OVERVIEW
With fewer than nine months to go until the U.K. begins its formal process of leaving the European Union, politicians, business leaders and workers are gearing up for considerable change.
Time is running short, but there is very little detail about how the two economic powers will work alongside one another after the divorce.
After a planned transition period that runs until 2020, the U.K. government has proposed a “soft Brexit” arrangement with two main features: a “free trade area for goods,” which will allow current trade rules to continue, and a “facilitated customs arrangement” that allows the U.K. to collect tariffs on behalf of the EU and pursue its own trade policy. However, this plan has yet to be agreed upon by the EU – and does not have the backing of some U.K. politicians, who want a “hard Brexit” that will allow the U.K. to operate outside the EU’s rules. For example, just 10 days after the U.K. proposal was announced, the government’s “facilitated customs arrangement” section was altered to accommodate the rebel lawmakers.
Businesses benefitting from the smooth running of the borderless supply chains that cross the EU’s “customs union” are wary that Britain’s EU exit will mean an end to that efficiency. And EU businesses with considerable exports to the U.K. market are weighing the potential impact of new customs policies, tariffs and compliance costs.
Despite all the uncertainty, multinational businesses with operations in the EU and the U.K. are doing their best to address identifiable Brexit risks, and the most prepared organizations often demonstrate key common characteristics. First, they’re relying on teams with diverse perspectives to identify potential business risks. Then, armed with that information, they are identifying new markets or product opportunities to explore.
IN DEPTH
The latest debate in the U.K. has been over the government plan for post-Brexit trade relations with the EU. After leaving the EU in March 2019, there’ll be a two-year transition period while the U.K. and EU settle on new trade arrangements. While the outline of the transition period has been agreed upon, details are yet to be locked down. Although the details remain uncertain.
As the details of the U.K.’s Brexit remain uncertain, businesses are considering a variety of options to address any anticipated fallout. The U.K. auto industry, for example, blames uncertainty over Brexit’s impact on supply chains for a decline in industry investment in Britain in 2017. The industry’s response to the uncertainty is to move new investment to locations safely within the EU’s customs zone.
European aircraft manufacturer Airbus is also concerned with the supply chain concerns that a Brexit could create. Airbus, which makes wings for its passenger aircraft in the U.K., says the absence of such a deal would threaten its long-term presence in the country.
A Brexit Risk Barometer
While businesses in the EU and the U.K. – including multinationals within the regions – are unsure just what Brexit might mean for their operations, most are convinced there will be an impact. A recent survey of Irish food and drink companies highlights increased levels of preparedness in understanding and managing Brexit risk, despite the ongoing volatility around the outcomes of political negotiations.
In February 2018, Bord Bia (The Irish Food Board) commissioned Aon to work with them on Brexit Barometer 2018.The Barometer research aimed to understand the mindset of Irish food and drink companies on six key areas of Brexit risk and to identify steps for addressing them. While there are many unknowns surrounding Brexit’s ultimate impact, “significant change remains a certainty,” according to Bord Bia.
More than a third of Ireland’s agriculture and food and drink business consists of exports to the U.K., according to Bord Bia. Of the 117 companies surveyed for the Brexit Barometer, 60 percent indicated they were unsure how Brexit might affect their business. Encouragingly, 73 percent of those surveyed indicated they’d taken some steps to address possible Brexit outcomes, while 54 percent said they were tailoring market strategies for the U.K. market, up from 39 percent in Bord Bia’s 2017 survey.
In addition, 67 percent of survey participants indicated they were aware of their supply chain partners’ Brexit readiness, up from 32 percent in 2017. Further, 85 percent of respondents said they were seeking export opportunities in new markets after Brexit, with 75 percent reporting growth in sales beyond the U.K. over the past year.
Diverse Perspectives Guide Response To Volatility
For businesses looking to assess Brexit risks and prepare for them, drawing insights from across the organization is far superior to taking a siloed approach to the issue, according to Ciara Jackson, director of Aon’s Agri-Food & Beverage Practice, Ireland. Jackson noted that many larger Irish food and beverage companies have formed Brexit committees or Brexit task forces to consider their Brexit exposures. “The senior leadership team across a range of functions is getting together to look at the impact on the organization as a whole, rather than relying solely on the finance team or legal team to consider Brexit risk,” Jackson said. Such an approach could benefit companies in other industries as well.
“The companies that have assembled broader Brexit task forces and are looking at Brexit as the key emerging risk on their risk register, and identify Brexit as high impact/high severity, are the ones whose preparations are better because they’re putting more thought and more effort into it,” Jackson said.
Companies looking for direction on how to address Brexit risks can consider soliciting perspectives from across their organization and embracing market and product diversification and innovation. Taking such steps will likely be rewarded through increased risk maturity and improvements in their overall financial performance, even in the face of uncertainty.
Addressing the Brexit Risk
While the Bord Bia Barometer showed progress in preparing for Brexit volatility, it also identified six key Brexit risk areas – U.K. customer relationships, supply chain, customs and tariffs, financial resilience, market diversification and emerging risks – and the strategies that companies in the sector and elsewhere in the EU can use to mitigate them.
In parallel with the Barometer report, a Recommendations & Brexit Plan Template was also developed, which provides guidance on how to address the risk themes identified. Jackson states, “While the recommendations have been set out by The Irish Food Board, at a high level, the guidance is applicable across sectors and geographies and can act as a reminder of the importance of diversification and properly planning for various types of disruptions to supply chains, especially for multinationals.”
Six Key Brexit Risk Areas
U.K. Customer relationships
Informed conversations with U.K. customers about Brexit’s possible impact will help guide companies on future market planning and priorities. Companies with business interests in the U.K. should:
Supply chain
“Companies doing business with partners in the U.K. or shipping goods into or out of Britain must consider the possible impact on the cost and availability of goods and what will happen to cross-border services,” said Eddie McLaughlin, chief commercial officer, EMEA, Aon.
To address possible supply chain risks, companies should:
Customs and tariffs
“There is a lot of nervousness over the potential implementation of customs and tariffs, and the associated cost of compliance among companies doing business in the U.K.,” said Aon’s Jackson. To address those concerns, companies should:
Financial resilience
“After Brexit, multinational businesses operating in the U.K. might face issues of capital mobility or new currency fluctuation risks,” McLaughlin stated. To address those risks, companies should:
Market diversification
“A strong mitigant to a single or key market dependency is market diversification, supported by an innovative, market-relevant, consumer-driven product strategy,” Jackson said. Possible diversification steps include:
Emerging risks
Other risks may arise as the U.K.’s Brexit date approaches. To stay on top of those exposures companies should:
In The Face Of Uncertainty, Preparation Is Essential
For multinational companies doing business in the U.K. and for British companies doing business with the EU, the uncertainty over Brexit is troubling. There are, however, steps companies can take to assess the potential risks and begin addressing them.
Soliciting a broad range of diverse opinions on Brexit’s potential impacts, communicating with U.K. customers, evaluating supply chains and alternatives, and embracing market and product innovation should position businesses to fare best whatever the ultimate shape of Britain’s Brexit.
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