LONDON: For 46 years, British manufacturers have built their supply chains and export markets around free trade with Europe. On April 12, that could come to an end, rupturing one of the world’s most advanced, cross-border assembly lines.
To get ready, British companies are hoarding at rates rarely seen outside of wartime.
Manufacturers, from cookie makers to metal fabricators to Airbus SE , are stockpiling imported ingredients, raw materials, car and plane parts and packaging. In March alone, U.K.-based companies squirreled away raw materials and components at the fastest pace of any industrialized nation, according to a closely watched survey of manufacturers published by IHS Markit since 1992.
“This dillydallying—it’s a total frustration,” said Richard Grant-Pearce, managing director of Stockton Engineering Ltd., based in Birmingham, a maker of brackets, wires and other metal parts used by manufacturers in a range of industries.
Stocks of finished goods in Britain also rose at the fastest pace on record last month, as factories churned out extra products to meet a surge in demand from customers worried about possible Brexit disruption. U.K. manufacturers are particularly vulnerable because they import so many components from Europe to go into their exports, and so would be hit twice by any new tariffs, border delays and paperwork.
Prime Minister Theresa May has failed three times to win parliamentary backing for a deal she hammered out with Brussels on the terms of Britain’s long-planned exit from the European Union. Lawmakers have twice failed to coalesce around alternative exit plans. That has left the door open to anything from a long extension to a disorderly departure from the EU as early as the end of next week, the deadline set by the latest agreement with the EU.
Mrs. May on Tuesday agreed to sit down with Jeremy Corbyn, leader of the main opposition Labour Party and a deep ideological foe, to cobble together a bipartisan, last-hour effort to break the logjam.
Governments on both sides of the English Channel are warning a no-deal breakup could result in border chaos, intrusive cargo inspections and steep tariffs between Britain and the bloc. Companies are taking steps to prepare.
Stannah Group, a 150-year-old manufacturer of equipment such as chair lifts and commercial elevators in Hampshire, southern England, has half a million pounds, or almost $600,000, tied up in stock, including 750 stairs-mounted chair lifts. It normally keeps around a hundred on hand. It has converted a training facility into a warehouse to store all the spare products.
Delays at the border would be just part of the problem, said Jon Stannah, group managing director. “There are issues around regulations and product standards,” he said, referring to policies that are uniform for all EU members.
Airbus, which makes most of the wings for its planes in Britain, has ordered suppliers to hold at least a month’s worth of extra inventory to protect against supply disruptions related to Brexit. It is also stockpiling parts itself at factories in the U.K. and Europe.
Meggitt PLC, an aviation components supplier to both Airbus and Boeing Co. , said it had built up around £5 million in inventory at the end of the year. Britain’s aerospace industry trade body, ADS Group, estimates the cost of adding that extra inventory across the industry could top $1 billion.
London’s Heathrow Airport, Europe’s busiest hub, said it had hoarded mechanical parts to make sure equipment that moves items such as luggage won’t be idled because components are stuck in Europe. The airport also has built up a stockpile of rubber gloves and other items needed to run security checks. Drug companies were ordered by the British government to build up their supplies of critical medicines.
Factories in Ireland, which shares deep economic ties with the U.K. as well as a land border, are also building inventories at a rapid clip, IHS Markit data show. Elsewhere in the EU, Germany-based sportswear giant Adidas AG has begun separating its shipping services for U.K.-based customers from those in continental Europe. Car maker BMW AG has reserved space on a huge Antonov freight plane if it has to fly in parts to get around a logjam crossing the English Channel.
Economists warn all this stockpiling could come at a cost to the wider economy even if there is a smooth U.K. exit. Cash tied up in inventory means there is less available to invest in new equipment or on hiring, potentially squeezing growth. Firms are also likely to rein in spending on new parts and materials while they work through what they have.
There isn’t a template for attempting what the U.K. is trying to do with Brexit. A 2017 study by World Bank economists concludes that of 279 preferential-trade zones, the EU is by far the deepest. It goes far beyond sweeping aside of trade obstacles at the border. It also harmonizes regulations and standards for products and services across 28 countries. Apart from a handful of exceptions, such as firearms, a product that can be sold in one country can be sold in the other 27.
The few precedents in which a country exited an area with such deep economic integration—the breakup of the Austro-Hungarian empire in 1918 or of the Soviet Union in 1991—are usually associated with geopolitical turmoil, providing little in the way of a road map.
There is one historically similar break. When Britain joined the European bloc in 1973, New Zealand lost its preferential access to the U.K. market. The trade hit was compounded by the 1973 oil-price shock. The country suffered rising inflation rates, a collapse in exports and a slowdown in growth that didn’t pick up until the early 1980s.
There were differences, however, as the Bank of England pointed out last year, which suggest the impact to the U.K. could be more profound. New Zealand was much less deeply integrated with the U.K. economy than the U.K. now is with the EU. After the trade shock, New Zealand was able to reorient its exports to countries closer to home, whereas the U.K. will have the harder task of seeking new markets farther afield.
That sort of upheaval is what Mrs. May and other lawmakers are trying to prevent or mitigate with their handful of competing proposals. The deal Mrs. May negotiated with the EU, which needs to be approved by Parliament to take effect, lays out the terms for Brexit, which British voters endorsed in June 2016.
