Any which way but lose?

By Adam Bernstein, Tuesday 17 September 2019

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In spite of the latest zany political shenanigans – Boris threatening to break the law (or actually breaking the law), opposition MPs sitting on Speaker John Bercow in an attempt to, physically, prevent prorogation, a government wilfully throwing its majority away – it looks very much like the UK could, one way or another, finally leave the EU on 31 October – and on a no-deal basis too.

brexit

The government’s stated plan, to force Europe to rethink the withdrawal deal, now seems a faint and distant hope.

But if the UK leaves without a deal no one knows what it may bring. One thing is certain, the sector needs to plan ahead as best it can.

Ian Cass, managing director of the Forum of Private Business (FPB), has seen a marked change in government thinking. “One of the main changes of approach that they [the Johnson administration] have brought to the Brexit discussions is that the government is planning thoroughly for a no-deal Brexit.” He contrasts this with the previous approach, which made it clear that a no-deal Brexit was off the table and as a result “in the opinion of many business leaders took one of our key bargaining chips away”.

Changing growth

A no-deal Brexit is of concern to BPIF CEO Charles Jarrold. He cites the BPIF’s Printing Outlook for Q2 2019: “Over half of our members are unconfident in the outlook for the UK economy. Specifically, in relation to Brexit, the top three concerns are maintaining a reliable and secure supply chain (77% of respondents), general cost inflation (52%), and non-tariff barriers (42%).”

All of these points are, as we will see, echoed by Andrew Lee, a consultant at Expense Reduction Analysts, a provider of cost-reduction services for sectors including print. He says that market research firm IBISWorld estimated that printing services for manufacturers will contribute 14.5% of the industry’s revenue over 2019-20. While the result of the EU referendum initially led to a fall in manufacturing activity, it actually increased in 2017, which was supported by the achievement of new contracts as the weak pound made UK-manufactured goods more price competitive.

But what worries him is that a no-deal Brexit will hamper any future growth and could prove detrimental in the short to medium term: “No deal will mean our reverting to WTO rules, which means no shared regulation of goods or services; a likely imposition of tariffs and checks at borders, causing delays to supply and production; a potential drop of 40% of trade between EU/UK, according to the Centre for Economic Performance; and, potentially, extra cost and borrowing by the government of £81bn until 2034.”

None of this sounds terribly appealing.

No movement

As Lee points out – and it’s something that cannot have escaped the attention of the sector – there is real potential for disruption at the ports.

“For both sides’ sake there needs to be a stay of execution where nothing material happens overnight other than perhaps documentation requirements, even so, businesses need to ready themselves and understand the requirements which are highlighted on the no-deal Brexit government and BPIF websites,” he says.

To be fair, iNews quoted Jean-Marc Puissesseau, the chief of the French channel ports as saying that little will happen if both sides do their homework: “There are certain individuals in the UK who are whipping up this catastrophism for their own purposes,” he said, adding: “This has provoked a lot of concern, but basically ‘c’est la bullshit’. Nothing is going to happen the day after Brexit. Britain will be a Third Country, that’s all, and there is no reason why this should lead to any problems.”

However, Puissesseau’s comment doesn’t mean that print shouldn’t prepare as Lee reckons that 90% of UK printers import from the EU and while product may move freely, the introduction of tariffs on imported print consumables will add price pressure to print businesses. As for currency benefits from a weaker pound, he says that “although 67% of UK printers export to Europe, this is often only indirectly. Their customers are doing the exporting and will be the beneficiaries from the exchange rate.”

As noted earlier, Jarrold considers the movement of supplies and finished goods a major concern for his members. These non-tariff barriers could “have a big impact, especially on firms reliant on just-in-time principles. A lot of the guidance we have featured on our website and in our monthly Brexit Bulletins has been about these issues”.

It makes sense then, that any UK business importing or exporting to the EU applies for and obtains an Economic Operators Registration and Identification number (EORI) number now as it’s needed for all customs procedures when exchanging information with customs administrations. Cass says that they are available via gov.uk . He adds: “Their importance lies in the fact that without one, firms will be unable to achieve anything... they cannot complete any of the subsequent documentation required to trade.” 

Contracts: front and centre concerns

Contracts, being legally enforceable, must reflect the commercial realities of Brexit. Lindsay Ellis, partner in outsourcing, technology and commercial team of law firm Wright Hassall says that a no-deal Brexit makes the need for watertight contracts more acute – especially with suppliers. “The key issue,” he says, “is whether or not the implications of a no-deal will affect the ability of either party to perform the contract, and the cost of doing so. For instance, most printers will rely on imports of paper and board from the EU. As an example, if the contract with the supplier refers to specific timelines for delivery to enable the printer to meet deadlines, then the onus to perform the contract rests with the supplier.” As he explains, if the supplier fails to deliver supplies on time as specified by the contract, they could be deemed to have breached the terms through non-performance and may be able to terminate if a contract contains a clause to that effect leaving the printer in a bind. 

