Brexit – a supply chain view

After the initial shock has subsided and the turbulence of the stock market hopefully calmed, we should take a view on the impact of Brexit and its short and medium term impact. In the initial aftermath, the decision to leave will likely have little or no impact, as the UK will have to negotiate and clarify a mass of legislation that currently embeds us in the European Union. Even though making correct predictions is notoriously difficult, let’s try to look at the rational arguments on how things are likely to develop in key activities that impact supply chains – which rely on the free movement products and people.

Movement of products:

Currently, if a company produces a new product it requires certification for its usage – this can be done locally and through the overarching European Legislation, once a product receives a seal of approval, this seal is accepted in all other member states – similar to your car MOT, you don’t need a French MOT to drive your UK registered car in France, as long as, the UK MOT is valid. Outside an EU, the UK will likely need to pay for this approval using EU approved agencies, which will increase the cost of creating products, especially as the majority of UK products are destined for the EU market. On the other hand, the EU producers are not dependent on the UK market and in all likelihood the UK will accept the EU standards without the ability to influence them.

There has been a lot of hype around import tariffs, however, even without an agreement these can be regulated via the existing global accepted agreements, most likely adding a few percent on the cost at most. The impact is, arguably, not from the tariffs themselves, but from the administrative effort and control required to manage their imposition, meaning the exporting and importing parties need to track, manage, reconcile, insure and probably require a bonded warehouse to manage the transactions. This could have a serious impact on the supply chain by adding delays, extra stock holding and increased overall risk. As the UK is an import market, this could have a significant impact on the responsiveness and agility of supply chains.

Movement of people:

Currently, any EU citizen can travel and work anywhere they like within the member states. If a points system is introduced, as in Australia, the EU will likely impose a similar system for UK citizens. For young people and for seasonal workers (e.g. in agriculture), a 9 or 12 months’ visa will be issued allowing people to work in the country with some maximum earnings and length restricted to a class of jobs so that people in their gap year can work at the local bar, night-club, restaurant or supermarket. This means low cost labour can still enter the UK for a limited time, return for a few months and return again the following year. UK companies might even sponsor this, as we struggle to find an effective local labour force in many areas of the country already for the warehouses, which would give them a right to remain after five years. We only need to look at the Channel Islands, they have had a mobile migrant workforce for the last 50 years.

If the access to these people is restricted, as the Brexit voters want, the result is fewer jobs in the UK. The scarcity of good labour, coupled with the minimum living wage and high land cost, is resulting in the design and build of more automated / mechanised warehouses, which can easily reduce the labour requirement by between 25% and 40%. However, the UK is not a big producer of automated high-tech equipment. Such equipment comes from Austria, Germany, Switzerland, Netherlands, Japan and USA who will happily export the equipment to us. In addition, these machines require regular servicing and support from professional engineers and the UK has a significant engineering skills shortage. So, as today, we are likely to find EU citizens coming over to the UK to maintain such equipment.

Summary:

So what is the overall impact likely to be?

Well, Brexit supporters want to take control of the UK economy. Actually, the products UK produces will need to follow EU guidelines regardless and the UK won’t be able to influence them. If the legislation is poor, it will create an unnecessary burden of administration and risk, so the likelihood is the system will be similar today to ensure products flow “easily” across national borders (especially as the UK is import dependent).

On the movement of people, we may see an impact in certain areas. However, the UK will wish to maintain some form of access for its people into the EU market, which will require a reciprocal agreement. We will also continue to require an inflow of people to the UK to fill skills shortages, albeit probably at a higher cost. To attract such people, we will have to actively recruit them in EU countries and hope the more negative aspects of Brexit do not put them off from coming.

So overall, we are unlikely to see a big difference in the near future, except that business may be burdened with some additional red-tape, labour-cost saving investments are likely to be increasingly attractive and, hopefully, common-sense business reciprocity will prevail. In short, no small challenge for those responsible for managing an orderly transition.

If you’d like to know more on The Logistics Business’ view and how we can offer strategic insight and the skills necessary for businesses to create an agile and responsive supply chain, contact us on +44 (0)1527 889060 or email info@logistics.co.uk.