It settles the U.K.’s tab with the EU for past financial commitments; it lays out citizens’ rights on both sides of the English Channel; and it sets out a plan to prevent a physical border from arising between Northern Ireland, which is part of the U.K., and the Republic of Ireland, which remains in the EU.
t also contains a transition period, until at least the end of 2020 that can extend until the end of 2022, in which trade and other relations between the U.K. and EU remain as they are now. During the transition, both sides hope they can negotiate a trade deal to keep goods flowing as freely as possible. Without a deal, there would be no transition.
The Confederation of British Industry, the country’s leading employers’ organization, and the Trades Union Congress, the main national body representing unionized workers, have called the prospect of Britain’s no-deal exit from the bloc “a national emergency.”
Advocates of Brexit say there is nothing to fear from a no-deal exit. They argue that any short-term pain from higher trade barriers with the EU will eventually be offset by freer trade with the U.S. and other big markets.
With all that uncertainty, almost any outcome is possible. Businesses have been left to plan for the unplannable.
Mr. Grant-Pearce, the managing director of Stockton Engineering, said his firm had a subdued 2018 as customers put major projects on hold to see how Brexit played out. This year has been better so far, he said, because customers are stockpiling his products in case of further disruption. But without some resolution to Brexit, he expects business to tail off again.
Mr. Grant-Pearce said others are also stockpiling essential raw materials such as stainless steel, pushing up input costs for his business.
Another Birmingham firm, J. Hudson & Co., which made the whistles issued to the crew of the Titanic, has socked away six months’ worth of brass and other metals. Simon Topman, managing director of the company that has operated since 1870, said he usually has at most a month’s supply.
For many, Brexit has become a lesson in the interlocking supply chains the globalized world has become—something Britain, once called the “workshop of the world,” helped create. Around the globe, exporters increasingly manufacture products made from imported components.
In Britain, around 28% of the inputs by value in manufactured exports come from abroad, according to the Organization for Economic Cooperation and Development. Around half of those come from the EU, according to the Institute for Fiscal Studies, an economic research institute. Foreign inputs into U.S. manufactured exports come in at only 15%, according to the OECD. In China, it’s 17.5%.
The U.K. is particularly vulnerable to leaving the EU precisely because the bloc’s frictionless and tariff-free single market encouraged manufacturers to look across the rest of Europe for their components. It worked. The EU average of foreign inputs is 30%.
That makes the uncertainty faced by British companies unprecedented outside of wartime, said Michael Kitson, a lecturer in macroeconomics at Cambridge Judge Business School.
During the Great Depression of the 1930s, protectionist measures in the U.S. and Europe hurt British exports. British manufacturers, though, won domestic orders to replace foreign imports hit by the U.K.’s own higher tariffs, Mr. Kitson said. They could also tap ready-made markets in Britain’s then-empire. Some sectors increased production after tariffs came in, including textiles and chemicals, as they pivoted to accommodate demands at home.
Even during World War II, when export markets in Europe and elsewhere were closed off and shipping was attacked, British manufacturers shifted production toward the war effort. Companies churned out huge orders for the British military and its allies, while also substituting for imports no longer available.
For much of the nearly three-year countdown to Brexit, executives expected some sort of deal. Toward the end of last year, that optimism began to fade. Preparations for a no-deal started ramping up in the last quarter of last year, and kicked into full gear early this year.
A March survey of almost 300 businesses by the Bank of England found two-thirds of those surveyed said they are making contingency plans for a no-deal exit, up from less than half in January.
Despite the manufacturing burst created by stockpiling, Brexit hasn’t boosted the broader economy. The U.K. expanded 1.4% in 2018, its weakest pace of growth since 2012. The eurozone grew 1.8%, while the U.S. grew 2.9%. The Office for Budget Responsibility, which produces official forecasts for the U.K. Treasury, predicts even slower growth in 2019, of just 1.2%.
Jean-Gil Abbate, general manager of Taylors Transport Group, a logistics firm based in England’s East Midlands, has applied to the British tax authorities to designate one of its three storage facilities as a bonded warehouse to store goods that would be subject to import tariffs if customs barriers go up with the EU. He said he was also helping his customers come to grips with customs clearances and other paperwork they might need but aren’t familiar with.
Companies have put in place contingency plans, such as alternative trucking routes to avoid overwhelmed ports. Engine maker Rolls-Royce Holdings PLC, a key Airbus supplier, has drafted plans to ship its engines by tractor-trailer or airlift them in special planes that Airbus operates.
Walkers Shortbread Ltd., a food manufacturer in the Scottish Highlands, imports some of its butter, fruit and chocolate from Europe, and it sells shortbread and cookies back there. It has been stockpiling imported packaging and is telling its shippers to get export documentation ready that might be needed if there’s no deal.
The company plans to use the northern English ports of Immingham or Hull if Brexit disrupts the carefully choreographed movement of ships and trucks at Dover, the fastest route into the U.K. from mainland Europe. It is also asking about spare warehouse space at Immingham.
James Walker, who co-manages the family business, has weathered currency fluctuations, avian flu and gyrating sugar prices in his 40 years at the company. But, he said, as he watched parliamentarians vote down Mrs. May’s Brexit deal for the third time last week, “I have seen nothing like Brexit in terms of uncertainty.” - WSJ
To gain full access to The Wall Street Journal online subscribe to StarBiz Premium Plus.
Did you find this article insightful?