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20.11.2017Back to Blog

“Hard Brexit”: European supply chains must anticipate major changes now!

Whilst the UK government has been asked by EU Chief Negociator Michel Barnier to clarify its position within a fortnight, several signals are turning to red in Europe as a “Hard Brexit” is anticipated from talks between Britain and the EU.  

Pierre Liguori, Director of the supply chain consultancy firm, Tokema International, will explain in a series of articles in the coming weeks how Brexit could harm trade between the UK and continental Europe, create major supply chain disruptions, and impact the logistics industry in the short and long term.

June 24th, 2016: the world was stunned by the British citizens’ decision to withdraw their nation from the European Union. Businesses were suddenly immersed within a great ocean of uncertainty.

October 9th, 2017: Brexit talks resumed in Brussels whilst the British Prime Minister, Theresa May, drew up plans for “no deal” for the first time in an attempt to unblock discussions with the EU-27. May was consistent with her speech about Brexit on January 2017 when she said, “No deal is better than a bad deal”.

What’s happened? Nobody has any interest to create business disruptions when the global GDP growth is only slowly recovering to a higher level, where EU economies are achieving around 2% growth.  Britain is the second largest economy of the continent.  German exports to the UK – mainly car manufacturers – achieve a 28billion EUR surplus per year, just for illustration.

The argument over the size of the “divorce bill”, whereby the EU may ask up to 100billion EUR when the UK is committing to 20billion EUR, means that the EU Commission could make things very difficult for Britain in the coming months and years.  It could be very tough to avoid another member nation exiting the EU in the future, and the lack of unity within the British government – pro-soft against pro-hard Brexit – marks significant instability for the possibility of “no deal” when the UK becomes officially ‘out’ of the EU in March 2019. Joachim Lang, Chairman of the Federation of German Industries (BDI), recently warned German businesses to be prepared for the impact of a very hard Brexit, referring to the fact that “anything else would be naïve”.

So, what does “Hard Brexit” mean for European supply chains?

In the coming articles, we will examine key potential disruptions that are likely to arise in the coming months:

  • Probably the lesser known but the most important impact to consider is the fact that the UK will no longer be a member of the Customs Union. Trading companies usually mix the Single Market with the Customs Union, but with the implementation of new Customs and Tariff rules as from March 2019, Britain would trade under World Trade Organisation rules, creating additional time and administrative constraints on border controls. For illustration, 10,000 trucks cross the Port of Dover on a daily basis, and the average administrative time is already two minutes per truck.
  • What does “leaving the Single Market” mean in terms of trade shifts and potential supply chain networks redesign? Is trading out of the Single Market potentially a positive opportunity for Britain, as Sir James Dyson recently claimed? Britain has already clearly stated that a trade deal with the USA and with Asian countries is a top priority. If this is to be the case, manufacturers and logistics service providers must be ready for this expected change of supply chain and distribution networks.
  • We need to look at EU citizen free-circulation control vs. attraction of new talents in the logistics/warehousing industry. The UK Warehousing Association (UKWA) recently highlighted the challenge to find a skilled workforce without negatively impacting profitability levels. In addition, one of the biggest challenges faced is to attract younger workers into a demanding service sector, knowing that there is already a global talent shortage in the logistics and supply chain industry as a whole.
  • Infrastructure needs to be considered. With the expected trade shifts in the years to come, infrastructure will be a key asset to the development of port centric operations in the UK, to support trade growth with overseas markets such as the USA and Asia in the first instance. On the other hand, continental Europe is currently trying to find the benefits of Brexit: the Northern France region, for example, is promoting its logistics cluster as the closest logistics platform to the UK.

Brexit may indeed be a threat, but it may also prove to be a major opportunity for British and European logistics service providers (LSPs) and for global manufacturers who are currently running operations in Europe.  In business terms, the only way to turn a threat into an opportunity is to be ready to effect change – and to promote this change quickly.

Sharing our own customer experience, Tokema recently helped a warehousing company to reshuffle their five-year plan in order to take into account the option of a “Hard Brexit”. As this company mainly provides UK domestic and European distribution services to US-based customers, it was time to work on new solutions to offer service continuity to the European continent, and subsequently plan a robust development plan.

A manufacturing company also appointed Tokema to remodel their existing supply chain network and anticipate additional constraints due to the exit from the Customs Union. As a result, the European supply chain network was redesigned with a local warehouse that will be implemented next year in the UK in order to supply to the domestic market; no longer originating from the existing pan-European central warehouse in Benelux.

However, it is worth asking the questions that, more than a year after the Brexit vote took place, how many LSPs are already working on a “Hard Brexit” contingency plan and new expansion strategies? How many manufacturers, shippers and importers considered any potential changes to their existing flows and anticipate post-Brexit supply chain and logistics constraints?

As a reminder, the Logistics Manager’s Quarterly Trends Survey – issued just before the vote in 2016 – found that: “81.6% of respondents had no plan in the eventuality of a vote for Brexit, despite the fact that 52.2% stated that a UK exit from the European Union would have an impact on their business”.  

It’s time to change!

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