them to expand in order to take on the jobs from the public sector?
Adam:
Well, I think it's absolutely right that that expansion challenge is the biggest one facing the private sector right now. The Office of Budget Responsibility, George Osborne's new independent forecasting unit, we broke down their statistics fairly recently. What it turns out is, for their growth forecasts for the UK to be realised, the private sector would need to create 330,000 new jobs every year.
Now, if you contrast that with what happened during the boom years, the private sector was creating 200,000 jobs a year. So the kind of step change that's needed from the private sector, from small and medium-sized businesses, the real workhorses of the economy, simply in order to get up to those rather anaemic levels of growth, is going to be enormous. So it is a massive challenge.
You mentioned access to finance – of course, that's one of the things, one of the enablers that would let those small and medium-sized businesses do that, and I won't deny that there has been a problem there, but it's a two-sided problem, I think, David. One problem is demand for finance is much lower than it ever has been amongst small and medium-sized businesses.
Why? – uncertainty, they're waiting to see how things pan out before they start to invest again. If I were in their position, I'd be doing exactly the same thing. You look prudent, you avoid massive risks, unless you see a market opportunity coming forward. A lot of businesses have done that. But, on the other hand, there are also complaints about the behaviour of the banks, and about the availability of money, so that they can expand when in fact they do want to. So it's a double-edged sword, I think.
David:
So are you saying that the finance is available? – because Vince Cable is jumping up and down at the moment, telling the banks to lend money to businesses. So who's telling the truth here?
Adam:
Both the businesses and the government are telling the truth here, because as I said, it's a complicated story. The banks have money available to lend, they assure us of that on a daily basis. When we look at their figures, there is money there.
What do our members complain about? Well, they complain about two things really. One is the terms upon which they're offered that money, which have changed dramatically over the past few years, and so many of them say to us, we don't expect to go back to the sorts of conditions when money flowed easily, but at the same time we didn't expect it to be this harsh.
So there's some questions of going to the banks and talking to them about how you ensure that the terms and conditions aren't so insurmountable that businesses can't borrow – that's one.
The second one is a problem of over-centralised decision-making in the banks. The lending system works best when branch managers actually can get a gut feel for a business, and then write a loan based on what they think the level of risk is. That's all but disappeared out of banking system.
You have young, often very inexperienced employees on the front line, typing into computers, and you get back a Little Britain-style, "computer says no", sort of response, and that's what sends the small business community into a tizzy. If you get back to proper relationship banking, and we work with the banks on a day-to-day basis to talk to them about how to do this, we think you'll start to see a lot more positive relationships between smaller businesses and banks growing again, so addressing both sides of that issue.
David:
So what about the cost of the loans themselves? I mean, the Bank of England is doing its utmost at the moment, keeping interest rates as low as possible, even though inflation is fairly high here in the UK, running at about 5% on an RPI basis. So is it right for the Bank of England to keep interest rates low for the benefit of your members, or should the Bank of England be addressing this bigger problem of inflation, be it imported inflation, or inflation inherent here in the UK?
Adam:
Well, it is our belief that interest rates have to stay low for as long as possible, to encourage and incentivise businesses to invest.
If you look at the business culture here in this country, here in the UK, we have a lot of strong entrepreneurs, but also some fairly risk-averse entrepreneurs as well. We have a lot of people out there who start a business, do fairly well at it, but don't take that next big leap to try to grow it and make it bigger.
We want to change that, and we think that low interest rates is a key component of doing that. Yes, inflation is a problem; yes, it's higher than we'd like to see it, but we think that taking a short term risk, vis-à-vis inflation, is better than raising interest rates too early, which could in fact slow down the growth that we need to see in order to get us back on an even keel.
David:
OK, so we've looked at the Bank of England, so let's have a look at George Osborne now. Now he has decided that he is going to dispense with the idea of increasing National Insurance contributions ...
Adam:
Ah – only partially, though, of course.
David:
OK, yeah. So he's done his bit as far as National Insurance contributions are concerned, but he is going to increase VAT. Which would have been worse for your members – an increase in the National Insurance, or the increase in the VAT?
Adam:
Our members were crystal clear on this – even before the election campaign actually began, throughout the election campaign, and we're still still crystal clear now. The one thing that we cannot do is dissuade employers from taking people on by effectively adding to the payroll tax burden they already face.
