Scanning the horizon
Mid-market sets sights on global trade growth
As the global economy continues to display what the IMF calls “remarkable resilience,” mid-market business leaders are being emboldened to explore new export markets in the search to add growth to their revenues. [i]
The latest International Business Report (IBR) data shows that mid-market firms have high expectations for global trade, with 47% expecting to increase exports over the next 12 months, an increase of two percentage points compared to the second half of 2022. This is the highest proportion of businesses expecting an increase in exports in over a decade of IBR data.
Regionally, the picture is more varied
In North America and despite a strong dollar, more than half (52%) of mid-market firms expect an increase in exports, reflecting the relative strength of the US economy and the outlook of businesses there. The figure is slightly below recent highs of 57%, but still demonstrates significant appetite for growth abroad. This has been underpinned by stronger business investment and resilient consumption in the region, with the IMF recently upgrading its growth forecast for the United States. [ii]
In EMEA, two in every five (41%) firms plan to increase exports, while in Asia-Pacific the figure has risen steadily over the last year, up from 37% in the first six months of 2022, to 47% in 2023, owing to key successes such as Japanese economic growth. A recent update from the WTO states that although trade has slowed, growth is set to pick up in 2024. [iii] With such a varied business outlook across the regions, picking the right markets will be key to success.
Percentage of mid-market firms expecting an increase in exports over the next 12 months by region
Countries where firms are particularly ambitious for non-domestic expansion include India, Indonesia, Turkey, Vietnam, Brazil, Nigeria, the Philippines and the United States. GDP growth has been particularly high in these countries too – often fuelled by export markets - with India’s GDP growth at 6.5%, and the United States reporting 2.1% GDP growth in the second quarter of 2023. [iv, v] Brazil's Finance Ministry also raised its projection for economic growth in 2023 to 3.2%. [vi]
“Businesses need to do their research in developing new markets. Understanding what’s happening in respective markets in any given period is key. Different markets ask for different things. Product needs in Asia may be different from Europe. There is also benefit in accessing government global trade organisations, as they can be useful in helping businesses understand the nuances of different export markets. Prioritising certain countries, diversifying the client base and not spreading yourself too thin is more likely to result in success and make more sense economically.” - David Munton, Global Leader, International capabilities and support, Grant Thornton International
The increase in expectations for exports is reflected in an uptick in revenue expectations. Globally, 44% of mid-market firms are forecasting an increase in revenue from non-domestic markets over the next 12 months, up four percentage points from 2022. Firms may be planning to boost activity with existing trade partners, but many are also intending to increase the number of markets they operate in, with 43% looking to expand the number of countries they sell to. Likewise, 37% of firms expect to increase the ratio of their employees focussed on non-domestic markets, whilst globally, 37% of firms also expect an increase in their use of non-domestic suppliers and outsourcing in the coming year.
“Recently we have seen an increase in pricing particularly with food and raw materials. This presents the mid-market with a real challenge: how to be more competitive when importing and reselling goods locally, amid exchange rate variation and increased overall taxation due to higher pricing and currency. To overcome this, businesses are exploring opportunities like increasing domestic transactions to avoid the currency and exchange rate variation.” - Sabrina Lawder, International tax partner, Grant Thornton Brazil
Navigating supply chain instability: Adapt and overcome
Geopolitical tensions have transformed supply chains. Russia’s invasion of Ukraine and global trade disputes continue to create challenges for firms planning for the long-term stability of their logistics networks. As a result, businesses have worked to diversify their trade routes to mitigate any risks associated with being overly reliant on a small number of markets. [vii] One of the major beneficiaries of this move has been Vietnam. IBR data shows that the country’s export expectations jumped in 2022 when four in five firms (80%) expected to increase their exports. Though expectations have fallen slightly since then, almost two thirds (60%) of mid-market firms in Vietnam expect to increase exports in the next year, as the country benefits from shifting trade networks. Export-led growth has helped to improve the economy, and the country has more recently also won a big role in the tech value chain. [viii]
Appetite for finding revenue through working with foreign partners is undiminished, but supply chain fragmentation poses a challenge for business leaders – firms will need to be continually reviewing their trade networks with the aim of mitigating risk.
