Asian businesses roll out Plan B for Brexit

With so much uncertainty abounding, Brexit is still a giant question mark for many businesses — and not just those in Europe. In the past few weeks, Asian companies have been ratcheting up Brexit planning and activating contingency plans as a no-deal Brexit seems more likely with every passing day.

Brexit uncertainties are a concern for Asian companies that export goods or services between the UK and the EU and over the border between Northern Ireland and Ireland; own manufacturing plants in the UK; have EU staff in their UK operations; rely on the same distributor for UK and EU markets; or have goods or services that will be exposed to different regulations in the UK and EU.

Businesses fear if Britain’s Parliament fails to agree on a Brexit deal by the end of March, the country will leave the EU and sever all ties with the trading bloc of 440 million people. Britain will conduct trade according to rules established by the World Trade Organization (WTO), causing unprecedented challenges to cross-border business activities.

“If the UK falls out without an agreement and has to trade on WTO rules with all countries including Europe, then the learned wisdom is that for the first two to three years, there’s going to be chaos … because no country in the world trades solely on WTO rules,” said Gavin Leake, FCMA, CGMA, a senior consultant at Saudi Investment Bank. He added that if a no-deal Brexit takes place, the UK will scramble to sign trade agreements with various countries to reach better alignment for goods and services regulations.

For instance, car exports from the UK to the EU will be hit by a 10% tariff under WTO rules, forcing automakers such as Toyota and Nissan with manufacturing facilities in the UK to absorb increased costs or raise prices on those models exported to the EU.

Of all Asian businesses, Japanese companies stand as the most exposed to the UK economy and the risks of a no-deal Brexit. The latest figures show that Japan is Britain’s sixth-largest source of investment and the largest from Asia at £46.5 billion ($61.6 billion) in 2016, and with nearly 1,000 Japanese companies with a presence in the UK employing 140,000 people.

“As you can imagine, not just Japanese companies but Asian companies in general are fairly risk-averse,” said Pernille Rudlin, a UK-based consultant who works with Japanese companies. She said Japanese companies have been preparing for the worst-case scenario for a few years.

Relocating or setting up a new European base

Companies are taking one of two approaches — relocating their UK offices, which serve as their European headquarters, to an EU country, or setting up a new base in the EU while maintaining their UK operation.

Japanese companies that are in the supply chain of pharmaceutical and automotive companies have stockpiled products and car parts ahead of Brexit, and in the heavily regulated financial services industry, which includes banks and insurance companies, companies have moved their bases to the EU or strengthened their existing European headquarters in the EU, Rudlin said.

In the services sector, financial institutions Nomura Holdings and Daiwa Securities are setting up EU operations in Germany, while Japan’s largest bank Mitsubishi UFJ and Norinchukin chose the Netherlands as their base for their EU business, Bloomberg reported. The Netherlands Foreign Investment Agency said more than 250 companies are considering a move to the Netherlands because of Brexit, Reuters reported.

Setting up operations in the EU will help service firms protect their revenue base, retain customers, and prevent significant cost increases due to Brexit. For instance, post-Brexit, companies in banking and the insurance industry in the UK may lose “passporting” rights that allow them to sell products in any EU country without a local branch in each country. Having a presence in the EU will ensure that their customers have access to their services after Brexit.

Halting or reducing production

Automaker Honda announced that it will stop production for six days after Brexit. The move is to give its factories time to stockpile parts, as it expects importers and exporters to face tariffs and customs checks at the EU-UK border following Brexit. Maintaining the Japanese carmaker’s “just-in-time” manufacturing system, where car parts arrive at its plants hours before they are assembled, would be a challenge.

The company had said that setting up new procedures would take 18 months if Britain left the customs union — the arrangement that allows goods to move freely without custom checks and charges between the UK and EU. Its plant in Swindon employs 3,500 workers. Honda’s most recent announcement said it will shut down the factory in 2021 but said the closure was not due to Brexit but rather to “unprecedented changes in the global automotive industry”.

Toyota warned that a hard Brexit will disrupt its operations and it may be forced to halt production. Nissan recently announced that it is pulling its X-Trail model from its Sunderland manufacturing facility because the EU tariffs on UK car exports are making the UK a less attractive location to manufacture cars.

Another factor in Nissan’s decision is the free trade agreement between the EU and Japan that kicked in the same week of its announcement, potentially allowing cars from Japan to enter the EU with a lower tariff than cars from the UK after 29 March 2019. Nissan’s Sunderland factory makes 480,000 vehicles a year, of which more than half are exported to EU countries.

In the UK, Toyota’s Burnaston plant employs about 2,500 people, and Nissan’s Sunderland factory employs more than 8,000 people.

Wait and see

Some companies are also adopting a “wait-and-see” approach toward Brexit as the uncertain outcome makes planning a guessing game of the likeliest scenarios, not to mention costly.

Sujit Nair, chairman of the Europe India Centre for Business and Industry said: “From our interactions with Indian businesses, there seems to be a confusion about Brexit, and most of their plans seem to be on hold, as their decision depends on the kind of deal that the UK will have with the EU.”

Nair said that in the case of a hard Brexit, Indian businesses that use the UK as an entry point into the EU market might move out of the UK if they have significant business interests in the EU. But in the case of a soft Brexit — where the UK will remain in the EU’s single market and customs union — Indian businesses will continue operating in the UK.

But if it’s a case of a no-deal scenario where the UK will trade with the EU like other countries in the WTO with no EU free trade agreement, Indian companies will need to redraw their strategy to tap the EU market and the UK market separately. “This will increase their cost of doing business and might have a significant hit on their balance sheet for the next few years,” Nair said.

Irreversible tide

With more companies launching their Plan B, the tide of people movement and investments away from the UK could potentially be irreversible.

“You make a decision to fall out now and people leave, people aren’t going to go to Paris, set up home and a new life, and come back in two years’ time, and say ‘Sorry, that was a mistake. We want to come back in [to the UK] again,’” Leake said.

“This is life changing for many people and fundamental for the country. Once a tide goes out, it’s really difficult for a tide to come back in in the short term,” he said.

— Alexis See Tho (Alexis.SeeTho@aicpa-cima.com) is an FM magazine associate editor.