Now, what George Osborne did was he met us, the business community, half way. He said, I'll make it only half as expensive as the previous government was going to do in terms of a rise in National Insurance. We welcome that, because we realise in this kind of climate you can't necessarily give massive tax breaks, or cut tax rates for any one group, in a massive way. But we do need to see employers taking people on, and National Insurance is a big deterrent, because it adds so much to the cost of doing so.
VAT, on the other hand, it's a tough one. We called it, at the time, the "least worst option" – grammatically incorrect, of course, but it really represented what so many businesses felt. If any one tax had to go up, they thought that a tax on consumption was the best way to go, rather than a tax on input, a tax on employment, or a tax on anything that would stop businesses doing business directly.
David:
Yeah, but surely a lot of your members must also be smaller retailers? So two-thirds of the UK economy depends on people going out and spending money.
Adam:
Absolutely.
David:
So if VAT were to go up, which it will do on 1st January, isn't that going to deter people going down to the shops, spending money, risking the UK going back into recession again, and just generally not good for your retailing members?
Adam:
Well, of course we said it was the least worst option, so they're all bad. No business, whether it's a retailer or any other form of small, medium-sized or large business across the country, wants to see tax rates go up, but if you look at the balancing acts that the Chancellor has to perform, what he's said is, corporation tax rates, the taxes on profits, are going to be simplified and come down.
Capital gains inequalities, as the coalition put it, even though some members of it were less in favour of doing so than others, have meant rises in capital gains taxes – not great for business, especially for entrepreneurs seeking to generate wealth to start up a business, but not the worst outcome we could have seen. National Insurance was held a little bit, so that it didn't get so high that we become uncompetitive in payroll terms with other countries, and VAT was put up.
Now, VAT going up – yes, it's a problem, I'll admit it, but any tax going up is a problem. At least in this case what we're not doing is pricing ourselves out of the market more broadly by raising a tax that would put us so much out of kilter with our European neighbours.
David:
And I suppose there is also the possibility that, just as VAT will go up, it can also come down, because it is one of those things that is easily adjustable?
Adam:
It is one of those switches that the Chancellor has. Unlike so many other parts of the tax system, look at corporation tax or capital gains, and how long it takes to do anything on those, this is a different matter entirely. It takes one budget to make a change in one direction or another.
What we as a business community want to do is to ensure that this 20% rate isn't in place for a long time. It does hurt so many of our members, just like it hurts the wider business community as a whole. We don't want to see it, so let's see how we can do with this particular package of measures, which on the whole our business members seem to support.
David:
OK, let's have a look at this other switch that the government is planning to flick at the moment, and this is the switch that will enable the UK to start becoming an exporter again. Now, this is something that is central to the Prime Minister's idea of getting the UK out of recession. How is this going to be done? Is it going to happen?
Adam:
I want to give the Prime Minister some credit for getting up on stage and saying, "We need to become more of an exporting nation again". I want to give him credit as well for leading a trade mission to India and to Turkey very early on in his tenure. Those are both the right sorts of PR moves to make. Unfortunately, however, they are PR moves. They are fronting up what needs to be a much broader set of policy measures to help companies export.
Now, we did some research last year. Right at the height of the recession, only 38% of the companies that we were talking to were exporting, and of those, six in ten did so because they got a phone call from overseas. We are not, by nature, looking to these growth markets, wherever they may be found in the world, and helping our companies as a country and as a government to get out there and take advantage of them.
Look at British trade with South America, for example – it's almost non-existent; in some parts of south Asia, the same thing. We talk about India and China and the BRIC countries incessantly here in the UK, yet they're not our main export markets. Our export markets are the US, and the European Union – both areas that we know are going to stagnate in terms of demand over the years to come.
So how do we flick that switch? This is not like VAT, this is one of the harder things to do. We think there are a couple of things that the government could do right away to help. The first is, make it easier for businesses to get export credit insurance. It sounds like a terribly wonky and nasty thing, but basically there's so many risks involved with exporting your goods or your services, that you need to have some kind of insurance protection often, and that's been all but withdrawn.
Now the Germans support their businesses, when they go out to compete overseas; the French do the same, the Americans do the same, the Canadians do the same. We need to get back into that game again as well.
