Wednesday, February 06, 2019

Project fear becoming a reality as no-deal Brexit looms

During the referendum campaign the suggestion companies would uproot and shift to Europe or elsewhere was dismissed as project fear.

However with less than two months to go until Britain likely crashes out of the EU, many companies have either left, downsized, reduced investment of shifted some operations abroad [Guardian / Bloomberg / The Scotsman].

Insurance companies shifting strategy

Since the referendum a number of companies have changed their strategy. The US insurance company AIG has set up a new company in Luxembourg for EU clients [Reuters] whilst the Admiral Group insurance company is moving some of its operations to Madrid and Seville to serve its European business outside of the UK [Bloomberg]. And the insurance giant Chubb is moving its European headquarters to France [Chubb]. Hiscox, another insurance company, has set up a new base in Luxembourg [Telegraph].

Other insurance companies making moves include Liberty Speciality Markets which is also setting up its EU headquarters in Luxembourg [Liberty Speciality Markets] as has the RSA Group [RSA Group]. And Lloyd's of London, the world's oldest insurance market, has set up a new subsidiary in Brussels and is moving some roles from London [Standard].

Banks & financial moves

Several banks and other financial institutions have also made move. Barclays bank plans to move 190 billion euros of balance-sheet assets to Dublin. And the exchange operator CME Group is moving its $240 billion-a-day European market for short-term financing, the largest in the region, from London to Amsterdam to guarantee continental firms can continue to use it if there is a no-deal Brexit. It's also moving its $15 billion-a-day foreign-exchange forwards and swaps venue to the Dutch capital [Bloomberg]. Cboe Global Markets, another exchange operator, is also shifting most of its European equities trading to Amsterdam [Bloomberg]. 

Pantheon, the private equity and infrastructure investor, has meanwhile set up a new base in Dublin [City AM]. 

Deutsche Bank, meanwhile, is repatriating at least 400 billion euros of balance-sheet assets [Bloomberg].  JPMorgan is also moving balance-sheet assets to Frankfurt to the value of 200 billion euros [Bloomberg].

Whilst it is perhaps understandable that financial firms might shift given the EU regulations concerning services, other companies have also made shifts abroad.

Media and tech 

Media company Discovery, the US broadcaster, is setting up a new European HQ in the Netherlands. In a statement the company said the move was one made that "ensures continuity" of "services for the viewer across Europe" [Broadband TV News]. However, the company was retaining "a large hub in the UK" at its London office which houses more than 1,000 people. Britain's former phone monopoly BT is also seeking a new data protection base in the EU.

Whilst the focus of Brexit has been on manufacturers and financial groups many have failed to realize the effect Brexit will have on media companies. Akin to global banks, international media companies like Discovery, Sweden's Modern Times Group and Time Warner's Turner International use UK licences to access the European Union. And these companies have had to make the decision as to whether they should relocate some operations to preserve that access.

"No one running a business of any scale can wait to the end of negotiations before deciding what to do," Adam Minns, executive director of the Commercial Broadcasters Association, said back in August 2017 [Independent]. The process of acquiring office space, moving staff and shifting technical support could take up to a year. And so Brexit damage has already been done as companies have already been forced to make the shift.

Slow burn hiding real impact

It is the slow burn of Brexit and the gradual trickle of companies leaving that has helped hide the Brexit effect. And this has given many a false impression that Brexit hasn't had a marked impact. But there was never going to be a mass exodus on any one single day. Dozens of companies all leaving on 29th of March or the day after the referendum would certainly make headlines. But the single reports of a company shifting out of the UK are soon forgotten about.

Tariffs & supply chain concerns

Manufacturing companies have also made a shift, partly out of concern over tariffs that might be imposed after 29th March 2019. The seller of Clarks shoes, C&J Clark, plans to open a distribution centre in continental Europe [Bloomberg]. 

And Dechra Pharmaceuticals, the maker of animal medicines, is looking at setting up dual testing facilities in the UK and EU in preparation for Brexit [Bloomberg]. 

Publishing company Monocle, the global affairs magazine, is moving its printing from the UK to Germany over concerns about difficulties exporting if there's a no-deal Brexit [Bloomberg]. And Ryohin Keikaku, which retails products under the Muji brand, is considering moving its European headquarters out of the UK to Germany [Bloomberg / Business Insider].

