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Executive Report on Strategies in the United Kingdom
ICON Group International, June 2007, Pages: 391
How to Strategically Evaluate the United Kingdom
Perhaps the most efficient way of evaluating the United Kingdom is to consider key dimensions which themselves are composites of multiple factors. Composite portfolio approaches have long been used by strategic planners. The biggest challenge in this approach is to choose the appropriate factors that are the most relevant to international planning. The two measures of greatest relevance are “latent demand” and “market accessibility”. The figure below summarizes the key dimensions and recommendations of such an approach. Using these two composites, one can prioritize all countries of the world. Countries of high latent demand and high relative accessibility (e.g. easier entry for one firm compared to other firms) are given highest priority. The figure below shows two different scenarios. Accessibility is defined as a firm’s ease of entering or supplying from or to a market (the “supply side”), and latent demand is an indicator of the potential in serving from or to the market (the “demand side”).
Framework for Prioritizing Countries
Demand/Market Potential Driven Firm
Relative Accessibility
Accessibility/Supply Averse Firm
Relative Accessibility
In the top figure, the firm is driven by market potential, whereas the bottom figure represents a firm that is driven by costs or by an aversion to difficult markets. This report treats the reader as coming from a “generic firm” approaching the global market - neither a market-driven nor a cost-driven company. Planners must therefore augment this report with their own company-specific factors that might change the priorities.
Latent Demand and Accessibility in the United Kingdom
This report provides an extremely detailed overview of factors driving latent demand and accessibility in the United Kingdom. Latent demand is largely driven by economic fundamentals. But, latent demand only represents half of the picture. A country may at first sight appear to be attractive due to a high latent demand, but it is often less attractive when one considers at the macro level how easy it might be to serve that entire potential and/or general business risks.
Chapter 2 deals with macro-accessibility. While accessibility will always vary from one company to another for a given country, the following domains are typically considered when evaluating macro-accessibility in the United Kingdom:
Openness to Trade in the United Kingdom
Openness to Direct Investment in the United Kingdom
Local Marketing and Entry Strategy Alternatives
Local Human Resources
Local Risks
Across these domains, a number of not-so-obvious factors can affect accessibility and risk. These are also covered in Chapter 2, which is presented from the perspective of an American firm, though it is equally applicable to most firms entering the United Kingdom. This chapter has been authored by local offices of the U.S. Government. I have included a number of edits to clarify the provided information as it relates to the general strategic framework.
In Chapter 3, I summarize the economic potential for the United Kingdom over the next five years for hundreds of industries, categories, and products. The goal of this chapter is to report my findings on the real economic potential, or latent demand, represented by the United Kingdom when defined as an area of dominant influence. The data presented are the result of various spatial econometric and time-series forecasting models which, for each category presented, are applied to forecast and allocate latent demand across all countries of the world and major distribution centers or centers of dominant influence within each country. This is accomplished knowing that economic fundamentals (e.g. income) generally vary from one country to another within a given country over time. In this chapter, I report the allocation for each category for the United Kingdom as an area of dominant influence in Europe and, potentially, the world.
The report concludes with trade indicators for the United Kingdom. Often, the amount of trade flowing into and out of a country is a strong indicator of trading partners, trade openness, and related latent demand. Trade indicators are purely statistical in nature. Although international trade is not a direct measure of latent demand, it does provide an indicator of general market conditions with respect to trade flows and trade openness in the United Kingdom.
As a whole, this report presents a strategic assessment of the United Kingdom by considering an extremely broad set of factors affecting both latent demand and accessibility, as outlined in the following chapters.
MACRO-ACCESSIBILITY IN THE UNITED KINGDOM
Economic Fundamentals and Dynamics
The UK is the fourth largest world economy. The emphasis on privatization and taxation that characterized the economy of the 1970s and early 1980s has become more moderate in scope over the past 10 years.
Principal Growth Sectors
With regard to factors that provide opportunities for foreign businesses, public-sector procurement policies seek best value and best practice regardless of the bidders’ national origin, and outsourcing of public services is encouraged at central and local government levels. National legislation on the UK’s infrastructure and the environment, health care reform, and private-public partnerships are continuing to create business opportunities for foreign investors. U.S. exporters, investors, and management companies participate in public and private sector ventures and partnerships with virtual equality to British firms. These U.S. entities also have established a route via the UK to the European single market.
