BREXIT: Making the transition

A transition deal offers companies breathing space, but risk managers must still work without fully knowing what business environment they face in the post-Brexit era. Graham Buck reports

When Unilever recently selected Rotterdam over London as its future head office, the consumer products giant denied the choice was linked to the UK’s forthcoming exit from the European Union. The Anglo-Dutch group has had two parent companies since the late 1920s and, after fending off a takeover bid from Kraft Heinz, says it wants to simplify its structure via a single legal entity incorporated in the Netherlands.

However, London’s deputy mayor for business, Rajesh Agrawal, is sceptical that the explanation represents the whole story. Unilever’s decision, he suggests “brings into sharp focus the need for the government to secure a Brexit deal that secures London as Europe’s leading business centre. The best way to do this is for London and the UK to remain part of the single market and customs union”.

Will this happen? While the recent agreement between the UK and the EU for a 21-month Brexit transitional deal eases fears that businesses could face a cliff edge when the divorce goes through next March, the nature of the country’s future relationship with its European neighbours remains worryingly imprecise.

Among other major corporate names considering its future, Rolls-Royce has a contingency plan should upcoming negotiations run into trouble. The aerospace group is alarmed by the disruption threatened by a hard Brexit and ready to shift the signing off of its airline engines from Derby to Germany, as the EU aviation authority would then hold the right to certify their safety.

More concerning is that any agreement signed and ratified before the extension period expires in December 2020 won’t necessarily complete the missing details. “Many believe that it will be extremely fluid, meaning it could be several more years before we finally achieve clarity,” says Nawaz Ali, senior UK/EMEA currency strategist at Western Union Business Solutions. “So there is much focus on scenario analysis and continuity planning. There’s a lot to contend with and for SMEs, the challenge is simply finding the time to manage all these risks.”

The good news, he says, is that sterling’s depreciation since the referendum forced companies to focus on pricing and exchange rate volatility. “That situation has more recently stabilised, so companies have reviewed other aspects of their supply chain, such as whether their supplies will continue to come from Europe and if they will be subject to tariffs. The focus is now divided between price, supplies and supplier.”

Balancing act

Western Union Business recently surveyed 1,100 key decision-makers at UK businesses on their Brexit business strategies. Many have taken measures to preserve their profitability; 68 per cent reported they had re-negotiated contracts and pricing while 57 per cent were sourcing from geographies where sterling enjoyed a more favourable
exchange rate.

Nearly two in three businesses had passed on higher import costs to customers through price increases, despite the risk of becoming less competitive than overseas competitors. Ali adds that 75 per cent of firms in the financial services sector had absorbed higher costs, those that had passed them on to customers via price rises had typically imposed an increase of 32 per cent – against an average across all sectors of 17 per cent and only 12 per cent for manufacturing.

“That might suggest that manufacturers are in a good position and able to absorb higher costs, but the reality is that they are in highly competitive industries and must suffer the resulting impact on profits in order to retain business,” he notes.

Ali cites the example of one northern England manufacturer of drilling tools and machinery, which sources components from Germany. Having adjusted to sterling’s lower exchange rate “they’re now concerned that in future their supplies might have to stop at borders for five days, rather than 24 hours.

“As their manager commented: ‘We’ve been walking blind for the past couple of years and the possibility we might have to continue doing so for the next couple – or even longer – is the issue keeping us awake at night’.”

The impact of changing customs arrangements post-Brexit also features in a survey conducted by the British Chambers of Commerce (BCC) and the Port of Dover. About a third of the UK’s trade in goods crosses the English Channel via Dover and Eurotunnel, so “maintaining fluidity throughout the journey of trade in goods, both at ports and along the key strategic road arteries serving them, is essential.”

The BCC survey, covering 835 UK exporters and importers, confirms that delays in the delivery of material and components at ports would trigger significant business disruption, particularly for those operating a Just in Time model.

Amongst its findings, 29 per cent of companies surveyed believe that delays at ports would impact on their administration, costs and operations, yet one in three businesses lack contingency plans to cope with likely new customs procedures.

The BCC wants firms to prioritise planning on how different post-Brexit scenarios could impact on them and the implications to minimise possible future disruption. “The transition period is still a fairly short timeframe for the UK and the EU to work through the detail for the future relationship, as well as to make practical preparations for future changes,” says Anastassia Beliakova, the BCC’s head of trade policy.

“At the moment, it’s still unclear for businesses what they need to adapt to. Many issues that are most relevant to businesses – such as regulatory checks, VAT payments, and product origin requirements – haven’t yet been addressed in the negotiations.”

The Federation of Small Businesses (FSB) wants future regulation to be a priority and says that many SMEs currently struggle with the overall burden of regulation and the associated costs.

“Immediately after Brexit, small businesses will need stability with the same regulatory rules applying on the day after we leave as the day before,” says the FSB’s national chairman, Mike Cherry. “After this period of time, the UK has a real opportunity to create a new regulatory environment that can drive small business growth and productivity.

“To make the most of this chance, the government must carry out an holistic review identifying how the UK’s regulatory framework could be reformed to promote small business competitiveness. Looking more long-term, ministers should establish an Office for Regulatory Reform in the Cabinet Office aimed at ensuring the better regulation agenda is a strategic policy priority.”

Advantage and opportunity

Amongst those offering post-Brexit guidance is Darren Wray, CEO of business management consultancy Fifth Step and author of The Brexit Readiness Guide. He notes that companies in sectors such as financial services aren’t deterred by uncertainty, but have commenced preparations prompted by the Bank of England’s stress testing and Brexit readiness regulations.

Some insurers are incorporating in Europe, with Lloyd’s establishing a Brussels office and Chubb expanding its European head office in Paris. AIG is creating two new firms – one UK-based, the other in Luxembourg. The latter, AIG Europe SA, includes 19 branches across Europe and will continue to underwrite European risks, while AIG UK covers UK-based risks. The insurer will launch the new structure in December.

“What companies have been less good at is looking for the advantages presented – what new lines of business will be required post-Brexit?” asks Wray. “Will there be opportunities for businesses to find – and will they need – different vendors in different geographies? There’s still little evidence of organisations pitching for this type of business as they’re unsure what type of Brexit we’re going to have.”

Wray recommends risk managers employ a five-point plan in preparing for the post-Brexit era, which seeks to identify what you’re protecting against and the challenges your company may face.

Questions may include:

1. How would business be impacted if you lost the same access to staff from other EU countries?
2. What would happen if you couldn’t sell products and services to the EU without additional tariffs?
3. Is your market position such that companies would pay more for your products or services?
4. What if the raw materials your business sources from the EU become more expensive due to import tariffs?
5. What if your EU-based vendors charge more because of tariffs?

Score and prioritise:
Walk through each risk giving each a score of low, medium or high impact should the risk become a reality. The chief information officer (CIO) will be involved here as the holder of data.

Mitigation planning:
The CIO and team should work closely with all parts of the business. Starting with those with the highest risk score, provide at least one mitigation action that could reduce the risk. Include as much detail as appropriate, spending less time on risks less likely to happen.

Identify opportunities:
This stage adds structure for those that began the process from the early stages of Brexit and an opportunity for those who haven’t started to make that change. It’s an ideal stage for innovative CIOs to add value and to demonstrate their value as they work with their C-suite and board colleagues, as well as with the wider business.

Monitor and review:
The monitoring and review cycle ensures projects run to plan and have the resources required. It monitors the progress of Brexit discussions and ensures any change in assumptions or risk assessment is monitored – while nimble and astute organisations can use it to identify new opportunities.

This article was published in the May 2018 issue of CIR Magazine.

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