I'll give you an example: wallpaper manufacturer in Lancashire – really successful, a big exporter, you know – a company that could drive the economy of an area of the country that's not been so successful, over recent years. Their biggest competitor's in Germany, and it turns out the biggest market for the type of wallpaper that they make is in Russia.
Now, our company had the better product here in the UK, but could not get the export credit insurance it needed in order to enter into contracts and enter into deals with some of its Russian buyers. The German company got support from the state, overtook our UK-based company. We cannot let that happen in future, so we've got to sort out export credit insurance.
The other thing we have to do is to get a full-time trade minister out there banging the drum for Britain and British exports. We talk ourselves down too much, we've got a lot of good things that come out of this country. Manufacturing, for example – the most productive year in British manufacturing, believe it or not, was 2007 – never generated more value for the UK, even though the number of jobs in the sector is nothing like what it used to be.
We don't talk about those positives, we don't talk about all the services that we have, here in London, for example, that are exported around the world. From where we're sat right now, I can see the headquarters buildings of two companies, major international services companies, that work everywhere. Those are exports too. So both the tangible and the intangible, the goods and the services, we need to do more to get them overseas.
David:
So are you saying that we don't necessarily need a low pound, in order for Britain to become competitive against other countries?
Adam:
What's been really interesting to us in recent months is that the low pound has not appreciably changed export volumes, and that's quite worrying.
It leads you to two questions: one, do we have things, whether goods or services, that people want to buy elsewhere? And two, are we doing enough to market them and promote them overseas?
Now, I'm fundamentally convinced that we've got the stuff, we've got the goods, we've got the services. This is too ingenious and interesting of a country not to produce those goods and services. What we don't have is that trade promotion angle.
Whenever you go abroad, and you go to trade shows, for example, you'll see company pavilions, but you'll also see countries clubbing together to market their products together and have a little economic nationalism overseas. The Germans are great at it, a lot of the other countries are great at it too – we're not.
We need to see trade promotion as one of the things that the government does fund and finance, even through these cuts. So help companies with £2,000 grants, for example, to get overseas to meet potential clients in South Korea or in China, or in Vietnam. These are the sorts of very very small things that can make a huge difference to a business's growth.
David:
Now, some of my listeners now will be jumping up and down and saying, "Ask Adam which are the sectors that are going to do well?" – because as you know, the Motley Fool is an internet website where we have a lot of people who are looking for investment opportunities. So which are the sectors that are likely to benefit from this export drive?
Adam:
Well, I think one of them (I mentioned it before, because it is unsung) is the manufacturing sector in this country.
Everyone thinks of manufacturing as the sooty, old, Victorian industrial era, thinks of Manchester with smoke and soot coming out of chimneys and factories and things like that. Manufacturing's changed so much, and we have to get the image of manufacturing back to where its reality is.
Where are we competitive in the UK right now? We're competitive on quality, in many areas, and we're also competitive now with a lower pound on price. Now, if we can put those two things together, you could see a lot of businesses, whether they're manufacturing a small component in something that becomes a bigger product, or a finished product in and of itself, doing a lot better.
I'll give you an example: a healthcare company in Derby. Now, Derby is not one of the places that you would think immediately, oh, economically firing on all cylinders – I'd say it's firing on half of its cylinders right now.
This particular family-owned company had 300 employees, and creates single-use medical devices for use in surgery, so some of the plastic kit that you need to do a surgery. That's the kind of thing the Chinese produce in mass quantities.
David:
Correct – I was going to say, how could you compete with a Far Eastern company making exactly the same product?
Adam:
Guess what? – they added another shift, they've never been more busy in terms of the percentage of their orders that were export orders. Why? – because they got out there, number one; and two, because their quality was s good. Every order was reliable, and everything came in right.
So we do have advantages in this country in the manufacturing sector, for example, that we need to bang the drum about. We need to get out there and say, we in Britain can do things. We can still be a workshop of the world, even if we are not the workshop of the world.
David:
But do we have the ability to do that? Do we have the necessary skills to be able to sell to the Far East, to China?
