Exports on the Rise
Connecticut among nation’s top ten in exports per capita
By Lesia Winiarskyj
Ranked eighth in the United States in exports per capita and fourth for exports to the euro zone, Connecticut is, by any measure, a global state.
Between 2000 and 2011, the state’s exports more than doubled, rising from $8 billion to over $16.2 billion. Similarly, export share of GSP rose from 4.9% in 2000 to 7% in 2011, directly and indirectly supporting an estimated 500,000 jobs in Connecticut: including 24% of those in manufacturing. (Roughly 87% of the state’s exports are manufactured goods, primarily transportation equipment, machinery, and computer and electronic equipment.)
“Export success is vital to Connecticut’s economy,” says Anne Evans, district director of the U.S. Department of Commerce International Trade Administration, noting that about 13 net new jobs are created for every $1 million in additional exports. Just as her agency recognizes the value exporting has for local economies, she says, “more companies are recognizing that their growth may depend on seeking global markets, and they’re focusing their efforts on becoming global players.”
The rise in Connecticut exports mirrors a national trend. For the first time since 2007, growth in U.S. exports outpaced the growth of imports in both dollar and percentage terms in 2012: a pattern that continued into 2013.
Still, the Commerce Department acknowledges that less than one percent of American companies export; of those that do, most export to only one country.
So, what are the biggest challenges associated with international trade? To what extent have the state’s export-capable businesses penetrated foreign markets, and what incentives or support systems would enable more businesses to follow suit?
Earlier this year, CBIA: together with sponsors HSBC and McGladrey: conducted its fourth biennial international trade survey to get a clearer picture of Connecticut’s exporters, identify barriers and benefits to international trade, and inform public policy that strengthens our state’s competitiveness and expands its global reach.
Who Are Connecticut’s Exporters?
In March, CBIA surveyed 1,188 Connecticut businesses about their involvement in exporting. Nearly three-quarters of those surveyed (71%)* were engaged in international trade, and most were not newcomers to the global marketplace: 41% had been exporting for more than 20 years, and 29% had been exporting for 10-20 years. Most exporters (87%) entered foreign markets to increase their company sales and profits. More than half entered to follow their clients or to diversify their business and offset domestic economic cycles.
Manufacturers accounted for the vast majority (72%) of exporters. Of these, the greatest share were in the aerospace industry. Other industry types within manufacturing included medical/health, information technology, environmental, and electronics.
Companies engaged in services (11%), wholesale trade (4%), construction (3%), retail (2%), and consulting (2%) were also represented.
“Manufacturing is still king in Connecticut, with aerospace and medical devices finding the greatest number of export markets,” says Evans, “but we are also seeing software and services finding global customers. Much of this software is security-focused.”
Overseas Investments, Revenues
Exports account for a sizable share of companies’ gross income: 28% of Connecticut exporters attribute at least 26% of their revenues to exports. Of those, about 44% say exporting accounts for more than 50% of their company’s revenues.
In addition to exporting, more than a quarter of respondents reported that they have facilities abroad, and nearly a third have employees outside the U.S. The primary reasons for investing in overseas facilities and/or personnel were to be closer to major customers and suppliers (cited by 78% of respondents) and to forge stronger international relationships (51%). Lower business costs were also identified as a reason for offshoring, but not by a majority of businesses (37%).
Barriers to International Trade
Cost competition is the greatest challenge for Connecticut exporters (57% of respondents), followed by trade/regulatory barriers (46%) and unfair trade practices (31%). These have ranked consistently at the top of exporters’ challenges in the three most recent international trade surveys CBIA has conducted (2009, 2011, 2013). Lack of knowledge about foreign markets (33% of respondents), administrative costs (29%), and loss of intellectual property (25%) are identified as barriers as well.
Weak foreign economies (55% of respondents) and transportation costs (51%) dominate respondents’ immediate concerns about international commerce, although future concerns are more diffused (45% of respondents say weak economies will be a major concern for them in the future, and 42% say transportation costs will be a future concern).
More respondents believe political unrest in foreign countries will be a concern in the future (31%: up from 22% who say it poses an immediate concern). The same holds true for changes to foreign trade agreements: 21% find these problematic now; 29% believe they will be in the future.
