International Business Report 2012The “New Normal” - low demand visibility, lowaccess to credit and low ease of doing business Main findings: Political turmoil, failure to lead and austerity across • ease of doing business - 381 per cent of Irish the EU in our view will continue to significantly impede business leaders cite regulation/red tape to be a economic growth in Ireland and the region and thus major constraint for doing business in 2012 curtail demand. The reshaping of the banking sector and (globally 37 per cent, EU 35 per cent and US 39 pressure to deleverage will continue to restrict access to per cent). This is the third consecutive year that credit into the long term. While the nationalisation of regulation/red tape has increased, after the banking system and socialisation of banking losses reaching a six year low of 20 per cent in 2009. will continue to increase the regulatory burden on Only one in every ten Irish businesses business. expect the lack of a skilled workforce to be a However over the longer term constraints and major constraint in 2012 (globally 28 per cent, opportunities are two sides of the same coin. It is over EU 25 per cent and US 18 per cent). Irish thirty years since Peter Drucker first posed the enduring businesses sentiment on the availability of question challenging businesses to change by asking “If skilled workforce is the lowest out of the 40 you werent already in a business, would you enter it countries surveyed. today? And if the answer is no, what are you going to do • reduced demand/shortage of orders - 49 per about it?" cent of business leaders cite a shortage of We believe successful businesses will overcome the orders to be the greatest barrier to growth in current constraints on growth by focusing on the 2012 (globally/EU 37 per cent and US 31 per following key drivers of success: cent) – an increase of 11 per cent year-on-year. • process – businesses will be stronger by using their • funding and finance – access to finance own regulation to ensure customer needs are continues to be challenging, with Ireland exceeded rather than relying purely on externally ranked 36th out of the 40 countries surveyed at imposed regulation; -52 per cent.2 The cost of finance at 42 per cent • talent and skills – although unemployment is (globally/EU 23 per cent and US 16 per cent), unacceptably high unfortunately the demand to shortage of working capital at 30 per cent recruit individuals for key roles is increasingly (globally 24 per cent, EU 27 per cent and US 11 difficult – particularly in growth sectors such as food, per cent) and shortage of long term finance at technology and life sciences. Talent management and 37 per cent (globally 26 per cent, EU 28 per skills development will be the key to the delivery of a cent and US 20 per cent) continue to constrain successful businesses goals; and growth in 2012 (see figure 2). • information – knowing your costs, revenues, business drivers and the attainment of customers’ needs has never been more important. Better qualityThis report identifies the “New Normal” of doing information will lead to better decision making andbusiness and constraints on growth i.e. low demand access to funding therefore increasing the likelihoodvisibility, low access to credit and greater regulation. of success.1 Findings are based on average percentage of respondents rating 4-5 on scale of 1-5, when 1is not a constraint and 5 is a major constraint2 Balance percentage of respondents indicating access to finance to be more or lessaccessible in 2012.
Figure 1: Most significant constraint on growth by economy – 2012Average percentage of respondents rating 4-5 on a scale of 1-5, when 1 is not a constraint and 5 is a major constraint Availability of Regulation/red Shortage of Shortage of Cost of Shortage of skilled workforce tape % orders/reduced long-term finance % working capital % demand % finance % % Australia 56 Argentina 52 Mainland China 43 Armenia 28 Greece 64 Spain*** 46 Botswana 52 Brazil 46 Denmark 32 India 61 Belgium 38 Chile** 32 Finland 36 Canada 42 Italy 60 Poland 50 Germany 35 Mexico 38 Sweden 24 Malaysia 38 Peru 30 Hong Kong 64 Netherlands* 24 Philippines 32 Ireland 49 New Zealand 44 Russia 45 Japan 69 Singapore* 28 South Africa 39 France 64 Switzerland 26 Turkey* 48 Georgia 38 UAE 30 United States 39 Taiwan 40 Thailand 78 United Kingdom 32 Vietnam 54 EU 25 35 37 28 23 27 Global 28 37 37 26 23 24 * tied with shortage of orders/reduced demand ** tied with cost of finance and shortage of orders/reduced demand *** tied with shortage of long term finance and shortage of orders/reduced demand Source: Grant Thornton IBR 2012 Figure 2: Constraints on expansion in Ireland – 2007-2012* Average percentage of respondents rating 4-5 on the scale of 1-5, when 1 is not a constraint and 5 is a major constraint2
