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How a robust trade function can help businesses leverage opportunities
In this episode, BASF Group Corporate Affairs and Sustainability Director Geoff Mackey and EY UK Trade Strategy and Brexit Leader Sally Jones discuss international trade strategies.
With the Brexit agreement delivered, attention has now turned to how businesses globally will respond to change. Though not every industry is affected by Brexit, industries that engage more in international trade are noticing remarkable changes. While it’s too soon to determine the full impact of Brexit on businesses, it is clear that challenges are exacerbating the trade environment disrupted by the COVID-19 pandemic. British businesses must prepare a resilient international trade strategy to help them survive and thrive in this unprecedented transition period. With appropriate trade functions and resilient trade strategies, businesses will emerge stronger and more profitable.
Key takeaways:
Brexit is just one of the many issues that are coming down the road at businesses globally. However, businesses do not feel that they can handle government affairs and engage with governments.
One silver lining in Brexit is that it gave British businesses once-in-a-generation opportunity to review their operations. These reviews helped businesses respond to the COVID-19 pandemic, particularly around supply chains.
Countries with fast-growing populations or working-age populations, such as Indonesia, Malaysia, Egypt, Mexico, Nigeria and Kenya, are more likely to have a critical place at the global league table.
For your convenience, full text transcript of this podcast is also available.
Justine Greene
Hello and welcome to the podcast series from EY Global Services. I'm Justine Greene, and with global trade experiencing such uncertain times, we continue to look at how organizations can respond to survive and grow. Our focus this time is on resilient trade strategies to respond to increasingly complex environments. Joining us from England are Geoff Mackey, Group Corporate Affairs and Sustainability Director at BASF. Hello, Geoff.
Geoff Mackey
Hi. Thanks very much for having me.
Greene
You're welcome. We're pleased to have you and Sally Jones, UK Trade Strategy and Brexit Leader at EY. Hello, Sally.
Sally Jones
Hello, Justine.
Greene
Now Geoff, supply chain issues, regulation and Brexit, to name a few, have brought huge uncertainty. In the network that you operate in, how well equipped are trade functions and organizations to respond at the moment?
Mackey
What a question to start with, Justine. I think the reality, and obviously, I can only speak knowledgeably about my own organization BASF in the UK. Looking at across the vista — customers, colleagues and even our trade associations — the range of challenges that have appeared linked to supply chains, friction, diverging legislation, as you say, huge uncertainty and the question of trade function. I think for most of us, it's effectively given us a smack in the face. Because thanks to Brexit, we simply weren't as ready as we should have been.
Greene
Sally, how much are organizations recognizing the need to have a well-thought-out strategy for international trade?
Jones
It's a really interesting question, and we asked that of 400 businesses recently. And really, the catalyst for us asking that question in the first place was Brexit. Having seen so many different businesses encounter so many different issues and hurdles which they had to clear. And interestingly, 93% of the firms that we surveyed said that they have an international trade strategy, which means that the 7% that don't are really behind the curve. And, 80% said they feel they would be at a competitive disadvantage if they didn't have an international trade strategy, and that it's rocketed up their board’s agenda, and that the C-suite of the firm got trade within their sights. However, when we scratched the surface a little bit to inquire about what their international trade strategy actually looked like, it was less robust than those original answers had suggested. Very often, what they call an international trade strategy is little more than a plan to expand overseas and to keep on top of the operational trading matters that they're already doing very well, like regulatory or customs compliance. But when it comes to strategic matters, those are often a little bit lacking.
Greene
Geoff, in which specific areas are businesses coming up short in their ability to react to trade issues?
Mackey
Again, for us in the UK, it really was a reality check to go through the Brexit process. I mean, we've been working for probably around three years properly with our customers, with our value chains to try and prepare ourselves for what was coming. The reality of the perspective, our capacity, even our expertise levels — I have to say we were just a tad naive.
Mackey
Sally, would you agree?
Jones
Yes. I always agree with Geoff, but I particularly agree with him on this. Brexit was a really hard set of facts and circumstances for businesses to deal with. There was no one thing in isolation that businesses couldn't cope with, but there were thousands upon thousands of those changes, all coming down the line at the same time. It was the sheer scale and scope of Brexit that was the real problem.
Mackey
Without data transitions.
