The U.K.’s decision to leave the E.U. roiled markets Friday, pummeling the pound and sending commodities linked to economic growth into a slump. As the dust clears and businesses start to consider the long, uncertain road ahead, Spend Matters has gathered its live coverage from contributors in England to explain the top six implications for procurement and supply chain organizations. Stay tuned throughout the week for expert analysis on the impact to direct materials purchasing, sourcing and supplier management considerations and much more.
1. Companies Will Face Widespread Uncertainty — For a While
The divorce process is expected to take up to two years. This means that companies are facing an uncertain future, with much to look out for from a risk management perspective — how new trade agreements will be structured, how the decision will weigh on already tepid global growth and swings in currencies and commodities prices, to name a few.
Add to all of that the resignation of Prime Minister David Cameron and the political landscape becomes even more murky. As MetalMiner Editor-at-Large Stuart Burns explained, “The automatic assumption is this will be Boris Johnson with Michael Gove as Chancellor, but the party is deeply divided and a lot could happen between now and the fall.” Just how the U.K.’s new leaders will approach negotiating the country’s new relationship with the E.U. is anyone’s guess.
2. Supplier Relationships Will Need to be Re-Evaluated
As the U.K. looks to throw out its current terms with its two largest trading partners, companies will need to consider several issues related to current suppliers. U.K.-based multinationals, for example, may find prices from European suppliers will turn unfavorable and start using local subsidiaries instead, Daniel Ball , director at Wax Digital, told Spend Matters UK/Europe.
Trade conditions will not immediately change following the referendum, so procurement groups have time to consider the vote’s effect on their supply bases. U.S.-based companies may even have more time to plan than they think. Reacting to the news, President Obama told The Economist “his country was focused for the moment on passing deals with large blocs, notably the E.U., so that Britain would be ‘at the back of the queue.’”
3. Borders Will Become More Complicated
One of the driving forces behind the "leave vote" was mounting fear of free movement between the U.K. and the continent. As Milan Panchmatia from 4C Associates told Spend Matters UK/Europe, the decision to tighten borders will increase regulation and administration associated with business travel.
The borders between the continent and the U.K. are not the only boundaries that could change. Consider how the border between Northern Ireland and the Republic of Ireland, a popular corporate home because of its low tax rate and an E.U. member, could now require security checkpoints. Britain itself could also face substantial reshaping. Scotland, where 62% of voters voiced support for remaining part of the E.U., moved Friday to hold another referendum on splitting from the U.K., and First Minister and Scottish National Party leader Nicola Sturgeon said Sunday she would consider advising the Scottish parliament to not give “legislative consent” for Brexit, effectively vetoing the decision. The travel and logistics implications from such changes could be far reaching for supply chains.
Panchmatia also pointed out that the future costs of imports are up in the air. While “leave” campaigners claimed that import costs will be significantly reduced (by as much as 8%), “import costs are equally likely to rise or stay the same ... It’s also likely that the administration of imports (everything from VAT to duty deferment) will become much more complex.
4. The Supply of Low-Cost Labor Will Shrink
A backlash against immigration tipped the referendum toward “leave,” and the U.K. will have to deal with the consequences of that decision. 4C’s Panchmatia said this factor would certainly add more costs to businesses. “There will be a clear increase in costs for products and services that depends on low-skilled migrant labour (everything from contract cleaning to logistics and construction),” he said.
But stopping the flow of immigrants while maintaining advantageous trade relationships may cause problems for the U.K. Businesses based there are already calling for the country to maintain access to the single market as Norway and Switzerland do, MetalMiner’s Burns said, but “what wasn’t acknowledged is that membership or access to the single market demands acceptance of free movement. You can’t have one without the other.”
5. Procurement Recruiting and Talent Management in UK Will Suffer
The free flow of goods and services is not the only inflow procurement organizations in the U.K. should be concerned with. Talent is also a major consideration. If the “leave” campaign succeeds in stopping the influx of migrants from the E.U., businesses will have a far smaller pool of candidates to consider for open procurement positions.
Panchmatia said his organization had already been tracking the vote’s possible effects on the procurement industry.
“Our recent monthly poll of 500 global procurement professionals, found that three quarters (79.5%) said they'd rather stay part of the European Union, 78.6% said they thought the procurement industry would be a harder sector to work in, 98% felt that leaving the EU would have a negative impact on procurement career opportunities in the U.K.”
6. Increased Market Volatility
The most immediate repercussions of Brexit have been its effect on markets. Stocks and currencies both reacted dramatically to the news, creating difficult new conditions for U.K. and U.S. companies.
“The markets have taken the decision badly,” Burns wrote on MetalMiner. “The FTSE 250 — which is considered a close barometer of the UK economy — fell by 12.3% before paring losses back to 7.1%, while the pound tumbled to $1.30, before recovering slightly to $1.36 against the dollar.
“The move in sterling is the biggest one-day fall ever seen. Against the euro, the pound dropped 7% to about €1.2085 and the euro also fell 3.3% against the dollar, its biggest one-day fall since the currency’s inception as markets recognized the risks this poses for Europe as a whole.”
U.S. companies will be watching two numbers in particular: the value of the dollar and interest rates. The dollar quickly rallied against the British pound Friday, up 6.3%, raising the prospect of harm to exports in the short term. Contracts negotiated in euros or pounds may need to be re-examined, as the currency fluctuations accompanying the vote will surely distort costs to businesses. If conditions from Brexit continue to depress markets in the longer-term, the U.S. Federal Reserve will likely shy away from any additional rate hikes this year — and perhaps even consider a rate cut.