 Another consideration is when the contract was drawn up. As Ellis outlines, “anything signed since 2016 should have taken account of Brexit to, for instance, allow both parties to agree to split the cost of tariffs (if imposed) or an increase in the price due to currency fluctuations up to an agreed amount.”

If a contract doesn’t mention Brexit, a review is necessary to mitigate – or risk share – if possible. Key terms to cover off are territorial references such as the UK and EU; in what currency payments must be made and who bears exchange rate risks; who pays any newly imposed tariffs; who is responsible for customs clearance; and lastly, taxation where, for example, VAT rules change in terms of rate and procedural application.

It’s of note that a BBC report, mid-August, said that food retailer Lidl’s Irish business reminded British suppliers they are contractually expected to pay any EU import tariffs imposed on goods crossing borders after Brexit.

And what of standards? BEIS, HMRC and government generally recognises that from a legal prospective all EU laws, regulations and policies will be carried over into UK law initially, so as Cass notes, “in the short term business will be covered in terms of standards, compliance and legal matters, so achieving a level of consistency and stability”. But he warns that over time the government may decide to adapt and change some of these to suit the UK, but those changes are for the long term.

Moving on, there is more to plan for contractually says Ellis including references to termination, compensation, IP rights, dispute resolution, and hardship.

Data protection is another worry as GDPR applies to the UK as much as it does to its continental partners; for all it carries stiff penalties for breaches. But as Cass highlights, “businesses will need to ensure that they know if they have any data transfer activity with non-EU countries; if they do, they may be working to two different sets of rules regarding regulation and compliance and this needs to be managed”.

Employee issues

Another, obvious, issue is how Brexit will affect workers and employers. Cass is pleased that the new government is to guarantee existing EU resident workers’ rights to stay and work in the UK: “The FPB has always felt that since the referendum decision to leave the EU the government should have guaranteed the rights of existing workers resident in the UK straight away, regardless of any negotiation, and not used them as a form of bargaining chip.”

For the BPIF, Jarrold is aware that members with EU employees have been concerned since day one: “Some of our members are reliant on EU staff from a variety of countries, working across all skill levels. However, this is one area where the government has given some clear guidance from an early stage.” He is, of course, alluding to the EU Settlement Scheme. “Employers,” says Jarrold, “should draw staff attention to the scheme; the Home Office has published a toolkit to help them take advantage of it. EU citizens have until 30 June 2021 to apply to the scheme.” It’s worth pointing out that if the UK leaves the EU without a deal, the deadline for applications will be brought forward to 31 December 2020.

Matthew Davies, a partner in the business immigration team at Wright Hassall, suggests that beyond the EU Settlement Scheme, employers should audit their workforces to gauge the numbers and profiles of EEA national and dependent employees and identify key affected staff. 

“Questions to ask include: do staff understand the implications of Brexit for their immigration statuses? Is worry or doubt about it making them less likely to stay in their jobs or in the UK? And what information and support have we offered? What can we offer?” In essence, Davies thinks that employers who reassure their workforce will be a step ahead of those that don’t.

 Looking at recruitment, Davies says that employers (and to an extent) EEA workers need not worry, initially at least, in the event of a no-deal Brexit as “the UK is likely to admit them on similar terms as present for at least another year after Brexit, and probably longer.” He advises having a recruitment effort that builds in this message. Beyond that though, he suggests firms create a longer-term strategy for recruiting from the EEA, or finding an alternative source of employees, once free movement ends by 2021. 

Dealing with higher costs

Since the vote in 2016 the natural worry was higher costs that followed the fall in value of sterling against the euro and US dollar, as well as the potential for new tariffs. Printers have either tried to pass costs on or have absorbed them. Both scenarios are full of risk. As Lee highlights: “Passing costs on will make some printers uncompetitive in the marketplace making it difficult to win new work and at the same time leaving their core client business vulnerable. At the same time, trying to absorb costs could see profitability erode to an unmanageable level leaving the business unsustainable.”

The obvious solution is to cut costs, but is it?

For Lee, consumables will attract tariffs, which may not apply to paper and board. That said, he thinks that “paper and board is set to rise again as mills find it more difficult to absorb increasing manufacturing costs, so in this scenario, margins will be under even more financial pressure”.

Cutting without structure or proper process may not be effective which is why he recommends professional procurement. “Procurement,” he says, “is an area of business that rarely gets a seat at the boardroom table as the focus is on the top line and productivity, yet it could be a driver to lower costs and a much-improved bottom line.” Done well he says that it can also set the scene for the rest of the business in how it controls costs: “In most print businesses, procurement is managed through a small team who look to deliver the best products at the best price. What they should be doing is looking at best value. Procurement analyses everything and every process to see how to bolster the bottom line.”

To reiterate, Lee says procurement isn’t about cost-cutting – it’s about value. In particular, he thinks that prices are often dictated by opportunistic suppliers attempting to drive high margins; that a local supplier can sometimes provide better value solutions than national or international arrangements; and that the longer a relationship, the longer a supplier has had to increase margins.

