Brexit: understanding the challenge for your business.

Dr. Shishank Shishank, Centre for Brexit Studies

Birmingham City University

Outline

What is the Centre for Brexit Studies?

Some Scenarios

Understanding the sectoral impact

Preparing your business: The way forward?

What is the Centre for Brexit Studies?• Interdisciplinary research and public engagement unit est. at

BCU in January 2017

– Lead by Professor Alex De Ruyter

• Provides a platform for research and debate on Brexit from both perspectives

• Strong focus on regional engagement

– Links with Chambers of Commerce, Local Authorities etc.

– Annual conference

What is the Centre for Brexit Studies?

• Current research projects

– Brexit and regional disparities: the need for new measures

– CBS “Brexit Roadshow” (series of public engagement/focus group research exploring current attitudes to Brexit)

– The role of HEIs in regional development

– AND Sectoral impact analysis on Automotive and Aerospace (Project with OpenText)

The referendum result

• “Brexit means Brexit” (Theresa May, July 2016)

– “It’s my Brexit Deal – or no deal” (Theresa May, September 2018)

• “Brexit is what you make of it” (Jeremy Corbyn, February 2018)

• Suggests a range of options are possible, but these ultimately depend on EU willingness..

Trade scenarios

EEA (Single Market)

Continued European Economic Area (Single

Market) membership and a “close” customs union (to

be defined but likely to involve regulatory

alignment similar to the single market in goods).

Swiss Model

The Kier Starmer Option / Swiss Model (“close” customs union and regulatory alignment in some or all sectors, but no EEA membership). Loose migration conditions.

Turkey “Plus”

A looser customs union (some regulatory

divergence but finessed to avoid a border in Ireland –likely to involve alignment

of phytosanitary regulations and some

goods regulations). Moderate migration

conditions.

Canada “Plus, Plus”

Free Trade Agreement (Canada/Canada Plus) but

NO customs union and potential for regulatory divergence (sector by sector basis). Future

migration as per non-EU.

• Trading on a WTO basis with tighter migration requirements.

Brexit is Coming: understanding the challenge to business

• Non-tariff barriers are likely to dwarf impact of tariffs

– WTO rules on Technical Barriers to Trade (TBTs) will have impact in limiting how quickly customs checks can emerge

– regulations, standards and technical provisions will be identical on 1st January 2021 to those appertaining on 31st December 2020.

– regulations around “rules of origin” and the need for customs checks to ensure compliance with the common external tariff (if UK signs FTA or applies different tariffs to the EU) will still apply…

Brexit is coming..

• Barriers to trade will raise the cost of production and exporting, whilst Sterling depreciation will have the opposite effect - the ultimate impact will thus be ambiguous although given the importance of “just-in-time” for UK automotive (Manufacturing), it is likely that the overall impact will be negative.

• OEMS and SMES have invested in reducing waste – Brexit feeds waste into the processes.

Brexit is coming..

• Implications for supply chain – 2 scenarios:

– Cost-benefit dynamics of sourcing from UK suppliers v. EU counterparts will change. Potential for reshoring? i.e., how to extend their UK supply chain? OR

– If plant closures inevitable then clear need to understand logistics around facilitating supply-chain management during transition to a continental base.

Automotive Figures

• Added value = £13.2 bn (of which two-thirds are wages)

• Imported Components = £18.1 bn

• Domestic Components = £18.5 bn

• Components from all sectors – even spent £47m on food! (for canteens etc.)

Date Source: Office of National Statistics

Automotive• A variety of complex issues raised:

– “Rules of origin” for markets in which the UK currently has (or will have) a free trade agreement. Taking CETA as an example, “rules of origin” dictate that any car manufactured in the EU must have at least 50% of its components sourced from within the EU in order to qualify for an exemption from duty. At present, this is fine for UK automotive manufacturers as they supply well over 50% of all components from the EU. When the UK leaves, even if an identical agreement is signed with Canada, this will not apply: for the purposes of rules of origin, only around 25% of UK automotive output is sourced domestically (mostly because even British components havesubstantial imported parts). As a result, duty will still be levied, unless so-called “diagonal cumulation” [originating parts each country are considered as originating inputs in other countries] is agreed. This also greatly reduces the value of any FTAs that the UK signs independently. It isn’t clear how useful such agreements would be in practice in the absence of diagonal cumulation (which would almost certainly require an accord from the EU as well).

– The imposition of tariffs by either the EU or UK is unlikely (REF: Michel Barnier’s slide arguing that a CETA-style option is possible). In any event, automotive tariffs at 10% on cars and an average of 4.5% on components are within the range of currency fluctuations (Sterling depreciated by over 10% in the aftermath of the referendum). In any event, a number of tariff exemptions (returned goods relief could be applicable for BMW, for example) will require additional documentation in order to take advantage of: without this, production in the UK may be uneconomic even with currency depreciation.

– Questions over tariffs are dwarfed by the potential realities of non-tariff barriers. Even relatively simple things such as type approval are likely to be major issues for smaller and niche manufacturers (the likes of Caterham and Lotus).

