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Will Brexit mark the end of “just in time” for industrials? A supply chain dilemma

Will Brexit mark the end of “just in time” for industrials? A supply chain dilemma

  • United Kingdom
  • Diversified industrials

09-03-2018

For the last 40 years, companies operating across the UK and the EU have managed their supply chains relatively straightforwardly under the free movement of labour, goods, services and capital with zero tariffs and minimal administration.

But what about Brexit?

The Government has been vocal about the possibilities of a “hard Brexit” whereby the UK may leave the single market with no other deal being reached. Should this arise, there are a number of alternative worlds that the UK may find itself in – including reverting to World Trade Organisation terms – which could lead to high tariffs on exports and imports being imposed.

What is the risk to business if a hard Brexit is implemented?

Post-Brexit UK/EU trade has the potential to impact on supply chains in a number of ways, such as exposure to tariffs, foreign exchange rates, differing market regulations and tax policies. This could result in profit margins being squeezed and delays in supply as a result of increased paperwork and bureaucracy.

The potential impact of stockpiles of goods being delayed for hours or even days as a result of HM Customs and Excise checks is devastating, and must not be ignored.

Businesses will need to start thinking about how they might protect against these risks, given the future uncertainty over Brexit; particularly where they operate on a “just in time” or sole supplier basis, which is the case for many of our diversified industrial sector clients. It may seem obvious, with less flexibility and available options, the effect on continuity of manufacturing could be dramatic.

How the industrial market is reacting to Brexit

Take for example the recent statement from Airbus, one of the UK’s biggest manufacturing employers, warning that it may have to stockpile parts to operate smoothly once the UK leaves the EU. This is of course one option, which comes at considerable cost.

Other risk management options may be to look at alternative suppliers either in jurisdictions outside of the EU or in the UK, which McLaren has adopted in the automotive space.

Industrials could also look to split their supply chains with two distinct and separate operations in the UK and EU to help in balancing risk, although this is likely to be expensive and reduce efficiencies in the process.

Finally, as we’ve already seen with Jaguar Land Rover, manufacturers may even delay future investment until there is more certainty over what the future holds. JLR recently announced that it will suspend plans to manufacturer electric cars in the UK until it has more information on the likely trading agreements that will be in place post-Brexit, painting a worrying picture for the future of automotive innovation in the UK.

What does the post-Brexit future hold for industrials?

The next phase in our journey towards leaving the EU is likely to be turbulent, and businesses should not wait to see what happens, but meticulously plan now. Two action points that businesses should be investing in immediately, if they haven’t already done so, are:

1. Develop a strategy for each of the likely potential outcomes post-Brexit and take care with long-term commitments.

2. Ensure that contractual positions are protected to allow for flexibility, depending upon which way Brexit may take us.

Eversheds Sutherland is ranked in tier 1 for its Brexit work in Legal 500. We are actively working with our clients to help consider and protect against risks post-Brexit. If you have any questions or concerns about the impact of Brexit on your industrial supply chain, or in any other manner, please contact us below. 

 

For more information contact

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