One step at a time for UK SME tied to Europe
Britain, over the ages, has thrived as an outward economy. From the first and second centuries when Roman Cantiacorum (modern day Canterbury) exported agricultural products, oysters and metals to the continent right up to today when almost 200,000 businesses trade with the EU*, this island has always been a hive for European commerce.
In more recent times, over perhaps the past 50 years, many foreign entrepreneurs have made the UK their business base, attracted by good governance, tried and tested common law and modest taxes. Back in 2014 the FT estimated that one in seven new companies in the UK were set up by foreign entrepreneurs. This is unlikely to ever change – The UK will remain open for business and a world leader in international trade for all our lifetimes.
However, we are clearly in the midst of significant political change with departure from the EU now well underway. The EU accounts for almost 60% of UK SME exports and while the opportunity to forge new independent trade deals with non-EU countries will create opportunities 5, 10 or even 20 years down the line, the immediate few years will be an uncomfortable adjustment for some companies.
After a fair jig of political dancing it now looks almost certain that the UK will leave the customs union and single market but that the future relationship will be reasonably amicable and consequently, relatively open. It is likely that UK companies will pay some additional costs on some of their imports and have their goods and services, particularly those in politically sensitive industry, subject to EU tariffs. With some fairly blunt assumptions I suspect segments of Agriculture/food processing, financial Services and luxury/fashion will be the sectors that take pain. This will be elaborated on in another blog post.
Away from trade, the other big concern being highlighted by the media is access to talent. With historical free movement of EU nationals, an unrivalled education system, and hubs of industry success (the ‘City’ of London, Silicon round-about, Thames valley pharma, the defence industry, high end fashion), the UK has traditionally be able to attract some of the very best talent from Europe. I don’t believe the top end of the labour market will face issues here as Theresa May’s government appear to recognise the importance of this human flow. The recent announcement securing the residency of existing EU nationals was certainly positive. The problems are more likely to be suffered by companies with lower skilled workers from the EU.
Another issue for UK SME arising from our exit is the weakness of sterling and the consequently higher import prices that feed into the supply chain. Since Britain decided to leave the EU, the pound has substantially weakened against all major currency pairs. Of course there is a benefit to exporters but importers have seen a fall of 20% in their purchasing power from end of 2015.
Another element of damage from Brexit often not talked about, is the negative PR spin and unpopularity effect that been born from our decision to walk away from the EU (Which rather unfairly is being portrayed by European media and politics of disgruntled arrogance).
So what are UK SME to do? How does the Europe dependent SME prepare?
Some ideas below to consider.. There are no easy solutions; the strategy has to consider every option and find the right cost-effective approach for your business.
1.) Explore setting up a market/sales satellite office in the EU. By having a subsidiary in an EU country and structuring the production or service delivery process there may well be scope to significantly reduce the impact of tariffs. The cost of this can often be less than you might fear. Shared office spaces catered for by an abundance of monthly services . Train travel via eurostar is expected to cheapen considerably in next two years and new direct routes are being opened to Amsterdam and Cologne.
2.) Consider developing new branding that can be applied exclusively for the European markets. Perhaps worth hiring sales and marketing resource in Europe to be stationed in their respective market.
3.) Investigate strategic partnerships within your European market. On a more ambitious level, there is an argument that now is a good time to consider horizontal integrations/ m&a.
4.) Be organised within your industry and ensure your voice is well heard by government. Lobbying in tandem with your European supply chain (And potentially peers!) will prove to be a worthwhile strategy. Tariffs and inefficiencies associated with customs are often reciprocal so likely your associated EU companies will be as eager to avoid also.
5.) Manage your fixed cost base prudently. The UK economy has enjoyed relatively solid economic growth for a number of years now. The likelihood of that continuing is slim so be prepared to cut staff and non-core fixed costs. Stay nimble Jack.
6.) For importers, weigh up backup supply options from within the UK. Unlikely you will need to act on this but having this as part of your operational risk management is recommended.
*HMRC 2012 report
**Courtesy of the Statesman Journal.