Regulation/red tape Figure 3: Regulation/red tape – top and bottom five countries Average percentage of respondents rating 4 or 5 on the scale ofThe issue of increasing regulation/red tape hampering 1-5, when 1 is not a constraint and 5 is a major constraintbusiness operations is a global issue with some markeddivergences (see figure 3). Globally, the impact ofregulation has marginally increased as a constraint forgrowth, from 35 per cent in 2011 to 37 per cent in 2012.By region, Latin American3 businesses are mostconcerned about regulation/red tape over the next 12months with 43 per cent (2011:41 per cent) citing it as aconstraint this year, followed by North America 39 percent (2011:39 per cent) and the BRIC economies 38 percent (2011:36 per cent). Ireland, alongside Hong Kong and Mexico, is ranked13th out of the 40 countries surveyed, with businessleaders in the troubled Eurozone economies of Italy(1st) and Greece (2nd), feeling the most from theregulatory burden, with both economies struggling tomake the structural reforms necessary to recover Availability of skilled workforcecompetitiveness. Irish businesses have seen Over a quarter of businesses globally (28 per cent) citeregulation/red tape rise by 18 per cent since 2009 to 38 an availability of a skilled workforce as a majorper cent in 2012. These findings support the World constraint in 2012. With unemployment risingEconomic Forum Global Competitiveness Report 2011- dramatically in the mature economies in the last number2012 which ranks inefficient government bureaucracy of years, and businesses shedding labour rather thansecond only to access to finance as the most recruiting, skilled workforce shortages as a constraintproblematic factor for doing business in Ireland. remains unexpectedly high in the EU at 25 per cent In other EU economies, 36 per cent of senior (2011:22 per cent).executives in Belgium and France (16th), 34 per cent in Only 1 in 10 Irish businesses expect a lack of skilledGermany (19th) and 30 per cent in the UK (26th) expect workforce to be a major constraint. However, there isred tape to be a major constraint throughout 2012. often a war for talent within the best performing sectors Three of the four BRIC economies, India (50 per such as food, technology and life sciences in Ireland andcent), Brazil (46 per cent), and Russia (45 per cent) are an oversupply in depressed industries such asamong the top ten most bureaucratic nations surveyed. construction and retail.Irish businesses seeking to export to these high growth Interestingly, the availability of a skilled workforce ismarkets must factor in the cost of extra government cited as a major constraint by almost a third ofprocedures and regulation/red tape. respondents in Latin America (30 per cent), 38 per cent Mainland China is 27th on the list with 29 per cent of in Asia Pacific (ex. Japan) and 36 per cent in the BRICbusinesses citing red tape as a major impediment to economies. This is also the case in other matureexpansion in 2012. The commercial environment in economies such as Germany (35 per cent), Australia (56Mainland China continues to become much more per cent), Canada (42 per cent) and Switzerland (26 peramenable to foreign investment, with attempts to cent). The war for talent is truly global.streamline regulation/red tape extremely positive.3 For the purpose of IBR, the term ‘Latin America’ refers to Argentina, Brazil, Chile,Mexico and Peru. 3
Figure 4: Impact of loss of skilled workers by region 2011-2012 8 per cent across the region year-on-year (29 per cent toAverage percentage of respondents rating 4 or 5 on the scale of 1-5, when 1 is not a constraint and 5 is a major constraint 37 per cent). According to the latest Eurozone Purchasing Managers Index, marginal increases in output in January 2012 were the result of businesses reducing their backlog of orders. Inflows of new business continued to fall, with companies cutting their headcounts for the first time since spring 2010 - indicating that European businesses have entered a challenging 2012 with a focus on cutting costs and boosting productivity as orders decrease. In France, this is expected to be felt most, with business leaders citing a shortage of orders as their main constraint in 2012 at 64 per cent (2011:39 per cent). In Germany, the order book is holding up, with 17 perShortage of