Although the UK’s telecommunications sector is among the most liberal in Europe, the rollout of high-speed Internet services has not been as fast as it could have been. British Telecom is still the dominant phone company in the country, and its control of the phone exchanges has allowed it to hinder competitors’ access to the last copper mile. Fully installed cable and cellular networks show limited additional opportunities for U.S. equipment manufacturers.
Overall, there has been a 19.9% drop in U.S. agricultural exports - agricultural, forestry and seafood - to the UK since 1998 (www.fas.usda.gov). The UK, however, continues to be a major market for U.S. agricultural products.
The UK Ministry of Defense (MoD) admits U.S. companies as potential suppliers in most procurement competitions, whether as prime contractors, as joint venture partners, or as major sub-contractors and suppliers to the UK prime contractors.
Government Intervention Risks
The UK has an essentially free and market-driven economy, with independent regulatory bodies providing additional direction in those sectors where private individuals are the principal users of the product or service. Regulated industries include the privatized utilities: telecommunications, electricity, water, and gas supply. Control of the railway infrastructure has been assigned to the Strategic Rail Authority. The Financial Services Authority regulates financial services, while the Office of Fair Trading regulates consumer credit. Further liberalization of the financial services, energy, and telecommunications sectors is an economic goal of the Labour government.
Infrastructure
Private sector production, transportation, warehousing, communications, and distribution facilities in the UK are adequate, although some of the physical assets employed show the need for repair and replacement. Much of the responsibility for public sector infrastructure in the UK has been transferred to the private sector, and to independent executive agencies that are accountable to government departments.
To supplement government investment, the Public-Private Partnership (PPP) initiative enables Private Finance Initiative (PFI) schemes that create viable business entities from public assets at minimal cost to the government. PFI schemes transfer ownership of public assets to the private sector, as well as transferring financial risk and reward - i.e. the private company has no recourse to the government if the business fails.
Political Risks
Political Relationship with the United States
The exceptionally close and productive Anglo American “special relationship” is anchored by long-standing and vibrant political and security contacts, common values, close trade and investment links, and a shared cultural heritage. At the government level, the strength of the relationship ensures continued cooperation on a very broad range of foreign policy and security issues. The UK is one of the strongest international supporters of the war against terrorism, and UK troops participated side-by-side with U.S. troops in Operation Iraqi Freedom.
Politics and the Business Environment
There are no major British political issues that affect the business climate as a whole in the UK. The status of the peace process in Northern Ireland does impact business sentiment there, however. The Labour Government has said that it favors joining the European Single Currency and will hold a national referendum on accepting the Euro as a common currency, if certain economic conditions are met. Recently the Chancellor of the Exchequer, Gordon Brown, announced that the UK was not ready for a referendum at this time, although he has since published HMG’s third National Changeover Plan, which details the timetable from any referendum through to withdrawing sterling currency. The Conservatives, by contrast, generally oppose joining the Single Currency. Wide differences of opinion on joining the Euro prevail within the parties and the public at large.
An important EU issue is the prospect of harmonizing direct taxation policies among member states, as in the recent case of savings withholding tax. Labour and Conservatives alike oppose this, as both political parties are committed to defending individual EU member states’ tax powers.
The Political System
The UK has a centralized parliamentary governmental system, though the Labour Government supported referenda that led to the creation of a devolved Scottish Parliament and Welsh Assembly. The government has devolved significant powers to the Scottish Parliament, including responsibility for agriculture, economic development, education, health, law and order, local government, social work, and transport. Fewer powers have been devolved to the Welsh Assembly.
The UK national government, consisting of 15 cabinet level departments, and numerous smaller entities, is staffed by career civil servants. The three to eight senior policy positions in each department (Secretary of State, Minister of State, and junior ministers) are drawn from the ranks of the ruling party, generally from the House of Commons and the House of Lords.
Parliaments are elected for a five-year maximum term, although the government of the day can call an election at any time, or be forced to call one by losing a vote of confidence in the House of Commons.
