Brexit - What next?
29 September 2016
Emile Naus, partner and technical director at LCP Consulting analyses the potential impact of Brexit on the UK supply chain.
It has been 3 months since the UK voted to leave the European Union (EU). From a legal perspective, the formal separation between the EU and the UK will take up to two years following the trigger for Article 50. Using Game Theory, the UK has a stronger negotiation position before it invokes Article 50. Once triggered, it has a weaker one.
The unintended consequence of Article 50 is that it has simply moved the prolonged negotiation to the period before the formal trigger. A substantial part of the uncertainty is born out of this, and this situation means that businesses need recognise now how they will need to respond.
Impact on supply chain
In the short term, the impact on the supply chain remains unclear.
The key over the next 2-5 years will be to create a level of agility, both to react to threats but also to maximise opportunities as they materialise. Businesses should work through a series of scenarios and understand what the appropriate response would be.
Areas of the supply chain for consideration include – migrant labour, off-shore manufacturing, locations of supply chain assets, level of reliance on export markets and where those markets are located.
Businesses can’t control factors such as migration policy, trade agreements, Fiscal Policy and regulatory requirements but they can control their customer proposition, sourcing and supplier base, capital investments, production and distribution networks, and their talent and skills.
Short and long term implications should also be considered. What will change is fairly predictable, but the extent to which they may change, in what order and what their cumulative effect might be, are less so.
Long term, and irrespective of the final form of bilateral trade agreements, supply chains will be impacted because of major effects on processes, network infrastructure, organisation and people, and financial flows. Now is the time to start to understand how these changes could impact on your business and its supply chains.
The utopian solution of closing the borders to migration, getting rid of EU bureaucracy, opening up trade with the rest of the world and not contributing financially to the EU while still maintaining free trade in Europe is never going to be an option. One wonders if anyone in the “Leave” campaign actually was naïve enough to believe their rhetoric.
A significant part of the UK economy is sustained by EU migration. It would be interesting to see the result of mass emigration of central-European workers on industries like agriculture, distribution and retail. And the risk is not solely in the imposition of work permits or immigration limits. At the moment, they are earning 15-20% less in Euros than they did a year ago.
We have seen some movement around opening up trade with the rest of the world. This is a sensible move, if only as a negotiation point with the EU. This may be combined with a reduction in tax to attract inwards investment.
Maintaining free trade with Europe is going to be an interesting challenge, because of the EU’s viewpoint. They’re not going to make life easy for the UK as this would cause a major issue and encourage existing opposition in countries such as France, the Netherlands and Italy, fundamentally weakening the EU to the point of collapse.
The rest of the world
Despite the UK media’s focus on Brexit, it pales into insignificance globally compared to the ongoing war in the Middle East, a very touchy situation in the South China Sea, elections in the USA and risk of conflict in Korea. But the uncertainty around Britain and the EU will have consequences. LCP is currently working with two businesses who are seeing this:
• A recently acquired British Business by a US corporation; the takeover became financially viable through the exchange rate fluctuation, making the takeover 20% cheaper US Dollars.
• An Asian manufacturer with a major UK manufacturing site who is looking at a very significant investment in 2-3 years; it is easy to see how ongoing uncertainty at that point might make investment elsewhere much more appealing. The impact on the local economy through direct and indirect employment could be huge.
Broadly speaking, the quicker we can remove the uncertainty and guarantee a stable Europe, the quicker we can get back to business as usual.