Investment intentions have taken a hit among UK manufacturers as they wait for clarity on Brexit, so we take a closer look at the issues at stake. The latest CBI Industrial Trends Survey, released in October, provided some sober reading on the prospects for manufacturing in the UK.
Among the findings, 30 per cent of the survey’s participants were concerned that access to skilled labour was likely to limit output over the next three months – the highest proportion since 1974. Planned spending on plant and machinery over the year ahead is expected to be scaled back at the fastest pace since July 2009, while further cuts were planned for investment in buildings, training and innovation budgets.
“Ongoing uncertainty around Brexit has made for a particularly tough quarter for the UK’s manufacturers,” said Tom Crotty, Group Director of INEOS and Chair of the CBI Manufacturing Council.
“Protecting jobs and people’s livelihoods from a lost generation of investment remains urgent,” added CBI Chief Economist Rain Newton Smith.
Hard decisions are being made across the board
Two days earlier, the CBI released research on business preparations, which showed Brexit was having a negative effect on investment decisions for eight in 10 firms. By December, nearly all firms surveyed will have actioned contingency plans. More than one in three already has.
Behind the statistics lie the very real and difficult decisions being taken by businesses in the UK. Contingency plans include cutting jobs, adjusting supply chains, stockpiling goods and relocationing production and services overseas. CBI Director-General Carolyn Fairbairn has warned the knock-on effect for the UK economy could be significant.
Some of firms’ difficult decisions have made the headlines. Jaguar Land Rover has warned a no-deal Brexit could put £80bn of UK investment at risk over five years. It has already shifted staff in its Castle Bromwich factory onto a three-day week – attributing the move to both Brexit uncertainty and a slump in the market for diesel cars.
Airbus has warned it could move production of its aircraft wings away from British factories, putting thousands of jobs in the UK at risk – citing both regulatory and customs concerns.
Quiet moves, serious implications
Many more anecdotes come from companies too concerned about protecting current clients and order books to talk publicly.
Like the multinational plastics manufacturer that has already cancelled a £7m investment in machinery, and is planning moving from a seven-day shift pattern to a five-day one in the event of a ‘no deal’ scenario. This would result in the loss of around 100 jobs, 30 per cent of its UK workforce.
Or the company specialising in safety equipment, which is moving production and distribution centres away from the UK.
Or the pharmaceutical manufacturer expecting its Brexit contingency plans to cost up to £70m over two to three years to action, with ongoing costs such as customs duties and administration costs are estimated at an extra £50m per year. That’s money not then available for productive investment like new talent and R&D.
And there’s the now all too familiar response from a machine tools manufacturer that has put all investment plans on hold until the Brexit situation is 100 per cent clear. Understanding what to do in the event of a deal is already hampering productivity, diverting management time and resources away from valuable product and process innovation too, the company adds.
Why frictionless trade matters – the chemicals sector tells its story
But if you want to know more about the impact additional borders and barriers could have on UK’s goods manufacturers, talking to chemicals companies provides a snapshot of some of the issues at stake. After all, they’re at the start of the supply chain for many manufacturers – including those mentioned above.
“The biggest single issue is going to be around how long it’s going to take to get products through borders,” says Dr Neville Prior, Chairman at Cornelius Group – a manufacturer and distributor of chemicals, additives and ingredients for the care, health and nutrition and performance chemicals markets. With customs checks and additional paperwork slowing the movement of goods, he adds: “We would undoubtedly have to increase our stockholdings so we don’t let customers down.”
While Cornelius has the capacity or at least the ability to find places to store extra goods, Prior warns this measure will quickly tie up cash flow for smaller companies, putting their businesses at risk. And it’s a fear shared widely: according to research from the Chartered Institute of Procurement & Supply, one in 10 businesses believe that customs delays of just 10 minutes to half an hour are likely to push them into bankruptcy.
Cashflow could also be hit by any changes in the VAT regime – as firms currently don’t have to pay VAT upfront on goods imported from the EU. “If duty and VAT are both payable upfront from 1 April next year on European imports, that’s going to have a massive cash flow implication for a lot of UK businesses,” says Richard Gilkes, Managing Director at Stort Chemicals – a family owned distributor to the coatings and fragrance industries.
“Obviously, we would rather not have to pay tariffs on anything we import from Europe,” he adds. “The cost of those tariffs would be passed to our customer base – the companies who make paints, inks, resins, plastics, things that go into goods that consumers buy. They will inevitably pass those price rises onto their customers, so inflation will inevitably follow – as sure as night follows day.”
But one thing Gilkes can’t fathom as a result of Brexit is any change to the regulation that governs the sector. REACH is the largest piece of legislation to come out of the EU, running to more than 600 pages. It’s one of the best examples of the importance of having a common rulebook to ensure continued smooth access to the EU.
“Setting up an alternative REACH regime means that all these raw materials that have been classified and we’re allowed to sell in the UK – we’d have to all start again. The thought of that is worrying everyone in the chemical supply chain,” he explains.
“Are we going to have to reapply through an EU subsidiary? Nobody really knows,” adds Prior. “But the cost of registering a single product under REACH is significant. We’re talking tens if not hundreds of thousands of pounds.”
Cornelius Group already has a subsidiary in Poland, which could prove helpful in this situation – and Prior is aware of several other firms who have set up small subsidiaries, mostly in Ireland, to do the same.
Complex supply chains: the knock-on effect
But he also points to the chemical industry being at the heart of complex supply chains – a chemical made in the UK often has to go to the EU for a particular process before coming back again, and the back and forth can continue before it ends up at the manufacturer. It’s another reason why both REACH and smooth border crossings are so important.
“If you're buying into a just-in-time kind of environment, then that’s going to cause the aerospace or the automotive industry untold headaches unless they can sort out how we get things across borders as we do now with speed,” he explains.
And because supply chains have been designed to be so quick, he worries that if any sector suffers a downturn because of Brexit, chemical businesses would “see the downstream effect quite quickly”.
Stort’s Gilkes agrees. The company has just enjoyed one of the best years in its history. “Brexit hasn’t had an impact yet, but if we do fall off a cliff come the end of March, things could very wrong pretty quickly.”
The impact for European suppliers
“The fact of the matter is the EU actually needs products that the UK makes and the UK needs products that the EU makes because we don’t all make the same things,” says Prior.
Stort is sole UK distributor for several European chemical companies – and Gilkes is confident they will want to continue to import into the UK. But stockpiling, cash flow pressures and any economic hit to manufacturers will affect those businesses too.
“The reality for them is going to start to bite come next year, if business starts to wane in one of their top 10 markets,” he warns.