24.In our previous inquiries, the sectors we considered made clear that a no deal Brexit cannot be an option. Given that it is still on the table, industry reiterated this view. The costs of reinstating customs checks, import duties, and tariffs for some goods travelling between Europe and the UK—or to third countries which the UK has a trade agreement with via EU membership—would be inescapable for business. Potential border delays could seriously undermine just-in-time supply chains. Businesses emphasised that although they can prepare in crisis management terms for a no deal exit, they cannot mitigate against all the risks. They have been forward buying, stockpiling and duplicating licenses, but warned that over the last year it has become clear that a no deal Brexit would be far more complex than they had anticipated - as some problems are solved, new ones are discovered. The overarching message was that it is difficult to quantify just how damaging it would be, but that this scenario would seriously undermine these sectors’ ability to provide competitively for their consumers and to use the UK as a base for serving European and global markets.
25.Ian Rayson, Director of Corporate Communications at Nestlé UK, advised that the interconnectivities in the food and drink industry’s supply chain that have been built up over 40 years, mean that leaving the EU and single market is not as simple as pulling out a three-pin plug. Rather, it is “is much more like ripping all the wires out of the back of a huge mainframe, and then when you are standing there with all these wires, it will take an awful lot of time to rewire us into a different trading system.” In summarising the prospect of a no deal scenario Ian Wright, Chief Executive of the Food and Drink Confederation, stated: “It is almost impossible to quantify, partly because none of us want to, but it is clearly going to be, in the very short term, very disruptive.” In the longer term, a no deal scenario was deemed “a grizzly prospect” because of doubts over how the disruption would end. He warned that while disruption ensues at home, it will be in other European companies’ interests to “hoover up the markets that have previously been well served by UK companies”.
26.Many of the businesses we took evidence from operate just-in-time, international supply chains, where goods cross multiple borders before final product assembly, and are often sent back and forth between UK and EU partners for processing before reaching consumers. Adding just 15 minutes of delays at key border points could cost millions of pounds for the biggest manufacturers. Businesses remain unconvinced that Government contingency planning can resolve the very “acute” problems likely to arise at the Dover-Calais border in a no deal scenario. Lorries arriving at Calais will be subject to third-country checks taking between 7 and 15 minutes, compared to less than 30 seconds at present. We were told that in this situation there would be no space for the lorries, so the boats will turn around with lorries on them, or would not allow the lorries on to the boats. The motorway would rapidly become a lorry park and all the lorry drivers and capacity will be taken out. Meanwhile, European drivers would be unlikely to come to the UK if they think their lorry is going to get stuck on the return visit. It was stressed that this situation would result in produce not being able to get in, and some not being able to get out.
27.To avoid shortages and added costs, Nestlé UK confirmed that they have started to stockpile products in the UK and some products in other European markets, but that these supplies will last only a matter of weeks because of warehousing constraints and limited shelf life of certain ingredients.
“Essentially, we are stock-building some products that we import into the UK, and we are stock-building in some other European markets products that we would export from the UK to there. We are stock-building at both ends but this is only for periods of weeks.”
28.In response to producers and retailers activating their no deal plans, demand for frozen and chilled food warehouses has increased. We were told that the country is running out of food warehousing facilities required by retailers and manufacturers to stockpile goods. Ian Wright revealed that most of the UK’s viable warehousing space, particularly for frozen and chilled goods, was “for all practical purposes booked out”. What is unknown, he told us, is whether businesses have booked to be careful or whether they are genuinely gearing up to put product in there. The shortage of availability has increased the cost of chilled warehouse space, even though the shelves may be bare. We were told that there is still availability for ambient goods—food that can be safely stored at room temperature—but not necessarily where it would be required on companies’ supply routes.
29.In the case of Toyota, disruptions to their integrated just-in-supply processes would result in “stop-start production” for weeks or months at their UK car plant. The value of the cars Toyota make is £10 million a day; any stoppages would be very challenging to cope with.
“We have 50 trucks a day coming through the (Channel) Tunnel […] we carry just four hours of parts at our plant. We collect the parts in sequence to the build and we build the cars one by one to customer order. There is no batch build, so we have to have not just the 50 trucks a day but we have to have them in sequence. It will be no good if we have 49 and truck 17, for example, is missing. We will then stop. […] We would have stop-start production for weeks, possibly months.”