orders/reduced demand cent of businesses citing a shortage of orders as a majorGlobally 37 per cent of businesses expect a shortage of constraint on growth (2011: 16 per cent).orders to be a major constraint for their business in2012 (2011:33 per cent). Consumer demand and fixedinvestment in machinery and buildings, the key drivers Figure 5: Shortage of orders/reduced demand – EU countries Average percentage of respondents rating 4 or 5 on the scale of 1-for orders, have fallen, or slowed abruptly in many 5, when 1 is not a constraint and 5 is a major constraintmature economies, as the economic downturn hasintensified. This is a natural feature of downswings, butthe impact has been exacerbated by the ongoing travailsof the Eurozone sovereign debt crisis, with shortage oforders now viewed as important a constraint globally asregulation/red tape on business expansion. 19 of the 40countries surveyed predict a shortage of orders to betheir biggest constraint in 2012, with 49 per cent of Irishbusinesses expecting a shortage of orders in 2012 – anincrease of 11 per cent year-on-year (ranked 7th out of40 countries surveyed). Shortage of orders is the most pressing concern forbusinesses in the East Asian economies of Thailand (78per cent), Japan (69 per cent), Hong Kong (64 per cent),Vietnam (54 per cent), Mainland China (43 per cent)and Taiwan (40 per cent). Disruptions caused by theJapanese tsunami to supply chains, increasedcompetition, and the slowdown in demand fromconsumers in European markets have led orderexpectations to be revised downwards. Regionally, businesses in Asia Pacific4 (ex. Japan) at42 per cent, followed by the EU (37 per cent) are mostconcerned by this constraint in 2012, with LatinAmerica (15 per cent) remaining the least concerned.Figure 5 illustrates that 10 out of the 13 EU countriessurveyed expect increased order shortages to be a majorconstraint in 2012 compared with 2011 – an increase of4 For the purpose of IBR, the term ‘Asia Pacific’ refers to Australia, mainland China, HongKong, India, Japan, Malaysia, New Zealand, Philippines, Singapore, Taiwan, Thailand andVietnam4
Figure 6: Access to finance over the next twelve months - EU and Eurozone membersActual percentage of businesses Change in Much more More No Less Much less Dont % balanceRanking accessible accessible change accessible accessible know Balance** 2011-20121 Denmark* 4 18 66 8 4 0 10 -192 United Kingdom* 0 12 62 20 5 1 -13 -223 Spain 3 22 27 30 17 1 -22 -174 Poland* 0 4 56 30 4 6 -30 -225 Belgium 0 10 40 40 8 2 -38 -496 Germany 0 9 41 40 8 2 -39 -297 Sweden* 1 6 41 48 1 3 -42 -568 Finland 0 6 40 42 12 0 -48 -839 Ireland 0 7 33 43 16 1 -52 -1410 Italy 2 8 28 56 6 0 -52 -4611 Netherlands 0 8 30 54 8 0 -54 -4812 Greece 0 4 18 44 32 2 -72 -3013 France 0 1 19 56 22 2 -77 -75 Eurozone 1 8 30 46 13 2 -50 -43 EU average 1 9 37 41 11 1 -42 -39 Global average 3 22 42 24 6 3 -5 -17* Members of the EU only not Eurozone members**Balance percentage of respondents indicating access to finance to more or less accessibleSource: Grant Thornton IBR 2012Funding and finance Figure 7: Global access to finance Index 2012With the financial sector in many countries under severe Balance percentage of respondents indicating access to finance to be more or less accessible in 2012.pressure, banks are continuing to adopt risk averseprocesses to restore balance sheet viability. In Ireland, 7per cent of businesses (globally 25 per cent, EU 10 percent and US 38 per cent), expect finance to be moreaccessible in 2012, with 59 per cent (globally 29 percent, EU 52 per cent and US 12 per cent) of businessespredicting access to finance to decrease over the nextyear. Expectations of an increase in access to financehas worsened year-on-year by 14 per cent to a balanceof -52 per cent in 2012 in Ireland. Businesses in the EU region at -42 per cent (2011 -3per cent) are the most concerned by reduced access tofinance, constituting 9 out of the bottom 10 countries of In spite of the European Central Bank (ECB)Grant Thornton’s Global Access to Finance Index 2012 recently offering the region’s banks unlimited finance of(see figure 7). Restricted access to finance is seen as a up to three years, businesses do not expect the measurethreat to business leaders across the globe, with to translate into credit. Banks are predicted to use mostbusinesses in the Eurozone particularly vulnerable with of the three-year loans to meet their own refinancingbanks accounting for approximately 80 percent of needs. According to Bloomberg the majority of lenderslending to the area, making them crucial to the supply of across Europe have committed themselves to meetingcredit. capital rules by cutting at least €950 billion from their balance sheets over the next two years, either by selling assets or not renewing credit lines. Figure 8 illustrates how under-capitalised European banks are vis-à-vis their US counterparts. According to JP Morgan 5
