Brexit – the calm before the storm

Manufacturing has the potential to be one of the most affected sectors as a result of Britain leaving the EU.

It cannot be denied that manufacturers are in an uncertain position and it is not likely to improve any time soon – we still have a total absence of proposals for our new trading relationships and manufacturers in particular desperately need to know what the plan is going to be. Businesses in this sector are at the heart of the supply chain and will therefore be most impacted by the potential imposition of import and export tariffs if the UK leaves the free trade area.

If we leave the EU Customs Union there will be a huge raft of new bureaucracy to comply with. Proof of origin requirements will be needed for each element of a product as these goods enter and leave the Customs Union. The Brexit won’t mean less red tape for manufacturers in this situation and paperwork could increase sustainably.

Of course, for exporters there is good news at the moment as these businesses are able to capitalise on the weaker sterling, but as existing currency hedges start to expire the costs of imports is set to rise significantly.

There is also a concern amongst Tier Two and Three manufacturers that, as a result of Brexit, OEMs may think about locating projects elsewhere – definitely a concern for the longer-term.

Ultimately we’re in the calm before the storm – once the Article 50 button is pushed it will be a hectic and chaotic two years of renegotiating to get the trade deals finalised. There’s no doubt this will be a near impossibility – negotiating these sort of deals usually take around 10 years and it is highly likely we will be left in a tough position.

However, it’s not all doom and gloom and in this calm there are some very practical measures which manufacturing businesses can be implementing to ensure they’re in the best possible position to trade profitably and even grow.

 

• Firstly, it is worth thinking back to the last recession and the important lessons learned there. In harder times, businesses will inevitably ask their lawyers to pore over contracts much more carefully, looking for a get-out clause. In the heat of the moment of a deal being done it can often be the case that the terms and conditions are skimmed over in a rush to get the champagne popped open. Those that have tightened their contract due diligence and exercised caution will be in a stronger position when this Brexit storm hits.
   
• Businesses should look at running a Brexit Risk Audit. This audit should look to identify the exact issues which could impact the business and put in place procedures now to manage these points.

For example, the audit could cover:

 

• Checking bank facilities It is important to renegotiate terms now with banks while they are still pushing the message they are open for business and willing to lend. This may change. For example, check the expiration dates on any fixed term loans. Even if they don’t expire for another year it may well be wise to think about discussing terms now.

 

• Managing impacts on your workforce The manufacturing sector has a high proportion of EU workers and for many businesses these employees will be difficult to replace. The first thing a business can do is set about reassuring workers. By opening a dialogue now it will help workers know what they’re facing. Employers can also recommend that those who have been in the UK for five years should consider applying for residency. It will help provide some certainty in these uncertain times.

 

There are some practical steps and processes which manufacturing businesses can put into place. In the midst of such confusion and economic upheaval, businesses would be well advised to be realistic and ensure they’re in a position to capitalise on any opportunities which may come their way.

Adam McGiveron is Partner at Shakespeare Martineau

 

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