Britain’s Businesses Have Already Lost, Brexit or No Brexit

(Bloomberg Businessweek) -- Tom Westley runs one of Europe’s leading foundries out of Cradley Heath, a small town near Birmingham in the West Midlands. He produces parts from precision molds for shipbuilders and carmakers on the Continent. But he’s losing sales. The reason: Brexit. The Westley Group had revenue of about £30 million ($39 million) in 2018. In the same period, he says, the vote to quit the European Union cost the company about £2 million after multiple German buyers canceled orders from Spunalloys, one of Westley’s divisions.

European customers are sourcing outside the U.K., afraid that British exports to the Continent will face customs checks and tariffs—meaning delays and added costs—once the country leaves the EU. In Westley Group’s case, that will increase what clients pay for the copper-based-alloy castings Spunalloys sells. “It’s very disappointing, but what can you do?” says Westley, who, in the 2016 referendum, voted to remain in the EU. He was outnumbered. The West Midlands voted to leave by almost 60%—a larger proportion than the U.K. as a whole. “Brexit is costing business right up front, with no benefit to us whatsoever,” he says.

The U.K. is hurting even before the country has officially split from the EU, which takes 44% of its exports and is a market of half a billion consumers. Multinational companies across industries are retreating from the world’s fifth-largest economy, which over the last four decades became the leading corporate gateway into Europe. Three years of political uncertainty have cost the U.K. about £600 million a week and left the economy 2.4% smaller than it otherwise would have been, according to a report by Goldman Sachs Group Inc.

Britain’s Businesses Have Already Lost, Brexit or No Brexit

The U.K. Parliament has repeatedly rejected Prime Minister Theresa May’s proposed deal with the EU. Deadlines to leave came and went in March and April, with the EU choosing to kick the can down the road to prevent an economy-jolting no-deal divorce. The next deadline is Oct. 31, but the EU could push it off again if Britain hasn’t resolved its political impasse. The unpredictability has left businesses in a state of consternation. Another delay “would be a nightmare, a rolling uncertainty,” says Anand Menon, professor of European politics and foreign affairs at King’s College London. “You can only plan for a few months, instead of a few years.”

May is now seeking the backing of the opposition Labour Party to get her deal over the line, given a lack of support from her own Conservative Party. Labour’s key demand is that the U.K. remains in a customs union with the EU, which would avert tariffs. But the frictionless trade that now exists would come to an end. There would be border checks and paperwork for British goods going into Europe, and vice versa. “The customs union is really very, very thin,” says Lorand Bartels, a trade lawyer at Linklaters in London. “There will still be physical inspections on goods, which will cause queues.”

Britain’s Businesses Have Already Lost, Brexit or No Brexit

Manufacturers based in Britain who rely on just-in-time deliveries of parts and material at their factories have led the Brexit backlash. Japanese automaker Nissan Motor Co. has abandoned plans to build a new model at its factory in North East England, concerned Brexit will disrupt the flow of components and finished vehicles across the U.K. border. Nissan, which set up shop in the region in the mid-1980s to use its North Sea ports to ship cars into Europe, employs 7,000 people in the Brexit-supporting town of Sunderland. Rival automakers BMW AG and Toyota Motor Corp. have also raised the prospect of moving out of the country.

Airbus SE has given the starkest warning yet. The company, which manufactures wings at sites in Wales and South West England, employs 14,000 people in the U.K. directly, and its supply chain accounts for an additional 110,000 jobs. It will move future investments out of the U.K. if there’s a no-deal divorce from the EU, Airbus’s then-Chief Executive Officer Tom Enders said in January. “Brexit-related uncertainty has hit confidence hard and investment even harder,” says Adam Marshall, director general of the British Chambers of Commerce. “We anticipate the U.K. economy will continue on a weak growth trajectory.”

The country’s financial sector—the City of London—is the other big Brexit casualty. Banks such as HSBC Holdings Plc and Royal Bank of Scotland have spent hundreds of millions of pounds Brexit-proofing their operations, while the likes of Deutsche Bank AG and Citigroup Inc. are shifting billions in assets out of the U.K. Foreign exchange and debt markets have moved to Amsterdam. People are on the go, too: Thousands of employees from JPMorgan Chase & Co., Morgan Stanley, and other banks have left for Frankfurt and Paris.