European banking sector liabilities are on average three without having to raise funds from equity or bond sales,to four times the size of their respective countries GDP giving them more incentive to boost loans to cash-- significantly larger than an almost 1:1 ratio in the US. strapped smaller firms.Figure 8: Europe – bigger banks, bigger problems Support of lendersLiabilities, multiples of Gross Domestic Product How supportive lenders are to business is cited as one of the key determinants to survival in the continued economic uncertainty. 73 per cent of businesses globally feel their lender is supportive of them, whilst only 9 per cent feel their lenders are unsupportive. 48 per cent of Irish business leaders expect lenders to be supportive towards their business in 2012 (2011:59 per cent) and 14 per cent unsupportive (2011:21 per cent), giving a net balance of +34 per cent (2011:+38 per cent) – a decrease of 4 per cent on 2011. Irish businesses rank 33rd out of the 40 countries surveyed in terms of lenders business support. Lenders to business within North America are perceived as the most supportive of businesses at +76 per cent in 2012. Latin America (+49 per cent) and the In contrast to the EU, businesses in North America EU (+50 per cent) remain the least optimistic regions.are positive about access to finance over the next 12 In Europe perceived support of lenders remainsmonths at +24 per cent (2011 +31 per cent). US weak, with 8 out of the bottom 20 countries surveyedcompanies are the highest ranked mature economy on being members of the EU. Figure 9 illustrates thethe index, with +27 per cent expecting an increase. tightening of credit standards in 124 Eurozone banks inSome of the biggest banks (J. P Morgan, Wells Fargo September 2011. The new rules governing theand Citigroup) have seen outstanding loans rise by $41 capitalisation of banks are expected to force lenders tobillion from a year ago to $2.14 trillion – the first re-assess their clients more rigorously either refusingincrease since the financial crisis broke in 2008. credit completely or attaching higher costs to loans and Emerging regions remain optimistic about access to funding.finance in 2012 with Latin America (+24 per cent) andthe ASEAN3 economies at +11 per cent. The BRIC Figure 9: Changes in credit standards applied to the approval of loans or credit lines to enterprisesregion has seen a slowdown in access to credit, falling (*net percentage of Eurozone banks reporting tightening creditfrom 12 per cent in 2011 to 0 per cent in 2012. standards) This fall can be mainly attributed to Russia andMainland China where business expectations forincreased access to finance have fallen from +29 and -16 per cent in 2011 to -6 and -22 per cent in 2012. Throughout 2011, the Chinese governmentincreased banks reserve rates as a measure to reducelending thus dampening demand and tackling risingprices. However, on the back of the Chinese economyexpanding at its slowest pace in 10 quarters by 8.9 percent in Q4 2011, China’s banking regulators areexpected to relax capital requirements. The Chinesecentral bank in December 2011 cut the reserverequirement for banks for the first time since 2008. Relaxing the capital rules may allow banks, inemerging markets like China, to provide more loans3 For the purpose of IBR, the term ‘ASEAN’ refers to Malaysia, the Philippines, Thailand,Singapore and Vietnam6
Figure 10 highlights factors affecting credit standardsin Eurozone banks applied to the approval of loan orcredit lines to enterprises. Industry or firm-specificoutlook remains the largest constraint on the approvalof loan or credit lines to enterprises. With a shortage oforders expected to increase across a number ofEurozone states in 2012, businesses in industries worstaffected by the sovereign debt crisis will continue to bestarved of liquidity and access to finance. The political turmoil, failure to lead and austerityforced upon its members means businesses and supplychains in the EU will need to come up with new ways oftrading in the era of low access to credit.Figure 10: Factors affecting credit standards applied to theapproval of loan or credit lines to enterprises(Net percentage of banks reporting a contribution to tighteningstandards) 7