Features
4 May 2016

How the EU referendum outcome could affect manufacturers

Manufacturing is a key sector in the EU referendum debate. David Adams takes a look at how either outcome could affect them

If my nine-year old daughter disagrees with me strongly, she sometimes shouts “Well, that’s just your OPINION!” At the time of writing, it seems this debating technique has been adopted by most of the public figures campaigning for both possible outcomes in the UK’s forthcoming in/out EU referendum.

Some more nuanced contributions have been shouted down. In March, Bank of England governor Mark Carney was criticised by those campaigning to leave the EU, after he described that outcome as “the biggest domestic risk to financial stability”. Days earlier, the head of the British Chambers of Commerce (BCC), John Longworth, had felt forced to resign after stating in public that there could be some advantages for the UK if it left the EU, even though the BCC was supposed to be remaining neutral on the subject. It has not been a particularly edifying or informative debate so far.

There are many different factors to consider when deciding how to vote. But looking at the question from the point of view of the UK’s manufacturers, their staff and shareholders – all of whom have much to lose if the referendum itself has a negative impact on the economy – how does one get a clear understanding of what might happen to UK manufacturing in the event of either possible outcome?

In February, a poll of members of the manufacturers’ association EEF showed a clear majority wanted to stay in the EU: 61%, compared to only 5% who wanted to leave. But that still leaves a lot of undecided voters. Meanwhile 81% of EEF members cited the advantages EU membership offers exporters as the biggest benefit of membership, although 72% said the greatest disadvantage was red tape. EEF chair Martin Temple said it was in the interests of UK manufacturers for the country to remain in the EU and for UK politicians to try to reform from within.

No-one knows what the future will bring if the UK votes to leave the EU

“The facts of our economic lives in Britain are European,” he said at an event during the organisation’s annual conference. “The job of our elected politicians is to... [use] power and influence they have to make it work better, rather than... simply giving up and taking us out into an abyss of uncertainty and risk.”

Automotive manufacturing companies have been among the most vociferous manufacturers suggesting the UK should vote to stay. This is not that surprising: in 2015, 57.5% of all the vehicles built in the UK were exported to Europe, according to figures from the Society of Motor Manufacturers and Traders (SMMT).

In March, UK workers at Rolls-Royce and Mini received an email from their companies’ parent firm BMW, stating the company’s belief that the UK should vote to remain; and noting that if the UK were to lose the free trade and free labour movement benefits conferred by membership of the single market, the company’s “employment base could be affected”. This followed similar statements from both Nissan and Toyota, although both stressed their commitment to investments in the UK. The industry supported around 799,000 jobs, directly or indirectly, in the UK and contributed £15.5bn to the economy during 2015, according to the SMMT.

Michael Mychajluk is chair of the manufacturing special interest group at ICAEW and supply chain manager at Jaguar Land Rover. His company built about 487,000 vehicles in 2015, of which 110,000 were exported to other EU countries.

“It’s good to see already that a number of automotive manufacturers have said in public that they’re committed to the UK whether it’s in or out of the EU,” says Mychajluk.

“We’re investing heavily in the UK – you have Nissan launching new vehicles; there have been positive announcements recently from Maclaren, Bentley and Aston Martin. But if we were outside the EU a lot of those investments would probably not happen, because those companies want access to the single market.”

Ian Malcolm, managing director of Elring Klinger (UK), a subsidiary of a German company that develops components for the automotive industry, also wants the UK to stay. He was not impressed by the prime minister’s attempts to negotiate a better settlement for the UK before the referendum, but points out that David Cameron has obtained agreement that the UK will no longer be pushed towards “ever closer union” and would never have to adopt the euro. He believes the EU is in need of further reform, but thinks the UK should work for that reform from the inside.

The Leave campaign points out that the UK decoupled from the EU would be an attractive trading partner on the world stage. It also suggests the EU needs trade with the UK more than the UK needs the EU. Their opponents point out that this is not true in relation to every individual member state, and all would need to agree to a trade deal with the UK.

Even so, there are plenty of manufacturers who favour leaving the EU, or at least dismiss the dire warnings about what might happen following an exit. In 2015, the CEO of JCB, Graeme MacDonald, told The Guardian that he did not think the UK leaving the EU “would make a blind bit of difference to trade with Europe. I don’t think we or Brussels will put up trade barriers,” he said.

