Brexit: The Supply Chain Implications
The decision by UK voters on June 23 to leave the European Union sent shock waves through financial and currency markets. Those reactions, and the many other implications of Brexit, present obvious risks to global supply chains.
But the United Kingdom’s move also presents opportunities for supply-chain managers, noted a recetn white paper from Resilinc.
The UK is the fifth largest economy in the world and second largest in the EU. The country contributes four percent of world GDP and is the world’s ninth-largest exporter. Over half of the UK’s exports
go to EU countries.
In the immediate aftermath of the vote, the British pound fell by over 30 percent and stock markets worldwide also tanked. While the stock markets have since recovered, Britain’s currency has not.
With the pound sinking to four-decades long lows, importers from the UK will find that UK products will become cheaper. On the other hand, companies that manufacture in the UK will find that raw materials they import into the country will become more expensive.
“As the 9th largest importer worldwide,” the report noted, “the UK imports the vast majority of the materials consumed in its factories. Even if a UK manufacturer locally sources from a UK factory, there is high probability that the sub-tier suppliers importing critical materials into the UK can experience financial distress.”
Companies outside the UK that materials imported from suppliers in that country may find it advantageous to lock in long-term price contracts with UK suppliers, the report recommended. But UK manufacturers that import raw materials “may find their margins squeezed as costs for their raw materials increase, and as customers lock in lower prices,” the report concluded. “Reduced gross margins and diminishing cash reserves can trigger financial distress in firms that may have low cash from operations or reserves.”
A low British pound may also present acquisition opportunities of UK companies by outsiders, the report noted.
Free movement of people across the European Union has been one of the hallmarks of the European Union. UK companies have benefited from this by having access to more affordable labor from elsewhere in the EU, especially in manufacturing and distribution and for high skilled jobs.
Restrictions on the ability of outsiders to work in the UK “could lead to a significant labor shortage and result in increased factory labor costs, distribution channels, and other operations,” according to Resilinc.
The benefits of free trade that the UK enjoyed with the rest of the EU will likely change as the EU is expected to impose value-added taxes and duties on goods originating in the UK. These will reduce much of the currency competitiveness gained by EU firms in the aftermath of the Brexit vote, Resilinc noted.
But in the near term, industries such as electronics could benefit from the reduction in the pound’s value when sourcing expensive components from the UK. “Since most of the exports from the UK are EU bound, we expect there to be a near-term window of opportunity while EU duties are low and UK currency is favorable,” said the Resilinc white paper.
In the pharmaceuticals industry, Brexit presents a scenario of regulatory uncertainty and market authorization of drugs in the UK. In the near term, the UK pharmaceuticals sector should be more cost-competitive before new tariffs are imposed and during a period of currency favorability.
It is important to note that the UK will not exit the EU until extensive negotiations on the subject have taken place, a process which is not likely to last less than two years. While the status quo will technically be maintained, presenting opportunities, the next two years will also bring tremendous uncertainty.
“The current outlook for the UK is not positive,” the report concluded, “but we do believe this has created an opportunity for many other European countries to offer attractive incentives and invite UK based companies to take advantage of low tariffs, free labor movement, and access to the wider EU markets.”
The very nature of global supply chains is that they have “diversified the risk of any one region,” according to Resilinc. “The supply chain will adjust and withstand this and emerge strong,” the report concluded. “The key strategy is to look for opportunities, identify the potential problems, protect the downside, and emerge stronger from this historic process.”