<img src="https://d5nxst8fruw4z.cloudfront.net/atrk.gif?account=Wfzuj1agkg00y6" style="display:none" height="1" width="1" alt="">

What Brexit means for the Global Supply Chain

Posted by Jenina Borromeo | June 27, 2016

Markets and governments are still reeling from the news that citizens of the UK, by a narrow margin, have voted to leave the EU.

nigel.jpg

David Cameron, England’s Prime Minister and chief supporter of “Remain”, announced he would be stepping down in October. The pound plummeted to its lowest level since the 1980s. The Dow had its worst day in five years; shares of two of Britain’s biggest banks had to be suspended after their prices plunged. Monday morning brought little clarity to the situation: markets remain in turmoil, the UK government is in chaos, and no one can be certain of what’s to come.


There’s no question, though, that the global product economy will be (indeed, already has been) significantly affected by the decision. We take a look at the most important impacts to supply chains worldwide—and what companies can do to brace for more chaos.

Fast Facts

  • ‘Leave’ won by a slim margin—52% for and 48% opposing. More than 30 million people voted, representing a 71.8% turnout, the highest in a United Kingdom-wide vote since the 1992 general election.
  • David Cameron has resigned, planning to step down in October. Analysts are uncertain whether or not there will be a general election held, or the new Prime Minister will be elected by MP’s. Boris Johnson, the leader of the “Leave” campaign, is a strong contender for Cameron’s replacement.
  • The fastest timeline for the UK officially leaving the EU is two years; to do so, the British government would have to invoke Article 50 of the Treaty of Lisbon, which sets in place a two-year path to sovereignty. However, David Cameron has publicly stated that he does not intend to invoke the article while he is still in office.

No Clear Path

Much of the economic implications hang in the type of deal the UK ends up making with the EU. Despite campaigning otherwise, ‘Leave’ proponents have stated that they hope to maintain freedom of movement and access to the EU’s single market—but officials from the EU have challenged that idea, saying that the cost to England for that access would be largely the same amount of money the country currently pays.


Leaders of the Scottish and Northern Irish governments, whose constituents voted in favor of staying, have voiced their intentions to try to block the referendum or, in Scotland’s case, re-introduce an independence referendum which would essentially break apart the United Kingdom.


With England’s parliament plagued with resignations and uncertainty, and many Britons demanding a revote, no one is certain what shape the UK will take in the months to come. For now, though, the chaos is enough to send global markets spinning.

The Brexit Club

A primary group of industries are suffering in the aftermath of the decision. Here’s what you need to know:

Science and tech 
Is a ‘techxit’ looming? Tech startups and giants alike in the UK are concerned about the vote. Apple, Microsoft, and Google all saw their shares dip after the referendum results. The startup community in England warned that the vote would stifle confidence in tech as well as making it harder to hire talent from abroad. British customers will ‘lose the benefits of buying from pan-European companies that can operate at maximum scale’—such as telecoms, IT, and software firms. Tech experts are already expecting a slowdown in the consumer electronics market. Samsung and LG have emphasized that ‘heightened uncertainty’ over new arrangements between the UK and EU is damaging consumer spending in the region and affecting South Korean exports while investment inflows could be impacted as well.

Auto
British auto makers are nervous about the backlash to trading operations. Companies like Jaguar Land Rover are worried about tariffs that may be placed on UK exports. Japanese automakers Toyota and Nissan argued that the vote could significantly impact exports and imports, making trade far more costly to businesses—and, ultimately, consumers. However, some British producers are optimistic about the lower cost of exports due to the weakened pound. 

Logistics

On Friday, shares of transportation and logistics companies slumped in trading on world markets. Analysts have warned that aviation, rail, bus and logistics companies will struggle with “stranded assets they are unable to move out of the UK”. Bus and rail companies also face lower margins amid weaker consumer and higher fuel costs. In addition, aggressive rail contract bids could struggle to meet planned revenues and profit targets. Other logistics operators agreed that mergers and acquisitions involving both British and EU countries will likely be halted. According to reports, China Logistics Property Holdings, Co. will postpone the launch of its US $400M Hong Kong IPO until June 29 due to volatile market conditions after the referendum. The Freight Transport Association (FTA), one of UK’s largest trade associations representing the interests of companies moving goods by road, rail, sea and air, also warned that the Brexit will likely be accompanied by higher supply chain costs, restrictions and bureaucratic requirements imposed on moving goods in and out of Europe.

Supply Chain Reactions

It is more likely that remaining EU members will take a tough stance on the UK’s access to its single market in order to deter other countries from holding their own referendums. So, given that reality, companies with supply chains in Europe and the UK should watch out for key supply chain challenges:

  • Commodity prices will fluctuate. Companies should keep an eye on exchange rates between the dollar, the euro, and the pound in order to track when is best to buy their necessary commodities.
  • Supplier relationships may need to be re-evaluated. If UK companies have suppliers based in Europe, the cost of those partnerships may skyrocket. This could trigger the reintroduction of basic industry (like steel) to the UK as British companies look for cheaper suppliers.
  • “Brexit taxes” may be introduced. Consumers and businesses in the UK are likely to feel a sting from levies on goods like petrol, which will be more expensive to import without help from the EU’s single market.

Things are likely going to stay chaotic for a while, and companies across the globe are already feeling the effects of the vote. No matter what the outcome, supply chain managers need to be flexible and make sure their company’s operations can adapt to change as fast as possible. Ultimately, real-time insights and agility will play a significant role amid the ensuing volatility.


But here’s one less thing to worry about: Brexit won’t impact Game of Thrones filming.