Imagine you are the boss of a small British manufacturer producing some obscure but vital component for motor cars. Your biggest customer is a giant UK carmaker, which simply cannot ship its products without your widgets inside.
As Brexit day looms with no withdrawal agreement yet in place, a call comes one morning from the chief executive of that customer. They urge you to ensure that supplies are available in the event of a no-deal situation. What do you do?
The obvious answer is that you build up inventories. Your most critical supplies — it turns out — come from overseas. So to avoid those raw materials getting tied up in some post-Brexit dockside chaos, you step up your orders. That means you can deliver come what may.
Hoarding may seem an extreme response. It is certainly not to be taken lightly, tying up scarce resources that could be used for other more valuable purposes. But as another EU summit slips by without the UK and Brussels reaching agreement, it is one more bosses may decide cannot be ducked.
A number of companies are talking about stockpiling — especially in critical sectors such as high-value manufacturing, pharmaceuticals and food. For instance, Airbus has asked its suppliers to start “ramping up” their stocks of components.
CEBR estimated value of the extra volume needed assuming a four-month buffer
Some companies have even announced stockpiling measures. Tristel, a Cambridge-based maker of disinfectant for medical devices, is not just hoarding itself; it has also advised its EU customers to increase their own stockholdings. Ornua, the Irish dairy produce company, is piling up Irish cheddar in UK warehouses against the risk of a no-deal outcome disrupting supplies.
How widespread is the phenomenon? It remains uncertain. In a recent note, CEBR, an economic think-tank, claimed there was some evidence of stockpiling in the second quarter of this year, with inventories rising at a faster rate than gross domestic product. That said, it then cautioned that Brexit might not be the reason.
What is clear is that companies cannot wait to the very eleventh hour to take the decision. If they are to dodge any no-deal confusion, they must act well before March 29 next year.
This may seem like a private question, one between companies and their customers. But, in fact, there is a very public interest in securing supplies. The Brexit secretary, Dominic Raab, promised not so long ago that there would be “adequate food” whatever happened. The NHS is stockpiling medicines. It all reflects the fact that the UK’s open economy is vulnerable to disruption. Imports and exports are worth more than 60 per cent of Britain’s GDP, twice the level of the US.
But if companies do start stockpiling more widely, they face two big challenges. The first is physical; literally the need to find somewhere to put all that stuff.
One problem is that warehouse space is already at a premium. Thanks in part to the expansion of internet retailing, warehouse vacancies (at 6 per cent, according to Savills) are at their lowest level in the past 10 years. Rents in London are rising at about 10 per cent a year, according to data from property group CBRE.
The second is that the extra stock must be financed. CEBR estimates the extra volume needed could be worth about £40bn, assuming companies would build a four-month buffer of the £100bn worth of raw materials and semi-finished goods they imported last year from the EU. That would put a strain on the balance sheets of small manufacturers (like our car parts supplier) and logistics companies whose margins are wafer-thin to start with. At a time of great uncertainty, the worry is that the banks would not want the extra risk.
Finance is not presently an obvious constraint on production. In the latest CBI manufacturers’ survey, only 4 per cent of respondents cited it as a concern. But the number is volatile; it spiked to 10 per cent at the time of the Brexit vote, and also last autumn over concerns about a transitional deal. (For reference, it was 17 per cent in January 2009 after the financial crisis.)
Little can be done centrally about the physical constraints companies are under. But the government should ensure that finance does not become a bottleneck. Banks should be encouraged to play the good citizen and keep credit lines open. Large companies can help too by easing some of the financial strain on supply chains their own demands are creating.
The biggest companies can often depend on small producers of critical components to keep their supply chains moving. The pressures on those links may come well before March 29.