Explained: How And Why Brexit Will Reshape Europe's Logistics Landscape

The logistics landscape of northern Europe is about to be reshaped, changing the continent-wide flow of goods by all modes, according to Wolfgang Lehmacher, leading logistics consultant and the former head of Supply Chain and Transport Industries at the World Economic Forum in Geneva and New York.

The catalyst for this change will be Britain's scheduled exit from the European Union (EU) on October 31. However, even if a no-deal Brexit is somehow avoided this month, Lehmacher believes the eventual departure of the U.K. from the EU will have a major impact on the logistics landscape of the continent and the supply chain strategies of shippers.

"Supply chains perform best in fluid and stable environments," he said. "Both factors are negatively impacted by Brexit."

As previously reported in FreightWaves, a no-deal or disruptive U.K. exit from the EU will have catastrophic implications for Europe's trucking companies and supply chains. Holger Bingmann, head of the foreign trade industry group BGA, said recently that German businesses were already suffering from the potential exit of the U.K., detailing losses to German exporters of €3.5 billion ($3.843 billion) this year.

Lehmacher takes a long-term view. He argues that supply chain design is a function of market size; a point equally valid for upstream procurement activities and downstream distribution and after-sales. "Larger markets have their own consolidation points or hubs benefitting from larger volumes and scale, while smaller markets are served directly from outside or smaller in-country warehouses, at higher cost," he added.

"When the U.K. separates itself from the world's second largest trade bloc, regardless of the efficiencies the U.K. may achieve at its borders, the barrier becomes an additional stop and incremental cost in the supply chain of a not so large market," Lehmacher explained.

He continued, "So, of course, Brexit changes where goods are manufactured, stored and how they are routed during the distribution process."

Image: Wolfgang Lehmacher; Lorenz Richard

As a result, Brexit of any form will erode the U.K.'s role as a gateway to the continent, with many manufacturers expected to migrate production and distribution of EU goods out of the U.K. to continental Europe. U.K. ports will also lose volumes.

"Post-Brexit, the U.K. cannot function any more as a key entry and exit gateway of the EU," Lehmacher said. "Too many factors may hinder the fluidity of the supply, ranging from administrative burden, to potential delays."

He added, "Flows of goods that can, will avoid the U.K. and U.K. warehousing and distribution facilities will be closed and reopened in markets in the EU, mostly in the Benelux countries where most of the EU distribution centers are located."

As the European supply chain and logistics map shifts towards a more continent-centered model, U.K.-based European hubs will become the exception. "The shift within manufacturing networks and transfers of European distribution centers from the U.K. to the European continent will strengthen the Benelux nations, Germany and France as logistical platforms in the world of global commerce," said Lehmacher.

"Ports there have the necessary capacity and the warehouses space will be created to absorb the additional volumes."

Lehmacher expects the port of Calais in France and the U.K.'s port of Dover located on either side of the Channel to become major infrastructure bottlenecks if customs checks are required post-Brexit. Irish companies will increase their efforts to circumvent the U.K. land bridge by using direct routes between Dublin and the continental European ports.

Essentially, Brexit impacts three freight flows, he explains. The first is outbound products of U.K. origin destined for other EU markets and countries that have an agreement with the EU. The second is merchandise entering the U.K. from EU nations and countries that have trade agreements with the EU. Third are transit flows originating in markets outside the EU that currently transit the U.K. that are destined to other EU markets and vice versa.

Taking those flows into account, Lehmacher expects the chief supply chain officers (CSCO) of Beneficial Cargo Owners (BCO) to be most concerned with ensuring the fluid flow of goods across their manufacturing network or footprint.

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"The EU is the U.K.'s largest trading partner, accounting for approximately half of both imports and exports of goods and the smooth flow of goods is the objective of CSCOs," said Lehmacher. "As they plot new strategies, they will forecast likely changes in demand, sourcing partners and countries for materials, parts and products, and the kind of products they have to ship today and tomorrow," he said. "Then they will scrutinize potential areas of risk, delays and disruptions along the chain, and tools which can help them rationalize a new strategy."

U.K.-based firms in the food and drink, chemicals and automotive sectors will be most seriously impacted by Brexit. For example, automotive manufacturers, with their low margin business models and vulnerable, just-in-time supply chains will be heavily impacted by tariffs and border friction.

"They are left with little choice," he said. "BMW is considering transferring production of its Mini brand from the U.K. to the Netherlands and Honda will be shutting down its plant in Swindon by 2021. Ford has confirmed that it will close its Bridgend engine plant in September 2020 with the loss of 1,700 jobs. This will burden an industry in decline and reduce further the automotive transport flows between the U.K. and other EU markets."

Chemical supply chains will also experience disruption. "GSK estimates that its costs caused by Brexit could be up to £70 million ($88 million) over two to three years alone," said Lehmacher. "The U.K. government estimates that the chemicals industry must factor in £400 million ($439 million) to reregister chemical products."

And he believes the U.K.'s pharmaceutical business is in jeopardy too as access to the EU's 446 million potential patients and customers risks being diminished. "U.K. patients might also suffer as 73% of pharmaceuticals are imported from other EU countries," he added.

"The pharmaceutical industry, as with other sectors, has been stockpiling products in the U.K. for months leading to a shortage in warehousing space. Increasing stocks of medicines has been just one Brexit contingency measure, next to changing and adding new supply routes and duplicating manufacturing processes."

As for food, in a post-Brexit world the U.K. is forecast to struggle. "The U.K. food supply chain will experience decreased competitiveness in exports and increased prices of agricultural imports," he said. "Forty percent of the food consumed in the U.K. is imported. Several non-EU countries are preparing to take a part of that share. Import and export volumes are expected to decline, whether to EU markets or beyond, requiring an adjustment of transport and logistics capacity. Demand is expected to decline due to increasing food prices."

The good news for the U.K.? Lehmacher believes its leading position in services will help the economy. "Services is a market that already exceeds that in goods when measured in value-added terms and it is growing more than 60% faster than the goods trade globally," he said. "Telecom, IT and business services are growing two to three times faster. This presents an important opportunity for the U.K., considering that the services sector is less dependent on proximity to markets.

"Finally, the pressure resulting from Brexit might motivate U.K. enterprises to increase the adoption of digital solutions in supply chain management from currently 12% to the 30% achieved in Germany."

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