In the face of supply chain concerns, UK businesses remain positive about international trade

It's hard to understate the profound disruption brought about in 2020 for UK businesses with a long lockdown and almost crippling economic contraction in Q2, things weren't looking too bright as we rolled into Q3.

In the face of supply chain concerns

It’s hard to understate the profound disruption brought about in 2020 for UK businesses ‘ with a long lockdown and almost crippling economic contraction in Q2, things weren’t looking too bright as we rolled into Q3. Yet, despite this we had what could be considered a good summer, with retail sales and jobs up, and stamp duty cuts boosting the housing market.

Unfortunately, the ongoing threat of COVID-19 soon put a stop to all this positivity. Rising infection rates resulted in new government mandated restrictions and continued lockdown measures to save lives and help protect jobs and businesses. At HSBC, our recent Navigator ‘ Now, next, and how for business report aimed to find out just how businesses are responding to these ongoing challenges and what they are doing to prepare for the future. 

The results of the survey indicate more uncertainty ahead, with business optimism having declined in the UK and expectations of revenue growth in 2021 now lower than they were in 2019. Despite continued uncertainty related to the pandemic, more than half of UK businesses (57%) are finding ways to adapt to this new environment. 

The current outlook

While business confidence has reduced year on year (from 83% in 2019 to 61% at the end of 2020) almost three quarters (71%) of UK businesses told us that they expect to have returned to pre-COVID levels of profitability by the end of 2022, with a fifth even believing they will return to similar levels by the end of this year. In fact, in somewhat of a silver lining, some organisations have actually seen COVID-19 as the biggest driver of sales growth this year. 

Strategising for the future

In readying for the post-pandemic business environment, a vast number of organisations have undergone various levels of change. In the UK, most businesses ‘ over four-in-ten ‘ have undergone short-term changes but expect to return to previous operations in the future. A quarter have undergone more of a long-term transformational change, and a further quarter have continued as before. The key drivers behind these changes have been adapting to new ways of working and looking to reduce costs.

Interestingly, those companies that either continued their operations as before or underwent short-term changes have reported more positive expectations of sales growth than those that pursued long-term changes. 

Another significant area of change as we look to 2021 is business investment priorities, with 62% of UK businesses investing in new areas of growth. Notably, more than half of businesses identify employee wellbeing (55%) and customer experience (53%) in their top list of investment priorities in 2021 ‘ which is above the global average (44% and 49% respectively). Investing in these areas makes sense though. We’ll likely see remote working continue, and with it the ongoing evolution of customer expectations. 

Alongside these priorities, UK businesses are also putting budget behind improvements to cash flow, employee upskilling, cyber security, and data protection. This all suggests UK businesses are taking a well-balanced approach and are investing across their organisations ‘ and that they expect technical innovation and a capacity for change to become more important characteristics of a business in a post-pandemic world.

The future of international trade is positive, but uncertainty remains

With the UK’s exit from the EU, the ability of UK businesses to trade internationally is an increasingly important factor. Our research found that 68% of UK businesses remain positive about their international trade prospects over the next two years. Additionally, more than three-out-of-five (61%) businesses say they have no plans to stop or reduce trading with existing partners. 

However, caution is advised. More than half (51%) of UK firms expect international trade to become more difficult in the next year as businesses face the economic headwinds presented by the pandemic and new processes and procedures following the end of the transition period. 

New criteria for supply chains

The onset of COVID-19 fuelled massive disruption to firm’s suppliers. In the UK alone, the majority of business leaders (90%) expressed concern about their supply chains related to the pandemic. These concerns are particularly focused on increasing costs, stability and suppliers being far from either target customers or their own business.

Supply chains have been tested like never before and many business leaders are only now understanding the importance of having transparency through each layer of their suppliers. Thirty-one percent of UK businesses have been selecting suppliers based on how effectively the country in which they are based has managed COVID-19.

As firms look towards the year ahead, increased resilience and use of technology within supply chains will continue to be of high importance. In fact, for 81% of UK businesses the use of digital technology is the immediate priority for their supply chains in 2021. 

By incorporating innovative technology into their day-to-day business and diversifying their suppliers to provide greater geographical contingencies; organisations can streamline their operations and help protect them from unpredictable economic uncertainty. These changes will ultimately be essential for businesses to thrive and grow in the months and years ahead.

Sustainability is seen as good for business

The final important factor that will shape businesses in 2021 is sustainability. External pressure to bring about broad change with environmental, social and governance (ESG) targets is increasing. In particular, consumer demands are the strongest driver for sustainability ‘ with consumers spending more time than ever analysing whether a brand’s claims are truthful and, if not, being much harder on that brand than in the past. 

Our research found that almost two-thirds (65%) of UK companies have targets set for a broad range of ESG measures. Up to four in ten have annual targets in place, notably for executive pay, energy usage and diversity. More businesses are also measuring some aspects of ESG than in 2019, although levels for measuring governance specifically are lower ‘ this is in line with global trends. 

Investment in ESG is now seen as a benefit to growth. In total, 86% of UK companies think there are multiple opportunities to be had from improving their environmental and ethical sustainability, and more than three quarters (78%) believe their sales will grow through a greater focus on sustainability. 

Although business optimism declined sharply in the UK in 2020 and uncertainty continues to pervade businesses, our results show that they are adapting to this new environment. Of course, there are further challenges ahead as we continue to tackle the pandemic but if businesses continue to look towards new avenues for growth and change, they can build the resilience needed to successfully navigate the next twelve months and beyond.

Ian Tandy
Ian Tandy

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