Archive: March, 2017

Brexit begins

Tomorrow Prime Minister Theresa May will trigger Article 50 which will formally start the process of Britain leaving the European Union. No country has triggered Article 50 before and there remains a lot of uncertainty about its impact. As Ahsoka Tano said in Star Wars: “This is a new day, a new beginning.”

Many budget holders and buyers are looking for answers to 3 key questions: will Article 50 lead suppliers to request price increases, are these increases justified and is there an alternative?

Brexit, like any negotiation, won’t take place in isolation. Each party, in this case the UK and EU, face political and economic constraints. By examining these constraints, we can start to provide some answers.

Exchange rate

Brexit has caused uncertainty and consequently the pound has fallen by over 10% against the euro and dollar since the referendum in June. Triggering Article 50 will do nothing to alleviate the uncertainty so the pound is likely to remain under pressure.

While the pound remains low the price of imported goods and services will be high. For many buyers it is too late to hedge against the weak pound. Where possible, buyers should consider switching sourcing to the UK.

The weak pound is driving higher inflation. In June last year the retail price index (RPI) was 1.6% and last month it was 3.2%. Many suppliers will see this as an opportunity to raise prices. Only those whose products are affected by the value of the pound will have reasonable justification.

Industrial policy

The move towards populism in Britain has resulted in Theresa May publishing the green paper is called  Building our industrial strategy which states the UK government will favour growth in local markets. A similar approach is seen in the US with Donald Trump’s policy of America First.

The industrial policy will help some UK suppliers, for example, those in sectors where Britain already does well, such as the creative industries and life sciences, and align with others that everyone believes will be big in the future like low-emission vehicles and robotics. Unfortunately, it will take a long time before buyers see the positive effects of the industrial policy in supplier’s pricing.

Another aspect of the industrial policy will be increasing trade tariffs on certain imported goods and services. Theresa May has promised new trade agreements, however, little is known about which countries will be included and how tariffs will be affected.

Increasing trade tariffs will compound the effect of exchange rates on some goods and services. Items that are imported and those that comprise a high proportion that are imported, that is, goods that rely on global supply chains, will see prices increase as suppliers pass on the cost of the tariffs. Although it’s easier said than done, particularly in industries like vehicle manufacturing, buyers should consider switching sourcing to the UK.

Investment

Brexit has created uncertainty and the lack of transparency from the UK government has compounded the situation. Many organisations will delay investment until the outcome is clearer. This will weaken buyer’s negotiation position in the short run as some of the benefits of economies of scales are missed.

Laws and regulations

Many hope that leaving the EU will result in a reduction in regulations. They further hope that this will enable suppliers to produce goods and services at lower cost which will be passed on to customers in lower prices. Unfortunately for these people, Article 50 provides two years to reach an agreement so tomorrow’s event merely marks the start of a long negotiation process. Buyers will see little change in regulation the short and medium term.

Nearly half of Britain’s exports go to the EU so if Britain wants to continue to trade with EU countries then its exporters will have to continue to follow their rules. Through the process of “flow-down” buyers will have include elements of EU regulations in their specifications if they want to sell these items in the EU.

The UK government intends to import all existing EU rules into British law via a (misleadingly named) Great Repeal Bill. Any unwanted regulations will be abolished only gradually.

Industries that are heavily reliant on trade with EU nations, such as food, will see little change for the foreseeable future.

Public procurement

Public procurement is worth about £240bn pa or about 20% of GDP. It is governed by the EU procurement rules, for example, all government bodies have to competitively tender any contract worth over €135,000.

Many procurement professionals in the public sector do not like these rules because they ignore key factors such as the size of the organisation’s supplier spend, the category of spend and existing supplier relationships.

It’s reasonable to expect some of these rules will be abandoned and for public procurement to take a more commercial, less rules based, approach.

Competition

The EU’s Competition Commission has been active in challenging multi-nationals that have tried to exploit a dominant market position such as Microsoft and General Electric.

The EU’s economy is more than 6 times bigger than the UK economy and therefore has a stronger negotiating position. It is reasonable to assume that the UK alone will not be as effective and therefore prices from certain dominant suppliers will increase.

Conclusion

Triggering Article 50 is an important milestone for Britain leaving the EU, however, Brexit is already having an effect on procurement through the weak pound. Once the formal process to leave the EU begins tomorrow the impact will be felt in different ways and at different times in different parts of the economy.

On the one hand, the price of some locally made goods and services will reduce in the long term as regulation is loosened and the industrial policy encourages growth of local suppliers. Furthermore, the public sector will benefit from a more commercial approach.

On the other hand, the price of some goods and services from the EU will rise as the UK government imposes import tariffs and global suppliers take advantage of their dominant position. Both private and public sector organisations will delay or cancel investments whilst uncertainty about Brexit remains.

The final word goes to Carrie Fisher, another cast member from Star Wars and who died recently: “Everything is negotiable. Whether or not the negotiation is easy is another thing.”