The Labour Government has distanced itself from its socialist origins, and widened its popular appeal by moving steadily toward the political center. It accepts the irreversible nature of industrial privatization and, while some Members of Parliament are sponsored by labor unions, the Labour Party is less reliant than in the past on union funding.
Marketing Strategies
Creating a Sales Office
Establishing a place of business or a branch office in the UK is a straightforward and inexpensive procedure, involving the notification of the parent company’s registration details and the physical location of the UK place of business to the Department of Trade and Industry’s Registrar of Companies. The local branch of a foreign company can trade for up to one month before it is registered, using the permitted grace period.
A company may be registered by its UK-resident directors or secretary, although using a local accountant or law firm for filing purposes may make the task even easier. Pre-registered companies can be purchased from company formation agents, allowing new-to-market companies to start trading with limited liability immediately. A company incorporated with limited liability must file annual returns, and incurs a local profit-related tax liability. The branch office has no separate corporate identity from its parent and no separate accountability for taxation purposes. In all cases, expert assistance should be obtained to mitigate risk and to avoid potentially expensive mistakes.
Creating a Joint Venture
Joint ventures may be formed as limited liability companies or as equal or unequal partnerships. Consortia of companies formed to bid or manage specific projects usually use a British-registered limited liability company as the vehicle, to more easily rent or purchase local premises and assets, and to hire and manage a local workforce and support staff. No ownership or control restrictions apply to joint ventures in the United Kingdom.
Agents and Distributors
National laws governing the relationships between agent and principal, and distributor and supplier are broadly harmonized throughout the EU. EU Directives establish the rights and obligations of the parties to an agreement, the agent’s entitlement to commission payments, and the conclusion and termination clauses of agency contracts. In the case of EU agents and their non-EU principals, the law favors the agent to such an extent that most of those agency arrangements have been terminated in favor of reseller and distributorship arrangements.
Hiring Local Counsel
The U.S. Commercial Service is ideally placed to advise on marketing strategies, and on methods of identifying effective sales and marketing partners for products and services of any description that are exported from the United States.
Although there are few instances that specifically require the use of a local lawyer, local contracts and agreements should be vetted by a competent law firm conversant with UK and EU Law, as such contracts are generally different from U.S. ones. U.S. contracts should not be used as they are mostly unenforceable in UK law. Many U.S. law firms have either established their own UK offices or have links with local practices, and are often the most convenient and practical sources of legal advice for American companies. The Commercial Service in London can provide lists of local law firms, including those with U.S. links.
Checking Bona Fides
Banks, accounting firms, credit agencies and risk management companies provide a full range of reporting services that U.S. companies can use as part of their due diligence before signing a local partner. Service providers include the UK subsidiaries of the American-owned Dun & Bradstreet, Equifax, and Infocheck. The U.S. Commercial Service has discontinued the preparation of International Company Profile (ICP) background checks in the UK, as private-sector alternatives are available.
Distribution and Sales Channels
Dedicated sales and distribution channels have evolved for most imported products and services, ranging from wholly-owned subsidiaries of foreign manufacturers to independent trading companies that buy and sell on their own account. Between these two extremes are independent resellers, sales agents, and stocking distributors that have contractual relationships with their suppliers. The selection of an appropriate marketing organization depends largely on the nature of the goods and services involved. One recent channel marketing development, responding to the expanding requirements of international e-commerce, is the growth of local fulfillment and delivery/returns services.
Franchising and Direct Marketing
Franchising accounts for approximately one third of UK retail sales in fast food and beverage services, hotels, car rental agencies, printing and copying, and auto services. North American-origin franchise systems operate in the UK, with more than 4,200 franchised units employing 35,000 staff, generating a turnover of $1.5 billion. Although franchising is a thriving sector, the biggest barrier to growth is a lack of suitable single unit franchisees.
The Office of Fair Trading (OFT) is the regulatory body that provides consumer protection in franchise operations. The OFT seeks to ensure that the franchise promotes a genuine product or service, and is not a pyramid-type sales scheme. Since the major UK banks recognize the value of successful franchise operations, they can evaluate the business prospects and local credit needs of franchise schemes, and can often provide advice and investor leads to U.S. franchise operators considering UK market entry. The market can be slow to adopt new ideas, and finding a suitable master franchisee can be a long process.