Japanese electronics groups Sony and Panasonic, insurer Chubb, and money-exchange company TransferWise are among the companies that have shifted their EU headquarters out of the U.K. or set up new European subsidiaries. And they’re unlikely to return, even if somehow the country decides not to leave. “If you’ve gone to the lengths and hassle of moving, why would you bring it back now?” says Edwin Morgan, interim director general of the Institute of Directors, an organization of about 30,000 company directors and senior business leaders. “Businesses see this as a huge distraction, and where they’ve spent money, it feels like a waste of money.”

The constantly looming no-deal deadlines have led Britain to stockpile goods and raw materials in a way not seen since World War II. Warehouses across the country filled to capacity in the runup to the March deadline as manufacturers hoarded everything from printing ink and packaging to aircraft parts and tinned food.

Britain’s Businesses Have Already Lost, Brexit or No Brexit

LittlePod Ltd., a maker of ethically sourced vanilla paste and extract in Devon, in South West England, has spent £100,000—about 20% of annual revenue—bringing in extra product. That’s cash that the company would otherwise be investing in a new machine to boost production. LittlePod is in talks with online grocer Ocado Group Plc about becoming a supplier but needs the device, which makes 45 tubes of vanilla paste per minute, to meet the demand. “You can’t grow the business at the moment,” says Janet Sawyer, the company’s managing director, who sells her products, including vanilla beer and Madagascan bourbon vanilla pods, in stores such as Whole Foods and Planet Organic. “We’re just treading water.”

Exporters are especially Brexit-affected. Leather and sheepskin apparel and bag maker Owen Barry Ltd. in Somerset has lost £190,000 in sales, about 10% of its total revenue, from customers in Japan who canceled orders because of concerns about disruptions to deliveries. Meanwhile, the cost of the sheepskin that Owen Barry imports from Spain and Turkey has increased 15% because of the weaker pound, shrinking profit margins and leading the company to cut staff hours by a quarter. Owen Barry is considering getting an extra overdraft facility from its bank because business has slowed and buyers are taking longer to pay for goods. “I think we’ve been let down by the government,” says Jack Allen, the company’s finance and production manager, who voted for Brexit because he wanted the U.K. to have more control over its laws and still believes Britain will be better off once it leaves the EU. “The lack of a deal is just debilitating.”

Britain’s Businesses Have Already Lost, Brexit or No Brexit

Brexit turmoil is a boon for some. Logistics companies and customs agents are benefiting from a strong increase in demand for their services. “My phone’s been ringing off the hook,” says Keith Robe, a customs adviser in North East England who helps businesses with their export form-filling and preparing for Brexit. Robe’s sales are up 40%. Lawyers and consultants are other big beneficiaries, collecting steady fees as the Brexit saga drags on.

The weak pound is also good for British exporters that don’t have to contend with rising import costs. Mo Bro’s Ltd., a Leicester-based seller of male grooming products that sources most of its materials locally, has seen its revenue increase 10% thanks to the currency decline and rising international sales. Keval Dattani, one of three brothers who founded the company, voted for Britain to remain in the EU but is bullish on the opportunities from new free-trade deals post-Brexit. “The outlook is promising still,” he says. “The level of interest we’ve had from new potential partners has far exceeded our expectations.”

There are economic bright spots: The unemployment rate is at its lowest since 1975, and wages are growing faster than inflation, supporting consumer spending and confidence. But the buoyant jobs market highlights the weakness of productivity and could have a direct Brexit link, as companies prefer to hire employees who can be laid off with a no-deal Brexit, rather than commit to big capital investment that can’t easily be reversed.

May is planning a June showdown to give lawmakers one final chance to vote for her deal. If that fails, the political turmoil will only intensify. Some combination of an election, change of prime minister, or second referendum may be needed to break the deadlock. A more hard-line Brexit-backer like Boris Johnson could end up in 10 Downing Street and pursue a no-deal exit. The socialist Jeremy Corbyn could win a general election and seek close ties with the EU. A public vote with the option of overturning Brexit could yet stop the process.

None of that consoles Westley. Back in the West Midlands, he has a plastics company, Westley Plastics, that makes products used in rail maintenance, construction, and the steel industry. It stockpiled £500,000 worth of goods in anticipation of a no-deal Brexit in March. Westley is planning to build up the stockpile again for October, which means tying up more cash that he can’t use for investment. “I think we’ve all been hoodwinked,” he says. “All I can see is, it’s cost us all a load of money and could cost even more.”

To contact the editor responsible for this story: Howard Chua-Eoan at hchuaeoan@bloomberg.net

©2019 Bloomberg L.P.