A week on; what should manufacturers be thinking in relation to Brexit?
04 July 2016
The past week has proven one thing for UK manufacturers; the only certainty is uncertainty.
In the short term, opportunities rather than threats may now exist due to the movement in exchange rates. UK exports have become significantly cheaper and the competitive advantage this offers is something manufacturers should be assessing and looking to capitalise on.
Alongside this improved export competitiveness, there may be opportunities for manufacturers to gain an increased share of UK domestic markets. The increased cost of imports means many UK based customers could well be looking for ways in which they can increase the percentage of their supplies from manufacturing facilities located in the UK.
Offsetting these near term opportunities is the threat of a slowdown in the UK economy as a result of uncertainty. A slowdown or reduction in trade could affect UK manufacturers’ ability to invest in productivity and innovation. On the other hand, it could create a catalyst for them to become earlier adopters of the new manufacturing techniques and new business models offered by Industry 4.0 – the fourth industrial revolution, in order to create new business models and gain competitive advantage.
In the medium term, the outcome of the negotiations surrounding Brexit will ultimately determine the changes manufacturers need to adapt to. The EU is currently the UK’s biggest trade partner with more than 50% exports going to the EU. Four of the UK’s six biggest export partners are EU Member States. However, whilst the EU is an important market for UK based manufacturers, many have expanded their business into regions elsewhere in the world, in particular North America and China and it may be that some decide to increase their focus and investment in these regions.
It would be prudent to start considering the potential implications of the various Brexit scenarios and developing contingency plans. However, taking any direction action now in contemplation of any one particular outcome is probably a step too far and runs the risk of manufacturers placing themselves at a significant disadvantage in the future. What is clear, is that if UK manufacturers wish to continue to do business with the EU under any scenario they will almost certainly need to continue to comply with EU regulations in order to do so.
The potential for increased costs in the form of tariffs means UK manufacturers should also start to analyse how they can address the issue of cost management. Manufacturers may be forced to drive significant cost reduction programmes through their business in order to counter an increases in tariffs or further movements in exchange rates.
Foreign Direct Investment
Foreign Direct investment has been an area most commented on both before and after the vote. A significant amount of FDI has flowed into the UK over the past decade from companies who have seen the UK as both an attractive market in its own right, but also a strong platform from which to take advantage of the wider European market. This investment has been both in the form of greenfield and mergers and acquisitions. In the short term it is difficult for manufacturers to make major changes to their production footprint. However, manufacturers are unlikely to make any significant new investments to their UK manufacturing facilities pending any outcome of future trade agreements with the EU.
It is also worth considering the potential for UK manufacturers to increase their focus on the potential to establish new operations in overseas markets in order to either continue to benefit from free market access or to provide appropriate currency balance across their operations. This will require them to potentially resize their UK operations and transform their business model to reflect a new operating model.
Access to talent
We are also hearing clients comment on the ability to continue to access engineering talent and skills from across the EU. Continued access to engineering skills from both Europe and the rest of the world will be a key concern for the manufacturing industry. Restrictions on the free movement of people could have implications for manufacturers seeking access to European engineering skills and manufacturing talent.
Whatever the short or medium term future, UK manufacturers have, throughout history, proven themselves to be resilient, agile and able to adapt their business to changes in market structures. I’m confident UK manufacturers will do the same again. I expect to see a short term focus on cost and liquidity management and I hope to see manufacturers accelerate their focus on the new business models and opportunities Industry 4.0 offers. This will ensure they not only protect their existing businesses, but also open up new revenue streams and enhance their competitive position through offering new business models.