U.K. Firms Get Ready for a No-Deal Brexit With Time Running Out
(Bloomberg) -- However much Prime Minister Boris Johnson says he will be able to arrange a trade deal with the European Union by the year-end, firms in Britain are already bracing themselves for the possibility he won’t.
Renold Plc, a Manchester-based maker of vehicle chains and gearboxes, is among them. It’s planning to fast-track deliveries to customers in the coming months to ensure they aren’t caught up in any potential border disruption due to Brexit in January, according to Chief Executive Officer Robert Purcell.
“We’re going to assume it’s going to be difficult,” Purcell said in a phone interview. “You can never count on the way you think it’s going to go.”
Johnson is still optimistic that a deal will be done with the EU, despite months of stumbling trade talks. But even if negotiations do make progress in the weeks ahead -- with extra sessions agreed for July and August -- firms are having to make hard choices now to reduce the risks to their operations.
For manufacturers, this includes rebuilding stockpiles. Luxury automaker Bentley, the U.K.-based unit of Germany’s Volkswagen AG, has doubled its warehousing capacity and is carrying between five and 10 days of parts compared with around two previously, Chief Executive Officer Adrian Hallmark said Tuesday. Bentley imports about 45% of the parts that go into its cars, with 90% of those coming from continental Europe.
“It has cost us millions per year,” he said, referring to the stockpiling expense. “We see a significant hit from a hard Brexit.”
Fellow carmaker Vauxhall, owned by Groupe PSA, has major U.K. production facilities in Luton and Ellesmere Port and is preparing for both a deal and a no-deal scenario.
It’s preparing to file new customs documentation for when the U.K. leaves the EU’s customs union, according to Helen Foord, the company’s head of government relations. It’s also getting ready to submit extra paperwork to prove so-called rules of origin, showing the eligibility of its cars to receive tariff-free treatment under any potential trade agreement.
Yet the risk of a 10% tariff on the export of cars to the EU from Britain under a no-deal scenario, which is the duty that would apply without a trade accord, means it is postponing a final call on expanding in the U.K.
“It’s no secret that we are due to make an investment at our plant in Ellesmere Port,” Foord said to a parliamentary committee earlier this month. “Until we have the clarity over what Brexit looks like, then we will make a decision.”
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The U.K. and the EU are hoping to have a trade deal hammered out by October, at the latest, because the bloc needs time to receive necessary approvals from member nations before the Jan. 1 exit date. However, the longer the negotiations go on, the more costs businesses will have to incur to protect themselves from the cliff edge of no deal.
The top concerns for businesses remain tariffs and disruption to the flow of goods crossing the U.K.-EU border. Without a free-trade agreement, Britain and the bloc will default to trade on World Trade Organization terms, which can impose steep levies such as an 8% tariff on chocolate and 30% on orange juice.
At the same time, the government is worried that businesses won’t be ready for the wave of new post-Brexit paperwork, which will lead to trucks being stopped at ports. Earlier this month, Cabinet Office minister Michael Gove said he was concerned by the lack of preparatory action taken by firms, and the government is planning a “shock and awe” information campaign in the second half of this year to jolt companies into action.
Many companies are still reluctant to conduct any major reorganizations of supply chains to avoid tariffs while there is still hope of a U.K.-EU trade deal, said Stephen Adams, senior director at Global Counsel, which advises firms on their Brexit planning.
“Strategy teams are reluctant to bake into their spreadsheets the worst case scenario,” he said. “That can create a whole cascade of choices that are hard and costly to reverse.”
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