14 Feb 2019
Once dismissed as an almost implausible scenario, the likelihood of a ‘no-deal’ Brexit is steadily increasing as the 29th of March draws precariously closer, with no agreement in place. For any business, a no-deal Brexit presents a significant risk but for manufacturing, the consequences of crashing out could be especially problematic and have a serious short-term impact.
In this blog, I explain how manufacturing would be affected, if the UK were to leave the European Union without a deal on the 29th March 2019.
Costs will increase, if they haven’t already – some manufacturers have already spent millions storing raw material and finished products in case of border delays, and are facing the likelihood of additional increased costs.
In a no-deal Brexit, Britain would automatically switch to WTO rules, which instigate a whole set of difficulties, from an introduction of hefty tariffs, to hard borders with the rest of the EU, to regulatory uncertainty. There will be significant complexity in the form of tariffs and customs declarations which will directly impact the cost of goods, affecting margins and profitability. Border processes would require additional time to clear customs, with a no-deal likely to result in long tailbacks at Dover. Without an appropriate planning response, a slowing down of the supply chain would increase costs and decrease customer satisfaction, as delays damage the operational effectiveness and profitability of businesses.
Higher costs could be compounded by continuing currency volatility. Decisions will have to be made as to whether these additional costs are absorbed, or should be passed onto customers. Given the current pre-Brexit profitability challenges, increased costs could further impact the commercial viability of manufacturer’s product portfolios.
Manufacturing businesses are already suffering from a skills shortage, with Brexit negatively impacting the flow of EU talent when Britain voted to leave in 2016. The government has confirmed that those who are already in UK would have the right to remain in the event of a no-deal Brexit – pending successful application for ‘settled status’. However, the increasingly strict policies regarding those arriving after 29th March 2019 – i.e., minimum earning threshold of £30,000 - could significantly reduce manufacturing’s easy access to talent March 2019.
Additionally, a no-deal Brexit would require manufacturers to source staff – either internally or externally – with the skills and expertise to handle the additional paperwork arising out of switching to WTO rules.
However, it’s not all bad. In truth, there is already an economic Brexit taking place, and it has been for the last 15 years – at least, according to renowned economic & political correspondent for the Independent, Hamish McCrae.
Over the last decade, the European market has been markedly sluggish in terms of growth – particularly in comparison to other markets, especially the emerging markets such as India and China. Consequently, the savviest UK businesses had already been restructuring to serve these new markets, exploiting opportunities and exploring new streams of revenue even before the EU referendum appeared on Cameron’s political manifesto.
Several manufacturers have already started to manufacture on the continent of consumption – Caterpillar in China, for example – avoiding the burden of complicated trade deals and import duties. Other manufacturers have changed the distribution model, streamlining the supply chain, and serving their new markets in cost-effective and profitable ways.
A no-deal Brexit, yes, would be painful and expensive in the short-term, but in the long-term, it could prompt organisations (who have not already done so) to review their supply chain and manufacturing approaches. Change is inevitable, and by adapting strategies to suit global markets, reimaging distribution models and improving processes, manufacturers can successfully restructure to remain competitive.