Why are major European manufacturers concerned about the impact Brexit will have on their supply chains?

There has been a lot of recent comment on the threat which a “no deal” will have on the supply chains of European manufacturers with significant UK operations. Firms such as Siemens, BMW and Airbus have all expressed serious concerns about the impact Brexit will have on their integrated European business models. These concerns are paralleled by fears raised by major UK manufacturers at the snail-paced progress of Brexit talks.

BMW has set an end of summer deadline for the British Government to disclose its Brexit plans. Ian Robertson, BMW's UK special representative, in an interview with the BBC,  said new border systems and warehousing would add to the cost of making cars such as the Mini. He said: "It's a potential risk... we would like to avoid." But he said BMW would be forced to invest in new customs systems by late summer if there was no clarity on the UK's trading relationship with the EU. Mr Robertson said: "Those dates at the end of the summer are quite real. That's when the contingency plans get applied, and that's when of course we need to see clarity."

But he added that BMW had no intention of moving its manufacturing operation outside the UK. "We would have to start to think about how our trucks are going to be managed at the border and how our stocks are going to be stored around our factories," Mr Robertson said.

"It puts a burden on industry. It puts a burden on us to find ways around it, when ultimately we should be focussed on more constructive issues.”

"Our customers have expectations as to the value in their cars. They see innovation and technology as having a value. I can tell you, I have never heard one that says there's a value in customs."

Siemens U.K. have also said they are developing contingency plans to ensure that components can still be delivered efficiently in the event of a hard Brexit.

Why should we be concerned?

Brexit Partners find that many firms talk about  a “no deal” and “hard Brexit” interchangeably. A “no deal” scenario could become the doomsday scenario for many firms short term. Trade between the UK and EU could potentially grind to a halt in the absence of preparation and governments and firms scrambling to redress the myriad issues with sticking plaster solutions to avert chaos to supply chains. In our experience most firms have not considered a “no deal” scenario and therefore do not have contingency plans to deal with such an eventuality. Whilst the probability of a “no deal” scenario may be lower than a “hard Brexit”, it would be unwise to discount it altogether.   

There is no universal definition of a “hard Brexit” scenario. In fact, we have never come across any firm, (even within the same ecosystem or within the same group of companies) with the same definition or understanding of a “hard Brexit”. Firms may make comprehensive internal contingency plans but the difficulty will be co-ordinating these plans between the various members of the supply chain or ecosystem across the UK, EU and beyond. These are likely to include private sector, state agencies and the public sector.

It’s hard to see in the time that is left available, that there will not be major disruption to supply chains. Even if we assume the EU and UK come to a workable agreement and that it buys more time for preparation, there will be major difficulties. Brexit Partners benchmarking research indicates that 8% of SMEs who are part of international supply chains believe they are adequately resourced in Brexit planning or indeed preparation. 47% of respondents indicate that Brexit will have a catastrophic or major impact on their supply chain and 58% state that they feel that they are not confident in addressing the issues.

The financial implications for some firms may also be considerable. These may include operational inefficiencies, production delays, service level penalties, WTO tariffs, credit issues, increased stock holding costs and working capital requirements. Where firms cannot pass these costs on to customers and are working on low margins, the picture may be bleak.

It will fall to large and well-resourced manufacturers, who have been raising concerns to lead the way and ensure that their suppliers and ecosystem (ports, custom authorities, logistics firms, commercial finance firms etc, etc.) are adequately prepared.  Frustration at the lack of progress in negotiations reflects their very real understanding of the business issues and wider economic consequences.

Likewise the public sector who have a critical role in enabling supply chains through state agencies will be equally challenged with the lack of clarity and need to provide leadership, co-ordination and engage heavily in developing workable solutions.

Dr. Ray NultyComment