October 6, 2016
Navigating uncharted waters: How businesses are managing their ‘Brexposure’
The UK referendum result has thrown British and European politics and economies into uncharted territory. Never before has a member state sought to disentangle itself from the European Union. And while Prime Minister Theresa May insists that “Brexit means Brexit,” what Britain’s future trade relationship with Europe (and the rest of the world) will look like is completely uncertain.
The consequences of Brexit for businesses are far-reaching, potentially impacting everything from market access to distribution chains, from the regulatory playing-field to access to a qualified workforce, from potential changes in currency valuations to R&D.
Companies need to undertake a comprehensive assessment of their ‘Brexposure’ and define their strategy to navigate the waters ahead.
As the UK government, the EU institutions and the other member state governments calibrate their priorities and agree on a strategy before the formal negotiation process gets underway, companies cannot assume they have the luxury of letting the process play out and tackling issues as they arise. They need to assess risks and strategic opportunities and either adjust their business model or get involved right at the beginning of the political debate. In order to do so, four steps are critical:
- Assessing ‘Brexposure’: Understanding the many potential aspects that affect a company in the event of Brexit is a complex exercise. The starting point is to map current and planned business operations, the key markets they serve and how their competitors are positioned against the many changes that a Brexit will induce. These can include market access, norms, tariffs (and the impact of custom controls on timing), price regulation, exchange rates, availability of labour, access to and cost of capital, subsidies and taxes. How will all these factors change? And how easy is it to adapt, operationally and strategically?
- Scenarios: The next step is to assess the impact each outcome scenario would have on the business model and the competitive position. What are the key points that need to be hedged? But also, which strategic opportunities could arise? What are the best- and worst-case outcomes?
- Stakeholder landscape: The Brexit negotiations will be a complex and high-level negotiation process, with a multitude of players influencing the outcome both formally and informally. Part of the challenge is that issues and interests will vary across (and partly within) industries. Who has opposing interests, and who are potential allies (in and across industries)? What does the overall balance of power look like, and what are potential routes to change that balance in your favour?
- Strategy: Based on these steps, companies will define their Brexit strategy. As the negotiations will play out between the UK government, EU Commission, Council and other EU Member States, there are numerous entry points. Germany has already indicated it will take a lead role in driving the process, making London-Brussels-Berlin the natural centres of decision-making. Timing and tactics will be of essence, as positions and alliances will shift.
The process is likely to be long and intensive, but the result will be game-changing for many industries.