Deal or no deal: Companies prep for Brexit

While the U.K. government and the European Commission continue to thrash out what kind of Brexit outcome might be acceptable to at least themselves, major companies are already preparing for the worst-case scenario of a “no deal” exit from the European Union (EU).

The lack of enthusiasm from the European Commission over British Prime Minister Theresa May’s proposals published in July has led to heightened concerns that the U.K.’s split from the European Union will not be a harmonious one, and that time is against both parties to cobble together a satisfactory agreement that works in practice.

Business groups and industry bodies like the Confederation of British Industry (CBI) and the Association of British Insurers (ABI) have long voiced their concerns about the direction in which the Brexit negotiations should go and have overwhelmingly spoken out in favour of as soft a Brexit as possible to ensure continuity of service under broadly similar regulations.

But with just eight months to go until the European Union loses one of its largest members and the United Kingdom goes it alone, some major corporates have started to drop hints about their contingency planning.

Pharmaceutical giant AstraZeneca, which produces its medicines in the United Kingdom, has recently said that it is preparing for the hardest-Brexit scenario—that of “no deal.” The company has warned that patients in the European Union may not be able to receive vital medicines from the United Kingdom because of potentially new customs rules or controls that would delay shipments. The company says that it aims to test medicines in both the U.K. and the EU to ensure they can cross the border in all Brexit scenarios.

AstraZeneca has spent around £40m (U.S. $46 million) on the effort to deal with Brexit. Last month, Pascal Soriot, the company’s chief executive, said that it was increasing its stockpiles of medicine in the United Kingdom and Europe in case the no-deal Brexit scenario that government ministers have been talking up becomes a reality. The company says that it will warehouse four months’ worth of drugs in the run-up to “Brexit day” on 29 March 2019.

Eli Lilly & Co. is also preparing for a “worst case” hard Brexit given the “ongoing uncertainties in the negotiations,” according to a company spokeswoman. The company is one of the U.K.’s biggest suppliers of insulin, but its production sites are in France and Italy. Lilly follows the likes of Novartis and Sanofi, also an important insulin supplier to the United Kingdom, in making contingency plans in the event of a no-deal Brexit, which the National Health Service (NHS), the country’s main healthcare provider, is also preparing for. In July Health Secretary Matt Hancock told Parliament’s Health Select Committee that the NHS is already preparing to stockpile medicines and blood products.

The motor industry is also prepping for a no-deal or hard Brexit. German car manufacturer BMW says it is preparing to mitigate against a hard Brexit by storing parts throughout the United Kingdom. Like other automotive firms, BMW operates a “just-in-time” management system, which means that it holds relatively small numbers of components at its manufacturing plants as a way of keeping down storage costs. However, this means that its operations are dependent on a smooth and regular flow of parts, and this is set to be impacted by Brexit because new customs checks are likely to come into force as the country leaves the single market.