Affordable transatlantic telecommunications and the use of electronic payment methods for international transactions have made direct marketing from the United States more popular. Public confidence in the accuracy of remote billing, data security, and delivery is increasing at a time when the Internet is an increasingly accepted marketing tool. These factors combine to make direct marketing of many types of goods and services worth considering. U.S. Web-based marketers should be aware of the EU Value Added Tax Directive that requires service providers to collect Value Added Tax (VAT) on sales of services to consumers over the Internet.
The EU Distance Selling Directive (97/7/EC) applies to most direct marketing activities. The legislation requires that consumers be given clear and comprehensive information about the vendor and the goods or services offered. The directive also gives the consumer the right of withdrawal within seven days without penalty, and requires the vendor to refund any monies due within thirty days of the cancellation of an order.
The Advertising Standards Authority (ASA) has established a code of practice for direct mail advertising and for list and database management, and the Direct Marketing Association has done the same in respect of direct selling. The industry code of practice for direct marketing can be obtained from the Direct Marketing Association, and the code of practice for advertising can be obtained from the ASA.
Selling Strategies
EU law implemented by national legislation governs exclusivity in agency and supply agreements, purchasing contracts, and contract terms. U.S. manufacturers and exporters are generally able to appoint exclusive representatives and to determine the methods used to promote the sale of their products. Such exclusive territories are usually national in size.
Sales practices that give regulatory concern are those that could give an unfair advantage to the supplier at the expense of competitors or end users. Recent legislation exempts some vertical agreements between manufacturers and their resellers, but requires the disclosure of certain types of inter-company commercial arrangements, and also gives powers of investigation and enforcement to the regulatory authorities.
Pricing and Licensing Issues
Import prices should be based on the landed cost, including value added tax (VAT), which is payable on entry into the EU. The basic formula is cost, insurance, freight and duty, plus VAT at 17.5% levied on the aggregate value. End-user pricing should include local storage, delivery, sales and support costs, with the local profit element. The formerly practiced “Resale Price Maintenance”, where manufacturers set a mandatory retail price and prevented retail discounting is now illegal. Traditional pricing methods have led to the acceptance of higher prices and profit margins than is customary in the U.S., because the UK market for any product is generally smaller than that of the U.S. The cost of sales in the UK is recovered from the smaller sales volume, and the local vendor generally bears the expense of promotion and support.
Advertising and Trade Promotion
While trade promotion practices in the UK are similar to those of the U.S., printed materials prepared for use in the U.S. market may need to be modified for use in the UK to account for local legal, cultural, and other differences. In addition to advice that the Commercial Service offers, local advertising agencies and marketing consultants can provide appropriate professional guidance. Also, the Advertising Standards Authority oversees the practices of the advertising industry and enforces the provisions of the British Code of Advertising Practice (CAP). Advertisers should become familiar with CAP recommendations.
The leading British daily newspapers are:
The Times (www.the-times.co.uk)
The Daily Telegraph (www.telegraph.co.uk)
The Guardian (www.guardian.co.uk)
The Independent (www.independent.co.uk)
The Financial Times (www.ft.com)
Daily Mail (www.dailymail.co.uk)
Daily Express (www.expressnewspapers.co.uk)
Sun (www.the-sun.co.uk)
Mirror (www.mirror.co.uk)
Sunday newspapers:
Sunday Times (www.sunday-times.co.uk)
Sunday Telegraph (www.telegraph.co.uk)
Observer (www.observer.co.uk)
The London Gazette, Edinburgh Gazette and Belfast Gazette (www.gazettes-online.co.uk) are the official journals of the UK, but these are less widely used for formal notices than the Official Journal of the European Community (OJEC).
Popular business journals:
The Economist (www.economist.com)
Investors Chronicle (www.investorschronicle.co.uk)
In addition, global publications such as Business Week and Industry Week are widely read.
