British Companies Are Frantically Preparing for a Messy Brexit

(Bloomberg) --

David Keyte’s fashion brand, Universal Works, sells edgy menswear across the world.

The designer, based in Nottingham, England, counts the European Union as the biggest market for his stylish suede jackets, cardigans and double-pleated pants. Yet the prospect of a chaotic break between Britain and the EU prompted Keyte to shift parts of his distribution operations to Portugal to avoid any potential tariffs -- costing jobs in the U.K.

British Companies Are Frantically Preparing for a Messy Brexit

“I’m five weeks away and I still have no idea what’s going to happen,” said Keyte, whose clothes are stocked in more than 150 outlets globally, from Austria to Taiwan. “It’s terrible.”

His experience is reflected across corporate Britain: with 35 days to go before the U.K. splits from its largest trading partner, the risk of a no-deal Brexit looms increasingly large. Prime Minister Theresa May is still struggling to wrest concessions from the bloc to help push her exit plan through parliament before the March 29 departure date.

Supplier Readiness

Firms from Nestle SA to Bayer AG to Airbus SE have already been stockpiling food, medicine and machinery and shifting operations abroad. Now companies are activating the final stages of their contingency plans, said Brian Connell, a supply chain consultant at KPMG who advises corporations on their Brexit preparations.

“They are implementing stuff they never thought they’d have to,” Connell said. “They’re having to spend proper money.”

Those steps include setting up “situation-rooms,” physical spaces where key executives will gather to make tactical decisions on the day-to-day demands of a cliff-edge exit, Connell said.

Companies are also frantically checking the Brexit readiness of their suppliers. BV Dairy, a Dorset-based maker of high-quality soft cheeses and cultured creams for customers like Pret A Manger Ltd., said it had been inundated with emails asking for proof of their Brexit readiness.

Customs preparations are intensifying too. Companies are building new information technology systems to handle extra tariffs on imports and exports, and demand for customs expertise is now so high that brokers and freight-forwarding firms are turning away business for lack of capacity, said Ross Denton, a U.K. trade lawyer at Baker McKenzie.

“People in the C-suite are starting to wake up to some quite unusual problems,” he said.

ABB Ltd., the Swiss manufacturer of industrial equipment, has taken steps recently that it had hoped to avoid, such as increasing working capital and bringing on people with expertise in customs and trade compliance, said U.K. Managing Director Ian Funnell in an interview.

"Frankly it’s a mess,” he said of Brexit. “We’ve been preparing for a no deal for the last nine months. And that’s the only credible scenario we can work to. Predominantly it’s around managing the supply chain, but it’s not exclusively so. It’s also about contracts and moving people backwards and forwards."

Nuclear Option

Other major firms still have their finger hovering over the nuclear option: to move outside the U.K., said a FTSE 100 chief executive officer, who asked not to be identified discussing confidential plans. If Britain confirms it’s in a no-deal scenario, those companies will go, the person said.

Further departures would add to a deepening gloom for British business. Honda Motor Co Ltd.’s decision to close its factory in Swindon and car-maker Nissan Motor Co Ltd.’s announcement that it won’t build its X-Trail utility vehicle in Sunderland have been high-profile blows to Britain’s industrial base in recent weeks.

The U.K.’s finance industry, which makes up about 7 percent of the country’s output, has suffered a flight of assets, infrastructure and jobs as Brexit approaches.

But there are limits to how much more some industries can prepare. For food manufacturers, chilled storage is full and fresh food can’t be stockpiled. To try to stock up any more would be prohibitively expensive, said William Bain, a policy adviser at the British Retail Consortium, which represents more than 5,000 retailers.

“People are busting a gut to make sure they do what’s deliverable,” Bain said. “Six months ago, people didn’t feel we’d be in this position, but it’s where we’ve landed.’’

At Universal Works, Keyte frets Brexit will hurt his trade with countries like South Korea and Canada, where he’s seen growth thanks to EU free trade deals. If Britain doesn’t quickly sign new agreements with those countries, Keyte plans to move more business to Portugal.

“We assumed that during the first year there’d be a plan, but the only plan has been an internal fight,” he said, shortly after returning from a trip to meet new partners in Seoul. “There’s been absolutely no plan.”

©2019 Bloomberg L.P.