David Munton adds: “Global events, including conflicts, continue to shape trade and supply chains. Businesses have got a lot better at anticipating change, modelling it through scenarios, and building greater resilience. Lessons have been learned and I think companies are now in a much stronger place to respond to unanticipated shocks than they were five or ten years ago.”
In China, expectations for the post-Covid recovery have been dampened by a property crisis, a fall in exports and weak consumer spending. [ix] And while other major economies have raised rates to tackle high inflation, China cut its one-year benchmark lending rate in August. [x] These circumstances are creating a mixed outlook on overseas trade from business leaders in the region.
“People are waiting to see what will happen with China’s economy and development, and are monitoring global events including China’s recovery, as the Chinese market is very important to Asia-Pacific’s trading temperament.
“Singapore is heavily influenced by economic activity in the US and China, and is often considered a stable base politically and economically. It is conveniently located with regards to shipping, time zone and accessibility to trading partners in the region - and all these factors have contributed to Singapore cultivating significant investor confidence. As much as the business outlook in Asia-Pacific is promising, mid-market businesses need to make sure their business continuity plans are in place and prepare for unexpected events.” - Emily Lai, Partner, Business risk, Grant Thornton Singapore
Despite domestic economic concerns and a recent fall in trade, Chinese business leaders are confident that exports will improve in the year ahead. Half of Chinese mid-market firms (50%) expect to increase exports in the next 12 months, up from 47% at the end of last year and 33% in early 2022. This suggests that confidence is high and that opportunities exist in the export markets where these companies have presence.
However, the proportion of Chinese mid-market businesses now saying that they expect to increase the number of countries they sell to has fallen by just one percentage point, to 44%. This suggests that Chinese mid-market firms’ outlook to enter new export markets has dipped slightly but still remains resilient, especially in comparison to early last year when only one in three (35%) of Chinese firms planned to enter new markets.
China experienced deflation for the first time in more than two years, although recent figures show that for now consumer prices are rising. [xi] Nevertheless, despite growth being lower than previous years, an expected expansion of 5% for China would still be high in relation to global standards. [xii] Keeping a close eye on the trajectory and changes to come in China, and capitalising on this could offer opportunities for mid-market firms in other markets to find greater value through their supply chains.
"In the wake of the pandemic, corporations around the world have recognised that their supply chains need to be more resilient. With the ongoing political tensions between China and the US, the desire to mitigate risk and diversify supply chains away from China has benefited firms in other countries, including India.”
- Deepankar Sanwalka, Senior partner, Grant Thornton Bharat
Amid concerns about climate change and damage to the environment, governments and consumers increasingly expect firms to guarantee the sustainability of their supply chains from end-to-end.
Firms are being asked to actively address these concerns, adhering to added requirements on their sourcing and reporting. For example, in the EU tighter requirements aimed at curbing deforestation would impose a ban on imports linked to deforestation from entering the EU. The new rules are due to come into force at the end of 2024. [xiii] Likewise, increasingly firms must monitor and measure the environmental impact of suppliers through Scope 1, 2 and 3 reporting.
Amanda Ward, Partner, Financial services advisory, Grant Thornton Ireland says: “There is a wide range of ESG rules that firms of all sizes are having to focus more attention on. Larger organisations may have more leverage to influence those within their supply chains, but smaller firms will likely have less complex supply chains and may have more insights and on the ground experience giving them more oversight. For many companies, this may be the first time they have had to formally consider sustainability in their disclosures or internal process, and we have seen a substantial increase in clients looking for support, to prepare them to meet their regulatory obligations or stakeholder expectations.”
Not only are firms facing increased scrutiny on how they source their products, but there is also added focus on the emissions of the supply chain itself, with measures such as the EU’s Carbon Border Adjustment Mechanism (CBAM), aimed at preventing carbon leakage. The new levy is to encourage manufacturers to “green” as much of their processes as possible. Its advocates say that it has become even more relevant now, with Europe’s rocketing energy prices meaning it is harder for EU companies to compete against industry abroad. [xiv]
The United States, has taken an alternate approach offering tax credits to support green technologies through its Inflation Reduction Act. However, concerns that these measures may conflict with WTO rules risk sparking trade tensions with key US trading partners. [xv]The changing framework of regulations and incentives adds to the complexity for mid-market firms looking to grow their trade with non-domestic markets, but sustainable logistics networks can help firms to become more tax efficient.