Finally, on the pricing theme, Jarrold urges the sector to protect against currency exposure: “Members have been concerned about exchange rates for some time with weaker sterling making imports more expensive. We’ve advised considering managing currency risk including stabilising dual invoicing, multi-currency accounts or setting forward contracts.”

To summarise

No one has a crystal ball. The real impact of Brexit is impossible to calculate. But just as firms plan for their future generally, so they should include contingencies for Brexit. Of course, it could be time and effort that is wasted, but planning for the unexpected offers one key benefit – that a firm will properly understand its strengths and weaknesses. 


Actions businesses can take now

Understand what the likely changes to customs and excise procedures will be to the business.

Firms should take account of the volume of their trade with the EU and any potential supply chain impacts. Engage with others in the chain to ensure that the necessary planning is taking place at all levels. This means looking at exposure to tariffs.

Renegotiate commercial terms to reflect any changes in customs and excise procedures and any new tariffs that may apply to UK-EU trade. Consider if the services of a customs broker, freight forwarder or logistics provider can help.

Apply for Authorised Economic Operator (AEO) status. This is a quality mark that shows a firm’s role in the supply chain is secure and that its customs controls and procedures are efficient and meet EU standards. (The BPIF has a guide to AEO on its website for members; paper merchants Denmaur and Antalis have AEO status).

Consider stockpiling if finance and space allow (51% of BPIF members have done so). Check funding opportunities for resilience – both Scottish government and Welsh Assembly are offering funding packages for firms in Scotland and Wales respectively.

Check the Department for Exiting the European Union website for useful information.


Viewpoint: Iain Clasper-Cotte

Managing director, Faber Exposize UK & Northern Flags

Of the likely impact of Brexit, Clasper-Cotte says that “currently we are talking to most of our larger clients about splitting their production between our UK plant and our factories in the Netherlands, Germany and Poland. This de- risks any distribution issues caused by customs delays.” He says that his firm is unique with its factory locations which “has proven a major plus point for our retail and print management clients so has attracted a number of new accounts into us.” Clasper-Cotte is, however, seeing changing views from his European workers as Brexit gets closer - they no longer feel welcome and have “concerns about people movement, pensions, etc, so some have already told us they plan to relocate to another European country.” To illustrate the point, he says that the business recently lost one of its Polish workers who is relocating to Spain.

As for planning, Clasper-Cotte says it is very difficult to do anything more than look to ensure the firm increases its stockholding of raw materials that it imports directly for production from other European countries and also ensure that his suppliers are doing the same. He adds: “We have no visibility on the likely additional process and workload that may come in the future so intend to grow from seven-day stocks to four-week stocks of all core items.” This, he explains, has a consequence on cashflow, but most of his suppliers are keen to work with him by allowing consignment stock.

Overall, though, Clasper-Cotte is concerned that “certain suppliers seem to not fully understand the routing of the goods into their warehouses so are probably too optimistic. I think that certain wholesalers will end up with stock shortages and those that plan better will win a lot of additional business”. As ever in circumstances like this he’s expecting that there will be winners and losers.


Viewpoint: Mark Bristow

Chairman of PICON and managing director of Friedheim International

Mark Bristow is worried that no-deal Brexit will have a negative effect on the industry “due to exchange rates, prices of imported machines as well as imported components for UK manufacturers will increase; and an increase of red tape and inspections at the border means delivery and supply schedules will suffer for all aspects of the industry”. 

While he foresees the sector turning to UK manufacturers for a small percentage of their requirements, much will still need to be obtained from EU manufacturers, increased costs may be passed on. 

It’s interesting that Bristow has seen some UK companies who trade in the EU invest heavily in satellite facilities inside the EU or shift manufacturing using similar strategies.

One thing is certain, reckons Bristow, UK print companies will need to factor in longer lead times. “The increased administrative procedures for a no-deal Brexit will mean delays at borders which will need to be taken into account. Preparation is going to be key for many firms. Stock levels need to be re-evaluated, consumables and parts need to be purchased ahead of time – contingencies will need to be evaluated where practical by businesses.” He advises that inks, paper, parts, lubricants, critical machine parts – anything critical that is imported from the EU - will need to be considered and pre-planned with all the appropriate documentation obtained beforehand.

As for sector preparation, Bristow says that many businesses have already begun preparations for no-deal. However, he knows that smaller companies don’t have the resources to do this properly. 

He says: “We have increased our contingency for the emergency supply of spares and consumables as printers simply cannot be at a standstill if a part takes almost three to four days to arrive.”

Worryingly, for him, the government has not supplied any useful advice to the industry. He says that “associations need to be advising and guiding members as to reasonable courses of action where practical.

“Unfortunately, there is no telling what will happen at the end of October – the only thing we can have any control over is in how well we plan for all contingencies.”

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