Exporters' euphoria wears off: The fall of the pound has proved to be a mixed blessing. David Bowen reports

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The Independent Online
IT SEEMED like undiluted good news at the time; the humiliation of the pound on Black Wednesday last September was greeted by exporters with the popping of champagne corks. According to John Gunn, director of the CBI in the West Midlands, the mood at his next members' meeting was 'euphoric'. Surveys since have confirmed a surge in export optimism.

But real life is not so simple. Many companies, especially the largest ones, import parts, assemble them and export the finished products. For them, sterling's fall cuts both ways. And there is another problem. Recession in major markets abroad has sapped demand just when it is most needed.

Ford, Britain's third-biggest exporter - it sold pounds 2.2bn worth of cars and vans abroad last year - tells the story. The immediate effect of sterling's devaluation was to put UK prices up. The Granada, Sierra and Mondeo models, which come from Germany and Belgium, suddenly became 15 per cent more expensive.

Because Ford could not allow price differentials to slip so far out of line, these models were increased by 7.5 per cent, while the British-built Fiesta and Escort went up by 4 per cent. And when it comes to dealing abroad, a spokesman said: 'The demand isn't there'. In the last quarter of 1992 the market fell sharply in Germany and Italy and this year's prospects are even more worrying.

The same story emerges from other large manufacturers. 'Although 75 per cent of our European spending is in the UK, many of our British suppliers buy in from the Continent and their extra costs went in very quickly,' said a spokesman for Nissan, Britain's 14th-biggest exporter in 1991. 'European markets, where we are exporting 85 per cent of our production, are in severe decline, to a large extent negating the advantage on exports.'

British Steel, the ninth-biggest exporter, said that 20 per cent of its operating costs were adversely affected: coking coal and iron ore are both imported and are priced in dollars. As a result, British Steel is increasing the prices of its plates and sections by 7 per cent this month, and further rises are on the way. 'We would have expected to see an increase in exports,' a spokesman said, 'but the collapse in European steel prices eroded any advantage from devaluation.'

British Aerospace, the biggest exporter of all ( pounds 4.62bn in 1991) found a little help for its Rover subsidiary and virtually no effect on aerospace operations, where both finished products and parts are priced in dollars.

But again, the realities of business intrude. BAe like other large exporters runs a sophisticated treasury operation that has protected the company against currency movements. It will only be when these forward transactions run out that the true effect of the currency realignment shows through.

The experience of IBM UK, the sixth-biggest British exporter with foreign sales last year of pounds 2.1bn, shows how complex the currency effect can be. Much IBM equipment sold in Britain is imported from Germany and France. Costs rose 15 per cent after devaluation, but the intensity of competition meant the company had to absorb most of this itself. 'It put great pressure on our margins,' said Richard Mackay, the company's treasurer.

On the manufacturing side, IBM has benefited from the same fierce competition. Personal computers and disc drives are made in Britain, but many key components are imported from the Far East. Although these parts are priced in dollars, the prices of many of them have been falling, countering the devaluation effect.

Few companies have escaped the slowdown in Europe. Richard Freeman, ICI's chief economist, said: 'There is no doubt there has been some positive effect from weaker sterling, but European chemical demand has been so weak that it's very difficult to isolate how much.' The German chemical companies have been cutting their prices to maintain their market share; for ICI, the real advantage of the devaluation is that it has been able to follow them without feeling the same pain.

For textile companies plagued by low-cost Asian competitors that price in dollars, the main benefit has been seen at home, rather than abroad.

Martin Taylor, chief executive of Courtaulds Textiles, said: 'We've been bedevilled by cheap products from the Far East which have forced us to reduce prices in the past two or three years. The strengthening of the dollar will take six to nine months to feed through and knock them out of the marketplace, which should just take pressure off us.'

But at the bottom line, exporting success depends on other factors than just the value of the pound and the strength of foreign economies. Exports by Glynwed, the Birmingham engineer, grew last year by 11 per cent as the company pursued a new strategy. Nick Boucher, planning manager, said: 'We had decided British markets were going to be dull for a long time. We decided to increase our language skills and put more people on the ground abroad. It takes five years to become established in a country.'

(Photograph and graph omitted)