Brexit creates supply chain uncertainty
- 16 August, 2017 19:46
For organizations operating in the EU, Britain’s pending withdrawal, known as Brexit, may disrupt both physical supply chains as well as the information systems required to manage those supply chains. Depending on the final Brexit terms, organizations may need to change the way physical goods and information move across British borders.
Here's a look at what Brexit means for business and how far-reaching the disruption may be as Britain prepares to extricate itself from the work EU member countries have done to standardize regulations, taxes, currencies, border crossing procedures, etc.
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EU data privacy laws are very strict and mandate how personal information must be protected. If Britain fails to agree to coordinate its data privacy laws with the EU, then processing or storing data in Britain about EU residents may not be legal. This could necessitate changes to IT systems, or potentially require building new data centers.
Because London is Europe’s financial hub, a great deal of financial and personal data flows through England where it is accessed by systems providing services to residents of other EU countries. This financial and personal data may need to be relocated so that it is not processed or stored in Britain. Enterprises with British servers may need to re-architect systems holding personal data to ensure that data is handled according to EU regulations.
Post Brexit, it is highly likely there will be a customs border between Britain and the EU. This will result in additional paperwork as taxes, duties, tariffs, and the value added tax (VAT) on imports are reported and collected. Air, land, and ship border crossing times could increase significantly, making it more difficult to move products, especially those requiring special handling or products with a short shelf life.
Although EU countries charge different levels of VAT, the EU has coordinated VAT collections. Each country charges the same VAT on goods that cross country borders as it charges on goods sold in that country’s domestic market. This makes it easier to track VAT and reconcile payments among EU countries, thereby streamlining border customs processing. If Britain decides to charge a different level of VAT on products that are exported than on products for the domestic market, supply chain tracking and accounting will become more complex as will border tax reconciliation.
Brexit will impact the supply chain of virtually every industry. However, several industries are expected to experience major disruptions. These include:
Cloud providers. Microsoft, Amazon, and other cloud services providers are watching Brexit closely. These companies are worried they will have to redesign the way processing is assigned to physical data centers, data storage polices, communications linkages, and failover procedures.
Airlines. EU-based airlines have not needed regulatory approval to fly between European airports since the 1990s. In addition, the US and the EU created open-skies agreements to ease regulation and promote the movement of people and goods between the US and the EU.
With the maturation of the air traffic network, Britain has been promoting an EU-wide air traffic control system. Unfortunately, Brexit decreases the likelihood that the new system will become a reality. All airlines and their customers have been hoping that this new system would reduce the cost of flying within the EU. Now airlines and customers are concerned that Britain and the EU could impose new border taxes or screening procedures. Depending on new Brexit agreements, airlines could change routes or modify pricing to fly to Britain.
Energy. Power grids are complex supply chains, requiring constant attention to balance the demand for electricity with power being generated throughout the day. Since Britain is part of the European electric grid, the British power plants are able to sell surplus energy and buy energy when not enough is being generated.
On March 27, 2017, British nuclear regulators granted permission for construction to start on the Hinkley Point C nuclear power station (HPC) in Somerset, England. EDF, a French utility is providing a large amount of the construction money with the understanding that some of the power will be sold to other parts of Europe. Unfortunately for the project, Austria’s anti-nuclear government is contesting the plant to the European Court of Justice. If Britain loses, HPC may not be able to sell subsidized surplus electricity into the European grid. As long as Britain is part of the EU, the case will be settled on the basis of EU contracts and treaties. Once Britain withdraws, new contracts and treaties could be used to determine how the case is resolved.
Pharmaceuticals. Pharmaceutical companies expected a “unitary patent system” across the EU by 2018. The system would allow a company to obtain a single European patent and not be required to obtain separate patents for each individual country. The unitary patent was to be enforced by an intellectual property court in Britain specializing in drugs and chemicals.
Pharmaceutical companies operate complex supply chains that track the movement of every container of medicine from the plant floor until it is delivered to the customer. Under the unitary patent system, pharmaceutical companies could rely on a single set of rules to manage their supply chain. Once Britain withdraws, the unitary patent system may not become a reality.
Preparing for Brexit
The best move you can make now is to prepare for what could be massive changes to the IT architecture and supporting infrastructure. Here are three steps you can take now:
Evaluate contracts. IT vendor contracts can limit an enterprise’s flexibility to change the way IT systems operate. Since few people imagined that Brexit would pass, most enterprises are currently using standard vendor contracts. Enterprises need to examine existing contracts to determine if they can be modified or canceled in the event the enterprise’s information systems need to be re-architected. Any contracts currently being negotiated should be relatively short-term with as much flexibility as possible until Brexit terms are finalized.
Evaluate systems. Since the supply chain is typically a core system that is tightly coupled to other systems, it may be necessary to change virtually all IT systems. Evaluate systems’ strengths and weaknesses to determine whether or not they are robust and flexible enough to accommodate what could be significant change. If enterprises with British operations or service providers are lucky, few changes will be required. However, if massive changes become necessary and the enterprise doesn’t have a plan, more resilient companies could use Brexit to gain a competitive advantage.
Do your research. Start researching Brexit’s impact on your supply chain contracts and your enterprise’s IT systems now and closely monitor the Brexit terms. If you don't, Britain’s exit from the EU might not be the only exit in your future.
Very little is known about the eventual Brexit terms. Theresa May’s recent loss of her parliamentary majority adds to the confusion. Even though she has not stepped down, it is possible she will be forced out. A new government could push for a “softer” Brexit than the “hard” Brexit that Ms. May advocates. Even if someone else becomes Prime Minister, Brexit is so complex that the terms are unlikely to be finalized until shortly before Britain leaves the EU in March 2019. Even after terms are finalized, no one knows how much time will be allowed for the transition or what penalties will be imposed for failing to comply.