Transcript - Episode 20: How are different industries preparing for Brexit?

Emily Khan: Hello and welcome to our latest Beyond Brexit podcast, I’m Emily Khan.  With the business focus ever stronger on preparations for the risk of no deal, today we will be looking at how organisations in different sectors are preparing for Brexit.

To help me do that, I am joined by Cara Haffey, UK Leader of Manufacturing and Automotive; Lisa Hooker, Consumer Markets leader; and Jules Kirby, who is leading much of our Brexit work in the Pharma and Life Sciences sector. Thank you all for joining me.

Jules, as a regulated industry, pharmaceuticals are often talked about as being one of the sectors most advanced in their prep, so, I would like to come to you first, if I may, what sort of things are you hearing from your clients at this point in the process?

Jules Kirby: Well you’re right, and the pharmaceutical industry is very heavily regulated, and there are long lead times in production quite often for the products. So, we saw our clients move quite early to hedge risk in their operating model, making sure they had the licenses in place within the EU, moving some roles, and in some cases changing their operating models.

They’ve made a lot of changes already.  That said no deal wasn’t necessarily seen as the most likely scenario.  So we’re seeing focus again on that.  A lot of the contingency planning around supply chain and so on, and deeper analysis, and we are seeing more engagement with both customers and suppliers, and seeing how they can work together to plan for all eventualities.  We are also seeing a focus on lobbying.  So, there was a bit of disappointment in the industry that pharma did not achieve a higher profile in the political declaration.  We know that pharma and life science companies are very active in terms of talking to the industry associations and working with government to make sure they are represented in the future deal.

Emily: Okay, so against that backdrop of general readiness, and I definitely recognise what you have just said there, what does that mean that you are advising clients to focus on at this point? That’s may be a bit different from the general calls for no deal prep and readiness that we might hear more across the government and business community at large.

Jules: Well, I think one of the things that’s really coming to light at the moment is the importance of having joined up conversations.  So, those areas of higher risks, whether it’s the supply base or who the customers are, and some of the more important products, trying to create a joined up conversation from the client, to the pharma and life science company to their supplier base, to say where can we join forces together to make sure that we are planned, and it is an end-to-end approach.  We are also advising to keep on lobbying in that deal.  It’s extremely important in the future trade agreement that the life science and pharma industry is represented in terms of things like mutual recognition, and how easy is to trade products across borders, and also the industrial strategy.

So, we saw recently a second element of the industrial strategy being released for life sciences. It’s a very important sector. There are a lot of opportunities in the UK.  There is a lot of investment, we saw over £1 billion worth of investment being announced recently.  So engage in that and look for opportunity in the industrial strategy.

Emily: Okay brilliant, thank you Jules.  Cara perhaps I can come to you next to talk about the concerns that you hearing in manufacturing and automotive. How does what you are hearing compare to what we’ve just heard from Jules?

Cara: Yeah, I think in terms of manufacturing and automotive, I would say that this sector is different, so it’s obviously not as regulated or not regulated in some senses.  You’ve also got a lot of SME community as well and that in the UK.  I think if I cast my mind back to last summer, we were talking about what the tariffs were, how is that going to look, what are the options.  I’d have to say now, it is about proper planning for disruption.  So, it feels real, and to go to the point Jules said about end-to-end talking, we’ve had customers asked by the suppliers how are they going to cope.  We have had suppliers ask for the customers how are they going to cope.

Therefore, it’s really real in terms of letters that have come in from suppliers, saying under no deal we will not deliver to the UK in the months following that.  Therefore, that feeling of, ‘wow, right that’s real.’

If you try and understand behind that, that’s not necessarily because they don’t want to supply to the UK, that actually comes to the disruption piece, which is, ‘I don’t really want my lorry stuck,’ and therefore I can’t get it back out, and it disrupts the rest of my worldwide supply.  There is a real focus here on real-life situations as businesses are thinking, ‘right, hold on a second, don’t have time to do anything about that now potentially, because I can’t kind of now back order a load of stuff, but how do I therefore plan for not having stuff leave my factory and still having all the costs.’  Lots of thought around that, and that’s going to be costly in a short term disruption piece.

