Brexit poses serious threats to the efficiency and financial health of European businesses trading with UK suppliers. In joining the debate on Brexit, CKS is pleased to release a three-part article series, exploring a cross-range of potential impacts on procurement policy. One article will be released each week.
The British withdrawal from the European Union has been an important feature of supply chain discourse. Precision and planning are key in facilitating successful relationships in business procurement. Significant changes that threaten to disrupt scrutinised links between the UK and Europe need to be considered by all relevant stakeholders. The EU Single Market ensures that the bloc functions without any internal borders or regulatory obstacles to the free movement of goods and services, therefore integrated European functioning and efficient supply chains are the foundations of manufacturers across the EU. Brexit, whether hard or soft, will threaten the efficiency and cost effectiveness of supply chain and procurement strategy. CKS will explore what Brexit means for enterprises in Europe and what the risks are by focusing on four key business elements: standards, cost, delivery, innovation. Our analysis will conclude with advice for stakeholders concerning business best prices, practical policy alterations and profitable opportunities.
After Brexit, EU Directives and Regulations will cease to apply in the UK. This threatens to disrupt the harmonisation of standards between EU businesses and their UK counterparts. The biggest driver of such disruption would be the removal of the binding nature of EU standardisation from UK legislation and the modification of the UK’s trading status from EU Member State to “Third country”. EU businesses will more than likely have to adapt existing software and data storing systems to facilitate this split, affecting assets, liabilities and competition positions. In the case of a No Deal being found, there would be zero recognition of standards.
According to a factsheet produced by the European Union , if your business requires on certificates or official authorisations issued by stakeholders or regulatory bodies in the UK, for example the Civil Aviation Authority (CVA) or the Vehicle Certification Agency (VCA), they may no longer be valid in the EU after Brexit. Research must be done to identify which steps need to be taken to ensure validity, if possible, between the EU and the UK after legislation changes. The factsheet emphasises on the importance of this particularly “in the automotive and medical devices sectors” concerning technical safety positions, environmental standards, chemicals and type approval. Should no deal be achieved by October 31st, EU product registrations may cease to be valid and companies may be faced with the administrative burden of complying with two sets of standardised requirements. Having an EORI number (Economic Operators Registration and Identification Number) which allows you to trade in all customs procedures when exchanging information with Customs administrations, is strongly advised. Application for AEO (Authorised Economic Operator) status, a concept based on the Customs-to-Business partnership introduced by the World Customs Organisation, is equally encouraged. This certificate establishes internationally recognised standards between traders.
Based on our expertise, we believe that companies based in the UK operating within differing data and privacy frameworks could end up receiving penalties for mistakenly breaching data protection issues. We also envision hypothetical issues related to sourcing and the storage of data applying to non-EU countries. Furthermore, the same issue can appear regarding intellectual property rights (which includes trademarks and licensing). It is safe to assume that after the official Brexit procedure, EU Trademarks (EUTM) will be applied only in very specific circumstances. Moreover, when it comes to software, we believe that some of them (IS, ...) might need to be updated, causing potential issues with current processes. We strongly recommend CPOs to review all their existing contracts and software to verify whether pre-existing legislation is sufficiently protected against Brexit. CKS has already started assisting companies with this specific task.
A hard Brexit situation would probably be the most disruptive scenario from a trade costing perspective, requiring EU and British businesses to respond to costly new tariffs, forcing customs agencies to treat imports and exports in the same way as businesses currently manage trade relationships with non-EU countries, and adapting to new tax laws. This would likely threaten financial health directly through changing customs, but non-directly through the administrative burden of quickly adapting to such rapid demands.
Tariffs introduced because of Brexit could be a threat to European competitiveness, as the impact would fall on the supply chain due to the raised importance of just in time delivery regarding the international nature of aeronautical and/or automotive supply chain logistic, with multiple assemblies of different parts required.
In the case of a No Deal agreement, the supply of goods between the European Union and the United Kingdom will no longer be considered as being made by members of the same trading bloc but simply separate continental countries with vastly differing custom procedures. Trade will therefore no longer be based on Single Market regulation and global value chains will be significantly impacted. Trading based on WTO standards would mean that all parts of a supply chain would suffer delays in aviation and cross border data flows, expecting the financial repercussions of such stagnancy.
