Reducing risk in a risky business

To pistonheads it looks like the chromed insides of a six-cylinder engine; to caffeine addicts, a coffee percolator. The latter might be on to something.

Lloyd’s, the insurance market in the heart of the City of London, was born in Edward Lloyd’s coffee house, an establishment first noted in the London Gazette in 1688. Coffee, which was becoming less of a novelty by the turn of the 17th century thanks to mass imports by the Dutch East India Company, had become the lubricant for business deals between London’s merchants and entrepreneurs. Mr Lloyd’s coffee house was one of 80 within the City walls where they gathered to trade their wares.

The modern Richard Rogers-designed Lloyd’s building, a stainless steel, glass and concrete tower on Lime Street, houses what is now the world’s foremost specialist insurance market. Everything from satellites to Shakira concerts can be covered here by one of the market’s 57 members. Companies from across the world come to seek protection at Lloyd’s.

This is an enviable position, but selling insurance in foreign countries – or for that matter, any services or goods – brings with it the risk that you are willingly or unwillingly selling your wares to someone that your government doesn’t want you to.

The political risks associated with exporting goods and services have been brought into sharp focus in the last few years because of American pressure. The White House is keener than ever to clamp down on trade with oppressive regimes, such as Iran and North Korea, and when the US decides to take action, Westminster, Brussels and governments throughout the West tend to fall into line.

Lloyd’s has one of the most powerful American financial regulators breathing down its neck right now. Benjamin Lawsky, the superintendent of financial services in the State of New York, was the man behind last year’s investigation into Standard Chartered’s dealings with Iran. The bank was accused of hiding at least $250 billion (£160 billion) in 60,000 “secret transactions”, paying out $667 million this year to settle the charges.

Regional variations in economic and political risk, exchange-rate volatility and regulatory challenges can be smoothed with global balance

Mr Lawsky wrote to Lloyd’s and 19 other non-US insurers in June this year. He demanded information on their connections with Iran, after his investigations found that an unnamed Western insurer provided cover for three aluminium shipments bound for the country.

When it received the letter, Lloyd’s was in the middle of a comprehensive internal review of its foreign operations, which it kicked off soon after the Standard Chartered scandal emerged. Lloyd’s has asked its members to conduct thorough internal checks to make sure they are not providing cover to countries on international sanctions lists. It says the review is part of its day-to-day role of overseeing the market, including conforming to international sanctions, which it says it has “always done”.

This kind of scare story might frighten a would-be exporter. Nonetheless, the latest figures on British exports are promising. Britain exported £78.4 billion of goods and services between April and June, an all-time high for the second quarter, according to the Office for National Statistics. The British Chambers of Commerce, meanwhile, said recently that confidence in exports is at its highest since 2007. The stellar performance, which helped shrink the trade deficit to £8.1 billion in June – its narrowest in nearly a year – was driven by demand from outside Europe.

“There’s strong evidence that having lagged behind Europe for some time, British exporters have woken up to emerging markets,” says Peter Arnold, a director at Ernst & Young, the accounting and consultancy firm. When these markets were growing fast through industry, he says, they needed resources, such as steel and oil – things that Britain does not export in any great amounts. Now, with growing middle classes, they do want things that Britain makes, such as music, fashion brands and professional services.

One force behind the exports rejuvenation, though, has nothing to do with services. In fact, it had long been seen as the sick man of British industry. International demand for British-made cars is climbing as demand for French, German and other European marques falls.

Phil Popham is global sales director at Jaguar Land Rover, which does 80 per cent of its business abroad. He estimates that group-wide sales are up by 15 per cent so far this year. “We’re seeing growth everywhere,” he says, which is down to huge investment on two fronts: new products and global infrastructure.

Jaguar Land Rover has been spending around £3 billion a year on product development alone, bringing in fresh lines, such as the all-new Range Rover and the Range Rover Sport. Meanwhile, it has been expanding its franchised dealership operation, predominantly in Brazil, India, Russia and China. Mr Popham estimates there will be 500 more JLR dealerships set up in the next few years, up from 2,500 presently.

It is this push to become a dominant global operation that he believes is the best hedge against export risk. This is not to say that there is no risk – the Japanese tsunami of 2011 had a massive impact on automotive supply chains – but regional variations in economic and political risk, exchange-rate volatility and regulatory challenges can be smoothed with global balance. “We don’t actually see exports as a risk in our business,” he says. “It’s a huge opportunity. We just need to make sure that we carefully plan our investments.”

He believes it is this careful planning that will help businesses of any size succeed abroad. “You need to know where you want to be in the long term,” he says. “To be a global player, there’s a huge investment to be made. So be careful and understand exactly what you’re going to do before you do it.”

Making the jump outside the comfort of European markets can be equally as challenging as it is rewarding, says Lee Hopley, chief economist at EEF, the UK manufacturers’ organisation. “Finding and making the right contacts can be very difficult,” she says, “as can understanding the rules and regulations about getting products through customs and into the country.

“Making sure you dot all the i’s and cross all the t’s in terms of the paperwork is perhaps the biggest risk. And of course, in the first place, you have to make sure that your products suit the tastes of the local market.”

Ernst & Young’s Mr Arnold believes the key to being a successful exporter is having good links into your target market. “It’s far easier to grow from a position of strength than trying to break into a market yourself,” he says. “If you’re part of the supply chain of a big company, you can reduce the risk involved with breaking into a new market. Ride on the shoulders of a big multinational.”