Emily: What are you advising in light of that?  I definitely recognise that feeling of running out of time, there not being many options available that businesses have got, what sort of things you are encouraging people to focus on?

Cara: Well, I suppose, it’s a difficult one, it’s not an easy answer to a very difficult question.  What we are trying to seek planning around, and help around is proper working capital thoughts.  Actually, you know under new levels of debtor creditor days, inventory cycles, how does your business look, where are the hard times going to be, so that you can really get a good handle on that and be really upfront, either with your financers, your bankers, how is it going to work in your business, in what we hope would be a period of disruption that gets back to normal.  So, therefore, hopefully nothing that can’t be coped with over a period of time, but a period of time, different to what management teams usually cope with.

But Brexit is one of these things.  There is also lots going on in automotive, as we’ve seen, in the unfortunate headlines over the last few months, and therefore, there is a lot going on worldwide in terms of trade wars, diesel, all of those things that are affecting industry, and that aren’t all to do with Brexit as well.

Emily: Great thanks, and actually some quite distinct themes there from what Jules was talking about.  Maybe, Lisa, we could draw you in there for another point of comparison.  I know, you and I have talked before about Brexit not being the only show in town in consumer markets and the retail sector.  Bring to life to us the kind of issues that people are talking about in that sector?

Lisa: We are just coming out of Christmas.  I think, we’ve seen the well-publicised concerns around consumer spending, whether people are buying things or doing experiences, and also the whole cost inflation through the business, and the structural change from stores to online.  So, all that is happening, and in the midst of this, is Brexit.

When I think about Brexit, I think you’ve got to think a bit differently between the food industry and the non-food.  We import 50% of our food and three quarters of that come from the EU.  So, the food industry has been much quicker at doing some level of contingency planning, such as, you know, if you’re a restaurant, looking at your menu and potential menu changes; if you are a grocer, sourcing locally, thinking about changing the mix on your shelves, may be having to reduce, some of the fresh element of what you supply.

There is a lot more contingency planning been going on, and there is a real nervousness around tariffs, which could be up to 40% on some food products.  Non-food is a bit different.  We actually only import 10% of our non-food from the EU.  So actually, longer term, it could be an opportunity in terms of negotiating new deals with people like China, where we import a lot of our non-food products.

Having said all that, there are some common themes and some of them we share with the other industries, frictionless borders, if we get fresh food stuck coming through, that is an issue.  People, we actually employ a lot of people from the EU in the industry.  Also, things like foreign exchange and volatility, and all that impact on confidence and consumer spending, so they do share all of those concerns.

Emily: Right okay.  What sort of things are you advising clients to do in that context, maybe building on what Jules and Cara have already suggested?

Lisa: Well, I think for non-food, I think Next has done a very good summary in their statutory accounts of how to think about it.  So, even though they are less impacted, they still need to think about the borders and the border impact.  I think, for the food industry you really do need to have a plan B of what are you going to do, and how are going to cope with potential shortages in some part of what you are doing, and, like other industries, work with your suppliers.  The simple things you can do, and I know there’s not that long, is look at your supply chain.  Can you simplify and stop some movement across borders, do you have the data you need if you need to make more customs declarations, and have you worked with your people to get them Settled Status.  I mean some retailers are coming out and saying we are actually even going to pay for our people to get that.

Cara: And I’ve heard that in manufacturing as well.  People really understand, they know, to try and the employee strategy of trying to help people feel secure, and work with them on their declarations, pay for that and for their family.  So, actually trying to see how that works through is very important for our sector as well.

Emily: Yeah, it’s interesting.  So supply chain absolutely dominates across all three sectors and what you have said there, but that people thing, I think is a really common theme too.  Jules, just reflecting on what Cara and Lisa just said, how does it look in the pharma and life sciences sector  - the focus on people - is it very much the same or are there different focuses?

