Last reviewed 31 August 2021
Businesses have been going through one of the most tumultuous periods in living memory. Brexit and Covid have had serious, but wildly varying impacts on performance. Do we assume that these are exceptional circumstances and look forward to a return to normal sometime soon? Or has the game changed permanently? We discuss the supply chain.
It was predictable that Brexit would have a significant effect on businesses that trade internationally. The actual impact was not always so easy to predict and varied according to the nature of each business. By leaving the Single Market and Customs Union, trade with the EU 27 countries was always going to be a bit more complicated. On the other hand, the freedom to negotiate our own trade agreements was a potential benefit. At the last minute, a trade agreement with the EU was agreed, meaning that import tariffs would be avoided for goods that met origin rules. But there was to be no mutual recognition agreement, for example on product standards, meaning more hoops for manufacturers to jump through in regard to CE marking.
And then, along came Covid-19. The World Health Organization and others had warned of such a possibility, but its impact on trade took many, perhaps most people by surprise. Governments took drastic action to contain the virus, often impacting on the ability of businesses to operate.
The impact of Covid-19 has been particularly severe on many international businesses with long or complex supply chains. Reliance on suppliers in Asia for essential materials and components has left businesses vulnerable to political decisions in other countries. The automotive industry is now suffering from a shortage of semi-conductors, an essential item in most modern vehicles. Distribution is struggling to cope with wide variations in traffic, while also seeking to manage the effect of absent workers caused by the virus itself.
The impact of sudden, major and random events
The writer and analyst Nicholas Taleb wrote about the impact of sudden, major and random events in his book Black Swan. The title referred to a once widely used phrase, describing unlikely events as a black swan, on the assumption that no such thing existed. The discovery of black swans in the seventeenth century changed the meaning of the phrase. Taleb suggests that there is a danger in seeing black swan events as exceptional, one-off happenings. Should we view Covid-19 and Brexit as black swan events and expect both to cause permanent changes in the way businesses operate?
As international trade has developed (which it has rapidly since World War Two) businesses have sought to gain advantage by using suppliers from around the world who can offer superior materials or lower prices. The drive for efficiency has also led to companies striving for “Just in Time” methods, where stock levels are minimised to reduce costs and production lines rely on timely and reliable supplies. Whether a business would be right to continue to pursue efficiency in this way very much depends on whether Covid-19 is viewed as a one-off or as something that has a long-term impact.
Over the last 18 months, drastic changes to supply chains have already occurred, and we must assume that at least some of these changes are likely to be permanent. Consumer behaviour, in particular, has seen a rapid move towards online transactions, a trend that appears to have hastened the decline in the traditional high street. Many office workers have readily taken to the imposition of home working, and the benefits for employers, employees and clients appears to herald a decline in commuting. In business-to-business transactions, companies have sought ways to deviate around broken links in the chain, for example by selling directly to end users.
On the supply side, we saw a taste of what was to come in February 2020, when the car manufacturer Jaguar Land Rover announced they were shipping essential parts in suitcases via passenger airlines from China, in order to keep supply lines moving. That initiative was soon frustrated, however, by a cataclysmic decline in air travel.
The challenge of Brexit
Frustratingly, the impact of Brexit for some businesses has worked contrary to some of the above actions. Being outside of the Customs Union and Single Market has tended to have the most profound impact on traders who buy or sell in smaller quantities. This has frustrated the move towards shorter supply chains that the pandemic encouraged, as the relative costs on sending smaller, lower value shipments between the UK and EU 27 has been higher than for larger shipments. So, while Covid-19 has prompted suppliers to deal more directly with end users, Brexit has placed a penalty on the smaller transactions that this reaction has encouraged.
What’s the solution? It’s worth stressing that it will be different for every company. But the rapid growth in sourcing essential materials and components from remote suppliers may be a crucial issue for many. If we do continue to rely on China, India and Southeast Asia, can we dare to keep on minimising local stocks, with all the risks that entails? In downstream supply chains, will there be less reliance on local distributors and wholesalers? Will the apparent reduction in risk of more direct sales lines mean that supplying end users directly becomes more typical in international trade?
One solution to the Brexit/Covid paradox might be for British suppliers to use a fulfilment service in an EU country. This is already proving popular. It means a supplier finding an operator who can accept a bulk delivery, deal with import clearance and taxation and fulfil orders to customers throughout the countries of the EU. If it works, it means customers can order in small quantities and experience the rapid deliveries that were possible before Brexit. It adds to the supplier’s costs, but by consolidating numerous orders in one shipment, the business minimises the customs and shipping costs and also reduces the risk of future disruptions.
Planning for the future
These often-contradictory developments amount to a huge challenge for international traders. So much of the growth in the value of trade and in the benefits of innovation have come from development of global supply chains. But perhaps the pandemic should be seen as a warning that the future is likely to be very different to the recent past. A recent poll of exporters found that the biggest current challenge wasn’t Covid or Brexit, but the rapidly rising costs of long-distance shipping, an issue that will surely be exacerbated by moves to combat climate change? Versatility might ultimately be achieved by creating more local self-sufficiency.
Right now, the long-term effects of Covid-19 and Brexit are very hard to predict. But it would be foolish to assume that there will be none. The businesses that flourish will be the ones that anticipate the impact on their operations and make timely changes to their practice.