Initial thoughts on the impact of Brexit on the UK manufacturing sector

The referendum and resulting Brexit raises significant challenges and potentially opportunities for all UK manufacturing companies.

The EU is Britain’s largest and closest trading partner, Member States such as Germany provide some of our largest export markets and we rely on the EU for over half of the UK’s annual exports.

It is fundamental that the UK will need to maintain access to the single market however on what terms and whether favourable ones can be agreed remains to be established. Alternatives such as those in place with Norway and Switzerland, or the mention of ‘Norway plus’, are models that may not be as favourable, or possibly palatable, as those we enjoy today.

The sector is heavily regulated and maintaining trading relationships with Member States can only be maintained within a regulatory regime that complies with EU standards. We are yet to see if a separate UK regime will place even higher requirements, and potentially added complication, on the UK manufacturing base.

At present the issue is not Brexit itself, it is dealing with the immediate aftermath of the decision, and potentially the years it may take for Brexit to become a reality. The impact on sterling has overnight made British exports cheaper for overseas buyers. However UK manufacturing will need to deal with the increased costs of purchasing from overseas suppliers. Passing these costs on will be necessary to ensure profitability and protect from margin erosion. With existing agreements this may prove difficult and we are yet to see how Sterling will perform going forward. This has been a major area of concern for a number of clients we are now working with. 

Both overseas and domestic investors in UK manufacturing businesses with an exposure to international markets will naturally have to adopt a more cautious approach to investment and capital expenditure, almost certainly until the fall out has subsided and the position becomes clearer.

Businesses who have done limited planning will be reviewing their options and developing strategies that offer flexibility in response to the changing landscape. Some may defer existing investment plans, consider the logistical requirements of moving production to other facilities outside of the UK over time or the direct investment in other EU markets to facilitate relocation.   

Such caution is wholly understandable as maintaining access to the single market on favourable terms remains paramount. The increased uncertainty has undermined the stability that manufacturing businesses rely upon and only in the longer term will we know whether the sector benefits from  being part of an independent state with the ability to negotiate its own trading relationships with countries beyond the EU trading bloc.

 

Author – Brian Burke, Director – Quantuma