Amongst all the political posturing, it has been hard for UK and international manufacturers to understand what Brexit actually means for trading and investment in the UK. Graham Carberry, Partner at Livingstone, explores the immediate and long-term implications.
The sky hasn’t fallen
So far, Brexit is having less impact on UK manufacturing than on other sectors, for a clutch of reasons. First, the decline in the value of sterling has made UK exporters immediately more cost-competitive. While this has been tempered by the rising cost of raw materials coming from outside the UK, the overall impact has been resoundingly positive for many.
Second, while there are concerns about future trading terms with Europe, nothing has happened yet and there is increasing recognition that the UK is a significant net importer of manufactured goods from the mainland. Therefore it seems less likely that the EU will seek tariffs in this area than in sectors such as Financial Services.
Third, the UK has been on a path of reducing dependency on European trade for some time. This, coupled with the sluggish growth across the EU may mean that Brexit causes the UK to accelerate its focus on global markets and should therefore derail few manufacturers’ international growth strategies.
Finally, and most pertinently, beyond Brexit the UK could possess a far greater ability to invest in and support key technical manufacturing industries (without running into state-aid issues) and greater flexibility in certain areas of tax; for example the UK would almost certainly not have had as many issues with the role of subsidies such as the R&D ‘patent box’ or the role of Venture Capital Trust outside of the EU.
Not without risk
Beyond possible future levies, the most obvious potential Brexit concerns for UK manufacturers relate to regulation and labour. We currently benefit from standardised regulation of many manufactured goods, which significantly reduces the risk and administrative process around getting new products approved for multiple markets. Were our standards and those of the EU to diverge following Brexit, this could impact the UK innovation environment by increasing the cost and the time scales for new product launches.
Similarly, many UK manufacturing industries benefit from both foreign labour and the ability to move skilled staff into emerging EU countries to launch manufacturing and sale sites. Any restrictions in the availability of skilled or highly skilled personnel will act as a drag on productivity, arguably UK manufacturing’s biggest current issue.
Another issue that has already raised its head is the position of international manufacturers who have invested in the UK as a platform for Europe. Should the EU seek a levy for UK-made cars, the position of Toyota, Nissan and Honda for example could be impacted. Each of these companies is a major UK employer and 80 percent of units manufactured at these sites go to the EU, with no non-EU exports, so the issue is real for them. However, other UK automotive marques are global suppliers and even Japanese Original Equipment Manufacturers (OEMs) would find any decision to move production extremely difficult due to the capital cost of doing so, as well as the significant and potentially politicised impact on sales in the UK, which remains Europe’s largest market for new cars.
Business as usual?
It isn’t quite business as usual for the UK manufacturing sector, but M&A and investment within and into the sector has far from dried up. Within our own practice we continue to see strong interest in investing in UK manufacturing from both major global corporations and domestic and international private equity investors. The recent acquisition of Nu Instruments by NYSE-listed AMETEK, Inc. is an excellent example of this trend since Brexit. Nu manufactures state of the art magnetic sector mass spectrometers and the purchase by AMETEK will significantly enhance Nu’s ability to sell their industry-leading instrumentation globally.
Furthermore, the Markit/Cips survey which was released in the month after the vote actually saw the joint biggest monthly increase in industry’s performance in the 25-year history of the purchasing managers’ index (PMI), taking it to its highest level since October 2015. Even more recently, September’s results found UK Manufacturing rose to the highest level since mid 2014.
Indeed, the UK may not necessarily see Brexit as either the main challenge or opportunity for manufacturing over the next few years. Trade deals will work themselves out and while UK may lose some ease of trade with the EU, this will be balanced by gaining some domestic flexibility to optimise the business environment. Neither will fundamentally decide the success of the UK manufacturing sector.
Alongside technological convergence, new manufacturing and automation technologies are emerging and global demand for high performance manufactured products is growing. The UK’s Intellectual Property (IP) development, productivity enhancement and development of the key skills required to adopt and utilise these technologies effectively, will remain the primary challenge and the key to the future success of UK manufacturing.
Graham Carberry is a Partner at Livingstone