Brexit options and their implications

On 12 July U.K. Prime Minister Theresa May released her blueprint on how the government would like Brexit to pan out. The white paper, “The future relationship between the United Kingdom and the European Union,” attempts to retain as many of the current trade advantages that the country presently has as a EU member, but with the right to limit free movement and arrange its own trade deals with other countries.
Michel Barnier, the EU’s chief negotiator, however, immediately scotched the idea that the Commission was likely to accept May’s proposals and since then there has largely been an impasse as politicians on both sides of the Channel closed down and went on vacation. Currently, a “no deal” scenario, whereby the United Kingdom simply walks away and World Trade Organisation (WTO) rules on tariffs and trade come into play, looks increasingly possible.
But there are still several other potential Brexit outcomes (or variations of them) that could be negotiated:
1. A “soft Brexit” entails leaving the EU but staying as closely aligned to it as possible. It could keep the U.K. in the single market or the customs union or both. It could involve British compromises on free movement of people, allowing EU citizens rights to settle in the United Kingdom with access to public services and benefits.
2. A “hard Brexit” would be one in which few of the existing ties between the United Kingdom and the European Union were retained, leading to more disruption than a soft Brexit.
3. A “customs partnership” is a kind of hybrid mode that would enable trade in goods between the U.K. and Europe without the need for customs checks. The United Kingdom would collect the EU’s tariffs on goods coming from other countries on the EU’s behalf. The European Union, however, is not keen on the idea.
4. “Maximum facilitation” would mean a complete break with the EU customs regime. Instead, customs arrangements would rely on technology to minimise border checks as declaration and clearance procedures would take place in advance rather than on a physical border. However, this option may not satisfy the need for tariffs checks.
5. The “Norway model” is an arrangement in which the U.K. would allow freedom of movement of people, make a contribution to the EU budget (but smaller than it currently makes) and abide by the rulings of the European Court of Justice, in exchange for remaining in the single market.
6. The “Canada model,” meanwhile, refers to a free-trade agreement between the EU and Canada that removes lots of barriers to trade between the two, but not as many as the Norway model.
— Neil Hodge

Other car and engineering companies are stockpiling, too. Honda bosses warned earlier this year of the “unprecedented” disruption that a hard Brexit could cause, potentially adding nine days to its production time. The company has admitted that it has had to rethink its supply chain. Elsewhere, both Airbus and Rolls-Royce have warned that they could be forced to stockpile parts in order to limit the impact of delays over trade negotiations. Speaking at the Farnborough air show in July, Tom Williams, the most senior British executive at Airbus, said the prospect of damage to the pan-European manufacturer from a no-deal Brexit was “criminal.”

Financial services was one of the first industries to make contingencies to ensure that it could continue to operate smoothly within the EU once it became apparent that “passporting rights” (which allow a firm registered in the European Economic Area to do business in any other EEA country without needing further authorisation in any of those countries) were unlikely to remain in place come 2019.

Lloyds of London, for example, has set up an office in Brussels in an effort to service EU clients, while in July insurance group Chubb changed its business registration and converted to a “Societas Europaea,” which means that as a public company registered in accordance with the corporate law of the European Union rather than a particular country, it is able to redomicile to another EU jurisdiction and continue to undertake business both across the European Union and into the United Kingdom via a branch.

Other insurers may want to follow suit. A reportreleased earlier this month by law firm Kennedys has warned that a “no deal” Brexit would be “a nightmare scenario” for the insurance sector and should be avoided “at all costs.” It says that if the proposed 21-month transition period following Brexit day in March 2019 does not become legally binding this summer, firms “will be forced to make contingencies based on a hard Brexit or a no-deal outcome.”

While the forecast exodus of financial jobs from Europe’s financial centre has not exactly happened (or at least yet), jobs have moved—and continue to do so. The economy minister for the state of Hesse, where Frankfurt is situated, said in March that around 20 banks have committed to launching new European Union hubs in the city since the Brexit vote.

More are expected to follow suit—if not to Frankfurt, then to other European centres. Goldman Sachs has indicated that it is planning to double the number of staff in Frankfurt, which currently stands at 400, while JPMorgan is said to be looking for a bigger office space in Milan, where it already has around 250 staff. This month HSBC Holdings announced that it is set to move more of its European activities to Paris as the bank prepares for the U.K.'s exit from the European Union. The bank said in 2017 that it would transfer 1,000 jobs to France.

And it is not just companies based within the United Kingdom that are assessing the damage that a failure to negotiate a smooth exit from the EU could cause. Ireland, which relies heavily on trade links with its closest neighbour, says that around two-thirds (64 percent) of the Irish Food Board’s clients are “sensitive” to increased lead times with the United Kingdom following Brexit (including Northern Ireland), and warns in its “Food and Drink Supply Chain Logistics: Strategies for Success” report that delays or disruption could result in serious financial implications and damage customer relationships.