Christopher Nieper, managing director of Derbyshire-based clothing manufacturer David Nieper, does not think UK manufacturers have anything to fear from leaving the EU. “The large corporates mostly would vote to stay in, but then they would, wouldn’t they?” he says. “They can afford to have someone in Brussels lobbying for them.”

He points out that some of the same companies currently urging the UK to remain in the EU were among those that warned the UK economy would suffer and be starved of foreign investment if it did not join the eurozone when it was launched in 1999. “They were wrong then and they’re wrong now,” he says.

Manufacturers would probably be well-advised to plan for either possible result.

He also cites the small percentage of UK SMEs that trade to any significant extent with the EU – only 6% of all UK firms trade in other EU countries, yet all those businesses are subject to EU regulations.

David Nieper itself employs staff in France, Germany, Holland and Switzerland and sells products in stores, online and via mail order to consumers in all of these countries. The company also buys some raw materials in Europe, then ships these back for manufacture in the UK. These two-way cross-border transactions create a natural currency hedge, meaning the company has less of a stake in what might happen to the pound in the event of Britain leaving the EU than do some other UK companies.

Overall, says Nieper, leaving the EU would make little difference to day-to-day operations. He can’t see any reason why, if Britain left, the company’s customers in Europe would suddenly be less likely to buy their products. He also points to the fact that there are plenty of other markets across the globe with which the UK could trade, many of which are in a healthier state than post-financial-crisis Europe.

Then there is what he sees as the enticing prospect of escaping all of that Brussels red tape. “I realise that if there is a Brexit we don’t get rid of those regulations overnight, but over the coming years Britain could start to make regulation more appropriate for British goods and British jobs,” says Nieper.

“Regulation is one of my pet hates,” says Malcolm. “People say a lot of it is European. But actually, is it? A lot of it comes out of our own parliament. I’m sure at some point someone will bring up the old story about the straight bananas, but I honestly don’t think there’s been much regulation that the EU has introduced that hasn’t been the right thing to do.”

Furthermore, if the UK wants to continue to access the single market it will continue to be bound by at least some EU regulations, while no longer being able to influence their content.

So how can one choose between these opposing views when so little about the future is predictable? Chris Parkin, financial director at Northumberland-based Miller UK, which manufactures earth-moving hardware such as buckets and couplers for diggers, says he and his colleagues are finding it difficult to isolate the facts in the arguments.

“No-one likes the costs per person that get quoted for our membership, but there is some scepticism about those figures,” he says. “No-one really understands what in or out means. A lot of opinions seem emotionally biased.”

Malcolm wants the question to be settled on rational economic and legal grounds, not overblown rhetoric. “My fear is that issues around the migration crisis will play into the exit campaign’s hands,” he says.

Whatever happens in the weeks that remain before the vote in June, manufacturers would probably be well-advised to plan for either possible result. For example, whatever the long-term results of leaving the EU, economic uncertainty might depress consumer spending in the short term, while the value of the pound may fall – which would be helpful for exporters, of course.

57.5% of all the vehicles built in the UK were exported to Europe

To protect against this, Buckinghamshire-based furniture manufacturer Ercol, which builds some products in the UK and sources others from partner factories abroad, including within the EU, has been developing a currency hedging strategy for the run-up to and aftermath of the referendum, according to financial director Mark Lawrence.

The company has benefitted from the free movement of labour in recruiting skilled personnel, but has been adversely affected by EU timber regulations. The European market will remain a key market for Ercol whatever happens. “Whether the vote is in or out, continued tariff-free easy access to the EU market is important to us,” says Lawrence. “But the skills shortage will potentially have a much greater impact on business if access to European labour is curtailed. It seems likely that wage costs may be pushed up.”

Some of those whose minds are already made up believe they know what exit from the EU would mean. “Of course there are many variables in play, but the likelihood is that [the outcome] would be negative,” says Mychajluk. “It could be positive, but the odds are stacked against it.”

Nieper thinks the Leave campaign should talk about positive changes the UK could experience if it left the EU. “If we were to not have to send £350m per week to Europe we could spend that on British hospitals, schools or roads, or on encouraging British businesses to export or to innovate more,” he says. “There’s a strong economic disadvantage to being part of the EU.”

No-one knows what the future will bring if the UK votes to leave the EU – but then again, the future is always uncertain. What is clear is that this question is perhaps not so clear-cut as some of those shouting loudest on both sides would have you believe.

David Adams

 

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