It’s the last Monday in June and as we pen this advisory commentary two major developments over these past few days are going to have a definitive long-term impact on various industry supply chains. One is the unexpected results of the referendum by voters in the United Kingdom endorsing an exit from the European Union. The other is yesterday’s formal opening of an expanded Panama Canal. Supply Chain Matters features two commentaries related to both developments. We begin with the Brexit vote.
The results of the Brexit referendum took many by surprise, including this author. On Friday, alone investors wiped away nearly $2 trillion in market value from various global equity markets in reaction to the news.
By voting to exit the EU, British voters have set off a series of events that many are describing as unprecedented. The most cited analogy seems to be- “unchartered waters and political events.” Such uncertainly not only surrounds the direct impact on the U.K., but on the EU alliance itself if other select countries take a similar course. Some fear the unwinding of Europe itself, which seems somewhat extreme at this point. However, it will add more political and governmental dimensions to this ongoing crisis, along with building pressure to accelerate Brittan’s exit to stave-off other efforts at similar separation.
Many of the implications currently reflect such uncertainty and caution. After all, the timeline of Brittan’s exit would likely span two or more years. None the less, there will be short and longer term industry supply chain impacts and various supply chain and S&OP teams need to begin thinking about and educating management on certain strategy scenarios. We view these impacts coming from specific industry, trade and transportation as well as people related dimensions.
Two major industries dominating UK based manufacturing are automotive and aerospace industry, the latter being focused primarily in commercial aircraft component manufacturing.
Two of the most dominant stakeholder brands of autos in the UK are Volkswagen and Tata Motors, The latter is currently the leading car maker in sales of various VW, Audi and Porsche branded vehicles and has a significant manufacturing presence in these brands as well as that of Bentley. For VW, the news is especially troubling given its current crisis for dealing with the financial and brand fallout stemming from the diesel emissions scandal across Europe and the United States. It adds yet another challenge to protecting its market interests. Tata Motors is the producer of Jaguar and Land Rover branded vehicles and the U.K. represents its single biggest market and source of profits. The shares of both of these manufacturers were impacted by the news of the exit EU mandate.
According to published business media reports, most global auto manufacturers seem to be collectively in reassessment mode regarding their current UK based operations. Concerns center on impacts on tariffs, uncertain currency fluctuations and the local market, as U.K. consumers themselves deal with new uncertainties and any economic consequences related to exit. According to a published report by The Wall Street Journal, registrations for new autos amounted to 18.5 percent of all European registrations last year. The WSJ cites forecasting firm data indicating that there could be as much as an $8.9 billion hit to auto OEM earnings and a nearly 14 percent decline in U.K. new car registrations in 2017. With the broader European auto industry coming off multiple years of retrenchment and downsizing as a result of the past global financial crisis, news of the UK exit, coupled with potentially other subsequent impacts, has many industry executives at-pause.
According to Wikipedia, the aerospace industry within the U.K. is the second- or third-largest national aerospace industry in the world, depending upon the method of measurement. The industry employs around 113,000 people directly and around 276,000 indirectly and has an annual turnover of around £25 billion. Domestic companies with a large presence include BAE Systems (the world’s third-largest defense contractor), Britten-Norman, Cobham, GKN, Meggitt, QinetiQ, Rolls-Royce (the world’s second-largest aircraft engine maker), and Ultra Electronics. External companies with a major presence include Boeing, Bombardier, Airbus, Finmeccanica, General Electric, Lockheed Martin, Safran and Thales Group. From our lens, the most significant company to watch will be that of Rolls Royce which was already struggling with growth and profitability challenges. Many of these providers exist in supply chain ecosystems being challenged to ramp-up production but at the same time, reduce overall costs. With such presence from many component manufacturers and actual commercial and military aircraft producers the open question is whether the reliance on a local currency and broken ties with EU trade policies will have an impact on the economics of the local industry. Only time will tell if they do.
From the independent trade and transportation lens, we had already predicted at the beginning of the year that major geopolitical developments centered on global trade agreements would present new concerns and challenges for industry supply chains. With a U.K. exit from the EU, industry supply chains need to factor another border crossing in their logistics and transportation plans, not to mention the potential for different tariffs or duties to emerge.
With major trade pacts such as the Trans Pacific Partnership (TPP) and the Transatlantic Trade Investment Partnership (T-TIP) still in ratification stages, a new unknown is entered, namely the U.K. as a separate negotiating party. With many pushing for quicker ratification because of the current anti-trade political environment, these agreements could be faced with having to factor the U.K. as an unknown until exit is achieved and new trade policies adopted, not to mention a possible change in political leadership. The implication extends to product labeling, country of origin, intellectual property protection and other unknowns at this point.
Finally there is the issue of people, both in talent attraction and retention. An advisory from CBI Insights notes- “The free movement of workers between the U.K. and the EU arguably made London into a top tech startup talent pool in all of Europe. The decision to leave the EU may cause a brain drain that could hamstring innovation in London.” Some others take issue with the notion of brain drain. However, multiple industry supply chains have already been impacted by the need for new talent and as supply chains become deeper invested in new technology needs and requirements, UK based producers, service firms and tech companies will need to assure that workers will find the U.K. economically and workplace attractive.
Brexit has ongoing implications beyond the U.K. that could conceivably impact other geographic regions, specific countries and industries. We advise supply chain and line-of-business teams to take on a precautionary approach towards any impacts brought about by Brittan’s exit from the EU. Rather than alarm, now is the time for active supply chain modeling and scenario planning to advise senior management of various business or financial implications, if any? Clearly, with overall global supply chain activity levels already trending toward contraction, and with this new politically active and vocal electorate, the global economy and global markets are becoming less uncertain. This is a time of constant strategy awareness and attention to needs for contingency planning with added visibility to ongoing global events. We highly recommend that industry teams be vested in market and industry intelligence, supply chain risk mitigation and technology that brings added intelligence and insights to both customer-facing and supply-facing operational, financial and global trends.
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