18 December 2018

Brexit’s domino effect

Many of the UK’s largest businesses, and its most critical industries, are highly integrated with Europe. So, how might Brexit affect the biggest players – and what will be the effects on those further down the supply chain?

Top car market

Europe is the key market for the UK automotive industry. More than half of the cars exported from the UK in 2017 went to the EU, which was also the source of over 80 per cent of imported cars1.

Jaguar Land Rover warned that any new tariffs introduced as a result of Brexit would make its business uncompetitive and put jobs at risk2. That hasn’t stopped it announcing new investment to develop autonomous and electric cars in the UK3.

The Brexit agreement announced in November was broadly welcomed by the motor industry, whose main concern had been the risk of a 10 per cent tariff on vehicles and an average 4.5 per cent on components, unless free trade deals were struck1.

Mike Hawes, Chief Executive of the SMTT, said it was a “positive step” but businesses still sought “certainty and ambition when it comes to securing a competitive future”1.

Carmakers are concerned not just about the effect on sales, but potential impact on their complex supply chains that stretch across the EU.

For instance, rules of origin require that 60 per cent of a car’s added-value be locally made, in order to be eligible for duty-free access. Only 40 per cent of added value on the average British car originates in the UK4.

Reshoring opportunity

Smaller businesses in the sector will inevitably feel the impact. The prospect of new tariffs and regulations poses a knock-on threat throughout the supply chain.

Some of the damage is already done. In the first week of November, European car parts manufacturer, Schaeffler, announced it was closing two UK factories, where 570 people are employed5.

However, the SMMT also sees positive prospects in post-Brexit investments, by the likes of Nissan, Toyota, McLaren Automotive and Jaguar Land Rover, pointing to significant opportunities for UK-based car suppliers.

“The reshoring opportunity for the upstream supply chain, estimated at £2bn, annually, in addition to the £4bn opportunity for tier ones, should be realised regardless of Brexit outcomes,” it says.

With recent vehicle manufacture commitments to the UK, the sourcing opportunity is arguably the largest the UK supply chain has ever seen.

Food tariff threat

The agriculture and food sectors also have complex supply chains that rely heavily on EU input.

The UK industry imports almost half of its raw materials, a third of that from EU countries6. So, a Brexit outcome without a trade deal would leave importers – and consumers – hit by tariffs of up to 40 per cent for some items7.

The draft agreement, according to the National Farmers’ Union (NFU), paves the way for “a transition period that maintains free and frictionless trade with the EU, and provides stability for farmers and the wider economy.”

NFU president Minette Batters said: “Since the EU referendum, the NFU has maintained that free and frictionless trade for British farming is absolutely critical”8.

However, Food and Drink Federation chief executive, Ian Wright, said it was still important to plan for every eventuality, including no deal.

Where perishable goods are concerned, efficiency is key. “A customs union in itself won’t solve the problems of delays at ports,” the British Retail Consortium’s Helen Dickinson has warned, emphasising the need for agreements on security, transit, haulage, drivers, VAT and other checks9.

“If there are problems getting fresh produce from Spain into British supermarkets, because of border hold-ups, it will be the British government’s responsibility,” says Professor Alan Swinbank of the University of Reading.

Supermarkets will be lobbying furiously as Brexit looms to ensure that their shelves remain full – and that any price increases are minimised.

Labour dilemmas

Some UK suppliers may benefit as big retailers seek to source within the UK, although there are limits on the types of foods that can be harvested here. Large-scale onshoring of production would also require a solution to one of the biggest issues facing the industry – labour.

Food and drink businesses of all sizes are concerned about the impact of Brexit on recruitment. From farms to processing factories and catering firms, many smaller companies currently depend on EU workers.

Over half of businesses responding to a Food and Drink Federation survey lacked confidence that they could fill lower-skilled and unskilled roles, even in the run-up to EU departure10.

Without access to EU nationals, over a third of firms predicted their business could become unviable, and 17 per cent said they would consider relocating overseas. However, half said they would seek to recruit locally, while automating production was a possible solution for 55 per cent.

Much depends on policy outcomes and the actions of the big players, but SMEs are already acting to anticipate the potential threats – and opportunities of Brexit.

40%

The potential tariff amount for some items without a trade deal

Over a third

Firms that are worried about unviability without access to EU workers

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