Mapping the Brexit storm - supply chain concerns post-Brexit
In September 2018, at the Zero Emission Vehicle Summit in Birmingham, the Chief Executive of Jaguar Land Rover (JLR), Ralph Speth, raised fresh concerns around the continued operation of UK manufacturing plants after Brexit. In front of both the Prime Minister and members of the cabinet, Speth warned of the ‘tens of thousands’ of jobs at risk and the uncertainty of UK plants remaining in operation in the event the UK fails to reach an agreement with Brussels.
Impact on manufacturing
Despite the £50 billion already invested in the UK over the past five years by JLR, plans to invest a further £80 billion in the UK may be shelved without an agreement that would continue to allow free trade and unrestricted access to the EU. This is due to the ‘just in time’ manufacturing model employed by JLR (and others) where new parts arrive ‘just in time’ for them to be used, rather than keeping large stocks of components, which allows 3,000 cars to be made daily. If any new measures cause the predicted chaos and delays in the supply of these parts, Speth claims that “bluntly, we will not be able to build cars”.
According to the Society of Motor Manufacturers and Traders, 1,100 trailers full of vehicle parts arrive in the UK from the EU every day without having tariffs or customs checks. Therefore, it has been forcefully argued that it is essential to keep tariff and custom free trade in order to ensure the UK automotive industry remains globally competitive and protect the 300,000 jobs at JLR.
While the government have played down Speth’s concerns, the technical papers released on 13 September offering guidance on a no deal Brexit do warn that cars made in the UK may no longer be valid for sale in the EU without an appropriate trade agreement.
The likely impacts on the manufacturing industry of a Brexit without tariff concessions include:
- A rise in export prices, which are likely to drive up prices and impact upon a manufacturer’s sales and revenue
- Supply chain problems and inefficiencies could lead to delays and additional challenges
- Additional administrative burden in order to obtain customs clearance.
Impact on insurance market
In the case of a no-deal Brexit, claims are likely to arise from potential production line shut-downs and the inability to meet contractual deadlines - as alluded to by Speth. However, the impact of the UK’s decision to leave the EU is likely to have wider reaching economic and political impacts, given that the majority of the UK’s import and export market consists of goods and services that are themselves input into production.
Over half of the UK’s imports from the EU are intermediate goods and services – which is to say they are goods or services that add to the value of a product or service that a firm goes on to sell. For example, the German’s Federal Institute for Drugs and Medical Devices recently ordered the county’s drug industry to look for potential supply chain problems in the event of a ‘no deal’ Brexit, with over 2,600 drugs having some stage of manufacture in the UK.
Across the medium to long term horizon, additional costs and risk will be observed through changes in regulations, patents, standards, exchange rates and even the time spent negotiating future manufacturing and supply agreements. These risks, alongside their claims, will of course be complemented by the necessary changes in the insurance markets which will be equally as exposed to these future challenges.
These uncertain changes in the market are likely to bring about considerable change within the market for business interruption insurance. With additional supply chain pressures expected - alongside the risks mentioned above - there will be increased opportunities for parties to suffer loss as a result of an unexpected event, meaning a much higher incidence of policy claims. This is then likely to be a contributing factor in a potential rise in premiums paid by businesses as they traverse this new terrain.
These impacts will not just be localised to manufacturing and their expected delays or complications in the delivery of important parts in the manufacturing process, but could also extend to the labour and expertise that lays at the heart of many UK enterprises.
Many of the key supply chains in the UK are in a precarious position, as some scramble to stockpile and make arrangements for the post-Brexit no-deal landscape - BMW have recently announced that they will close their Mini factory in Oxford for one month after 29 March 2019 to minimise disruption in case of a no-deal outcome. However, only time will tell whether this will result in a general exodus of manufacturers from the UK.
In any event, all insurers – particularly those involved transportation and/or storage of goods - should be looking ahead and positioning themselves to accommodate any new requirements of the market.
Read other items in the Marine Brief - September 2018
Read other items in the London Market Brief - October 2018