The business end of Brexit

The warnings by business leaders over the past three years that Brexit would be bad for the British economy have gone largely unheeded. One of the most frequently cited examples is that of Sunderland, in the north of England, which voted 61.3% in favour of Leave despite the threat this posed to the region's largest employer, Nissan. Even today TV camera crews can found on the streets of Sunderland filming the views of locals who continue to insist that Nissan will not leave the town. Yet two years ago Nissan executive, Colin Lawther, appearing before a parliamentary committee indicated the difficulties for companies like Nissan in dealing with a hard Brexit. The plant receives 5 million parts a day, 85% of which are imported, but the plant holds only enough parts for half a day’s production due to the costs of storing them. Just-in-time inventory management, facilitated by free movement of goods, is crucial to the plant’s success.

As long ago as September, BMW announced that it would bring forward its annual maintenance shutdown to late March in order to deal with any potential problems. Since the turn of the year we have seen a number of other companies announcing Brexit contingency measures. A couple of weeks ago Honda announced that it would shut its factory in Swindon for 6 days in April to ensure it could adjust to "all possible outcomes caused by logistics and border issues." Jaguar Land Rover has also decided to shut down its four main factories for an extra week at the start of April on top of a previously planned maintenance pause because of “potential Brexit disruption.” Not convinced yet?

Earlier this week, Airbus CEO Tom Enders warned that the company might be forced to quit the UK in the event of a hard Brexit. In Enders’ words, “please don’t listen to the Brexiteers’ madness, which asserts that because we have huge plants here we will not move and we will always be here. They are wrong.” Indeed, Enders gets to the nub of a problem which has been a running sore in the Brexit debate with some politicians having demonstrated extraordinary arrogance with regard to business. Last summer, when asked about corporate concerns over a hard Brexit at an event for EU diplomats in London Boris Johnson is reported to have replied: "F*** business." A couple of weeks ago he was at it again: When presented with the not-unreasonable claim that Jaguar Land Rover boss Ralf Speth might know more about the car industry than he does, Johnson replied “I’m not certain he does.”

A few months ago, Owen Paterson MP also dismissed claims by car manufacturers that Brexit would have consequences for their business. In his words: “If we really do leave the Customs Union, Jaguar Land Rover will have access to cheaper parts and components all around the world and the European suppliers will be forced to compete or they will lose Jaguar Land Rover’s business.” This is peak Bluffocracy and is reminiscent of armchair fans who claim that they would make better football managers than the present incumbent. Clearly there is something seriously wrong with our political culture when MPs can make such claims in public and not suffer the ridicule they deserve.

But it is one thing to ignore the warnings of business: It is another thing entirely for politicians not to take any decisions at all which hugely complicates the difficulties in the business decision-making process, particularly when there are very long lead times involved. This lack of certainty acts as a brake on corporate activity, and business investment declined in volume terms in each of the three quarters of 2018 for which we have data. In the nine quarters since the EU referendum, UK business investment volume has increased by just 0.6% compared with 5.7% in the nine quarters leading up to it. CBI survey data indicates that investment intentions in plant and equipment have been lower over the past six months than at any time since 2009. This is not indicative of a business community that has any faith in the government’s Brexit assurances.

Business is no longer taking government on trust. The Guardian reports today that firms are planning a mass exodus in the event of a no-deal Brexit. In the financial services industry, banks have long been preparing for the worst case outcome. Since the passporting legislation, which allows banks to be regulated in one EU country but conduct business throughout the EU, cannot be guaranteed beyond 29 March this has prompted them to put in place contingency plans to transfer staff to other EU locations to maintain business continuity.  Although the numbers involved so far are relatively small, probably of the order of 7000, firms are also transferring assets out of London as balance sheets are run down. And this is only to keep business running in April – the shift will be far larger in future. 

The experience of Nordea bank acts as a cautionary tale. Nordea was involved in a tax dispute with the Swedish government and threatened to shift its headquarters from Stockholm to either Copenhagen or Helsinki. When the Swedish government refused to back down, Nordea management persuaded shareholders to sanction a move to the Finnish capital which was not only one in the eye for Sweden but allowed the bank to base itself inside the euro zone’s banking union. The moral of the story is that businesses do not issue threats they are not prepared to carry out.

Of course, the biggest irony over the last week was the announcement that that Brexit supporter James Dyson is to move his company’s HQ to Singapore. There may indeed be good business reasons for the move but it is a PR own goal of mammoth proportions. It does not sound as though Dyson has great faith in the UK’s role at the heart of a new global trading hub. Still, it is consistent with the actions of the likes of Jacob Rees-Mogg whose investment fund decided last summer to set up a fund in Dublin, as asset managers worry about being cut off from European investors. A case of “do as I say, not what I do.”