Panasonic has said it would move its European headquarters from the outskirts of London to Amsterdam effective 1st October [Bloomberg / BBC / Dutch News]. 
The list of companies goes on. Renishaw, maker of precision measuring and calibration equipment is opening a distribution warehouse in Ireland, whilst Schaeffler, the German maker of ball bearings, used in cars and the London Eye Ferris wheel, is closing two of its three UK production plants, which could cut its workforce by half [Bloomberg / BBC]

The Japanese consumer electronics firm Sony is moving its European domicile to the Netherlands [FT / CNN]. The Surgical appliances manufacturer Steris plans to move its corporate base to Ireland from the UK [Bloomberg / Irish Times].

Stifel, the US firm, will buy the brokerage operations of Germany's MainFirst Holding, ensuring that it can keep offering financial services in the EU after Brexit [Bloomberg]. And Swissquote, the Swiss bank, is planning to move its European retail business from London to Luxembourg [Bloomberg].

TransferWise, a money transfer company is opening an office in Belgium [FT]. Travelers, the insurance company, is setting up a new subsidiary in Dublin [Global Banking & Finance]. 

The Hut Group, a company which sells beauty, wellness and luxury products online, is constructing a facility in Wroclaw, Poland [Bloomberg].

Automotive industry hit

Of course the automotive industry is one that has commanded headlines when it comes to Brexit. Vauxhall is said to be considering closing one of its two British factories [Bloomberg]. 

Meanwhile Nissan has confirmed that the new X-Trail originally planned for its Sunderland plant will instead be made in Japan [BBC]. This despite government Brexit bribes being offered to the company of up to £80m [Sky News].

Jaguar Land Rover meanwhile temporarily paused production at its engine factory in Wolverhampton in the run-up to Christmas, citing Brexit as a factor contributing to fluctuating demand.


Whilst some companies have decided to ride the storm, at least for the short term, there are quite a number that have already begun to stockpile. This is of course at a time when Britain is not at war. Nonetheless the concerns over supplies and increased tariffs have prompted businesses to plan for the worst.

Amongst those stockpiling include Airbus, the European company, which is said to be stockpiling parts to maintain production rates in case of customs delays. Bentley, the carmaker, is building up stocks of imported parts as is Bosch, the world's largest auto-parts maker

Brompton Bicycle, the foldable bike maker, has even rented a warehouse near Heathrow to store an extra month's worth of supplies.

Associated British Foods, the maker of Ryvita crackers, Twinings tea bags and Jordans muesli is also buying key items like food, packaging and machinery ahead of time. And Creative Nature, the superfood firm is stockpiling hemp seed and other ingredients for its snack bars.

Heineken, the Dutch brewer, is stockpiling thousands of pallets of goods to make sure beer taps don't run dry. LVMH, the French maker of high-end beverage brands including Moet & Chandon champagne and Hennessy cognac has added four months of wine and spirits inventory to the UK. Majestic Wine is meanwhile planning to stock an extra 5 to 8 million pounds of inventory to mitigate any potential supply chain disruption.

And Imperial Brands, whose tobacco brands include Davidoff, will hold about 30 million pounds worth of cigarettes to mitigate possible supply disruptions. That equates to more than 2.6 million packs of 20 cigarettes each. So at least perhaps smoker won't get too twitchy after a hard Brexit.

With concerns rising over the supply of pharmaceuticals AstraZeneca, the drugmaker, is increasing its stockpile of drugs to four months from three and spending about 40 million pounds [$51 million] to duplicate UK-based testing facilities that prepare products for distribution.

And the list goes on with Joules, the clothes retailer, Marks & Spencer, Cadbury's owner Mondelez International, Nestle, pharmaceutical giant Merck, the drugmaker Novartis and Pfizer all making plans to stockpile. Even Pets at Home is stocking up of dog and cat food.

Cancelled plans, investment & job cuts

Others, whilst remaining in the UK, have shelved plans in terms of investment or expansion, and in some cases have cancelled production of certain products.

All of this has an effect on jobs. Thus far job losses directly connected to Brexit are not significant, though for those who have lost their job it is of course extremely significant. The numbers might not be large now, but all the signs point to far more significant losses in the coming weeks, months and years should Britain crash out of the EU.

Bank of America, which has 4,500 UK staff, is moving 400 jobs to Paris, mostly from London. Barclays, which has 10,000 UK staff, has reported that it will move 150 jobs to Dublin, which will be its main EU hub after Brexit. They are also creating 150 new roles in the Irish capital.

