Nick Brainsby - director and partner at Pemberton Capital - consider the ramifications of an EU referendum on the UK's industrial sector.
Following the outcome of the recent General Election, the referendum on the UK’s membership of the EU is certain to take place before the end of 2017. Indeed, negotiations with our EU partners have already commenced.
On the sidelines, there’s an escalating war of words being waged about the potential risks and benefits of leaving the EU, which can only intensify over the months leading up to the vote.
Lobby groups and corporates are already exchanging salvos over the potential effect of an exit.
On one side, the CBI is issuing warnings about threats to the recovery and jobs. On the other end of the spectrum, the CEO of JCB said in May that it would not make a “blind bit of difference” to trading with Europe if the UK left the EU.
And on top of that we have the Business Secretary telling everyone to tone the rhetoric down.
But do the politicians, big corporates and lobby groups really understand the potential effect of the referendum, let alone an exit, for UK manufacturers – particularly in the SME sector?
Those who express confidence that an exit would not make any difference to trading with Europe, might – just might – be right in the very long term, but they clearly don’t appreciate what will certainly happen in the short and medium terms.
Our view from the front line of SME manufacturing, is that it will not be very long before the issue has an effect on decision-making by UK manufacturers and their customers.
This in turn will have an impact on UK manufacturers’ investment and hiring decisions, well in advance of any vote.
Although the UK has many successful manufacturers who export all over the globe, the vast majority of UK manufacturers rely on exporting directly to the EU or rely on customers who export to the EU.
For UK manufacturers, membership of the EU matters. Although membership has its burdens, they are outweighed by the many advantages of being in the EU “Club”, which gives us direct access to the vast market on our doorstep.
We would be foolish to underestimate the benefits that come with that access.
The reality is that UK manufacturers compete directly or indirectly with other manufacturers in Europe, many of which have highly efficient, low cost production bases.
When potential customers based in the EU assess options as to who to buy from, the threat – or if it comes to it, the reality – of the UK leaving the EU will certainly be a consideration in any decision making.
It’s another factor which potential customers can – and will – use to say “no” when considering who to do business with.
One more form, one more regulatory or bureaucratic barrier – perceived or real – reduces our competitive edge and may be all it takes to tip the balance in favour of a competitor who is in the EU.
In a similar vein, large manufacturers looking for a base in Europe, see EU membership as an important factor, which in many cases tips the balance in favour of the UK.
Without it, the balance shifts to other countries who are equally competitive.
Nissan – currently the UK’s largest automotive manufacturer – has made it clear that it would consider leaving the UK if it left the EU.
Nissan employs 6,500 people in its Sunderland plant. Not only would those jobs be at risk, but so would the jobs of the many thousands employed through the vast supply chain which keeps vehicle production flowing.
And with that uncertainty hanging over their head, it would take a bold management team in a Tier 1 or Tier 2 supplier to not delay capital expenditure and hiring decisions.
The magnified effect of this scenario amounts to a potential brake on the economy which is not to be underestimated – the UK automotive industry alone accounted for 3% of GDP in 2014 and employs some 700,000 people.
In a similar vein, Airbus UK – which has a 16,000 strong workforce – has recently warned that an exit from the EU would damage competitiveness and could lead Airbus to reconsider its investment in the UK.
There is no doubt that manufacturing managers and investors across the country will be thinking about the same issues and acting accordingly in the coming months.
This is turn will pose a direct risk to hiring and productivity growth in the period leading up to the referendum vote.
In short, for UK manufacturers, there is much risk and little potential benefit on the horizon. The referendum alone brings uncertainty.
An exit would certainly damage our competitiveness in the short to medium term and the UK manufacturing sector will – not might – suffer. In the long term, who really knows?
So, let’s just get on with holding the referendum sooner rather than later. And then we must hope that the views of those who value job creation and wealth creation prevail.
