As Brexit negotiations continue, businesses on both sides of the Channel will be thinking about their trading partners. Many will be wondering if and how those relationships can continue when the dust has settled.
With negotiations entering the complex trade phase, uncertainty reigns. However, assessing and understanding what might happen to buyers and suppliers is essential. Supply chains, imports, exports, manufacturing processes, company strategies and even branding should be coming under close scrutiny, ensuring any negative post-Brexit impacts are mitigated.
The most challenging scenario is if the UK government adopts a ‘hard’ Brexit stance, invoking WTO trade rules. But businesses must prepare for every eventuality. Whatever transpires, “planning is vital for every company because many elements of their business models, from strategy to logistics, will be impacted”, says Bertrand de Comminges, Head of Structuring, Global Trade and Receivables Finance.
The largest international players typically have experience managing uncertainty, often gained from trading in developing regions. Many more companies will not have this capability in-house. Sourcing personnel with experience of tariff-based trade, especially with sector specialisation, for example, is likely to become a highly competitive space as companies begin preparing.
At a strategic level, companies must assess whether, in the worst-case scenario, continued access to certain markets (in the UK or EU) is viable under their current business model, in terms of cost and practicalities. If not, it’s important to establish plans, primarily to protect the business, but also to leverage any advantage.
This may suggest market withdrawal for some. It could equally lead to businesses shifting their manufacturing bases, making strategic acquisitions or setting up partnerships or joint ventures.
Building a new model
With this in mind, business models need to come under intense scrutiny, says de Comminges.
As part of the planning process, businesses need to undertake a thorough macro-economic impact analysis. This will reveal the extent of Brexit’s effect on key issues such as currency exchange rates, inflation, etc. and the resulting impact on their activities, at a country and industry level. This should be followed by an assessment of the strategic impact. By revealing the business-specific challenges ahead, it will subsequently inform the operational response.
The combined process will guide necessary adjustments to the business model. But with the impact of Brexit “going far beyond trade”, de Comminges cautions that a great many questions will be raised throughout the process.
These may include the most appropriate location of treasury, and the ability of partner banks to access capital and support the business in the desired location. Cash management processes, such as cash concentration, FX and cross-border trade risk management, and the centralisation of trade facilities, may similarly demand attention.
The impact on fundamentals such as materials sourcing, manufacturing and sales must be measured, with due consideration given, for example, to the effect of trade-barrier induced port delays on logistics and inventory management. The depth of investigation required will, he adds, necessarily reach as far as the customers’ customers if the effects of Brexit are to be properly mitigated.
Brexit will see winners and losers emerge, states de Comminges. The benefits from the falling pound, post-referendum, are well-known. But this is a short-term gain. In the long run, “every industry will have to adjust to accommodate the new rules”.
The support companies receive from their banks may prove the defining factor for success. With long-standing banking subsidiaries in Germany and France, and branches throughout Europe, HSBC clients should anticipate a seamless post-Brexit transition.
Within trade finance, HSBC has long-established networks and relationships servicing EU/UK and global trade. This is complemented by dedicated local expertise, de Comminges notes. With a product set capable of reflecting both large corporate and SME needs, the bank is capable of analysing clients’ existing facilities, through the lens of their ongoing Brexit planning, to offer the right outcome.
Accommodating the future
HSBC recently created Brexit-themed finance solutions for two Asian clients trading in the UK and Europe. This demonstrably leverages the bank’s capacity for “balance-sheet optionality”, accommodating its clients’ business models in both pre- and post-hard Brexit scenarios.
One client is adopting a receivables finance solution out of Germany and the UK under the same model. The other is using a pan-European supply-chain finance solution out of London, with the option to migrate it to France if needed.
With the right business model and banking partner, keeping the trade channels open, whatever Brexit brings, is entirely possible.
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