Procurement Leaders

Brexit and procurement — for once the word shock is correct

Brexit and procurement

The unexpected decision by the British electorate to vote for the UK to leave the European Union (EU) triggered immediate and sharp changes in both financial markets and political leadership.

 

Those will subside over time but for businesses and their procurement executives Brexit poses serious medium and long term threats — as well as opportunities — from the economic shifts that will follow.

 

The first of these is posed by the sharp fall in sterling’s exchange rate. The 30-year record drop in the pound against the dollar grabbed the headlines, but that may only be the start. HSBC is one of many banks to predict that sterling will fall to $1.20, marking a 20% depreciation from its recent $1.50 high while the euro could hit 92p (from 77p before the vote).

 

British firms will pay more from imported inputs and especially for commodities such as oil that are priced in dollars.

 

The second impact flows from that, which is a recalibration of relationships between UK firms and overseas suppliers. UK firms will be tempted to search for domestic suppliers as import costs rise.

 

If the UK’s economy will be 6% smaller by 2020 than it would have been without Brexit, as the Economist Intelligence Unit predicts, then suppliers might find lower demand from the UK, which is currently Europe’s second largest economy, and so they may need to find innovative ways of maintaining their contracts.

 

Third, there will be a huge amount of uncertainty over the long-term trading relationship both between the UK and the rest of the EU and the UK and other countries if it is no longer part of pan-EU agreements. Outside the EU’s free trade agreement, both importers and exporters would be hit by the burden of higher tariffs. The UK will be free to negotiate its own free trade deals but after four decades of delegating that job to Brussels, it simply does not have a supply of negotiators equipped to bargain with the likes of the US, China and India.

 

Even if Britain can muster the skills, signing each new trade agreement could take up to seven years, if Canada’s experience is followed. As US President Barack Obama told the BBC during the referendum campaign, Britain outside the EU would find itself “at the back of the queue”.

 

Fourth, British companies such as retailers that have major import demand will face more complex supply chains.

 

They will also have to cope with regulatory divergence and changes in rules such as those governing the administration of imports. And all this will come as their domestic sales are hit by a slump in confidence among nervous consumers.

 

Fifth, although not directly a procurement issue, if the new UK government succeeds in reducing net immigration to “tens of thousands” a year from the current 330,000 this will almost certainly feed through to higher costs for goods produced with low-cost labour as wages rise to attract workers to fill the gaps left by migrants.

 

Finally, the exit of the UK from the EU may lead to more borders being erected within Europe at a time when countries have started building physical fences to stem the flow of refugees.

 

Borders and customs checks within the island of Ireland and between Scotland and England and the end of the Le Touquet treaty that puts the UK/France border in Calais threatens to add new and unnecessary supply chain hurdles.

 

The storm clouds gathering over businesses in the UK and the rest of Europe look very dark. But there are small silver linings. European buyers and British suppliers may benefit from a cheaper pound and the 5% fall in commodity prices in the aftermath of the vote, which will be a boon for some.

 

If Brexit does happen in 2019 or later it will be an economic shock but — as is the case in any turbulent times— there will some firms nimble enough to take advantage.

 

This article is a piece of independent journalism, written by an experienced journalist and commissioned exclusively by Procurement Leaders.

Procurement Leaders Logo

© Sigaria Ltd and its contributors. All rights reserved. www.sigaria.com

Sigaria accepts no responsibility for advice or information contained on this site although every effort is made to ensure its accuracy. Users are advised to seek independent advice from qualified persons before acting upon any such information.