Last week, I spoke with Mike King from the Flying Typers about the impact of Brexit on European supply chains. The discussion was summarized as follows.
The UK’s political contortions continued this week even as it races towards leaving the EU on Friday, March 29. It now seems an extension of some sort will see that deadline pass, but one noted analyst told Flying Typers that whatever happens next, the UK’s economy and standing in the world have already been harmed.
Wolfgang Lehmacher, leading logistics consultant and the former Head of Supply Chain and Transport Industries at the World Economic Forum in Geneva and New York, believes Brexit is already reshaping European supply chains, irrespective of how and when the UK departs the Union.
“Companies have already taken action and built risk provisions, investments and cost increases in their business plans,” he said. “Already today, the UK economy has taken its hit.”
According to Lehmacher, supply chains perform best in fluid and stable environments – both factors which are negatively impacted by Brexit. “Supply chain design is a function of market size – this is valid for upstream procurement activities as well as downstream distribution and after-sales,” he explained. “Larger markets have their own consolidation points or hubs benefitting from larger volumes and scale, while smaller markets are served directly from outside or smaller in-country warehouses, at higher cost.”
Brexit Or Else
Brexit in whichever form it takes separates the UK from the world’s largest trading bloc, thereby inevitably diminishing its importance. “Regardless the efficiencies the UK may achieve at its borders, [a new border will be] an additional stop and incremental cost in the supply chain of a not so large market,” said Lehmacher.
As a result, UK supply chains will be redesigned and manufacturers will reorganize their European strategies to recognize the new landscape. “The logistics companies will follow and support their customers,” he said. “They will, though, take measures to ensure continuity of smooth operation and operating conditions to be able to continue to service customers at unchanged terms.”
Locked and Loaded
Many companies have already announced their post-Brexit strategy, even before the terms of Brexit have been finalized. P&O, for example, has announced that its cross-Channel ferry fleet will be re-registered under the Cypriot flag, while Dyson has moved its headquarters to Singapore where the company will also manufacture its electric cars. A raft of leading auto companies have also announced plans to cuts jobs and production in the UK.
“After Brexit, the UK cannot be the entry door to Europe any more, that’s a fact,” said Panasonic Europe CEO Laurent Abadie.
Weight & The Risk
Leaders focus on risks and opportunities, said Lehmacher. This means mitigating Brexit-driven risks in the supply chain and being creative to capture upside opportunities. “For example,” he added, “through the creation of additional services to cope with the challenges brought about by Brexit – the consulting business is booming and border services will re-emerge – or simply through price increases justified by the EU exit.”
He also predicted the accelerated closing of less profitable sites with CEOs now able to cite the increased cost of the new border in justification. Some may also demand subsidies or other governmental support to compensate for their additional costs, for example caused by re-registrations or reduced competitiveness due to VAT on UK exports to the EU. “All costs of a post-Brexit UK which will not only need to be added to the exit bill but factored into the cost of doing business and prices going forward and to be shouldered by UK tax payers and consumers,” he said.
“Since the referendum in 2016, the UK government has decided to make available more than £4.2 billion for EU exit preparation, including more than £2 billion recently added for no-deal planning,” he said. “The private sector is forced to pay billions on Brexit. Bank of America spent $400 million preparing for hard Brexit, according to its CEO.
GSK estimates that their additional costs could be up to £70 million over the next two to three years. The UK government estimates that the chemicals industry has to factor in £400 million to re-register chemicals. 7,000 UK civil servants are working on Brexit, with Treasury funding for 9,000 more.
“The regulation and unavoidable red tape they produce will not make the flow of goods more fluid and cost-efficient.”
The Shift Within
Unless the UK somehow reverses its decision to leave the EU, the European supply chain and logistic map will shift towards a more Continent-centered model. “UK-based European hubs will become the exception,” he said. “The shift within manufacturing networks, and transfers of European distribution centers from the UK to the European continent will strengthen the Benelux, Germany and France as logistical platforms in the world of global commerce.
Ports On Call
“Ports within the European continent have the necessary capacity and the warehouse space will be created to absorb the additional volumes. The shift will help to compensate for potential shortfalls in volume caused by slowing global economy and trade.”
Ireland will also increase its efforts to circumvent the UK land bridge through direct routes between Dublin and the continental European ports. “In April 2018, the Celine, also referred to as ‘Brexit Buster’ was christened,” he said. “With almost twice the size of any ferry operating out of Dublin Port, it can accommodate more than 600 trucks – which as a convoy would reach a length of eight kilometers.
“The UK container ports Southampton and Felixstowe will lose the volumes from previously UK based European logistics centers and European manufacturing sites in the UK, but will continue to play a vital role in international trade. Heathrow has raised £1.6 billion to brace Brexit. ‘Leave’ or ‘remain’, the London-based cargo platform will also continue to grow as an important global air hub.”
Certainty & Trust
Beyond the supply chain considerations, certainty and trust are additional negative factors for the UK. “Both factors determine the level of investment,” said Lehmacher. “Both factors are quickly destroyed and it takes a long time to rebuild them.
“The UK is a traditional trading place and enjoys a trust bonus. While trust in the UK might or might not significantly erode over time, certainty needs to come back if the UK wishes to reduce or even stop the stream of factory closings and companies leaving the country.
“Significant incentives will need to be granted to attract some of the business back. The pressure on results and the broad set of measures to support businesses will help.
“Leaders in business and government will experience highest pressures to limit the damage – which will come at a big cost with highly uncertain gains.
“History will tell whether going through the pain was eventually worth it.”
This summary originally appeared as a podcast on Flying Talkers.
Industry and technology evangelist and polymath, assisting stakeholders across the global supply chain ecosystem – from start-ups, to asset owners, to Fortune 50 companies – in upscaling and transforming their organizations: envisioning system change, what it means, and how to stay/get ahead of the curve. Engaged in think tanks, awards committees and expert groups, including the IATA Air Cargo Innovation Awards Jury, and the World Economic Forum Expert Community, supporting projects such as the Blockchain for Supply Chain initiative