Jones
Without a transition. Geoff is referring to the fact that the deal was announced on Christmas eve, and then went live on New Year's eve. So that was six days — three working days over the Christmas period — for businesses to react to what was in that free trade agreement. It just wasn't enough. But I don't think it's okay to just focus on Brexit because Brexit is just one of any number of issues that are coming down the road at businesses globally that they need to adjust to, and they're telling us, they're concerned about, but they don't have the capabilities to deal with. We've got digital and technological innovation, and data and privacy, intellectual property reform, trade remedies, and that's a particular concern for UK businesses because we've not really had our own trade remedies, authority, or regime in the past, and now all of a sudden we do. But interestingly, one of the areas where businesses felt that they were least capable with government affairs and engaging with governments. Fifty-six percent of businesses that we spoke to said they didn't feel confident that they had the skills and capabilities to deal with such a critical part of any trade strategy.
Mackey
Well, it's an interesting point though, because, of course, if I may be so blunt, is it for business to engage with government or for government to engage with business would be one of my starting swipes on that. And, I mean, your list that you mentioned earlier about what's coming down the track, at the moment, I would throw in three others if I may: digital changes, digitization, the future of work on the workplace — are net zero.
Jones
Sustainability, yes. I can't believe I forgot that. You're absolutely right. Every single business we spoke to cited.
Mackey
Managing our carbon, managing our footprints.
Jones
Yes. And there's a very strong desire for businesses to actually build back better and greener. I know it sounds like a really trite phrase, and it is a really trite phrase. It's really meant, by the business, they want to do that, but they don't always know how.
Mackey
But also going back to your point about linking with the government. The government can't do it for business. Therefore, when people say they're not engaged with the government, I would always turn it around and say the government really should be listening more. The answer is they can't do it without us. It's an interesting question of whether we can do it without them.
Jones
My mother always said you have one mouth and two ears and use them in that ratio.
Greene
Quite right. Okay, well, coming next, we will look at Brexit’s impact on trade strategies in Europe and globally.
Greene
UK's future relationship with the rest of Europe began on 1 January this year. Geoff, BASF is a multinational chemicals operation based in Germany. In terms of where we're heading now, what’s the impact of Brexit on your sector’s trading capabilities?
Mackey
I think the reality is that although Brexit happened at the start of the year, the impact of it is going to run for years and the minutiae of the detail of the in-depth pieces that we're going to have to react to. I mean, recently, we've seen all sorts of announcements from the UK Government as they continue to move the legislation and the marketplaces we work in. I mean, I'm never going to speak on behalf of my German colleagues, but the reality of the complexity of the border crossings and the material crossings that works with us is enormous. Therefore, the answer of the impact is, it’s ongoing and time will tell just how large or small the impact is and how we've dealt with it.
Greene
Sally, how do UK companies compare to the rest of the world when it comes to having effective international trade strategies?
Jones
The quick answer is, the UK businesses are a bit behind their international competitors, but not far behind. The reason for that, I think, is because they didn't have to have international trade strategies, at least not UK-based ones. For 40 or so years, while the UK was within the European Union, trade strategy was set at Brussels level. And, London and British headquartered businesses were largely content to allow trade to flow around them rather than trying to influence its course. And they were reasonably successful with that plan of action. Then Brexit happened. I think Geoff has very eloquently explained just what a pain it was for British businesses to navigate Brexit. But one of the silver linings that have come out of all of that pain is that British businesses have had a once in a generation opportunity to review all of their business operations, really dig down into the holes of their organization and find out exactly how all of the working parts fit together. And as a result, they are in a better position than I think many of us thought that they would be in six or seven months post-Brexit. It's also noticeable that all of that Brexit hard work really paid dividends in how British businesses were able to respond to the challenges of COVID-19, particularly around the supply chain, where British supply chains were found to be much more robust than I think they would have been before all of the Brexit preparations took hold.
Mackey
I'm not going to disagree with Sally, but I'd like to add to our question about robustness, because actually for those of us who work in industry and business, we haven't done this before in the UK. You know, this is the first time that we've been involved at this level to drive those types of trade strategies, and this is the real conversation about looking forward and seizing those opportunities.
Greene
Geoff, looking ahead, how will the UK's new agreement with the EU affect trade globally?
Mackey
I'll start by saying at the moment, we are still being affected by it because it's still being worked through. If I take some of the legislation in our industry, the implementation of UK reach, we're already looking at 2027 and 2028 to fully understand the impact on our business. And actually, when you throw in some of the other conversations linked to Australia or India, we have moving of plates in all sorts of ways, and that is something strategically we're going to have to work very hard to get our heads around.
Greene
Sally, what opportunity should UK businesses be looking at to harness new trade agreements?
