The UK’s industrial strategy reflects the government’s current approach of encouraging overseas companies to look at the sectors and clusters the UK is traditionally strong in, and enticing them to set up facilities in the country. In the meantime, the general strategy for growing exports has been to encourage more small and medium-sized enterprises (SMEs) to consider exporting, and then host overseas trade events and missions to help them find new markets.
To date, both strategies have been successful. But the potential impact of Brexit on importers and exporters is without precedent. The organisations we work with are already dealing with price rises on imports of over 17%, while new trade tariffs and costly non-tariff barriers will disrupt complex supply chains that criss-cross European borders. The companies that do most of their business with European partners could find future margins under severe pressure – squeezed between higher input costs and tariffs on their products.
According to CBI analysis, seven of the UK’s top 10 export markets are EU countries. So simply focusing support initiatives on new exporters and exciting new markets, or hoping that inward investors will still come to the UK, is unlikely to help the companies that are currently the backbone of UK PLC’s manufacturing and service sectors.
Support the companies that rely on European suppliers and customers
As so many UK importers and exporters are the integral links within complex European supply chains, any support strategy must carefully consider the unique nature of these individual supply chains. A one-size-fits-all approach won’t work.
Engaging with industry to understand sector-specific supply chain characteristics and opportunities will help to encourage more trade between companies within the UK. It will also identify opportunities to help UK companies to maintain their current EU customers by setting up manufacturing bases in Europe, and targeting missing manufacturing processes that can strengthen entire sectors.
Look to do more business with ourselves
In our work with UK companies of all sizes, and in supporting public sector bodies to help local companies to grow, we find the default approach is to tell companies to head for the nearest airport and look for overseas opportunities. The problem? Organisations often do this before fully assessing their current UK market penetration, the opportunities of UK market growth versus overseas growth and the difficulty of operating in markets abroad. In the process, they miss valuable routes to securing UK customers and forgo the advantages of having products that comply with UK regulations. As the UK regulatory framework moves away from the EU harmonisation manufacturers have successfully exploited, a rigorous approach to developing business within the UK will become ever more important.
A further challenge is that most of the largest companies in the UK are divisions of foreign multi-nationals, with their engineering and purchasing functions based in the likes of Japan, Germany or the US. Highlighting UK supply chain companies’ capabilities to these overseas corporate functions should be the overriding priority in the new exporting strategy. This activity should be targeted at key decision makers, with less priority placed on speculative visits to trade shows.
Connecting SMEs across the UK is also very important. Efforts by the UK’s Department for International Trade to create ‘super regions’ – delivery structures like the Northern Powerhouse – will help encourage this connectivity at a regional level. But it’s important competition between UK regions and nations doesn’t prevent structured activity to promote business-to-business interactions.
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Support targeted offshoring where it safeguards existing contracts
Recent research by the British Chambers of Commerce suggests agile UK companies have already established shadow facilities in Europe to ensure they can continue to supply their current customers without the increased costs and delays any future tariffs or changes to customs clearances rules might bring. It’s highly probable that, having taken such a decisive step, these companies will look to exploit their new location and grow. As long as the companies remain UK owned, this will benefit the UK Exchequer. In fact, a study by Copenhagen Economics found jobs moved offshore by companies tend to create more jobs in the home country, as firms become more competitive and expand. A detailed analysis of the effects of targeted outward investment on post-Brexit Britain should now happen.
Completing this analysis could inform a bold strategy for an ‘outward investment organisation’ within the Department for International Trade, to support UK companies to expand overseas. This might encompass partnering with other countries’ investment agencies to look for contract manufacturers, or setting up shared facilities for UK manufacturing in key markets overseas. While there’s one passing reference to outward direct investment in the industrial strategy, there’s no indication a detailed approach has been formulated yet – but this should take priority.
Target specific elements of supply chains to iron out tangled supply chain logistics
The proactive strategies used to attract investors in recent years have been focused on component or product gaps in UK supply chains. With Brexit approaching, a much more relevant question is to look at where process gaps exist. For example, if a specific plastic moulding can be manufactured for a UK vehicle in the UK, but must travel to Spain or Germany for chrome finishing during its manufacture, it will be subject to two sets of tariffs, customs delays and paperwork requirements. The government’s ‘Industrial Strategy Challenge Fund’ for driving innovation in priority sectors should be mirrored by a ‘Process Challenge Fund’ initiative to target some of these strategic process weaknesses by attracting investment in new equipment and skills.
Targeting investors and providing grants to companies to fill these capability gaps will strengthen entire sectors. The grants involved may be quite small, but have the effect of safeguarding many more jobs than those directly created.
All of this can only be achieved with a detailed supply chain knowledge across all priority sectors. In most cases, the only way to obtain this knowledge is through the effective account management of UK-based companies. This means finding a way to truly understand their growth strategies, challenges and exit strategies.
For a long time, the government’s approach has been to treat inward investment and export growth as two separate activities – to the extent that delivery teams are based in different parts of the UK, and delivery contracts are fragmented along different regional and national models. Despite this, the UK Government’s approach has been the envy of many countries around the world, having enjoyed a leading position in global inward investment league tables and a recognised brand.
To ensure the new approach builds on our previous success, and exploits the opportunities that arise from Brexit, the industrial strategy should adopt a sophisticated supply chain view to develop an empirical base for pragmatic, joined up policies to help sectors to grow. These policies and business support will be truly relevant to drive forward the UK’s economy in a post-Brexit world.