After a generation in the doldrums, Britain's exporters are back. With the near collapse of the global banking system, and taxpayer bail-outs still fresh in public minds, financial services are now distrusted – if not factually discredited -- as a long-term source of wealth building. While there is plenty in the City that is still a powerful contributor to Britain's position as a global financial hub, an old international economic engine has been rediscovered in the export of manufactured products. We are, after all, the world's sixth largest manufacturing economy. While we could characterise this as out with the 1990s 'Cool Britannia' and back with the 1960s 'Made in Britain' it isn't just a fad. There are several powerful fundamental reasons why the UK economy is well-placed.
The prime driver is the rise of the emerging markets. While for much of the 1980s and 1990s, British jobs were lost to low-cost rivals in Asia. First textiles, then household goods, and eventually much basic manufacturing was drawn away from the developed world and into low-cost economies, principally China. However, globalisation is a much more subtle process than the crude hollowing out of western industrial supremacy. Rising living standards in China, and soaring wages are already helping to redress the balance. An enormous middle class of 120 million Chinese consumers, eager for western products, has been created, and is likely to expand to 200 million by 2020, according to Euromonitor. In India, in Brazil, in the Gulf and increasingly in places like Vietnam and across the Sahel regions of North Africa, the rise of middle classes is creating new markets that Britain is well placed to exploit. The growth rates, 8-10 per cent annually in Chinese car components, for example, are way beyond anything seen in the UK since the 1950s.
Although Britain is well behind Germany in its exports of engineering products, the 20 per cent trade weighted depreciation of sterling since the start of the financial crisis has given a competitive edge to UK manufacturers. Britain also has historic cultural and linguistic ties which are particularly advantageous in India, though perhaps less so elsewhere.
The companies profiled here are all exporting powerhouses, highly geared to the increased sales that emerging markets have to offer, but in many cases still recovering from the mauling that British industry has endured in the recession. Though many of these cyclical companies don’t look cheap, and have already seen their shares surge since the early summer, in almost all cases there is still more to go for on a long-term view. There are two caveats. Many of the firms still have hefty debts, much of which needs careful managing. High cash conversion ratios will help, as will cash generative activities like after-sales service and maintenance, a key driver for Rolls-Royce and IMI among others. The other issue is local competition. If Chinese firms can nab market share in the UK, they can certainly do so in their home markets. GKN, despite its market leading position in drive shafts in Asia, is so worried about a couple of aggressive competitors, one Chinese and one Korean, that in a recent interview the company's head of Asia refused to name them. We only have to look at the fate of the British motorcycle industry at the hands of Japanese rivals to realise that even in high value-added engineering, you cannot take a technical superiority for granted.