Jones
The EU is always going to be a critical trading partner for the UK. I think that's fairly common ground. There's a concept in trade called the gravity model. The name that we trade geeks called the fact that it's fundamentally easier to trade goods and services with countries that are physically proximate to you than it is for countries that are further away. But the world is changing, and we can see that from forecasts from organizations like The Economist, which have looked at which geographies will be of critical importance to the global economy in 2050 or 2040 or even 2030. And you see that the countries which have got very quickly growing populations or very quickly growing working-age populations are going to rocket up those global league tables. So, countries like Indonesia, Malaysia, Egypt, Mexico, Nigeria, Kenya — those countries are going to become increasingly important as the years unfold. And if the UK can position itself as the hub of business from Europe into the Asia-Pacific region, for example, in much the way that it did with Japanese businesses in the 1980s, and I think there are genuine opportunities there for the UK to seize.
Greene
Alright. Well, in our final part next, what should organizations do to develop a better trade function? We've spoken on previous podcasts about customs and compliance. Geoff, should trade teams focus beyond this or be directed more to other areas?
Mackey
I'd love to think there was one answer to your question. I really would. Sally's already talked about one of the starting points, which is business strategy. What's the plan? Now, if you go back a couple of years, many of us were sitting there with our plans, with our strategies in place; we were being very, very clear. But what we can't get away from is black swans. So, if you take the last 18 months in the UK, and I will use the word COVID-19, that completely moved us off track about where some of our businesses were. I mean, we are absolutely customer-focused in what we do. And, the question of how that links through to the market opportunities, and that's before we get into things like supply chain logistics and compliance. I mean, there is certainly not one answer, and I suppose my comment would be from our side of things, our plans moving forward. We have about 10 areas of focus. We set them all going parallel and then we sit down and thrash stuff out on a regular basis.
Greene
Sally, do trade functions need more talent and expertise in their teams?
Jones
Oh yes. Yes, they absolutely do. We can see from our clients, from anecdata, from our survey results that trade people are in really short supply at the minute. And that's not just in the UK; that’s globally. And the reason that talent is in such short supply is that trade is becoming ever more complicated and fragmented. And we're in a world where trade barriers are currently on the rise rather than being dismantled, and that needs expertise to help companies manage that. About half of the businesses that we speak to say that they're actively trying to recruit trade people. But equally, those same businesses tell us it's really, really hard because there just aren't people in the market. When we speak to them, they tell us that nobody at all is finding it easy to recruit the talent they want — 11% are finding it really difficult, 48% are finding it difficult, one-third think it's broadly neutral. I mean, that's not great stats in terms of how you build the capability that you need, which means that businesses are going to have to look inward and train up their existing talent rather than look to be able to recruit from the external market.
Greene
Finally, one for both of you. What practical next steps should organizations take to formulate a plan for a robust trade strategy and trade function to capitalize on in the future? Geoff?
Mackey
Business management is exactly that. It's a moving target. We bring value in what we do by actually having a clear strategy, understanding what the opportunities are, planning, checking replanning on a regular basis. And the question of having a robust trade strategy for many of us is still a matter of understanding what the vista looks like. Because certainly, for us in the UK, this is still a moving target. Things are still moving underneath our feet. I'm never going to be anything but optimistic, but actually we're going to find it rocky from time to time. And the answer is — be positive and take the opportunities.
Greene
And Sally, your thoughts?
Jones
I think the most important thing is for businesses to build a robust trade function. And when I say trade function, I actually mean a group of people who come together regularly and have common reporting lines. One of the things we found was that oftentimes trade people are dotted throughout a business. Their reporting lines are entirely fragmented, which means that nobody has one holistic overview of their activities and their challenges and their opportunities. So, bring them all into one function, virtual or literal, and give them common reporting lines so that you do have somebody at the top of the organization who knows what's going on, would probably be my first thought on that. Just to give you a sense of it, EY has put its money where its mouth is and has created a chief trade officer for EY in the UK doing exactly that — pulling together the various parts of our business under one reporting line to understand better all of the challenges. If I were allowed to pick a second, I would talk about the key performance indicators (KPIs) that that trade function should have. We reckon that there are nine key KPIs that every trade function should have and should be held honest against. But people aren't. At most, people have got four or perhaps five of them in their annual appraisals. So, making sure that you're measuring the right behaviors from your trade function and holding them accountable against those behaviors would be my number two top tip.
Greene
OK, well, it's been a fascinating conversation. Thank you both very much for your insights on this topic. Geoff, thank you.
Mackey
Thank you, my pleasure.
Greene
And Sally. Thank you.
Jones
Likewise. It’s been great fun.
Greene
That's it for now. But just a reminder – you can subscribe and listen to more episodes in this series. From me, Justine Greene, Geoff Mackey and Sally Jones, thanks for listening and goodbye.
