Markets & Companies

Brexit Means Brexit

Experts Discuss the Potential Meaning of Brexit for the Chemical Industry

12.06.2017 -

Many questions – few answers and a long and uncertain time line for the fog to lift from the new “Channel” between the UK and the EU27. Welcome to the VUCA (volatile, uncertain, complex, ambiguous) business world of 2017!

The United Kingdom will leave the European Union in one way or the other in 2-3 years from now. Prime Minister Theresa May has announced a “hard” Brexit strategy, e.g. to separate all contractual ties with the European Union and the European Court and aggressively negotiate a new, better deal for Britain – or walk away.

This will require rethinking many strategies and processes related to working with UK based affiliates and partners, moving personnel and goods between the UK and the EU, and developing and executing strategies to operate on the UK markets.

Great Britain proper is of course the country most affected by Brexit. But the German industry is estimated to be the country within the EU with the biggest stake at risk. In case of a hard Brexit the Euler Hermes Group forecasts a reduction of German exports in 2019 by about €7 billion with the automobile industry (€2 billion), the machine building industry (€1 billion), and the chemical industry (€1.1 billion) the hardest hit.

On May 17, 2017, the Association for Chemistry & Economics (VCW) within the German Chemical Society (GDCh) organized a half-day orientation event in Frankfurt, Germany, offering an overview of existing rules, regulations, processes and strategies which will be affected in a significant way by Brexit. As Brexit is not yet clearly defined, likely scenarios and its potential consequences for the German chemical industry were presented and discussed. Experts from leading chemical companies, industry associations and law firms offered their view on what

  • Questions to ask concerning the effects of Brexit on a company level
  • Developments to monitor and scenarios to think through
  • Expertise to be developed and capabilities to be put in place to best ride the storm

Minimizing the Damage

After more than 40 years in the EU and its predecessors the UK and the EU27 are integrated deeply in many aspects: politically, economically, legally, financially, regulatorily, logistically… . In particular for the chemical sector the UK exports 60% of its production to the EU27 and imports 75% of its chemical purchases from the EU27. So the process of the UK leaving the EU resembles more a divorce than a simple cancellation of a club membership. And as with any divorce there are no winners. However, both parties need to come to an agreement both can live with in order to minimize the damage done to each.

In business this translates into minimizing the disruption of business operations and relations as both sides represented by the British Chemical Industry Association CIA, the European Chemical Industry Association CEFIC, and leading German chemical companies unanimously emphasized. A no-deal on trade after Brexit would relegate the British-European relationship to WTO standards – the worst possible outcome.

For the chemical industry REACh represents a particular challenge. REACh (Registration, Evaluation, Authorization and Restriction of Chemicals) addresses the production and use of practically all chemical substances, and their potential impacts on both human health and the environment. The UK is confronted with the uncomfortable choice to either take over all current REACh regulations as national law and continue to respect decisions of the European Chemicals Agency and the European Court of Justice in case of disputes or design an equivalent regulation work to enable trading chemical products between the UK and the EU27.

Difficult Negotiations at Hand

But the starting points for the Brexit negotiations are quite apart. The EU27 plans to negotiate two separate agreements one after the other: first the withdrawal agreement, and after its successful conclusion the future relationship agreement. This requires to first agreeing on honoring past commitments like the status of UK citizens in the EU27 and outstanding payments the UK has agreed to as a member of the EU. The UK wants to negotiate both agreements at the same time bargaining about elements from each simultaneously.

The timeline is short: All agreements have to be ratified by March 2019 unless a special – and not too likely – extension is agreed unanimously by all EU27 members. Negotiations are expected to start in earnest in fall 2017 after the German elections and have to be concluded by fall 2018 in order to allow for proper ratification by all parliaments involved for the March 2019 deadline.

The resume of the half-day conference on Brexit: Given the complexity of the situation, the far reaching implications of potential outcomes of negotiations, and the uncertainty of timings each company should conduct a “Brexit Stress Test” now in order to identify the areas critical for its business and develop appropriated back-up plans for those.

But divorce proceedings taught all involved an important lesson: Not only facts and logical conclusions but also emotions will have an important impact on results. The recent UK election results did not simplify the situation as the reliance of the Tories on the DUP (Democratic Unionist Party) from Northern Ireland might further complicate finding a workable compromise with respect to the Northern Ireland border. Let’s keep that in mind when planning for Brexit!

Dr. Joachim von Heimburg is an independent Innovation Architect and Executive Advisor helping companies to improve their innovation processes and create sustainable business value by innovation. He is the founder of the Open Innovation Alliance (OPINA), an alliance of European multinationals dedicated to developing their innovation capabilities and competencies. He is a Certified Innovation Management System Professional (PDMA), and member of the board of the Chemistry & Industry Section of the German Chemical Society (GDCh).