And Citigroup, which has 9,000 UK staff, has reported that it will move 250 jobs. Credit Suisse, with 6,600 UK staff, has reported that it will move 250 jobs to various EU cities. Deutsche Bank has reported that it will move 500 jobs to Frankfurt of its 9,000 UK staff. Goldman Sachs, which has 6,000 UK staff, has reported that it will move 700 jobs. HSBC, which has 5,000 UK staff, has reported that it will move 1,000 jobs to Paris. And JPMorgan, which has 16,000 UK staff, has reported that it will move 400 jobs. Other finance companies are also relocating staff including Societe Generale, Standard Chartered and UBS which between them are sending more than 700 staff abroad.

On the face of it such relocations may not look significant. In many cases the numbers equate to only 5% of the company's London workforce, though in the case of HSBS they are shifting 20% of their staff . Nonetheless, should uncertainty continue and operations become more difficult for these firms the numbers could increase dramatically.

In other sectors the losses are already sizeable. Jaguar Land Rover, Britain's biggest carmaker plans to cut 4,500 jobs globally, representing roughly 10% of its workforce, citing Brexit as an indirect factor. And since October 2017, 650 people have lost their jobs at the Ellesmere Port factory where Vauxhall Motors builds Astra hatchbacks.

Perhaps one of the biggest blows was Japan's Hitachi Ltd putting a £16 billion nuclear power project in Britain on hold [Guardian / Reuters / BBC].   

Warnings against a no-deal Brexit

Many companies have warned for some time that they may have to seriously consider their future in Britain, especially in the event of a no-deal Brexit. And those warnings have have grown in the last few weeks.

The message from many businesses is that the government take no-deal off the table saying it would be disastrous for them and the country [Standard]. 

Airbus has been particularly outspoken. Its CEO Tom Enders said the European aerospace giant may have to move future investments out of the UK in the event of a no-deal Brexit. "Make no mistake, there are plenty of countries out there who would love to build the wings for Airbus aircraft," Enders said in an unprecedented video message [Guardian / Airbus].

Ford, too, has painted dire warnings. The automaker is considering closing factories in Europe and has cautioned any action might be worsened in a no-deal Brexit. In January this year the company said a no-deal Brexit would mean costs of $800m in 2019 alone [Guardian] a repeat of warnings it gave only four months previously [BBC].

BMW's CEO Harald Krueger has said that the carmaker "would be forced to build in the Netherlands." The company has also said it would bring forward a four-week stoppage for routine maintenance at its Oxford factory to April 1, a few days after the UK is planned to leave the EU.

Bentley's boss has also pointed at the risks of a no-deal and said a failure to reach a Brexit deal would be "quite damaging" to annual profit in the worst-case scenario, limit the company's ability to invest and could lead to its plant closing for an additional few days at Christmas or Easter.

PSA Group, the maker of Peugeot, Citroen and DS vehicles, has been more cautious in its public statement. But CEO Carlos Tavares has warned that business could face dire consequences without a deal but says that in the event of a hard Brexit it would enter into talks with unions in the UK before taking any tough decisions on production.

Meanwhile Toyota says it anticipates halting production at its Midlands factory, which has 2,500 employees, in the event of a no-deal Brexit.

These are just some of the effects on British industry because of Brexit. Britain has already lost the EMA [Guardian] as well as the European Banking Authority [Guardian]. Britain's disconnect from Euratom [Sky News], Galileo as well as security agencies such as Europol [BBC] are likely to affect Britain's place in science and create uncertainty concerning security.

Hard line Brexiters & WTO myths

There are of course those within the Brexit camp that will maintain that much of this is project fear or that Britain can renegotiate deals and regulatory alliances with other partners. This is true to some extent. Britain can of course negotiate new trade deals. But these could take decades simply because of the lack of available trade negotiators and the average time it usually takes to get a trade deal negotiated. And as for the much lauded WTO Article 24, which Brexiters are claiming could provide a framework for Britain moving forward, the idea is just fanciful [Bloomberg]. Indeed the first major stumbling block would be getting the EU to sign off on it. The UK can't sign an Article 24 deal unilaterally; it would require agreement from the EU. And that is extremely unlikely as it would mean the EU saying goodbye to the £39 billion divorce settlement, amongst other things. Thus Britain would have to drop back to a default position and begin trade deals whilst operating on punitive tariffs. And whilst such deals are being discussed, business will have to make the decision as to whether it's economically viable to stay in the UK.

For Japanese manufacturers such as Nissan it looks almost certain that it will eventually wind up operations in the UK, especially given the fact that Japan has recently signed a free-trade deal with the EU. How could Nissan UK remain competitive given the high tariffs on cars and car parts under WTO rules [BBC]?

