Will There be Life After Brexit?

Life After Brexit

David Smith is the Managing Director of Specac, a leading UK SME in the analytical instrumentation industry. He shares his insight into how Brexit will impact businesses from a variety of different perspectives.

What Do We Know So Far?

The picture of what our world might look like post Brexit is beginning to emerge. Gradually, as negotiations with EU begin, both sides have laid out their vision of what the trading relationship might look like from 2019 onwards.

In her speech at mansion House on 2nd March 2018, British Prime Minister Theresa May reinforced her message that:

  • The ‘Implementation Period’ must be time limited. Currently, it ends in December 2019.
  • We are leaving the single market. Life is going to be different. In certain ways, cross border access to each other’s markets will be less than it is now.
  • The UK has been clear it is leaving the Customs Union. At the border, the UK would mirror the EU’s requirements for imports from the rest of the world, applying the same tariffs and the same rules of origin as the EU for those goods arriving in the UK and intended for the EU.
  • The UK will need to make a strong commitment that its regulatory standards will remain as high as the EU’s.
  • Yes, there will be ups and downs in the months ahead. As in any negotiation, no-one will get everything they want.

You may say, ‘I know all this.’ At a high level, I’m sure that’s right, however, we are almost wholly short of details. How will it work in practice, what effect will it have on your business?

UK PLC - A Nation of Exporters?

The UK is not a world-beater at exporting. You can see from the table below that despite being the 6th largest economy in the world, the UK exports less than the Netherlands, a much smaller country in terms of GDP.

GDP vs Exports

The graph below shows a breakdown of the destinations to which the UK exports. As a collective, the EU accounts for 43% of UK exports. How will  this be affected by Brexit?

Percentage of UK Exports

Furthermore, currently only 8-10% of UK SMEs export. Germany exports $80bn to China, four times more than the UK! Overall, it’s a fairly sorry picture, and that’s even before Brexit.

How Might Brexit Impact Upon Different Enterprises?

UK SME’s

We will sign a new Free Trade Agreement (FTA) with EU. We must, the alternative is World Trade Organisation rules (WTO), which means prohibitively high tariffs for the goods we export to EU.

The Customs Union within which we’ve traded for the last 40+ years won’t be the same. There will be tariffs on what we sell, and on what we buy. There will be more customs paperwork, things will take longer to arrive.

To qualify for ‘preferential’ tariffs, I.e. low tariffs, you will need to calculate (and prove) the proportion of the cost originating in the UK of all the products you’re exporting (The Rules of Origin). If the UK percentage is less than 55%, you won’t qualify for preferential tariffs.

Furthermore, you will need to be able to track the movement of your goods around EU with a lot of traceability.

UK exports will stagnate at best, and maybe even fall.

I’m not trying to paint an Armageddon scenario here. We will learn to cope with these extra costs and extra administration. My chief concern is that UK SME’s that don’t export now, and many that do export currently, will conclude that exporting is too costly and too difficult. UK exports will stagnate at best, and maybe even fall.

Cambridge Roadshow

European Enterprises

European enterprises who buy from or sell to UK will be faced with similar issues. 8% of EU exports are to UK. They don’t want to lose that business, so it is in their interests to have a new Customs Union with low tariffs.

Importing is a different matter. Put yourself in the mind of a buyer in Belgium. If he can only buy the product he’s looking for from UK, then things should remain unchanged. I’m more concerned about less niche products (or more commoditized!). He may have bought the same item from your company for the last 20 years. My concern is that in 2020, he’s going to wake up one day and decide that UK PLC is just too difficult and too costly to trade with. He’ll start to look across Europe for an alternative source. UK exports will fall.

USA Enterprises

The concerns expressed in the previous section don’t only apply to European buyers. Yes, we will sign a new FTA with USA, and it may have relatively low tariffs. I believe that many US buyers will look at UK and EU alongside each other and decide that it is easier/safer/less trouble to deal with EU. UK exports will fall.

There Can be Life After Brexit

It doesn’t have to be a disaster. We must be bold, and fight our way through these choppy waters. UK design and manufacturer are very highly regarded across the world. We must find new markets in which to export. I’m not saying we should trade outside EU instead, it should be as well as.

The business I lead has grown exports substantially in the Americas and Asia in the last eight years.

This is the ten-point guide we use at Specac to growing exports:

  1. Be bold – Find that difficult market to crack. Go to places that don’t get a great write-up in the media. Find out where the customers are, and go there
  2. Be confident, don’t believe the nay-sayers when they tell you a country is too difficult to trade in
  3. Make it an adventure and have fun – Almost a third of our staff have travelled abroad on behalf of the company. We encourage them to stay there a bit longer and see the sights.
  4. Learn some of the culture – You don’t have to learn the language: however, learn some little facets of the culture you are visiting, your hosts will respect you enormously for it
  5. Embrace these different cultures, don’t complain about them, go with the flow
  6. Stay ethical, don’t accept the need to pay backhanders for someone to help you, walk away
  7. Work hard to achieve a broad regional spread of your export growth
  8. Stay high on quality and price – don’t compromise on either. Don’t break the market. Most countries have the money to spend, let them spend it
  9. Invoice the customer in whatever currency they choose.
  10. If you can, ensure the customer pays before you ship the goods. Try to avoid letters of credit, long payment terms, and export finance.

SME’s vs Large Corporations

I think the challenges brought by Brexit are greater for SME’s. Large corporations can look after themselves. The automotive and aerospace industries will strike their own deals. These companies have whole Brexit departments. They are seasoned lobbyists.

I’m an individual leader of an SME, however, I too have a voice. I’ve become part of www.euristaskforce.org which is representing product manufacturers. It is made up of in excess of fifteen trade associations. As part of these discussions, I’ve met a number of Civil Servants. They will admit that they don’t have a good understanding of the Brexit issues facing SME’s. They’re learning, fast.

So, is the future bright?

Brexit will hurt us, I think SME’s will see between a 10-20% drop in sales into Europe in the short to medium term. Everything will be a shock, and it will take time to recover, to learn our new world order. We will recover, and I believe all of us in SME’s have a responsibility to make that recovery happen as soon as possible.

Stay Calm and Keep Exporting

My advice would be to engage with your customer base. Have the conversation now, even though you don’t know what the detail is going to be. Lay the groundwork for a successful world, post Brexit. You might say, stay calm and keep exporting.

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Posted by David Smith

David has been Managing Director for 10 years at Specac, the leading design and manufacturer of accessories for the Infrared and XRF spectroscopy markets. From a finance background, he brings analytical insight and a mantra of ‘be bold’ to his team, whose key focus is innovation. David’s passion is encouraging more SMEs to grow their exports, and this has driven him to get involved and ‘do my bit’ as the UK tries to navigate its way through Brexit.

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