Stepping away from the politics, ACCA UK head John Williams talks about the practical implications of Brexit for businesses’ supply chains and how the accountancy profession’s pragmatism could be a welcome. But, when it comes to Brexit, by its very nature, the politics can’t stay away for too long. Interview by Vincent Huck.
The Accountant: Looking at the potential fallouts of Brexit, what is at stake for businesses, in particular with relation to supply chains?
John Williams: The basic issue here is economic integration. The marriage of the UK with the EU is not solely a political one. It is a very clear process of political and economic union.
The economic integration, bearing in mind we’ve been in the EU for 43 years now, has been a process of increasing connectivity between the production and supply facilities in the UK and in not just one or two countries, but all over Europe. There are some obvious examples. The two that are normally used are the automotive sector and the retail sector, particularly around perishable goods.
In the automotive sector, the example that is often given is that a number of components will cross the channel many times. Three, four, maybe six, maybe more times, in order to have components added or fitted to them, or to be tuned, to be machined… That kind of supply chain integration is difficult to dismantle because it’s grown up over many years. Nissan’s choice about where to site a plant in order to make optimum use of the facilities is not solely “We’ll put this in Sunderland because they’ve got the best workers and the best productivity ratio.” It is actually about where the supply chain requires all of these cars and their components to go.
We’ve gone beyond “just in time” – we’ve had synchronised delivery for many years now, in a sector like automotive and other manufacturing sectors.
That depth of economic integration is extraordinarily difficult to unwind, and will certainly take as many years to unwind as it took to actually develop. That is an issue that might be worth remembering when it comes to a transition period, if there is going to be one.
The other example that is often given is retail, particularly around perishable goods. We have a process now where goods can come on trucks, into ports like Felixstowe, Harwich or Tilbury, and flow straight through customs and immigration, and on to the destination.
Foods that normally need refrigeration very often don’t have full-scale refrigeration facilities on the transport because the transport moves very quickly. If they get held up for an hour, a day, or two days, because of customs and immigration, then there will be a requirement to make sure that they do not perish. Or, indeed, a need to think seriously about whether or not they should be transported at all, if there is going to be that kind of delay.
Those two examples are often used as the challenge to the economic integration of supply chains in Europe. If you ask the companies that have based their business models on those supply chains, they will explain very clearly that these business models are not created to supply the UK, or even actually to supply Europe in many cases.
They are created as the foundation supply chain for supplying global markets.
What is at stake here is not the UK’s production or productivity, or indeed even Europe’s. It is the impact on the global economy of that kind of dislocation within the supply chain in Europe, which is major supplier to the global economy.
The Accountant: Can you explain this a bit more? The EU is so integrated. How does that model apply with, let’s say, China, where there is a hard border?
Williams: Let’s look at the automotive sector, for example. The automotive supply chain within Europe is incredibly integrated. Still, that supply chain is not limited to Europe. Supply chains are global. Distance does have an impact, certainly. Tariff and non-tariff applications do have an impact. Nevertheless, most of the manufactured goods supply chains are actually global, not merely European.
Certainly, if you look at machinery, equipment, clothes, white goods and brown goods that are manufactured ostensibly in China, they actually have lots and lots of components from somewhere else, including Latin America or indeed Eastern Europe.
So we already have a precedent, which is the global supply chain for manufactured goods. We’re not suddenly saying: “Actually if we come out of Europe, we won’t be able to move things around the world any more.” We’re already moving things around the world.
The global supply chain community already exists. It’s just that Europe is a more integrated part of that.
The Accountant: But doesn’t being more integrated makes it easier than the global supply chain that is impacted by tariff and non-tariff barriers?
Williams: Of course it is impacted by tariff and non-tariff barriers. A whole range of them, because every country has its own.
Nevertheless, what is evident is that actually, if we look at the growth of the global economy over the past, probably 60 years, the effectiveness of global supply chains is not destroyed by border and tariff and non-tariff barriers. It is constrained, it is limited, but it doesn’t stop economic activity happening. Whatever the outcome is, we can still look forward to a flow of supply chain.
The Accountant: Nevertheless, the challenge here is of going from a streamlined scenario to something where there are hurdles…
Williams: Yes. There is already a suggestion, that I have seen in a couple of places, that technology will solve all of this.
The Accountant: It’s the trendy buzzword.
Williams: Absolutely right. There is very little doubt that the application of increasingly sophisticated technologies can help us in organising and managing supply chain flows. This is where the accountancy profession, in its understanding of business models and the use of technology to change business models, has a really substantial, active and pragmatic role to play. This is not solely in terms of advice, but in terms of application as well.
There are new business models that will emerge, and are already emerging, regardless of Brexit. These new business models in supply chains are based around the increasing use of cloud technology.
For example, a vertical cloud is the application of cloud technology to a supply chain. It makes all the data within that supply chain visible to all the businesses within that supply chain. This brings opportunities to take cost out of the supply chain in all sorts of ways – not least deciding on the flow of components, parts, engines and so on around that supply chain. In perishable goods, for example, the flow could be adjusted so we take account of any potential delays.
The use of technology will not immediately overcome any of the issues that might emerge as a constraint on supply chain flow. However, the progress that is being made by the accountancy profession in altering and renewing business models based on opportunities from technology will go a long way towards limiting the constraints that Brexit brings.
The Accountant: At the moment, we don’t know how it’s going to play out, so what responses have you seen from businesses?
Williams: There are a range of responses, as you might imagine. First of all, there a range of impacts likely to occur for any given business. Second, there are a range of sizes of business. The reason why that is important is that larger business will have teams of people who can spend time looking at the impact of Brexit.
