Saturday 22nd Jul 2017 - Logistics & Supply Chain

First degrees of separation

The UK government is starting to plan the country’s exit from the European Union. Malory Davies looks at the implications for supply chain professionals across the continent.

This article first appeared in Logistics & Supply Chain, October 2016.

The UK’s political summer break is over and the government is now starting to map out a plan for Brexit. At the moment there is little clarity about what it will actually be trying to achieve – all we know is that for prime minister Teresa May: “Brexit means Brexit”.

Even so, there are a range of scenarios that will have implications for everyone involved in supply chain in Europe – both in the UK and in the European Union.

At one of the scale would be membership of the European Economic Area (EEA). This would amount to almost full membership of the EU. The UK would continue to have full access to the single market. In return it would pay a contribution to the EU budget and accept EU regulations and free movement of people.

The EU’s policy on the free movement of people was the key driver behind the Leave campaign, so it would be difficult for Teresa May to accept that as part of any future deal. Conversely, other EU countries would be unlikely to agree to full market access without free movement of people.

The other Brexit options would involve negotiating separate trade deals, not only with EU countries but also with all those countries with which the EU currently has trade deals. That promises to be a long a difficult road, complicated by the fact that the UK currently has no trade negotiators – they all work for the EU.

Last month, The Institute for Fiscal Studies produced a report that provides a quick snapshot both of the state of UK trade globally and with the rest of the European Union.

In 2015, UK exports totalled £510 billion, £222 billion of which went to other EU countries. At the same time, the UK imported a total of £549 billion, £291 billion of which came from other European countries.

This clearly highlights the UK’s position as a net importer – the total trade imbalance is £39 billion for 2015. But the imbalance with the rest of the EU is higher – £69 billion. The one area when the UK is a net exporter is in services. It exported £89bn worth of services to other EU countries in 2015, and at the same time it imported some £68bn worth.

The term “Services” tends to conjure up images of the financial services sector, the City of London, and so on. But it should be noted that some 14 per cent of UK service sector output is generated in transport, storage and communications. Another 14 per cent comes from the wholesale and retail trade.

The IFS is particularly concerned about the impact on the UK service sector. Its report highlights the fact that financial services has been a key beneficiary of single market membership. It warns that leaving the EU only the join the EEA would mean that regulation of the City of London would effectively be in the hands of a body over whom the UK had little or no influence – the European Union.

Nevertheless, the IFS report suggests that maintaining membership of the single market as part of the EEA would be worth about four per cent of gross domestic product to the UK, relative to World Trade Organisation membership alone. “Both theory and the available modelling suggest EEA membership would be likely to mean stronger UK economic performance than an free trade agreement with the EU,” it said.

Clearly, for supply chain and logistics professionals there is a very direct impact from any change to trade rules. The imposition of trade barriers with the rest of Europe could result in major restructuring for many supply chains.

Dr Christos Tsinopoulos, senior lecturer in operations & project management at Durham University Business School, questions how the free trade deals will operate across increasingly sophisticated supply chains.

“As we move closer to Brexit, it remains to be seen how new bilateral trade deals will be able to provide an environment where supply chains both across service industries and manufacturing can remain competitive.

“Although manufacturing supply chains are global, common legal frameworks and efforts for standardisations at the EU level have enabled companies based in Europe to establish relationships quickly and efficiently. This, and the highly educated workforce, has often allowed the high value end to be located in the UK despite the relatively high operating costs. The result has been some highly efficient and innovative supply chains, such as those of the automotive and retail sectors, which work and compete globally.

“Leaving the EU will have an effect on our ability to be a valued member of this broader EU supply chain and we could miss out as a result.

“New trade deals outside the EU could boost manufacturers willing and able to export to countries such as China and Australia. However, given the already global nature of other existing supply chains it is difficult to see how such an agreement will balance the impact of losing our position with what we already have with the EU. At the same time, we will need to agree separate trade agreements with the EU or member states, which could potentially increase the bureaucracy and ease of doing business.

“In my opinion, the most pressing trade agreement should be one that prioritises access to innovation. Although access to markets for trade is essential, a longer sustainable competitive advantage will come from ensuring that UK businesses and the associated supply chain benefit from developing innovative products,” says Tsinopoulos.

A survey of UK logistics professionals by Logistics & Supply Chain’s sister magazine, Logistics Manager, in the two weeks leading up to the referendum, found that less than one in five logistics organisations had a post-Brexit plan prior to the referendum. More than half said that a UK exit would have an impact on their business.

The survey also found that 71 per cent of logistics professionals felt economic stability was a major concern. Some 56 per cent said currency value was a big issue; 52 per cent were concerned about the impact on trade deals with Europe; and 17 per cent said the possible reduction in migrant workers was an issue – not surprising in an industry that has become increasingly reliant on workers from Eastern Europe.

Val Jonas, chief executive officer at Risk Decisions, the risk management software specialist, says that talking to many large customers, she has seen a slow-down in decision making. “However I don’t see this as affecting supply choices, and in the long run, we still need to do business with organisations across the globe. It’ll just mean more bureaucracy to deal with.”

Both the UK’s Freight Transport Association and Road Haulage Association have called for meetings with prime minister Theresa May, urging her and the government to put logistics first in Brexit negotiations to ensure the free movement of goods.

FTA chief executive David Wells said: “We cannot allow new bureaucratic burdens to hamper the efficient movement of exports heading for customers and imported goods destined for British consumers. The government has two years to ensure the conditions currently imposed on other non-EU member states such as Albania and Serbia are not imposed on UK freight flows. Norway and Switzerland have better arrangements but have accepted tough conditions including the free movement of people, so this will be a difficult negotiation.”