Amanda Ward says: “Green taxes, green incentives and green grants are proliferating around the world as governments look to reach their environmental goals and net-zero targets in an effective and cost-efficient manner.
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"Firms can add value by taking advantage of green incentives and green taxes but they must understand the tax and incentive landscape based on their location. This means understanding the rates and bases for green taxes, understanding eligibility criteria for green incentives, and drilling down to a national and even sub-national level to fully appreciate what might be relevant for your firm.”
Decarbonising the supply chain
Certain industries are seeing scrutiny on their role in reducing emissions. The global shipping industry contributes 3% of global carbon emissions – and the industry has recently agreed to reduce planet warming gases to net-zero "by or around 2050." [xvi] It remains to be seen how industries begin to grapple with this, though new (and old) technologies are offering ways to reduce carbon emissions of the supply chain, an increased reliance on technology to solve these problems underlines the importance technology has, and the pace at which it is developing. [xvii]
Climate change is also having a direct impact on trade routes in other ways. In August, the drought in Panama led authorities to lower the number of crossings and bar ships with heavy loads from using the Panama Canal. [xviii] This caused unusually long delays and tough restrictions along one of the world’s most important trade routes, illustrating the challenge climate change poses to global commerce.
Amanda Ward adds: “Decarbonising the supply chain is a complex and multi-facetted challenge, involving both direct and indirect emissions. Addressing this challenge presents an incredible opportunity, as the impacts of these actions can be highly significant in the fight against climate change. Working towards decarbonisation of the supply chain offers many benefits in terms of operational efficiency, mitigating the impact of potential carbon taxes, and ensuring that supply chains remain resilient and sustainable.”
Mid-market leaders plan for global growth
The mid-market has shown a continuing appetite to grow internationally, with IBR data for 2023 indicating that more businesses are expecting an increase in exports than at any point over the last ten years. This comes despite concerns about geopolitical tensions forcing firms to reconsider their trade networks. The fact that the mid-market continues to find ways to develop through partnerships in non-domestic markets illustrates the pioneering entrepreneurship of business leaders. But, to be successful over the long term, business leaders will need to ensure they have the management information and the business plans in place so that they can navigate any changing circumstances in global trade conditions.
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i. www.ft.com- World economy on course for 'soft landing' despite headwinds, IMF chief says - 05.10.23
ii. www.cnbc.com - IMF hikes U.S. growth forecast for 2023, leaves global outlook unchanged - 10.10.23
iii. www.wto.org - Global Trade Outlook and Statistics - 10.23
iv. www.fortuneindia.com - India's GDP outlook ‘bright’; 6.5% growth expected in FY24: FinMin - 22.09.23
v. tradingeconomics.com - United States GDP Growth Rate
vi. www.reuters.com - Brazil raises 2023 GDP growth outlook as activity strengthens - 18.09.23
vii. www.ft.com - How rising conflict is reshuffling global supply chains - 12.10.23
viii. www.ft.com - Vietnam becomes vital link in supply chain as business pivots from China - 02.07.23
ix. www.reuters.com - China's trade slumps, threatening recovery prospects - 08.08.23
x. www.reuters.com - China surprises with modest rate cut amid growing yuan risks - 21.08.23
xi. www.bloomberg.com - China’s Consumer Prices Creep Out of Deflation in August - 08.09.23
xii. global.chinadaily.com.cn - Interpretation: 5% growth target feasible - 13.03.23
xiii. www.ft.com - EU deforestation rules risk ‘catastrophic’ impact on global trade, says ITC chief - 20.08.23
xiv. www.weforum.org - What is a carbon border tax and what does it mean for trade? - 26.10.21
xv. www.greenbiz.com - What you need to know about the EU's new decarbonization plan - 04.01.23
xvi. www.bbc.com - Climate change: Shipping agrees net-zero goal but critics chide deal
xvii. edition.cnn.com - Wind-powered cargo ship sets sail in a move to make shipping greener - 21.08.23
xviii. www.ft.com - Severe drought in Panama hits global shipping industry - 14.08.23