Nearly half of the businesses we surveyed acknowledged that the global recession resulted in a reduction in new orders for exported goods. An equal number also experienced buyer defaults and/or significant delays in receiving payment for international sales; 16% had difficulty securing long-term orders as a result of the recession.
However, 56% of companies surveyed maintained that their exporting activities helped them weather the economic slump and position their businesses for a stronger recovery.
“Developing overseas markets is a business strategy that has clearly demonstrated its worth to many firms: including smaller companies: enabling them to diversify their customer mix and smooth out some of the troughs that occur in the domestic economy,” says CBIA President and CEO John Rathgeber. “Because their markets are more diverse, companies that export can offset domestic economic cycles in the same way individual investors can protect against downturns in any one financial sector by diversifying their portfolios.”
Richard Wheeler, president of Connecticut-based manufacturer Capewell Components LLC, says exporting has increased his company’s revenues and profitability.
“We’re devoted to exporting in all three of our divisions: including military components and cable TV and fiber optic installation and stripping tools. We’ve had an office in the U.K. distributing our products throughout Europe for over a decade, and we just established an office in Shanghai in 2012 to move product throughout the Pacific Rim. These sites allow us to transact in the currencies, languages, and times zones of other countries.”
Critical to exporting, he says, is “establishing uniqueness in your product and having the technical capability to adapt to needs that are different in other parts of the world.” An understanding of brokerage, customs, duty services, and applicable taxes is essential too, Wheeler notes, adding that the Commerce Department’s Middletown Export Assistance Center provides invaluable help with these and other administrative details for local businesses new to the global marketplace. “A small company cannot do it alone.”
CBIA’s 2013 survey found that the largest foreign markets for Connecticut exporters are, in order, North America (Canada/Mexico), western Europe, and northern Asia/Pacific Rim: China, Japan, and Taiwan.** But that distribution is expected to shift over the next three years, putting northern Asia in the top spot. Only 17% of Connecticut businesses surveyed anticipate doing the majority of their exporting within North America in the next three years, down from 31% currently. Western Europe will also see a decline, from 30% of respondents today to 25% in three years. On the other hand, Connecticut companies plan to sell more of their goods and services in northern Asia: 29% of respondents in the next three years, up from 20% today.
It should be noted that CBIA’s survey was conducted in March, when China’s manufacturing purchasing managers’ index (PMI) had reached an 11-month high of 50.9 and analysts expected it to hit 51.0 the following month. Since then, however, China’s PMI fell (to 50.6 in April), reflecting headwinds from the euro zone recession and sluggish growth in the United States. Exports to China, therefore, may not grow to the extent that Connecticut businesses had anticipated earlier this year, when they took part in our survey.
“Euro zone economic weakness in early 2013 is now adding to our own uncertainty nationally and here in Connecticut,” says Klepper-Smith. “The fiscal situation there is problematic because of the number of players involved and because of an apparent lack of confidence in their ability to find viable long-term solutions,” he explains. “China and the economic fundamentals there are a very different situation. They’ve been posting growth of about 8% annually over the last several decades, and now the slowdown in growth implies not only slack labor markets but less of an appetite for commodities: creating greater uncertainty for U.S. exporters.”
Evans notes, however, that northern Asia “will continue to be an important market, as it is huge and still growing, even if not as fast as earlier predicted.” China’s aerospace industry, she says, is expanding rapidly, and at press time, she and other Commerce Department officials were on a trade mission to China to evaluate markets for Connecticut aerospace components.
Successful exporting requires a mix of financial, logistical, technological, and legal resources. Our survey asked Connecticut businesses what types of tools and services they use, if any, and to what effect. We also asked them what was lacking, and where government and the private sector could do better to support their efforts.
- Financing. Most Connecticut businesses that have sought financing for their exporting efforts characterized banks and other lending institutions as “friendly” or “somewhat friendly” to their exporting needs (74%): a view more favorable than what we’ve seen in our general credit availability surveys. This is significant, because most of our international trade survey respondents were small companies: employing fewer than 100 workers: traditionally the types of businesses that experience greater difficulty securing export financing.
- Trade shows. When it comes to finding new customers or marketing a product/service, participation in domestic and international trade shows often delivers results. A majority of survey respondents are involved in domestic trade shows: 74% in 2013, up from 68% in 2009. About half (52%) participate in international trade shows, up slightly from 47% in 2009. Cost is the greatest barrier to participating in international shows (cited by 57% of respondents), followed by lack of time and other resources (48%), and limited staffing (37%). In past surveys, lack of knowledge was a major deterrent to participation in international trade shows; this year, only 20% of respondents said that was the case.