Supplying Customer Service
There are independent after-sales, warranty and product servicing organizations in the UK. Most specialize in a single business sector, but a few major firms operate nationwide, providing a comprehensive maintenance and facilities management service. The leaders in this sector are Serco, Jarvis, AMEC and Planned Maintenance Ltd. The smaller service companies that provide local coverage can be identified from business directories, the Internet, and from listings held by local trade associations.
Government Procurement
Most UK government departments are subject to the EU Procurement Directive and the Remedies Directive, and to the WTO Government Procurement Code which gives qualified foreign bidders from signatory countries equal access to each other country’s public sector contracts. Urgency or national security considerations can be used to justify procurements outside WTO rules. Intended procurements above the EU public procurement thresholds are published in the Official Journal of the European Community Supplement (OJECS), and in specialized industry-specific publications. Smaller procurements do not need to be published. Information on specific tenders may be found at www.ted.eur-op.eu.int.
The Ministry of Defence (MoD) publishes information on its future projects and procurements in a biweekly Contracts Bulletin, which is available to U.S. subscribers. Nonetheless, most U.S. defense companies require more lead-time than the bulletin provides, and need detailed guidance on the procedures and bid evaluation criteria used in this sector. To remedy this, the Embassy’s Office of Defense Cooperation (ODC) has prepared a handbook of unique insights and case studies in UK defense marketing for U.S. companies. The handbook is routinely updated to incorporate changes in UK defense procurement policy, procedures and organization.
The handbook is a briefing tool that supplements the practical advice that can be obtained directly from the ODC in London. This advice includes insight, guidance, status and advocacy in support of U.S. defense contractors competing for sales and cooperative development programs for military equipment and services, including missiles and defense systems, munitions, sensors, ships, planes and helicopters.
Larger defense contracts awarded to non-EU contractors require the negotiation of industrial participation (IP) i.e., offset arrangements. The IP arrangements are separate from the procurement contracts, but administered by the MoD’s Defence Export Services Organization (DESO).
Import and Export Regulation Risks
Membership in Free Trade Arrangements
The UK participates in the free trade arrangements of the European Union (EU) and European Free Trade Association (EFTA).
Tariff and Non-Tariff Barriers
The UK has no significant trade or investment barriers, and no restrictions on the transfer of capital or repatriation of profits. The very few barriers that exist are almost all attributable to UK implementation of EU Directives and regulations, and do not reflect UK Government intentions.
Customs duty is assessed on the fair market value of imported goods at the time they are landed in the UK. The commercial invoice value is usually accepted as the normal price, but if a preferential arrangement has been established between the overseas supplier and the importer, or an unrealistic value has been declared, HM Customs reserves the right to assess a fair market value for duty purposes. The duty is payable at the time the goods are imported, but established importers can defer payment for up to 30 days. In addition to customs duties on imported goods, an excise tax is levied on in-country sales of alcohol, tobacco, and road vehicles, and on sales of oil and petroleum products.
The applicable import duty and excise tax rates can be obtained from U.S. Department of Commerce Export Assistance Centers, and copies of the tariff can be purchased from HM Stationery Office
Prohibited Imports and USG-Imposed Export Controls
Prohibited imports include AM citizens band radios, switchblade knives, devices that project toxic, noxious or harmful substances (e.g., tear gas), counterfeit coins and currency, certain types of pornography and hormone-treated beef.
The UK participates in the Wassenaar Arrangement for the control of dual-use exports, the Australia Group (AG) for the control of chemical and biological weapons, and the Nuclear Suppliers’ Group (NSG) for nuclear-related goods, preventing the export of restricted goods and technology to countries of proliferation concern. The UK also supports United Nations’ sanctions restricting exports to certain other destinations. Although sensitive to the extraterritorial application of U.S. law in export controls, the UK authorities cooperate with the U.S. in preventing the re-export of sensitive goods and technology of U.S.-origin to unauthorized destinations, when the enforcement action is based on multilateral controls.
Import Taxes and License Requirements
A limited range of goods requires import licenses, which are issued by the UK Department of Trade and Industry’s Import Licensing Branch. These include firearms and explosives, nuclear materials, controlled drugs and certain items of military equipment.
Customs Regulations and Contact Information
The documents required for shipments include the commercial invoice, bill of lading or airway bill, packing list, insurance documents, and, when required, special certificates of origin, sanitation, ownership, etc.
