View from Europe: HVAC and Brexit
Thursday, September 19, 2019
As U.S. readers are no doubt aware, the U.K. is still in the throes of trying to leave the European Union, a process we now universally describe in a single word: Brexit.
It is not my place here to go into the political machinations that have been going on for the last three years as the country has attempted to negotiate a legal exit from the EU — or indeed the unprecedented events of the past month, which has seen new Prime Minister Boris Johnson suspend Parliament in a bid apparently to help him concentrate resources on leaving Europe. (Or to stop MPs disagreeing with him, depending on your perspective.)
My purpose, instead, is to report on the challenges that the HVAC industry faces because of the threat of Brexit. What the industry fears — indeed, what a majority of the U.K. fears — is the prospect of a no-deal Brexit, where no transitional arrangements are agreed with Europe, where the U.K. would effectively have to start from scratch on Oct. 31. This is generally referred to as “Crashing out of the EU without an agreement, with all the drama that implies.”
A Brexit with no such arrangements for customs waivers and the like in place would clearly cause a good deal of disruption to the movement of goods and labor, and this is a major concern for the HVAC sector, as it is for many industries that import components and finished products.
The European Union Relationship and Industrial Strategy (EURIS) Taskforce is a coalition of trade organizations representing U.K. manufacturing companies that are between them worth £148 billion in turnover and employ 1.1 million employees.
It includes both the contractor-focused heating body Building Services Engineering Association (BESA) and the HVAC manufacturers’ umbrella body Federation of Environmental Trade Associations (FETA). It is a coalition that was founded simply to provide a unified voice over the implications arising from Brexit in general, but it has found itself having to raise the alarm quite a lot over potential threats from a no-deal Brexit.
EURIS has highlighted that a no-deal Brexit would cause severe damage to U.K. manufacturing and risks huge job losses from the impact on trade.
A report by the organization, “Securing a competitive UK manufacturing industry post Brexit,” concluded that a no-deal scenario would place the UK at the bottom of all global trading leagues under default World Trade Organization rules, which would be a disaster for the product supply sector.
Dr. Howard Porter, EURIS chair, said: “A no-deal Brexit will result in significant long-term damage to the UK manufacturing sector and will put at risk the industrial product supply sector’s £148 billion contribution to the UK economy. Of particular concern are the potential costs of regulatory compliance and administration placed on exporters and importers in the UK under a no-deal, which many believe will be too hard to bear for some companies.”
The political proponents of a no-deal Brexit take the stance that cutting all ties with the EU and seeking new trade deals is preferable to further protracted negotiations beyond October.
But a host of trade bodies from around the country fear that there will be huge complications arising from leaving the numerous regulatory systems and standards that the U.K. has helped to devise as an EU member.
A coalition of leading figures in the construction industry, in which the HVAC sector of course plays a specialist and subcontracting role, recently sent an open letter Prime Minister Johnson, urging him to secure a withdrawal agreement, which they said would save the construction sector “billions of pounds” in lost output.
Organizations including the Construction Products Association (CPA), BuildUK and the Federation of Master Builders were signatories to the letter urging the Prime Minister to heed expert advice about the financial risks of a sudden exit from the EU.
Forecasts from the signatories have concluded that a smoother Brexit, with some form of withdrawal agreement, could see an increase in construction output of over £1.2 billion by the end of 2020. Against that, they say, a no-deal Brexit could see the opportunities of work within house building and commercial construction reduced by up to £10.5 billion.
The forecasts are based on the signatories’ members’ expertise and information shared with the government on the dangerous uncertainty of Brexit. The letter warns of “massive short-term disorder and potentially long-lasting damage.”
A major concern for the signatories is that, despite their combined importance to the wider U.K. economy, members say they have “no idea” of the cost of material and goods to ensure construction work can continue after Oct. 31.
They point out that their cost fears have been exacerbated by a sharp fall in major office projects and construction activity since the EU referendum result in 2016, according to data from the government’s Office for National Statistics. They say: “This comes whilst our members seek to properly prepare for an unknown future after October 31. As in other sectors, they are spending time and resources on stockpiling; transportation and logistics alternatives; auditing and guaranteeing the resilience of their supply chains; and vetting contractual risks and obligations.”
But one of the biggest impacts of planning for no-deal has been the need for companies to stockpile components or finished products, to avoid the prospect of delays at the customs borders.
The British Electrotechnical and Allied Manufacturers' Association (BEAMA) trade body said that members had been stockpiling since back in March when fears first emerged over a no-deal exit.
Yselkla Farmer, policy and marketing director for BEAMA, said: “Despite manufacturers’ best preparations, any single component in the supply chain stuck at a port due to log-jams or whatever problem may occur, means that product will not be ready despite efforts made at other stages in the supply chain. I think our members are very aware of how fragile the supply chain might be in a no-deal situation. Despite all the efforts they make to prepare, they still expect problems to occur.”
She added, “It’s not a secret that companies have spent large amounts of money stockpiling for a no-deal back in March. Manufacturers I suppose are wary of being unable to afford to take such measures again, especially when the political situation might change in a few weeks anyway.”
One manufacturer of heating products is typical: it spent £1 million on additional 100,000 finished products, which it has in a warehouse in the Northeast of England. The company’s marketing director said: “We have just spent another £50,000 just for contingency. We have so much stock that we have run out of warehouse space and are storing the products in the yard under cover.”
Farmer said that BEAMA concluded that, under no-deal, the U.K. would be only one of three countries in the world that would be trading, at least temporarily, under WTO default rules.
She said, “One of these countries is Syria, so we would be in the same trading leagues with Syria in terms of our rights globally.”
Such a prospect highlights why HVAC manufacturers — and much of U.K. industry — is so desperate to avoid a no-deal Brexit.
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