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Brexit - Deal or No Deal. Has the day of reckoning arrived for the UK Manufacturing sector?

The services sector of the UK economy seems to have taken a very low profile, and pragmatic approach, to the pending question of whether the UK exits the EU under a negotiated deal or crashes out with no transition arrangement under World Trade Organisation (WTO) rules.

It is not widely known that the Bank of England, together with some key City interest groups, have struck a fundamental agreement with The European Securities and Markets Authority, in addition to a similar deal with the European Commission which was concluded in December 2018. The upshot of these deals is that “Deal or No Deal Brexit”, whether it happens or not, will not impact the City. This extremely under-publicised and underplayed result means that London becomes a “free port” as the regulators have issued permissions, via licences, to clearing houses and European banks, to disregard EU regulation, and to continue to trade on London derivative platforms. It is astounding that the financial services sector, which makes up the lion’s share of UK GDP, has managed a fundamental and far reaching arrangement that so far seems to have eluded the UK products sector!

Britain’s car manufacturing sector is in decline with impending closures set to take place at Honda in Swindon. Even though this is an underperforming plant, and no doubt the closure would have taken place sooner rather than later, there are still other players in this sector who have repeatedly stated that the continuing malaise and uncertainty that has dogged the Brexit process is not making the future of this industry in UK any easier. Indeed, Johan van Zyl, President and CEO of Toyota Motor Europe and Peter Schwarzenbauer, board member at BMW, have stated that the continued operations of these major players in the UK is not a certainty. We all know that Nissan has recently decided that production of future X Trail models will not be manufactured in the UK as previously promised, but now will be located in Japan. Certainly, a large proportion of the challenges that are facing the UK car manufacturing industry are due to the demise of diesel engines and the need for cleaner emission electric motors and therefore many of the decisions above could have taken place anyway. Brexit and all the uncertainty surrounding the process, I believe, has brought forward or accelerated these decisions exactly at the time that the overall global economy is showing signs of a slowdown. The China-US trade war is not helping global trade and combined with a significant decline in Chinese demand due to the cooling of the Chinese economy has meant that demand for products has distinctly softened.

Many manufacturers are stockpiling key items to cater for the “no deal” Brexit scenario, which means that many small and medium-sized businesses have diverted funds earmarked for investment into working capital, thus exacerbating the already low funds spent on growth and investment. Stockpiling has also meant that premises that could have been used for new ventures have been taken up to house stockpiled inventory.

The manufacturing sector in the UK is, according to official sources, in recession and is by far the worst affected sector of the UK economy. The decline in investment in this sector has left manufacturing in a weak position to boost productivity and increase wage growth. The messages from the automotive industry regarding the continuation of car production in the UK should leave the government in no doubt that failure to secure an orderly Brexit will plunge this sector into decline with further plant closures and job losses.

The aerospace and defence manufacturing industry is also bracing itself for a “no deal” Brexit. The sector estimates that a no deal will cost billions in extra costs and the impact on some goods is as high as 38% of sales value, which on any contract is unsustainable, particularly for those negotiated before the Brexit referendum with predetermined margins. Customs checks alone would cost an additional £1.5bn per year. Tariffs in this sector are less of an issue as finished aerospace products are free of levies, however import VAT and tariffs on generic parts and raw materials will add unwanted costs. Indeed we are all aware of the warnings issued by Airbus that a “no deal” Brexit would cost £875m per week and would cause the business to leave the UK. This is a sector that employs 260,000 in the UK and therefore the fallout in the event of “No Deal” Brexit would be profound.

The above challenges are also replicated in the UK pharmaceutical sector where two thirds of medicines used in the UK are imported from the EU, of these 90% come through Dover and Folkestone, which will clearly be pinch points in the event of a "no deal" Brexit. AstraZeneca, the UK’s second largest drug manufacturer has halted all manufacturing investments at its Macclesfield site. Other drug manufacturers such as Novartis and Pfizer have stated that they will be closing manufacturing and packaging sites in the UK by 2020. Senior executives in these major companies have issued the stark warnings to the UK government that no business can make strategic decisions whilst there is the continuing climate of uncertainty in the UK economy.

With all these economic warnings emanating from UK industry regarding the outcomes resulting from a “no deal" exit from the EU, will UK MP’s heed these warnings when they vote on the current exit arrangements in Parliament this evening? Time will tell.

Should you wish to discuss planning opportunities and managing your manufacturing business despite of Brexit, please contact, Rodney Sutton, Partner and Head of Manufacturing here or on +44 (0)330 124 1399.

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