And RHA chief executive Richard Burnett said: “The logistics industry employs over 2.2 million people and is a vital component of UK plc. It is therefore essential that as Prime Minister she understands that the needs and interests of our industry must be taken into account during the forthcoming Brexit negotiations.”

Peter Ward, CEO of the UK Warehousing Association said that for forty years members of the association have enjoyed the benefits of ‘logistics sans frontiers’ and argued that new trade agreements should not return to costly “red tape and customs regulations”. “As usual the devil is in the detail, and we will work hard on behalf of our members to ensure those negotiating Britain’s exit fully understand the ramifications,” he said.

Kevin Richardson, chief executive of the Chartered Institute of Logistics & Transport, says the institute will be offering impartial expertise across all modes of transport and industry sectors to support negotiating teams and help them understand what is important in for supply chain, logistics and transport.

Richardson points out that in aviation, for example, a lot of the legislation in international, notably with the Chicago convention.

In road transport, much of the legislation comes from the EU, notably in areas such a drivers’ hours and CPCs, he points out.

The institute’s policy committees will be looking at the different aspects of the legislation – what could be changed or amended, with a focus on efficient operations.

Richardson highlights a number of actions that logistics and supply chain professionals can take including a review of supply and operations contracts, include exchange rates; and assessment risk in terms of market access.

The key message, he says, is that, for the moment at least, it is business as usual.

Andrew Baxter, managing director of Europa Worldwide, says: “We need to have our eyes wide open, to try and anticipate what the consequences are for our customers, and then consider the solutions. Regarding clearance, I will be waiting for a clearer position from the government as to what will happen. Once this is clear we can start to react. But in the short term we do not know what the situation will be, therefore it seems foolhardy to start reacting at this point.”

About three quarters of Europa Worldwide’s business is with Europe, so perhaps it is surprising that Baxter supported the Vote Leave campaign.

Looking at the options for the UK’s future relationship with the EU, he says: “I would say the principal point is, will customs clearance be reinstated or not. I suspect that the answer to this is yes. Personally I doubt that there will be any meaningful tariff barriers between Britain and the EU. It’s in nobody’s interests to do this. While politicians might posture, there are a lot of continental jobs that depend on British trade. Therefore, business and Unions will be applying pressure on politicians to maintain free trade. I suspect the UK will have a different deal to any other country, without free movement, but with free trade (or something very close). In the end the UK is a much bigger economy than Norway or Switzerland, and therefore we should be able to leverage this at the negotiating table.”

Jonas says: “Most large businesses need to keep a careful eye on their supply chain. For SMEs, it’s harder as they probably don’t have the bandwidth to have a great deal of visibility. In the current climate of uncertainty, it’s important that supply chain professionals gather as much information about suppliers as possible from across their business. Understand individual and aggregated risk. Be aware that a number of small risks relating to a single supplier can add up to a significant risk across this business. Improve the resilience of your supply chain – you might need to think out of the box, for example, by investing in a supplier instead of squeezing them! For larger businesses, they may want to start thinking about how they invest in and pro actively manage risk.”

Baxter sees opportunities resulting from the Brexit decision that can be exploited in the near future.

“In my view, when markets change there are always opportunities. Winners and losers, it’s just a matter of making sure you are on the right side of it. In reality the reinstatement of customs clearance will bring massive opportunities and risks. The best companies will take advantage of the situation. The less good companies will struggle. Customs clearance (presuming that is the outcome) will be a huge revenue stream. But in the short term, there will be a massive learning curve to ensure that there are enough skilled people to deal with this work.

“We need changes to the existing customs set up, to speed up the process. If the existing processes don’t change we will either have a lot of trucks awaiting clearance in Dover or, a lot of freight that gets delayed awaiting clearance. We need the government to make changes. But I am hopeful that they will do that,” says Baxter.

Jonas says: “It’s a classic case of one man’s risk being another’s opportunity. Low inflation means UK suppliers are enjoying low wages growth. Provided you don’t import a lot, there’s the opportunity to be more competitive where you’re exporting goods and services, as the value of Sterling continues to fall.

“We’re still in the EU single market at the moment, but that doesn’t necessarily stop us doing business outside the EU. Taking early action could be key. We might just have to pay tariffs and do the necessary paperwork. While the tariffs are currently offset by the value of Sterling, why not start opening up new markets now?”

Time to take a risk

Global supply chain risk has hit a high driven by uncertainty over the UK’s decision to leave the European Union, according to the CIPS Risk Index.

The index climbed to 80.8 in the second quarter of 2016 continuing a worsening trend with sluggish growth across both developed and emerging market economies.

The Index, produced for the Chartered Institute of Procurement & Supply by Dun & Bradstreet economists, tracks the impact of economic and political developments on the stability of global supply chains.

The UK is yet to start the process of negotiating its exit from the EU, and negotiations could take two years. Not only that, there are several possibilities for the final shape of the relationship which will continue to create uncertainty over medium term prospects.

The study highlights the fact that the Brexit vote is part of a wider shift towards trade protectionism. For example US presidential hopeful Donald Trump has indicated that he is likely to seek increased trade barriers with countries such as China and Mexico, which could also have an impact on supply chains.

“In these volatile times, businesses must develop bespoke contingency plans for possible scenarios. This must start with gaining clear visibility of the supply chain to accurately assess emerging risks. The next step would be to ensure supply chains are agile and flexible to adapt and react quickly to changes and disruptions,” said John Glen, CIPS economist and director of the centre for Customised Executive Development at The Cranfield School of Management.

Good advice, but it also has to be recognised that changing market conditions can open up new and unexpected opportunities. No-one is going to get fired for battening down the hatches in the current environment. But the real winners will be those that recognise the supply chain opportunities as the arise, and have the agility to take advantage.

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