It is therefore significant that EU27 businesses prepare as fully as possible for delays and confusion in customs declarations by being as up to speed as possible with the requirements needed in the case of a No Deal scenario, particularly concerning those with British suppliers. Analysis on costly customs procedures need to be submitted in advance in order to reduce financial shocks through lack of preparation. Businesses therefore need to rest flexible in the wake of fluctuating global sourcing decisions, to ensure not only that currency arbitrage is known in advance, but also that their supply chain logistics need to be fully understood in order to ensure that resources available will not threaten the harmony of critical sourcing requirements.
A strong example of this need to prepare can be found in the Irish border question. Indeed, after the UK leaves the EU customs union, over 250 road crossing checks could be implemented.
Buyers in Europe collaborating with UK suppliers, or vice versa, will most likely have to deal with changing tax-related issues due to Brexit, which will result in direct changes to their supply chain model.
It is crucial for procurement organisations based in the EU to start auditing for potential vulnerabilities and review transfer pricing. In other words, CPOs will have to wait and adapt to a new fiscal framework, which will undoubtedly create delays and raises administrative costs.
One of the major problems facing businesses from a more practical stance refers to the high likelihood of delivery delays due to customs changes and increased administrative processes. With businesses under increasing pressure to meet high demands of customers requiring fast delivery times, increased delays across borders could create major issues within supply chains. Blockages at ports affecting the flow of goods in and out of the United Kingdom threatens long and frustrating delays.
To avoid backlash from customers, it is of high importance that businesses audit thoroughly their supply chains to identify which parts are most vulnerable to delays, so that contingency plans can be put into place well in advance. Border delays at borders separating the UK and Europe could see gridlock traffic and intense delays due to increased and complex administrative processes.
Another concern related to border controls would be the custom capacity to manage additional work, notably concerning the excess number of declarations that would need to go through the new systems, making extra administration an unmanageable burden, and therefore slowing supply chain processes and business productivity.
One of the greatest benefits of trading within the Single Market is increased innovation brought about by recruiting international talent through the mechanism of free movement of people. Staffing management on many levels of the supply chain could be at threat through changing visa requirements and newer and more restrictive labour market environments. Businesses need to understand which of their current and potential employees could be affected, to then draw out a successful strategy. Understanding new visa requirements, being prepared for restrictions within recruitment processes, and staying on top of the burden of increased bureaucracy whilst facilitating business activity and keeping jobs afloat, is of upmost importance for EU companies whilst navigating Brexit.
CKS finds that if businesses implement thorough audits to enhance their customs compliance and procedures by reviewing their procurement channels well in advance, any supply chain problems brought on by difficult administrative and logistical problems will be easier to manage in the case of a complicated Brexit. Improved efficiency and productivity within supply chain B2B is therefore key.
CKS recommends that any European businesses with close supply chain links to the UK through suppliers need to consider its own exposure to the UK markets, and how its market development strategy must evolve in order to successful combat problems raised, for example potential mergers, diversification or weak links within the supply chain and supplier base.
CKS would advise further scrutiny at future investment within the EU bloc to remove any unnecessary complications with UK suppliers, recognising the possibilities related to FDI (Foreign Direct Investment) within the Single Market. A Financial Times-owned database of cross-border investment shows that the amount of capital invested in the EU27 surged 43% in the three years to the first quarter of 2019, compared with the preceding three years. In Spain specifically, the number of jobs created because of foreign investment has more than doubled over the three-year period, compared with previous years.
Investments and supply links must be analysed in order to identify holes in profitability and to maximize return and effectiveness across all potentialities.
CKS advises businesses to conduct thorough supply chain analyses from the basis of a worst-case scenario following a hard Brexit. This will therefore map potential risks and identify specific weaknesses in certain parts of the procurement strategy. Contingency plans therefore will be produced from such thorough audits, preparing your business for potential supply chain disruption.
Article written by our consultant Sara Roebuck.