Businesses at work in the UK face a boots-on-the-ground reality as the nation prepares to march out of the EU. And the possible scenarios involve some precarious consequences – stiff customs duties, supply-chain snags, and threats to profits among them.
The British government announced on Monday its intention to invoke Article 50, the legal basis for leaving the EU, on March 29th. That action will mark the beginning of a two-year process in which the UK will seek to negotiate the terms of its withdrawal with the remaining 27 EU member countries.
While not even Her Majesty owns a crystal ball to see it all, companies can still plan for the uncharted road ahead, as outlined in a Bain & Co. study brief, “Is Your Supply Chain Ready for Brexit?”
The industries that might be hardest hit fall into two categories, said Thomas Kwasniok, a London partner at Bain and co-author of the study. Those are “sectors with a high share of imports from EU into the UK, such as retail, and sectors with a high share of exports and high customs tariffs in a [World Trade Organization] scenario, such as automotive.”
A hard Brexit, which could include a shift to standard WTO tariffs on all exports and imports, would also pose the biggest risk to food retail, which could see profits fall by £6 billion ($7.44 billion) to £20 billion ($24.8 billion), and technology companies, which could see profits slide between 20% and 35%. Pharmaceuticals, aerospace, and chemical manufacturers round out Bain’s list of industries that could feel a jolt, no matter the shape Brexit takes.
Accountants “should consider reviewing the product flows in their companies’ sourcing, manufacturing, and distribution network,” Kwasniok said. This also demands “particular attention to flows crossing UK borders, and how it would potentially be affected by WTO customs tariffs and loss of EU free-trade agreements.”
Hard vs. soft
How this will ultimately shake out depends on whether Britain will opt for a hard or a soft Brexit. With the former, “disruptions to supply chains could reduce net profits of five key UK manufacturing industries alone by as much as 30%,” the Bain article stated. The damage could equal £3 billion ($3.72 billion). And with a soft exit (with minimal or no tariffs on trade with the EU), “companies that move manufacturing or sourcing out of the UK risk incurring a higher cost base unnecessarily.”
So is taking a wait-and-see approach worth considering? Hard or soft represents the proverbial rock and a hard place, but sitting back until the dust settles hardly ranks as feasible.
“That double peril has left many leadership teams feeling anxious and reluctant to act,” the brief noted. “But waiting for a clearer sense of the future is the riskiest option.”
Thus finance leaders have a crucial role to play – one where their evaluation of possible consequences warrants attention all the way to the top of the company.
“This is a moment where finance departments can step out of their reporting role and provide strategic insights to their CEOs, by providing transparency on cost of moving goods in the network and how it would be impacted by different Brexit scenarios,” Kwasniok said.
Possible outcomes
Different is putting it mildly. As things stand, the possible outcomes “range from no change at all to severe change,” the brief stated. Yes, that may feel overwhelming. But Bain boils Brexit’s impact on supply chains down to a handful of factors. These include “export tariffs, foreign exchange rates, and the UK’s labour market regulations, immigration laws, and tax policy.”
“Corporate leaders need to set up a Brexit road map that [factors in] uncertainty,” Kwasniok said. That could range from actions of “no regret”, such as general cost cutting, to the “big bet”: one that involves production relocation at significant cost. Nissan’s decision to manufacture new models in the UK, for example, is a big bet that the UK will negotiate a “zero-for-zero” tariff arrangement with the EU.
“One way to think about this is to define ‘signposts’ that would make you trigger the ‘big bet’ actions,” Kwasniok said. To that end, it’s a good idea to “monitor news for emerging information on how Brexit might play out.”
It could take at least two years to know how Brexit will affect supply-chain speed, costs, and inventories, the Bain report said.
Lou Carlozo, the managing editor at the Bank Administration Institute, is an investment reporter for US News & World Report and a CGMA Magazine contributor.
Projected impact of Brexit scenarios on UK industry sectors
Source: According to a Bain analysis of data from ONS, S&P Capital IQ, WTO, company annual reports, and literature search.