Richard North, 16/05/2017  

In an intelligent piece which goes to prove that not all legacy media articles are written by juvenile imbeciles, Marcus Leroux in The Times writes a disturbing account of how "almost half" of European businesses with British suppliers are looking for replacements elsewhere in the EU.

This stands to reason when one looks at the potential problems associated with Brexit, and the quite obvious lack of grasp displayed by politicians as to the consequences of dropping out of the Single Market.

The original information comes from the Chartered Institute of Procurement and Supply (CIPS) which has surveyed more than 2,000 supply chain managers, finding that the "separation from Europe is already well under way".

Understandably, since the UK Government is not giving credible assurances that post-Brexit supply chains will be maintained, 46 percent of managers are expecting a greater proportion of the supply chain to be sourced from outside Britain. Some 28 percent say that they intend to source all their supplies from the mainland.

Putting this in focus, Gerry Walsh, the group CEO of CIPS, says: "Diplomats either side of the table have barely decided on their negotiating principles and already supply chain managers are deep into their preparations for Brexit". He adds: "Both European and British businesses will be ready to reroute their supply chains in 2019 if trade negotiations fail, and are not wasting time to see what happens".

Quite simply, managers cannot afford to wait to see what the Article 50 settlement brings before taking action. It would irresponsible of them to do so. Nor can they rely on bland, non-specific assurances from the politicians about getting the "best deal". They must take whatever action is necessary to protect their operations from the potential impact of tariffs, customs procedures and regulatory hurdles.

And this is what we are seeing - insurance against a "hard Brexit", with CIPS saying that European businesses are in the process of "reshoring" their supply chains within the Single Market. On this side of the channel, 32 percent of businesses which currently rely on suppliers in the EU-27 are looking for replacements within the UK.

Effectively, this demonstrates a lack of confidence in the Government's Brexit strategy, which is hardly surprising. Beyond generalities, Mrs May and her ministerial team have nothing to offer, and are not been able to give any bankable assurances.

Even then, businesses do not seem fully to have grasped the nature of the challenges facing them. Rather than focusing on the extensive non-tariff barriers that will hinder their operations, both mainland European and British supply chain managers believe that the main priority for negotiations should be keeping tariffs and quotas to a minimum.

However, even here, they are expecting negotiators to face serious hurdles. Thirty-nine percent of supply managers think the UK has a weak negotiating position, 36 percent believe there is a lack of time and 33 percent are concerned that there is a dearth of supply chain expertise and knowledge in the UK upon which to draw.

Pessimism is also apparent when it comes to managing the financial costs of Brexit. More than a third (36 percent) of managers plan to respond by pushing supplier costs lower, but 11 percent felt that parts of their operations would no longer be viable. Worldwide, 67 percent of respondents felt that the uncertainty surrounding international trade agreements were making long-term plans difficult to confirm.

Above all else, it seems that uncertainty is the killer. In the absence of clear direction from the politicians, businesses cannot afford to sit back and hope for a favourable outcome. Contingency planning is essential. What appears to be the case from this survey, though, is managers are working on a worst case scenario basis, and are making arrangements accordingly.

This means that businesses are disregarding promises of securing a "good deal" at the end of the negotiations. As with the banks such as J P Morgan, which are already making alternative provisions, businesses have to make their decisions before final agreements are reached, and before the nature of any deal is known.

Without clarity and certainty of direction, they have to assume the worst. Perversely, therefore, a sub-optimal but predictable outcome would have been better than the prospect of a more favourable deal coming at the end of a protracted period of negotiation, the nature of which is unknown and where there are no guarantees of delivery.

This, then, points to a major flaw in the Government's Brexit response. Mrs May's promise of (unspecified) jam tomorrow, in the form of a "bold and ambitious" free trade agreement, might in the long run produce desirable results. But since no one can be sure, she would have been better advised to go for a modest but more predictable outcome.

As it stands, the penalties to which businesses are exposed could be so severe that they could threaten their survival. Businesses must, therefore, take pre-emptive measures to safeguard themselves, even if those measures prove unnecessary in the longer term.

Without putting too fine a point on it, had Mrs May kept to her original promise of continued participation in the Single Market, and made determined efforts to pursue the Efta/EEA option, uncertainty would be less of an issue.

Rather than helping, though, rhetoric from the likes of David Davis, giving every appearance of relishing the prospect of battles to come, is adding to the sense that we are venturing into unknown territory. That will remain until we are able to see the final outcome of the negotiations.

Between then and now, the indications are that other businesses will follow the example of supply chain managers and the trail blazed by the banks. Airline companies are already setting up satellite operating companies abroad, haulage companies may well have to do the same in order to continue enjoying cabotage privileges, and chemical and pharmaceutical manufacturers will almost certainly have to relocate some of their operations.

What is currently a trickle could, over the next year or so swell to become a torrent, as firms decide that relying on political assurances is simply too great a risk. From being an offshore hub serving the whole of mainland Europe, the UK could quickly revert to the status of an isolated island, serviced from the mainland.

Where the greatest concern should lie is that many of the business decisions taken over the next year will have long-term effects and could be hard to reverse. To avoid long-term damage, the Government must make business confidence its absolute priority, to which effect it needs to be far more open about its intentions.

If Government itself cannot come clean, it can have no cause for complaint if business makes its own decisions in its own best interests.

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