Blog: Four Brexit Unknowns To Consider When ‘Stress Testing’ Your Strategy

Published: 12th January 2018
Author: Anish Gupta

There is a deluge of articles and broadcasts about Brexit. Often, they reflect contradictory points of view. The only consistent thread is the inability of anyone to predict what the outcomes will be.

That’s not very useful for businesses who, unlike many commentators, have to prepare for this uncertain future. Every business is unique in some ways, so there is no ‘one size fits all’ solution that applies to all.

The actual impact of Brexit will not kick in fully until March 2019. Given the prevailing confusion, this could tempt businesses to adopt a ‘wait-and-watch’ policy.

Our advice to all businesses is that they simply cannot afford to wait and watch, because there are a few possible implications which are already visible, and measures to deal with these cannot be taken overnight. It is essential for organisations to look objectively at possible scenarios, assess what the impacts could be, and initiate preparatory actions now.

There are four areas that we recommend businesses should look at:

1. Revenue

60% of UK exports currently go to Europe, on a zero-tariff basis. Is your firm dependent on exports to Europe?

There is often talk of ‘no deal’ being better than a ‘bad deal’. In its simplest form, this could mean a tariff of 10% (which is the World Trade Organisation’s default rate). Will your business still be competitive if this is enforced?

Similarly, there is also talk about how other markets will be opened up outside Europe post-Brexit. Unlike the USA (or even Germany), where exports are spread reasonably evenly across the world, the UK is overwhelmingly dependent on exports to Europe (60%).

Replacing revenues from exports to Europe by exports to other countries could be tough depending on the extent of the shortfall higher tariffs for exporting to Europe may create. Can you examine a range of scenarios to establish your tolerance to change on this front? Doing this effectively can provide assurance, or at least provide a clearer view of the risk to be mitigated.

It’s also important to recognise that the default tariffs in many of the other markets being alluded to (for example, India or Brazil) are more than 10%, and often closer to 15-20%. When you forecast future revenues from these markets, make sure you have taken this into account.

2. Cost

Between 50-60% of imports into the UK come from Europe, and complex supply chains have parts, components or assemblies moving back and forth between Europe and UK in a zero-tariff environment. This has already been hit by the 15-20% devaluation of the pound since the announcement of Brexit. The issue affects imports not only from Europe, but also other parts of the world. It is possible that new trade agreements may need to be negotiated (first at a government level, and later at a company level), and this requires time.

How could this affect your business? What actions can you take now to anticipate this?

3. Availability of skills

Many UK businesses depend on highly skilled personnel sourced from Europe, and vice versa. Is your business considering how to source or foster the skills it requires, and / or the logistics of continuing to obtain skills from Europe given potential changes to immigration law?

Equally, there are businesses (for example, in agriculture and food production) where low cost European labour is able to move freely into and out of the UK, as required. If free movement of people within Europe is affected, what could be the impact on cost, output and productivity? There are many permutations within this issue that could be modelled and tested to ensure businesses better understand the impacts of a multitude of potential legislative scenarios.

4. Non-tariff barriers

Firms looking to diversify into other markets to minimise the impacts of a decrease in trade with Europe must take into account the impacts of any non-tariff barriers on the cost of doing business in those jurisdictions, for example:

  1. Import licensing
  2. Rules for the valuation of goods at customs
  3. Pre-shipment inspections
  4. Rules of origin
  5. Lack of local infrastructure, skills and knowledge of the environment in these markets

Accurate cost and time modelling in this area can provide valuable information on the costs of doing business in different jurisdictions, and will inform pre- and post-Brexit strategy, investment and focus.

Planning for multiple scenarios

For UK businesses, the challenges of Brexit are well documented. The many possible outcomes – as well as uncertainty around ongoing negotiations – mean that businesses must plan for many scenarios, and be agile when the final deal with the EU is agreed. By scenario planning and stress testing in the areas above, businesses can obtain the clarity they need to know the strategic direction to move in as they approach March 2019.