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European firms dust off 'no-deal' Brexit plans
ROBERT Bosch, the world's largest car-parts maker, is stocking up components in the UK. LVMH, the maker of Moet & Chandon champagne and Hennessy cognac, is building up its inventory there. Channel tunnel operator Eurotunnel is expanding its parking lot for trucks in France.
European firms that do a lot of business with the UK are preparing for the worst. Their frenzied activity reflects the growing likelihood that Britain will drop out of the European Union (EU) without a deal on March 29, resulting in higher import duties and border delays. That concern grew after British Prime Minister Theresa May on Tuesday won the UK Parliament's backing to go to Brussels and renegotiate her Brexit deal, an option the EU says is out of the question.
"We now have to prepare for the worst case," Bosch's chief financial officer Stefan Asenkerschbaumer told reporters late Tuesday in Stuttgart. Chief executive officer Volkmar Denner added that a "no-deal" Brexit "would have fatal consequences". A so-called hard Brexit will cost companies in the EU and Britain 58 billion pounds (S$102 billion) a year in "red tape", or tariff and non-tariff expenses, a report by Oliver Wyman and Clifford Chance estimated in March 2018. While the EU automotive industry is likely to be hit the hardest, for the UK, the deepest impact would be in the financial services sector, the report said.
Companies across the region have been preparing for the divorce ever since the UK voted to leave the EU in 2016. While they have largely focused on an orderly exit, they are now having to dust off plans for the extreme-case scenario.
Take LVMH Moët Hennessy Louis Vuitton, for example. The company said Tuesday that it has added four months of stock to its UK wine and spirits inventory in preparation for the country's expected exit from the EU in March. British sales represent about 4 per cent of the group's revenue, and executives said they are ready for the worst-case scenario.
Eurotunnel, for its part, is expanding its French terminal's parking space by three hectares so more trucks can park while they wait for customs inspections. Prefab buildings are being installed to accommodate more customs officers, before permanent ones are built.
The company's tunnel under the channel transports more than 20 million passengers, 1.6 million trucks and 2.6 million cars every year between Dover in the UK and Calais in France. It accounts for 25 per cent of goods trade and 1.7 billion tonne-kilometres of freight between the UK and continental Europe. While the goods sail through now, customs checks will mean long road backups.
"Eurotunnel has been actively preparing for all possibilities for the last two years, including the worst-case scenario," Romain Dufour, a spokesman for Getlink, Eurotunnel's parent, said in a phone interview. "We will be ready as soon as March 29." French harbours - through which 60 per cent of all goods and people moving between the UK and the EU go - is adding 580 additional customs and sanitation staff.
"My mandate is to make sure we are ready to face the most constraining situation," Vincent Pourquery de Boisserin, the national coordinator for harbours, said in an interview.
Banco Santander SA, the eurozone's largest lender, whose UK unit contributes 13 per cent of group profits, has been hedging the pound and being prudent about its credit exposure since the 2016 referendum, chairman Ana Botin said on Wednesday.
"When it comes to Brexit, we have contingency plans in place not only in our UK system but also in Europe - we are perfectly prepared for any scenario," she said. "We are not counting on a no-deal Brexit though we continue to plan for a UK economy that's softer and inflation having an impact through the depreciation of the pound."
While lenders such as Santander that focus on retail banking are less vulnerable to a disorganised Brexit than investment banks that depend on securities trading in London, they are still in the line of fire. They could face a barrage of loan defaults from small businesses that have not prepared the documents needed to export and import goods.
Small businesses are scrambling to squeeze in as much of their business as they can before the Brexit deadline hits to avoid higher duties. Spanish vineyards, for example, are shipping as much wine as possible ahead of a potential hard Brexit.
"We already completed our sales for the first semester of 2019 with 90 per cent of our customers," said Santiago Frias, general director of Bodegas Riojanas, a vineyard in Cenicero in the wine-growing region of Rioja. "This will allow us to face the first collapse we expect in UK customs."
About 350 kilometres north of the capital Madrid, La Rioja is the largest shipper to the UK among Europe's wine-exporting regions. In the first nine months of 2018, its wineries sold 32 million litres, one-third of their global exports, in the British market, according to data from the Spanish Wine Market Observatory.
"It could get worse in case of no deal," said Inigo Torres, manager of Grupo Rioja, an association grouping most of the region's wineries. "Sterling would further depreciate and the UK would turn into a third country with no customs agreement and probably higher duties. And that would amplify the negative effect." BLOOMBERG