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29 January 2019 / article

Brexit Blog 3: Market Reconnaissance

Brexit – what is the competition doing?

In this third Brexit blog, we will take an inspirational tour d’horizon of how (major) European companies are preparing for whatever type of Brexit will happen.

Two weeks after the historic vote of the British House of Commons where the proposed withdrawal agreement with the EU was rejected, clarity is yet to be provided on the future of Brexit. Given this uncertainty many major European companies - in various industries - have initiated a preparedness package to be ready (and maintain operational) regardless of the Brexit route. These preparations can help other companies to prepare (without having to reinvent the wheel).

Relocation

The biggest step companies can take is relocating from the UK to the ‘continent’. Although a Brexit on 29 March 2019 as such is still topic of debate (as some people advocate a postponement of the Brexit), some companies already have announced moving (part of) their operations from the UK. This can either be the separation of the European operation into a UK company and another company in a EU Member State (which was done for example by AIG), but also the incorporation of a separate ‘continental’ subsidiary of a British company for EU law-compliance purposes. BT and Dell have for example been ‘shopping’ for data protection bases on the continent and other companies have indicated their European headquarters will be moved to cities such as Amsterdam (Sony and Panasonic), Paris (Chubb) or Dublin (Steris and Pantheon). Also allocation of funds may shift geographically, where companies (such as pharmaceutical companies AstraZeneca and GlaxoSmithKline) shift funding of R&D facilities to EU-based facilities (at the expense of facilities in the UK).

Relocation (partly or as a whole) can be useful or necessary when intra-company transactions cross the Channel (such as ingredients, components or data). As these transactions might even trigger customs duties and trade tariffs, it could even be considered to cease or relocate all of the facilities of a company from the UK (or from the continent). Such radical steps have been considered and announced by Airbus and some car manufacturers (such as Ford and BMW).

Operational amendments

Any Brexit will lead to operational amendments for most companies. In a no deal/hard Brexit custom duties will apply and supply chain disruptions may appear (as the borders with the UK are not equipped any more for mass checks and controls). Delays of up to two days are expected, which can be considered material in a just-in-time supply chain (for example Toyota keeps only about 4 hours’ worth of stock of some parts in its plants in the UK). In order to smoothly continue production lines in the short and long term, preparations are being made throughout the manufacturing and retail industries.

In the British automotive industry the consequences are most dire, as demand is decreasing in the UK and Brexit has serious effects. Although several carmakers have production facilities in the UK, no car leaves the factory without components crossing the Channel at least once. This has led to Vauxhaul, Toyota, BMW and Jaguar Land Rover considering (or already deciding) to close one or more of their UK-based facilities. Also certain companies halted expansion plans for UK-operations (or thrown out), such as physically for a paper mill (by Smurfit Kappa) and financially (by Telefonica, halting their proposed ICO of subsidiary O2).

In the short term also operational shifts are made, for example where annual or periodical shutdowns for maintenance or repairs are being moved to 29 March 2019. Also companies are making administrative amendments to their organizations, amongst others educating their employees to fill in customs forms and increasing regulatory affairs departments. However, the most short-term action relates to companies stockpiling ahead of the Brexit-date to ensure that operations will continue.

Stockpiling

As a sudden reviving of borders between the EU and the UK will lead to trade tariffs and delays, one of the easiest short term solutions would be to stock up on supplies to last until the Brexit-skies clear up. In this respect companies already have been seriously busy with stockpiling parts, ingredients and storage space. This in fact has already led to an increase of warehouse capacity in the UK being filled up to 94% (appr. 10% more than usual).

Especially companies in the food and beverages, pharmaceutical and car industries have been storing massive amounts of supplies. Food and beverages giants such as Heineken, Associated British Foods and Mondelez have been stockpiling months’ worth of ingredients and supplies. Also Merck/MSD and Novartis have been planning to store of as much as six month of supply for the British operations. Although stockpiling is a quick fix for the upcoming uncertainty, it brings material extra costs such as storage costs, transport, insurance and write-offs.

To sum up, throughout corporate Europe, companies in all industries are taking appropriate measures in order to be prepared for Brexit as it may come. Partly these plans are contingency plans for an as smooth as possible transition, but mostly companies already look further into the future and take decisive measures to align operations with the expected post-Brexit reality.

If you have questions about the consequences of Brexit for your company, please feel free to contact our Regulatory-department.


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