Saturday 20 July 2019

Richard Curran: 'Brexit gets ugly as firms push the button on doomsday plans'

Making the cut: Since the Brexit referendum, the top three meat processors in Ireland have all spent millions acquiring or developing further processing capacity in the UK
Making the cut: Since the Brexit referendum, the top three meat processors in Ireland have all spent millions acquiring or developing further processing capacity in the UK
Richard Curran

Richard Curran

Is your business Brexit-ready? It's a question that Enterprise Ireland has been asking client companies for the best part of two-and-a-half years. Many can now answer that question in the affirmative. Others have done very little.

The truth in business is that companies don't like uncertainty, so some firms have already done quite a lot.

The state jobs agency says that over 80pc of firms have taken some actions. This isn't bad, but it depends on whether that means much more than having a meeting or committing something to paper.

Enterprise Ireland has been all over Brexit from the start and it has laid out the implications as well as provided direct assistance. Yet for many firms, they either don't believe they can do anything until they see what happens, or in some cases they are ploughing ahead with Brexit-triggered changes even though Brexit hasn't happened yet.

Irish firms which import important raw materials for their business operations from or through the UK are already coming right up against the Brexit-ready plans of British firms.

One industrial service firm I spoke to, which did not want to be named, said they typically purchase pieces of electronic equipment from suppliers in the UK. The British firm uses an international logistics operation to deliver to Ireland. In recent weeks, the logistics firm has introduced Brexit-related changes whereby orders going to anywhere in the EU which involve electronic equipment are sent to Belgium for clearance first. They are then moved on to Ireland.

There is no Brexit yet, but this firm is trialling or has fully introduced its new post-Brexit systems. The Irish firm must now wait a week to 10 days for what was previously delivered in one or two days.

Another firm I know buys metal raw material from the UK as part of its business. The metal is used to finish products which are then sent North of the border to be sold everywhere and anywhere by a Northern Ireland firm.

The Irish firm was told in recent weeks it could no longer enjoy the same credit terms it had in the past with this British supplier.

This change of arrangements was put down to Brexit by the British firm.

It follows moves by the Irish company to start sourcing more of the metal in continental Europe as a hedging exercise ahead of Brexit.

We are so focused on how Irish firms are preparing to meet the challenges of Brexit, some businesses are ignoring the fact that firms in the UK face the same uncertainty and are re-shaping their supply, sourcing, credit and logistics processes in advance.

There are very few businesses which will put together a Brexit plan and then sit back and wait until the end of March to start implementing it. They are doing it now whether it is on a trial basis or indefinitely.

Nowhere has this been more obvious than in the meat -processing sector.

Since the Brexit referendum, the top three meat processors in Ireland have all spent millions acquiring or developing further processing capacity in the UK.

Larry Goodman's ABP announced in 2017 that it was investing €19m expanding its plant in Perth in Scotland.

Kepak spent an undisclosed sum buying the meat operations of 2Sisters in the UK.

This gave it a further five facilities across the UK: three sites in Cornwall, in south-west England, as well as one in southern Wales and another in the north-east of Scotland.

At the time, the Co Meath-based business described the deal as a "strategic growth acquisition".

It said the move would be a hedge against Brexit and currency fluctuations, and would support its "meat-based, value-added business".

Co Waterford-based Dawn Meats entered into a strategic partnership with rival, Dunbia, which saw it establish a new joint venture in the UK.

Dunbia has two plants in the North and seven in Britain. This is seen as providing a Brexit buffer and securing its supply chain for the British market.

So what if there was a second referendum and Brexit didn't happen? Or what if the British government eventually secures a much softer Brexit with a permanent customs union?

These deals have been done. That genie is out of the bottle.

Undoubtedly the threat of Brexit has shaped the investment decisions of these companies, which will want to ensure they are successful.

Inevitably, these large meat processors had to make strategic decisions to protect their businesses. The longer term outcome for meat production could be negatively affected by Brexit, even if it didn't go ahead.

The uncertainty around Brexit is already costing jobs in Ireland. One industrial supplier I spoke to has let people go because a large Irish buyer of his products is now sourcing them in the UK.

The Irish buyer has switched supplier for this raw material and is saving money by sourcing more product in the UK and availing of a lower sterling.

It is an example of an Irish company doing the right thing for its business.

As an exporter of finished product, a weaker sterling is making its final product more expensive.

If it can source some raw materials more cheaply in the UK, it can offset some of that loss.

The casualty is the Irish supplier of those raw materials.

The best advice will be that everybody should look at their own cost base, where they purchase and find new customers, whether they be in Ireland, the UK or in new markets.

Unfortunately, a weaker sterling has severely challenged some businesses and they have lost out to the Brexit referendum before Brexit even happens.

Those searching for new export markets know it is achievable but not easy.

The issues with direct access to continental markets is a very real problem.

There are businesses in Ireland which have only really ever exported to the UK.

Depending on the age of the owner/manager, succession planning and the appetite for new longer term thinking, they may well be simply praying that the whole Brexit thing will just go away.

I know of one Northern Ireland-based importer of home furnishings. This guy had a small solid lifestyle business importing from China for many years. The fall in sterling after the referendum wiped out his margin as he had to pay more for his product, but couldn't hike prices at home by the same amount.

Brexit stopped his business in its tracks.

We are no clearer about what the final outcome of the Brexit debacle will be.

Such prolonged uncertainty is prompting more businesses to enact their Brexit plans ahead of any real change. It is proving painful.

UK Prime Minister Theresa May has two options - retain the course towards her Brexit which may well precipitate a no-deal crash out or move towards a softer Brexit. She appears to have chosen the former. Her Plan B is basically a re-run of Plan A.

No matter what the final outcome looks like, Brexit is re-casting the business relationship between Ireland and the UK and not always for the better.

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