A copy of the commercial invoice should accompany the shipment to avoid delays in customs clearance. No special form of invoice is required, but all of the details needed to establish the true value of the goods should be given. At least two additional copies of the invoice should be sent to the consignees to facilitate customs clearance. Consular documents are not required for shipments to the UK.
Temporary Goods Entry Requirements
Raw materials, temporarily imported for incorporation into products for export, may be admitted without payment of duties and taxes. The importer must provide a bank or insurance company guarantee or indemnity for the applicable duties and taxes. Goods intended for unaltered re-export may also be imported free of duty for a period of up to six months by prior arrangement with HM Customs & Excise. Duty-free entry is also permitted by prior arrangement for leased or loaned machinery, plant, and equipment, and goods imported solely for processing, repair, technical examination and testing.
Professional and demonstration equipment may be temporarily imported into the UK free of duty and tax under the Customs Convention on the Temporary Importation of Professional Equipment. For this, a carnet should be obtained from the U.S. Council of the International Chamber of Commerce.
Labeling Issues
Origin, weight and dimension, chemical composition and appropriate hazard warnings are required for consumer protection purposes on any product offered for retail sale. If the product cannot be labeled or marked, the data may be included on any packaging or accompanying printed material or product literature. Although metric units of weight and dimension are required, the continued use of labels with both metric and standard units is permitted through a derogation from EU directives. This continued freedom is supported by importers, and also by British exporters of products destined for the U.S. market. European and British clothing and shoe sizes are differently marked, and special provision may have to be made for retail labeling of apparel.
The entity responsible for placing products conforming to EU standards on the market must also affix a CE-mark. To support the CE-marking, a technical file must be maintained, with test data and methodology showing how the standards conformity was checked. For standard products, a single file is generally sufficient, but for purpose-built units, a technical file may need to be prepared for each unit imported. The file must be held available for inspection for a ten-year period. Self-certification is permitted for most product categories, and only a limited range of goods require third-party test and certification by a “notified body”.
Warranty and Non-Warranty Repairs
Duty-free entry is permitted for goods imported solely for processing, repair, technical examination and testing and for the repair parts needed to restore them to their original condition. Upgrade kits and parts of a higher specification do not qualify for duty-free entry.
Free Trade Zones and Warehouses
The Free Trade Zones of the UK are the cargo ports and freight transshipment points of Birmingham, Humberside, Liverpool, Prestwick, Sheerness, Southampton and Tilbury. These seven zones are used only for cargo storage and consolidation, and not for value-added processing of the goods concerned.
Investment Climate
Openness to Foreign Investment
The UK is home to more big-name corporations than any other European country. As Europe’s top location for inward investment, the UK receives 19% of all investment in the EU. Currently, the UK gets about 32% of U.S. investment in Europe. London remains the “Best City for Investment”.
With a few exceptions, the UK does not discriminate between nationals and foreign individuals in the formation and operation of private companies. U.S. companies establishing British subsidiaries generally encounter no special nationality requirements on directors or shareholders, although at least one director of any company registered in the UK must be ordinarily resident in the UK. Once established in the UK, foreign-owned companies are treated no differently from UK companies. Within the European Union (EU), HMG (the British Government) is a strong defender of the rights of any British registered company, irrespective of its nationality of ownership.
Market entry for U.S. firms is greatly facilitated by a common language, legal heritage and similar business institutions and practices. Long-term political, economic and regulatory stability, coupled with relatively low rates of taxation and inflation make the UK particularly attractive to foreign investors. The Blair government inherited a legacy of economic reforms, including privatization, deregulation, and support for competition. These initiatives have been continued, with very few instances of government intervention.
Local and foreign-owned companies are taxed alike. Inward investors may have access to certain regional grants and incentives that are designed to attract industry to areas of high unemployment, but no tax concessions are granted. The UK taxes corporations at rates between 10% and 30%. The rate applicable to a particular company in a particular year will depend primarily on the level of profit made, but revenue can also be a contributing factor.
In April 2002, a social tax increase was levied on corporations (and employees) in the form of a 1 percentage point increase in the 11.8% employers’ n
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