This is part of Out-Law's series of news and insights from Pinsent Masons experts on the impact of the UK's EU referendum. Watch our video on the issues facing businesses and sign up to receive our 'What next?' checklist.
One of the most fundamental aspects of EU membership is the free movement of labour across borders. This aspect was at the cornerstone of the UK referendum and has led to a great deal of uncertainty as to what the UK government will negotiate in relation to the UK's exit from the EU.
A large number of migrant workers are employed in the manufacturing sector. Post-Brexit businesses in the UK manufacturing sector might face a challenge in sourcing workers, many of which currently originate from other EU countries.
If there is a shortage of migrant workers to fulfil low-skilled jobs, such as those in logistics and warehousing, then it could encourage manufacturers to invest in and integrate robotics into their production processes. It could serve to increase UK productivity levels which have largely remained static since the financial crisis of 2008.
Whilst the future is uncertain, it is important that manufacturers take steps to understand how the UK's vote to leave the EU could impact on them, and take advantage of the opportunities that Brexit presents, as well steps to address the risks.
Beyond the issue of skills, Brexit could have major implications for UK manufacturing businesses in a range of other areas. It could affect existing contracts, business models, funding arrangements and product development, for example.
Experts from Pinsent Masons, the law firm behind Out-Law.com, will be discussing how Brexit will impact manufacturers and looking at some of the opportunities at the Financial Times Future of Manufacturing 2016 event in October.
UK manufacturers could become involved in complex renegotiations of their contracts with retailers and suppliers if the cost of performing contracts in the sector changes when the UK leaves the EU.
Brexit could spur changes in legislation, alterations to customs regulation and tariffs and fluctuations in currency valuations, which could all impact on the cost of performing contracts.
In some cases it could become more economical to deliver contracts, but it might also make existing contracts unprofitable or lower margins. In those circumstances parties to the contracts might look to renegotiate the terms of their agreements, seek termination or exercise 'pass through' rights, which is a contractual right to pass the increased cost on to the customer.
Some businesses in the manufacturing sector might also claim that Brexit, or the resulting implications of the UK leaving the EU, are 'force majeure' events. That is events that are completely outside the control of the contracting parties and thus a legitimate trigger for relief from performance of the contract. We are likely to see an increase in the number of disputes in the sector should companies argue that Brexit is a force majeure event.
The governing law for manufacturing contracts might also change in future after Brexit. We have seen an increasing number of pan-European contracts in the manufacturing sector as businesses have become more global. At the moment English law is often chosen as the governing law for those contracts, but this may well change as a consequence of the UK leaving the EU.
Manufacturing businesses might also face new funding challenges as a result of Brexit. Money for research and development (R&D) projects might be withdrawn or delayed if manufacturers choose to be cautious in light of the uncertainty over future trading conditions.
A funding shortfall might also need to be plugged if money from the European Regional Development Fund (ERDF) is withdrawn. The ERDF is an EU funding programme that has supported research and innovation in areas such as advanced manufacturing production and technologies.
Any funding shortfall could impact on the manufacturing supply chain if manufacturers scale back projects. It might also stifle innovation if funds are not available to test new ideas and technologies.
Operations and processes
Brexit could also spur changes in the way manufacturers operate. Offshoring could become more popular as manufacturers seek cheaper ways to deliver services or technology, for example, in a potential change to business models.
Business processes might also evolve to account for changes in economic conditions and the risk environment post-Brexit. In practice this might mean new contract approval or sign-off processes are introduced, as well as new procurement policies and procedures for determining whether to bid for new contracts.
Within the broad manufacturing sector, Brexit might have a particular impact on the automotive industry.
It is estimated that the automotive industry accounts for about 10% of all UK exports. In 2013, 77% of vehicles made in the UK were shipped abroad.
At the moment the UK exports premium high value vehicles and imports lower value vehicles from other countries. Changes in the economic position could significantly impact on this balance and its attractiveness.
If manufacturers move out of the UK the knock on impact will be significant. In the industry ‘clustering’ is common. For example, parts suppliers often locate near to original equipment manufacturers (OEMs) to ensure part availability and just-in-time supply. If the OEMs were to move then suppliers in the cluster could lose a large portion, or potentially all, of their business. The collapse of British van manufacturer LDV in 2008 had a major impact on a number of suppliers in the Birmingham area, for example.
In other areas of manufacturing, a move away from EU regulation could cause some product uncertainty. Many sub-sectors of manufacturing, such as in the area of medical devices, are heavily influenced by EU policy and legislation. It is unclear whether the UK will adopt a radically different approach to the regulation of such products in future.
Common EU regulation, and an ability to influence it, has been critical in manufacturing to ensure product consistency. This has been especially the case in the automotive sector where standard regulations on emissions and safety have been developed. There is a risk these types of regulations will not be appropriate for the UK market if the UK can no longer influence them. Previously the UK helped to shape the Co2 regulations to ensure it was appropriate for niche and small volume manufacturers – critical and almost unique to the UK market.
On the other hand, some people in the industry believe car manufacturers and their suppliers are too heavily regulated. Brexit will offer an opportunity for the UK government to simplify the regulatory burdens on those businesses.
Clare Francis is an expert in commercial contracts in the manufacturing sector at Pinsent Masons, the law firm behind Out-Law.com. Experts from Pinsent Masons will be discussing how Brexit will impact manufacturers at the Financial Times Future of Manufacturing 2016 event in October.