When looking back at the three weeks of industrial action in 2015 by French ferry staff that caused severe disruption to both ferry services and the Channel Tunnel, Toyota told us that because their trucks were out of sequence it took the company two months to get back to where it should have been. Toyota’s 50 trucks are only a small proportion of the estimated 1,100 trucks moving from the EU into the UK each day for the automotive industry.
30.In a no deal scenario, and without a trade deal with the EU, the automotive sector would be subject to WTO tariffs: ten per cent tariff on a finished vehicle and between 2.5 per cent and 4.5 per cent on components. This would add around £4.5 billion to the cost of importing and exporting completed vehicles, with an incalculable additional cost due to tariffs on components. We heard that these costs would not be easy to absorb, nor enable the industry easily “to remain competitive”. For Toyota it would be “unimaginable that we could implement overnight full import-export customs arrangements in line with WTO third country.” A no deal scenario would increase the need to reach trade agreements rapidly. These typically require local content to be around 50 per cent; whereas we heard from Tony Walker, Deputy Managing Director at Toyota Motor Europe, that the typical UK content for rules of origin purposes was around 35 per cent. We heard that it would be “crucial”—in order to benefit from tariff-free trade—for these rules of origin issues to be taken into account in negotiating future trade deals, whether with the EU or with third countries.
31.Airbus warned in their June 2018 risk assessment that in a no deal scenario disruptions to their integrated just-in-time processes would result in up to €1 billion weekly loss of turnover. This they cautioned would force Airbus to reconsider its investments in the UK. Katherine Bennett, Senior Vice President of Airbus UK, told us that the company was serious about reviewing UK investment - even if it was “not going to move overnight”. As it is not easy to build a new assembly line, Airbus would have no choice but to absorb those costs. Airbus is 50 per cent of the global marketplace, so if it is uncompetitive this would impact on the supply chain which employs 100,000 people. Airbus has spent €15 million so far on preparing for a no-deal exit. Katherine Bennett told us that she “would much rather that money had been spent on research and development or more skills”.
32.Border delays are likely to have more severe repercussions for the pharmaceutical industry. Mike Thompson, Chief Executive of the Association of the British Pharmaceutical Industry (ABPI), emphasised that “in some sectors an 80 per cent solution will be considered good enough, that would be a catastrophe in our sector. We need to make sure that we deliver medicines to 100 per cent of patients”. He explained that different medications require different transportation processes, illustrating the example of a stem cell medicine:
“You take a bit of DNA out of a patient. You need to get it to where it is processed. There is one plant in Europe where it is processed. You have to get it there in 24 hours. It is processed and then you have to get it back in 36 to 72 hours to infuse it back into the patient. You cannot take it through an airline because it cannot be Xrayed. Those are the sorts of things for which we have to work out a back-up plan, because you cannot stockpile someone’s DNA.”
33.Mike Thompson described no deal planning to secure a supply line of 12,000 individual medicines as the “biggest logistical challenge that we have ever faced”. ABPI’s members have stockpiled an extra six-week supply of drugs, as instructed by Government, but predicted that “[t]here will absolutely be unknown consequences where things do not go right, and those are the things that keep us awake at night”.
34.In some cases, pharmaceutical companies have organised for duplication of licences or marketing authorisations to guarantee that they have the respective licences within the UK and the EU. The Government, when publishing no deal technical notices, said that they would in the event of no deal recognise medicines that are manufactured on the continent to be available to British patients, but this has not been reciprocated by the EU. Consequently, AstraZeneca and GSK have had to build duplicate laboratories for batch test releasing on the continent. We were told that “they are clearly very frustrated” because this is essentially duplicating what is available here. ABPI told us that while they will bear transition costs, in the longer term it would be a cost borne by the NHS and taxpayers:
“In the short run, they will be borne by the industry because, when we agree a price with the NHS, that is the price we agree [..] in the long run, industries cannot stay profitable and find investors to invest in them if their profits are going backwards.”
88 [Walker]; [Thompson]; and [Bennett]
89 [Walker]; [Bennett]; [Nash]
91 [Thompson]; [Sahota]
97 Seventh Report of Session 2017–19, , HC381, para 26
98 [Rayson]; [Wright]
105 ; and [Wright]
113 For information on the impact of the prolonged industrial action by French ferry staff see: House of Commons Transport Committee, , (HC 65; June 2016); BBC News, , (July 2015); BBC News, , (July 2015).
122 Airbus (21 June 2018)
126 [Everitt]; [Bennett]
Published: 10 December 2018