- Trade intermediaries. As recently as 2009, 60% of Connecticut businesses surveyed had no knowledge of the services provided by trade representatives; of those who were aware of such services, only 36% made use of them. Today, 62% of companies surveyed are familiar with trade representatives, and 48% are using them. In fact, industry reports and international trade consultants were identified as the resources most helpful in identifying overseas markets and increasing companies’ presence in those markets. Seventy-four percent of today’s exporters use freight forwarders for international trade support, up considerably from 59% in 2011 and only 50% in 2009. Thirty percent use legal advisors for exporting (up from 16% in 2011), and 15% use accounting services for exporting (up from 9% in 2011).
- Internet. Connecticut businesses are not using the Internet to its fullest potential to support their international trade efforts, and Internet readiness and capability among the state’s exporters has not statistically improved over the past four years. Despite widespread use of the Web to communicate with international customers/clients (72% of respondents), market their goods or services globally (65%), and receive product/service inquiries (63%), the majority of respondents (75%) acknowledge that their company website is not capable of processing international orders. Only 20% have their online content translated into foreign languages. “Connecticut exporters need to do more to source, bid, and transact business online in the global marketplace,” says CBIA economist Pete Gioia. “Right now, their online presence is mostly limited to marketing and information delivery, and mostly limited to one language: English. For certain industries, however, it makes sense to migrate to a fully transactional site, one that can process orders and payments and integrate with back-office systems such as accounting, inventory, and after-sales service.”
- Government assistance. More than one in four Connecticut companies not engaged in foreign trade (27%) say they would like to be, and 23% believe their current staff capacity would make it possible. From their perspective, the greatest barriers to exporting are a lack of knowledge about foreign markets and licensing concerns. We surveyed businesses about ways the state could facilitate their exporting activities. Their recommendations included seminars and webinars with practical, step-by-step export assistance and guidance; tax relief for income and assets tied to demonstrated export activity (e.g., a waiver of income tax on export sales), tax credits for market development or attending international trade shows, and similar incentives; B2B meetings in Connecticut and abroad with top international OEMs to raise awareness of Connecticut’s strong manufacturing supply chain; and consistent duties for imported and exported products.
Land of Steady Exports
Since the release of CBIA’s first international trade survey, in 2007, Connecticut has seen a steady increase in the number of export-capable companies doing business abroad: from 53% to 71% over a six-year-period. Today, roughly 2,000 Connecticut manufacturers: and many other nonmanufacturing companies: export to more than 200 countries.
In the near term, the economic slowdowns in Europe and Asia pose challenges for exporters but also underscore the need for Connecticut’s business community to expand its access to growing markets and marshal the full resources of state and federal government export assistance programs. Indeed, there remains tremendous untapped potential for the state’s chief job creators: small and midsize enterprises: to enter new markets, increase their share of U.S. exports, and compete for the 95% of customers in the world who live outside the U.S.
The biggest barriers for Connecticut companies with export potential, according to Evans, are “resources: both human and financial. To have a successful export plan, a company must have management commitment and a budget that allows sufficient market investigation.”
Businesses participating in our international trade survey agreed, suggesting that the most important step government could take in boosting exports would be to lower the cost of doing business.
“Our latest survey shows greater interest and involvement in international trade among Connecticut companies,” says Gioia, “but it also shows cost constraints and a need for more information and awareness about export assistance, trade agreements, and foreign markets. These are areas where government agencies, along with international trade consultants, can really help.”
* We surveyed companies most likely to be involved in exporting, i.e., manufacturers; companies engaged in technology, research and development, or natural resource exploration; wholesalers; retailers; agricultural businesses; and larger insurance and financial services providers. A broader survey of companies of all types and sizes would have revealed a smaller proportion of Connecticut’s overall business community engaged in exporting.
** According to CBIA’s survey, other markets with moderate growth potential for Connecticut exporters over the next three years include South America and South Asia: and, to a lesser extent, the Middle East and Central America.
Lesia Winiarskyj is a writer and editor at CBIA. She can be reached at firstname.lastname@example.org.
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