Automotive (cont.)• More problematic issues:

– Customs checks will be a reality in the British Government’s preferred scenario even if all automotive regulations remain aligned.

– Are there ways around this?

• Yes!! Trusted-trader schemes help, but queues may be a reality unless the UK and continental partners both massively beef up customs capacity. Some kind of “queue-skip” mechanism might be a possibility? Major businesses need to discuss these options with Government.

• Technology can help, but the real solutions will be political. Sweden-Norway is a best case scenario, but Norway is inside the EEA (ruled out by Theresa May’s Gov’t).

– All of these work-around require both goodwill and extensive documentation. Larger businesses in particular need to investigate what additional documentation might be needed in different scenarios and ensure that contingency plans are in place.

– The UK government will have some control over the length of delays for goods coming into the country: if they accept EU standards and recognise the relevant certification this can be minimised (even if recognition is not reciprocal).

– EU automotive manufacturers will also be affected: will the UK’s exit have an impact on your ability to meet binding CO2 targets? How much of your supply chain is UK-based (including tiers 2 and 3)? Will it become more challenging to export to one of the largest automotive markets in Europe.

Automotive (cont.)

• A number of specialised components already sourced from outside EU (Japan in particular).

– May prove a useful guide to the kind of procedures that need to be put in place to ensure continued profitability.

• Ensuring Government understands industry issues will be very important as specific expertise at highest levels is not necessarily a given (politicians are generalists!)– Documentation, compliance and robust procedures will be crucial. Suppliers may need help to ensure they comply with new rules and

documentation. Greater supply-chain oversight may become necessary (who are your suppliers two tiers down and where are they located?)

– For suppliers, risk management will also be critical: how do you guarantee you can comply with scheduling?

• Documentation, procedures and (potentially) warehousing may become necessary to avoid the risk of stoppages.

Aerospace Figures

• Added value = £6.2 bn of which 72% is wages

• Imported components = £6.5 bn

– Of which £3.8bn are specialist components

– Supply chains criss-cross national borders (particularly in Europe)

• Domestic components = £9.7 bn

Aerospace Issues• Very different to automotive

– May be less serious, depending upon ultimate outcome of talks.

– Continued membership of EASA (European Aviation Safety Agency) absolutely crucial.

• Even the British CAA doesn’t believe it has the capability to take on EASA’s functions at present (i.e. EASA or bust)!

– Aerospace supported by a plethora of smaller companies throughout the supply chain (as membership of regional aerospace alliances attests!)

• Components criss-cross international boundaries. In the unlikely event of tariffs being applied, extensive documentation to support returned goods exemptions will be necessary.

• In any event, serious thought needs to be applied to facilitation of customs procedures. In contrast to the automotive sector, little control of this is in the hands of the UK Government. Nevertheless, documentation will again be crucial, as will political negotiations to ensure that trucks aren’t delayed due to personnel issues of the sort that afflict the Turkey-EU border.

Some observations from Current Research• OEM- Two planning scenarios • Base Scenario

– The base scenario was a Canada style free trade agreement. The UK leaves the EU, leave the single market, leave the customs union, customers territory, freedom ends. Jurisdiction of the European Court of Justice end. In line with the UK governments red lines. But, UK agrees a tariff free trade agreement with the EU.

• The alternative scenarioExactly the same, except there would be tariffs - WTO style scenario. Updated base scenario to include transition period with no change until 1st January 2021

“We’ve taken both, I think, prudent and probabilistic assessment of which we think is the likely outcome”

Key Issue – If tariffs applied – Will supplier be able to cope, will they pass the cost to OEMs, Will they look to share and what will be the impact on suppliers financial integrity – Unanswered question and would need to be one-to-one negotiation with supplier.

• Supplier – Understanding demonstrated but no action or planning

• Day-to-day business as usual with the political uncertainty

• Positive approach – only one trading block with 27 countries to deal with post Brexit

• Have suppliers who source from Europe (intermediaries are local UK traders)

• Challenge –– £ sterling value as majority of suppliers trade in US$

– Rules of Origin – no experience [Opportunity]

Some observations from Interviews conducted

• German company based in AnsbergCEO Quotes ‘Sad’ ‘bad result for us’Decision to enter the UK market was a long term decision but losses as a result of acquisition [acquired the company when the £ sterling was strong and now value of the firm has depreciated with the low value of £ sterling]Trades in Euro with 10% local UK suppliers and 90% European suppliersMid sized companies not much aware

Limited growth due to lack of Human Capital Cited and e.g. of Bosch – could hire 800 engineers if they could find these engineers.

Brexit is backwards against globalisation philosophy.

Some observations from Interviews conducted

Brexit is coming…

• Both sectors affected by HR and personnel issues.

– Continued access to appropriate skills may become more difficult.

– Likely that skilled workers will be permitted to enter the UK but companies hitherto reliant on EU labour may need to become more conversant with visas and sponsorship…

• In any eventuality, GET DIGITAL! Embrace Disruptive Technology

• SMES utilise COOPTETION [Paradox – Competition Vs Co-operation]

Thank you. Any questions?