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How is Brexit Affecting Businesses So Far?

By Karen Lynch

In quarterly earnings calls, surveys, and other forums, executives from U.S., U.K., and EU companies have been describing steps they’ve taken to contain the effect of Brexit on their businesses in the three volatile years since the U.K. voted to exit the European Union. Among them: stockpiling goods, revamping supply chains, establishing new EU business units, and hedging against foreign exchange risk.

In mid-2019, Brexit expectations range from a hard exit to a soft exit to no exit at all. What’s at stake for U.S. companies? Many not only do business with the U.K., which is a major U.S. trading partner, but also rely on the U.K. as a gateway to trade with the rest of the EU. Either way, Brexit is affecting their trans-Atlantic business prospects.

 

As noted by the American Chamber of Commerce to the European Union, “Whatever the metric—total assets, R&D expenditures, foreign affiliate sales, employment, trade, etc.— the United Kingdom has been a long-time pillar of America’s global economic infrastructure and a key hub for the global competitiveness of U.S. companies.”1

 

More than 43,000 U.S. exporters use the U.K. as their entry market into the EU, often transiting through the country to the continent, according to U.S. government statistics. Over 7,500 U.S. companies have a presence in the U.K., which is also the top location in Europe for U.S. regional headquarters covering Europe, the Middle East, and Africa.2

 

To assist companies affected by Brexit, many checklists and key considerations regarding potential challenges have been issued by governments, shippers, management consultants, and others.

 

Rerouting and Stockpiling to Mitigate Brexit Effects on Business

 

An early 2019 roundup of earnings calls by the S&P Global corporate credit rating service described how some companies were coping with the effects of Brexit on their business.3

 

  • A major U.S. snack food company reported renting more trucks and warehousing space, while increasing inventories.
  • An American lab equipment manufacturer had already evolved much of its production out of the U.K. over time.
  • An EU medical device maker reported, “We have built up to 8 weeks of stock to ensure that we have adequate supply on U.K. soil should there be a hard Brexit.”
  • A British engineering company opened a warehouse in Ireland, “so that the shipments that we do at the moment directly from the U.K. to European customers can now be done from Ireland.”

S&P Global summed it all up, writing, “The lack of certainty around the course of Brexit and what it might mean for cross-border trade and logistics has triggered a corporate response involving a combination of short-term surge in inventories, warehouse relocations, and supply-chain adjustment.”

 

Millions of dollars are being spent on such contingencies, according to the Wall Street Journal. “Many companies say they are proceeding with their Brexit plans, regardless of political twists and turns.”4

 

Reacting to Brexit’s Financial Impacts

 

Many U.S. financial services companies have a presence in London. But in a separate October 2018 S&P Global report, the rating service noted that some financial institutions had already started to trigger elements of their contingency plans.5 The New Financial research institute published a “Brexitometer” in March 2019, counting 250 financial services companies that were moving some of their business, staff, assets, or legal entities from the U.K. to the EU.6

 

Ireland’s central bank, for example, has been processing applications from small, medium, and large companies relocating or establishing a second location outside London for their investment management, banking, payments, and insurance businesses, Reuters reported. Otherwise, “their London operations may lose the right to operate across the EU with Britain’s departure from the bloc.”7

 

Finance departments in other industries have also stepped up to address the Brexit-related volatility of the British pound. Financial executives at British and international companies have been hedging currency exposures further into the future, the Wall Street Journal said.8

 

Managing Customs, Contracts, and Regulatory Impacts

 

There are thousands of examples of detailed contingency work already underway, according to the Harvard Business Review, including the installation of new software to deal with additional customs declarations, revision of contracts, and assessment of the validity of intellectual property protections in the wake of Brexit.9

 

Anticipated customs and port congestion delays could mean lost business, according to a survey of supply chain managers by the Chartered Institute of Procurement & Supply (CIPS). Specifically, a delay of just one day at the U.K.-EU border could result in late delivery discounts and lost contracts.10

 

Product regulations and standards would also need to be addressed for both the EU and U.K. In light of this, a U.K. drug maker has reportedly spent tens of millions of dollars on duplicating product testing and transferring regulatory licenses.11 An executive at a much smaller U.S. cosmetics company reported that his legal representative in the U.K. set up a Dublin office to hold EU product licenses and approvals.12 The British government has notified companies that it would accept EU standards for U.K. product sales for only a limited period.13

 

In addition, many American technology companies are preparing for the implications for data privacy regulation, pending assurances that U.K. regulation will satisfy the EU’s General Data Protection Regulation.

 

The many administrative measures needed to accommodate Brexit would disproportionately affect small and midsize enterprises (SMEs), increasing their costs and complexity while hitting their productivity, according to a report from Business Advice.14 Academics have found that the largest Brexit factor concerning SMEs is uncertainty about future regulatory change.15

 

The uncertainty has created some inertia. “In the U.K., around 50 percent of businesses have put things in place while the other half have held fire—and you can’t really blame them,” said CIPS economist John Glen. “For companies looking down the barrel of significant investment for Brexit, when do you press the ‘go’ button [if] that investment could come to nothing?”

 

What’s the Good News in Brexit?