It isn't just the manufacturing base under threat. Agriculture is likely to be decimated after a hard Brexit. From fresh fruit, vegetables and grain to meat and dairy exports, all will be affected. Without a free trade deal with the UK, which could take years, Britain would be now selling such products at an increased cost because of WTO tariffs. For fresh fruit, vegetables and grains this would mean tariffs of around 10%. For meat exports the effect will be far more significant.

Just over 80% of total beef exports are to the EU, highlighting the significance of the EU market to the UK beef industry. The majority of beef imports into the EU, from non EU countries, are subject to ad valorem tariffs of 12.8%, plus an additional fixed amount that can range from €1,414 to €3,041 per tonne, depending on the product. These tariffs could account for well over 100% of the price per unit. Under a 'no deal' scenario, UK exports could be subject to these tariffs, which would limit access to the EU market. At the time of writing [January 2019], no information is yet available regarding the rate at which UK import tariffs would be set in the event of a 'no deal' Brexit [Project Blue PDF]. 

Suffice to say any significant price increase would make British beef, and other meat, noncompetitive and too expensive for EU consumers. The EU would simply shop elsewhere with countries with which it has trade agreement or trade within its own borders. Brexiters have argued that Britain might simply sell to someone else. But this fails to understand several things. One is the so-called gravity of economics - whereby countries do the most trade with their nearest neighbours. Secondly other markets may - and are quite likely - to already have ample supplies of meat or other products Britain might be trying to sell them. Furthermore, given that Britain would - at least initially - only have default WTO tariffs under which to trade, they would be in no better a position to trade with markets further afield than with the EU market on its front doorstep.

It is perhaps no surprise that some government departments, fearing a no deal Brexit, are already making plans to implement mass slaughter of livestock and burn or otherwise dispose of the carcasses.

Sunlit uplands or a mad max apocalypse?

It is hard to see the sunlit uplands that Brexit was supposed to bring. For many rationally minded people the view won't be sunlit. Rather is will be lit by the burning of thousands of unwanted carcasses whilst police and army patrol the streets to quell civil unrest in the wake of food and medicine shortages. Maybe it won't be a 'Mad Max apocalypse that former Brexit secretary David Davis dismissed as scaremongering [BBC]. But neither will it be the utopia painted by some Brexiters.

Economists are already raising concerns about a global recession, precipitated by US president Donald Trump's trade war and also Brexit. The Eurozone is not entirely stable, economically speaking - indeed Italy recently fell into a technical recession. And China's growth reduced in the last quarter of 2018.

However, Britain's economic outlook is even more dire. And much damage has already been done. Indeed the latest economic data suggests the economy has been brought to a near-halt as firms grow increasingly anxious about Brexit [Bloomberg / Guardian / Reuters / BBC]. At a time when being part of the world's biggest free-trade block would held Britain ride the storm of another global recession, the country is instead severing ties and going it alone.

The sea is likely to get very rough in the coming months and years - Brexit or no-Brexit - and Britain is going to find it very difficult navigating let alone surviving by itself.  Weary of being outpaced by its continental competitors, the UK belatedly joined the European Economic Community in 1973. In 1976, the plummeting value of the pound forced Jim Callaghan's Labour government to humiliatingly accept a £2.3 billion bailout from the International Monetary Fund, the largest in its three-decade history. Britain became known as "the sick man of Europe". 

Slowly and after much pain, Britain forged a new role for itself. The creation of the European single market – enabling the free movement of goods, capital, services and people between member states – bolstered an increasingly service-driven economy. London, whose population had declined from 8.2 million in 1951 to 6.8 million in 1981, became Europe's financial powerhouse [NS / Wikipedia]. 

Brexit will likely undo all the good that the EU done in helping bolster the UK economy. And as Britain heads for almost certain disaster, the EU President Donald Tusk has expressed his incredulity of how Britain managed to find itself in this position. "I've been wondering what that special place in hell looks like, for those who promoted Brexit, without even a sketch of a plan how to carry it out safely."

So what are the chances of a no-deal Brexit. Despite the warnings and damage already done to the British economy there are quite a number of economists who fear it may well happen.

The risk of a no-deal Brexit still exists as "you can't underestimate the stupidity of politicians," said Pau Morilla-Giner of London & Capital Group Ltd. speaking on Bloomberg TV on Tuesday 5th of February. Essentially the UK is "uninvestable for the moment" he added, "grab the popcorn and see what happens!"

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