Jules: The pharma and life science sector in terms of the direct employees, obviously employs actually quite a high percentage of EU, staff from EU, non-UK EU countries.  We’ve seen from the Migration Advisory Committee just before Christmas that there is a view that residents and travel to the UK should be facilitated for those earning higher salary, higher qualification level.

Existentially there is less of a threat for a lot of those types of roles in pharma, but that doesn’t stop the more subjective feeling of people, thinking is it as attractive to work in the UK as elsewhere.

There is definitely communication to be done and engagement with staff within pharma and life science companies on that basis.  Also, you mustn’t forget that the second tier supply level.  There are, for instance, logistics providers for whom operational issues could be very dramatic for pharma companies.  If pharma companies’ suppliers are suffering that is still an issue that needs to be addressed, and that’s where some of the lower skilled and lower salaried workers are involved.

Again, it comes back to this point about engagement, a lot of internal planning has been done on operational contingency planning, and now it’s about reaching out actually across that ecosystem to suppliers and customers, and starting to talk, and starting to set expectations.  It’s the same thing with employees.  It’s time to talk and make sure that the communications are very fluid at the moment and that will help adjust to whatever the scenarios are.

Emily: I could see noting that, Cara, are you recognising what Jules has just said there in your sector too.

Cara: Yeah certainly some conversations I have had with clients even over the last week is around, and actually very different in different companies, different regions.  So I don’t think, there is a brush that goes across this, but certainly the level of recruitment, particularly on that agency workers, and actually they were saying that they had much shorter lists when they’ve been going out looking for people than they had in the past.

They were putting that down to Brexit, I don’t know, but actually it was interesting to hear that directly from clients in the manufacturing space, particularly potentially at that lower factory operator level.  It’s something that people are on a watch on, because skills has been a key area that we’ve talked about for years, and therefore that’s a deep concern.

Emily: That’s quite an interesting link to the final question that I was hoping to put to you, which is around unintended consequences.  We are already starting to see the impact of that as an unintended consequence of the uncertainty.  Are there any other examples that you are seeing of things that are already happening, that maybe we hadn’t foreseen of being disruptive in their own right, maybe slightly separate from the direct Brexit impact, things that maybe have surprised you or really brought home, how significant this change might be for us all?

Lisa: I think it shows a little bit how the consumer is feeling, that we’re now getting talk about consumer stockpiling, and this is at a time of squeezed consumer income.  So, this whole stockpiling could actually make the problem worse.  We have been saying to our clients that they probably should think about one to two weeks of extra stock than they normally have, and think about the working capital implications of that. But actually, what they actual consumer does, could actually make the whole thing a little bit worse than that.

Cara: Yeah, because you think in the past, if we’ve had any weather disruption or anything like, then the consumer stock piles, and people say, ‘you’ve cleared the shelves’, that’s really interesting.

I think one of my intended consequence is really just around that.  I am not sure that we have thought, well certainly I have thought in the past about people not delivering, because they don’t want their lorry stuck on the road, it is not necessarily where I can fly in and fly out, as if you’ve got this picture of how easy it is to transport and the logistics around it.

So, for me that’s really important, but also you are relying on the rest of the EU, everyone who is at the other side of our ports or our airports, so that’s a big point that I am not sure everybody understood a good while ago.

Jules: One of the interesting areas in pharma is that we are hearing anecdotally that consumers are extending their stockpile, if you like, by perhaps not taking the dose that they should be taking of their medicines.  So, that’s obviously a concern.

Emily: Quite scary actually.

Jules: Particularly on a number of levels.  So, particularly the end result might be the effectiveness of that medicine is impacted and so there are obviously impacts on the health of those individuals.  So, that’s an example of something that might not be so much, a direct operational business concern, but it is obviously an impact of Brexit, and it comes again down to communication and it comes down to making sure that engagement with government is ongoing to try and avoid those issues.

Emily: Absolutely, I think that’s probably a good point to draw this to a close. Thank you all very much - some really fascinating angles there.  Really bringing to life why so many businesses are craving more certainty in what lies ahead.

Thank you listeners for joining us.  Don’t forget you can find insight pieces from all our industry groups on www.pwc.co.uk/brexit, and bye for now.

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