 

Major developments such as Brexit create winners as well as losers. For example, it has been a boon for lawyers, consultants, and customs brokers, Bloomberg reported.16

 

Among the benefits to U.S. companies are less expensive British imports, as the pound has fallen relative to the dollar. What’s more, the U.K. government announced tariff reductions on imports into the U.K. from non-EU countries, in the event of a no-deal Brexit.17 For this and other reasons, U.S. companies could stand to add $5.3 billion in exports to the U.K., up 9 percent over current annual levels, according to the United Nations Conference on Trade and Development.18

 

Overall, “it’s a massive change and people need to plan for that, but equally this is a serious opportunity,” said Professor Richard Wilding, Chair of Supply Chain Strategy at Cranfield School of Management in the U.K. “A lot of things that have been taking place in the last 15 to 20 years may not be the most efficient way of doing things, so it gives organizations the opportunity to really reflect on the right way of doing things.”19

 

As of mid-2019, “businesses are in a better state of readiness,” according to Tom Woodham, a Digital Supply Chain Leader at PwC.20 And, “the good news is that Brexit’s disruption will only be felt temporarily in the transition period,” said Elham Mafi-Kreft is an Associate Professor of Business Economics at Indiana University. “Eventually U.S. companies will get to a new normal of doing business with the EU.”21

 

The

Takeaway:

U.S., U.K., and EU businesses have taken many steps to minimize Brexit’s effect on their business, as elaborated in recent earnings calls, surveys, and other forums. Companies can learn from each others’ strategies and tactics as they await definitive political decisions on the U.K.’s exit from the EU.

Karen Lynch - The Author

The Author

Karen Lynch

Karen Lynch is a journalist who has covered global business, technology and policy in New York, Paris and Washington, DC, for more than 30 years. Karen also is a principal at Content Marketing Partners.

Sources

1. The Transatlantic Economy 2018, American Chamber of Commerce to the European Union; http://www.amchameu.eu/sites/default/files/publications/files/transatlantic_economy_report_2018.pdf
2. “United Kingdom—Market Overview,” export.gov; https://www.export.gov/article?id=United-Kingdom-Market-Overview
3. “Stockpiling for Brexit,” S&P Global; https://www.spratings.com/documents/20184/5975398/Countdown+to+Brexit+Stockpiling+for+Brexit/919c1288-a77b-40b4-50a6-8e15bda897ef
4. “Brexit Deal’s Failure Prolongs Corporate Uncertainty,” Wall Street Journal; https://www.wsj.com/articles/brexit-deals-failure-prolongs-corporate-uncertainty-11552419237
5. “Countdown to Brexit: Financial Institutions Are Past the Point of No Return,” S&P Global; https://www.capitaliq.com/CIQDotNet/CreditResearch/RenderArticle.aspx?articleId=2111891&SctArtId=461208&from=CM&nsl_code=LIME&sourceObjectId=10729660&sourceRevId=1&fee_ind=N&exp_date=20281010-15:06:25
6. “The New Financial Brexitometer,” New Financial; https://newfinancial.org/wp-content/uploads/2019/03/2019.03-New-Financial-Brexitometer-EXT-HIGH-RES.pdf
7. “Bank of America Completes Brexit Switch to Dublin,” Reuters; https://www.reuters.com/article/us-britain-eu-bank-of-america/bank-of-america-completes-brexit-switch-to-dublin-idUSKBN1O20PD
8. “Companies Prepare for Currency Gyrations Amid Brexit Turmoil,” Wall Street Journal; https://www.wsj.com/articles/companies-prepare-for-currency-gyrations-amid-brexit-turmoil-1542308240
9. “Businesses Are Preparing for Brexit—and Bracing for the Worst,” Harvard Business Review; https://hbr.org/2019/01/businesses-are-preparing-for-brexit-and-bracing-for-the-worst
10. “Brexit,” Chartered Institute of Procurement and Supply; https://www.cips.org/en/knowledge/procurement-topics-and-skills/brexit1/brexit-surveys/
11. “What Brexit Will Cost Some of Britain’s Leading Companies,” Bloomberg; https://www.bloomberg.com/news/articles/2019-04-12/what-brexit-will-cost-some-of-britain-s-leading-companies
12. “Grow Global: How to Find and Select the Best Experts to Help Your Business Grow Globally,” American Express; https://www.eventa.us/events/killeen-tx/digital-mentoring-by-american-express
13. “Migration and Development Brief 28,” World Bank; https://www.knomad.org/sites/default/files/2017-12/Migration%20and%20Development%20Report%2012-14-17%20web.pdf
14. “No-deal Brexit Plans Reveal Worrying Outlook for Small Importers and Exporters,” Business Advice; https://businessadvice.co.uk/supply-chain/international/no-deal-brexit-importers-exporters-trade/
15. “More Than a Million U.K. Small Businesses See Brexit as Major Obstacle to Success,” The Conversation; https://theconversation.com/more-than-a-million-uk-small-businesses-see-brexit-as-major-obstacle-to-success-114518
16. “What Brexit Will Cost Some of Britain’s Leading Companies,” Bloomberg; https://www.bloomberg.com/news/articles/2019-04-12/what-brexit-will-cost-some-of-britain-s-leading-companies
17. Tax Information and Impact Note for the U.K. Tariff 2019,” HM Revenue & Customs; https://www.gov.uk/government/publications/tax-information-and-impact-note-for-the-uk-tariff-2019/tax-information-and-impact-note-for-the-uk-tariff-2019--2#summary-of-impacts
18. “Brexit. Implications for Developing Countries,” United Nations Conference on Trade and Development; https://unctad.org/en/PublicationsLibrary/ser-rp-2019d3_en.pdf
19. “Brexit: Where Now for Business?” DHL; http://www.delivered.dhl.com/en/articles/2016/11/brexit-where-now-for-business.html
20. “Brexit: Three Years On,” Chartered Institute of Procurement and Supply; https://www.cips.org/en/supply-management/analysis/2019/may/brexit-the-preparation/
21. “Brexit: What It Means for U.S. Banks, Car Makers, Drug Companies,” MarketWatch; https://www.marketwatch.com/story/brexit-what-it-means-for-us-banks-car-makers-drug-companies-2019-04-10

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