Adam:
Well, we are a self-effacing country, and often a very shy country, so the first thing we have to do is work on our sales skills here at home. Another thing that we need to do is to work, I think, on our international projections. So many companies that start up here in the UK, they look at the home market, and if they really get adventurous, they look to France or the US or Canada as places where they can expand, because it's fairly easy to do so.
I think the companies that are going to be successful over the long term – I can't pigeonhole them into any one sector, but I can say are those that are look at the growth markets from day one, and think of themselves as global, from day one, and think about things like acquiring the language skills that they need, or the trading skills that they need, or understanding the customs and the culture of the countries that they're trying to sell into, from day one.
That will make a big change, I think, for many of these smaller companies just starting up in someone's back room, or a company that's been in business for ten, 20, 30, even 100 years, but that's rethinking its strategy.
David:
Now the thing is, you must deal with small and medium-sized enterprises all the time. In your opinion, when you look at a company, what is it that makes one stand out and sort of say, this is going to be a small and medium-sized enterprise that is going to grow into something really big?
Adam:
Well, I think the first thing is leadership and vision. One of the things that we've identified as really being key to growing the entrepreneurial culture and the enterprise culture of this country is SME leaders, SME owners, SME directors, who think big from day one, and who have the skills and the drive to bring people along with them.
So often what we end up having actually are SME owners and SME directors who really want to do well for themselves and their family, but that don't necessarily have, from day one, those leadership skills to help bring other people in, sort of to be the Pied Piper if you will, and bring the whole town along with them in order to buy into their story and into their product.
We need to do more with that, I think, and here there's a case for business helping business, so much more mentoring amongst businesses, and the number of small and medium-sized businesses that I work with on a day-to-day basis that are mentoring their peers is absolutely phenomenal.
We as Chambers of Commerce up and down the country have a big role to play, I think, in making sure that that happens more and more going forward, because a number of people say to us, "I don't actually need a service from the government – I just need advice from other business people who've been there before."
You see it on the Dragons' Den, you see it in loads of different places, and it's in fact very much one of the factors that we think needs changing.
David:
Now, another thing is, I don't think there's any denying that the UK economy is going to be very slow growth, low growth. What sectors are likely to do well in this sort of very benign economy?
Adam:
It's very difficult to predict at this point in time, because we don't know what the components of global demand are going to be, going forward. But if I was a betting man, which I'm not, I would say they ...
David:
I am!
Adam:
...I know you are, David! – the fundamentals of your business. But if I was a betting man, what I would be doing at the moment is looking at those growth markets around the world, those that are going to be registering six, seven and ten percent growth year on year, and asking, what are the gaps that they face? What are the market niches that are available to someone like me who has a service, or who has a good? Can I adapt what I've got to what they need?
And there I'm thinking of, a country like India, for example – incredible brains, incredible minds, graduates more engineers than any other country that I can think of in the world at the moment, but is woefully lacking in terms of infrastructure planning. We've got loads of planning skills in this country, for example – how do we use those?
For example, if I was running a small business that was an infrastructure consultancy, how would I get business in India? How would I get out there and gain clients out there? It's that kind of vision and that kind of thinking that we want to see happen, going forward.
David:
OK, that's great. Now, I have one final question for you, Adam, and it is a very very simple question – are things going to get better, or worse?
Adam:
David, I'm a natural optimist. Things are going to get better, they have to get better, and we have to do one thing, it is to give the business community the certainty that it needs and the stability that it needs, so they start to think it's getting better, and I need to invest again and grow my business.
David:
That's wonderful. Thank you very much for coming in today, Adam. I feel a lot better about the prospects for the UK economy, having spoken to you.
Now, it only remains for me to give you the quote of the day, not just you, but also to our listeners. This is a quote which I think will sum up in a few words today's podcast. Believe it or not, today's quote comes from Harold Wilson, and he said, "I am an optimist, but an optimist who carries a raincoat".
Adam:
Well then, I'm in good company, I think.
David:
So, thank you very much! This has been Money Talk, I have been David Kuo, and my guest has been Dr Adam Marshall, Director of Policy and External Affairs at the British Chambers of Commerce. If you have a comment about today's show, please post it on the Money Talk blog at fool.co.uk/podcast, and if you have a suggestion for future shows, please email me at moneytalk@fool.co.uk. Until next week everyone, have a great week, and happy investing.