For instance, financial services companies have already been making noises around where they will need to re-site fairly large numbers of personnel, dependent upon the outcome of the Brexit negotiations.
The same will be true of manufacturing businesses. A difference of course with manufacturing business is that, unlike the service sector, it is not simply a case of moving half their people to Frankfurt, Paris or wherever. A manufacturing facility is a whole. It’s not just a group of parts that can be separated.
So there will be some quite serious discussions under way in some of the larger manufacturing businesses about what the impact ought to be on their presence and supply chain. For example – I hate to use Nissan again – but the conversations that the government had with Nissan about their continued presence in the UK, the details of which we don’t know, resulted in Nissan committing to staying in the UK. That will have been a decision that was made purely on economic grounds for the company.
This is really important for the government to remember: companies will make their decisions based on economics, not based on politics.
The political impact of these economic decisions will come in two or three ways. One will be around the future shape of tariff or non-tariff barriers. That will be heavily impacted by the kind of trade relationship we have with the EU after Brexit. Is there a transition period? Do we remain part of the customs union? Do we move to World Trade Organization rules? What will the impact of tariff and non-tariff barriers be?
What is the impact on flows of talent? There is very little doubt that one the most important elements in any business performance is the people within that business. Businesses, particularly in a sophisticated and mature economy like the UK, need to have access to talent that is globally effective. As a result, they need to have access to talent from all over the world. That includes the EU.
If there are any constraints on the flow of talent in and out of the UK, that will have an impact on this decision.
The Accountant: Imagine that we go back to a border where the lorries come on the ferry in Dover filled with perishable goods and there is a delay. Then there are questions of infrastructure: is there a parking lot for all those lorries? Is there cooling containers? And then, who takes care of that? The businesses? The government?
Williams: I will sound a bit like a politician here, but the question you should have asked me is: who is advising the government? In the end, the government will need to make decisions based on the expected impact of its deliberations in the discussions with Brussels.
At the moment, it’s not absolutely clear if the government itself has absolute clarity on what it wants to achieve, over what time scale, and how it wants to achieve it. Certainly, if the government does have clarity, it is not actually letting us see that.
Our consideration is that the government should be getting advice from people who understand not just the pure business economics but also the impact of political decisions on those business economics, and the business models associated with them.
The people who should be giving that advice to the government are people who understand the finance and economics within the business. We would view that as being the accountancy profession, because nobody else sees the way that a business or a public sector organisation operates in the way that an accountant does.
All business is about risk. Accountants are trained in identifying, recognising, assessing and managing that risk. Also, being able to articulate it to other people, to senior management or, in this case, to politicians. We would be strongly urge the government to make sure that it is getting advice on the economic impact of its discussions from the accountancy professions.
The Accountant: Talking about the government, there have been a few announcements this week with two possible scenarios outlined with regards to borders. What did you make of it?
Williams: It’s too easy, because of the lack of clarity in the government’s position at the moment, to be distracted by what appear to be confusing options.
Fundamentally, we are going to be out of the EU when Brexit occurs in March 2019. The ease of flow of the things which benefit the UK economy and society – and that includes goods, services and capital – is very important. I would expect the government to be very clear about the fact that there will need to be a transition period.
The timeline between now and 2019 is too short to manage the complexity of conversations. There will need to be a transition period. During that transition period, the government’s idea that we remain part of the customs union is a good one. The more we can limit the immediate damage to relationships within supply chains etc, the better.
Continued access to talent is very important. I just think the government is tied up with the political implications of Brexit, and probably needs to challenge itself a little more on the economic ones.
The Accountant: Do you think the proposal sounded like: “We’re going to have a transition period where everything stays the same. At the end of the transition period, we’ll be in a position where everything is the same.”
Williams: What I’ll say is that it is not possible for us to leave the EU and remain in the EU. That decision has already been taken, in the referendum. It is highly unlikely, on that basis, that the economic elements of Brexit will remain exactly the same after Brexit.
Yes, a transition period is not only a good idea but also necessary. After that transition period, there will be a difference between the way we trade with Europe now, and the way we trade with Europe then. I would expect that difference to be based upon some fairly hard-headed negotiations, which will end up benefiting the UK and the EU as much as possible, and disadvantaging both as little as possible.
This is probably the first time that there has ever been a trade negotiation wrapped around the idea of making things more complicated rather than less complicated. This is the big challenge, and this is why there is so much confusion – maybe even fog – around what our position is.
We are trying to limit the complexity that we are deliberately creating by leaving the EU. The decision of the referendum was clear. The government’s job now is to negotiate the optimum conversation.
The Accountant: Where does the profession stand in all this?
Williams: There are three roles for the profession in this. One of them is the advisory role. What is the UK’s strategy for having a final economic agreement with Brussels? This applies not just during the face-to-face conversations but also in behind-closed-doors conversations that government is having with their officials. The accountancy profession ought to be represented there. We have, across the whole of Europe and obviously including the UK, professional accountants on every level, in every kind of organisation, public and private.
They have a view that nobody else has, and there are more of them than in any other single constituency with an interest in the outcome.
The government should be engaging directly with the professional accountancy bodies around its strategy for negotiating with Brussels.
In addition to that, there are special advisers sitting around the tables with government officials when they are actually in negotiation. I would see that as another opportunity to have professional accountancy bodies present. This is because it’s very difficult for somebody who is not that well versed in the whole of the economy to have at their fingertips an understanding of everything that will impact that economy.
The economic element of Brexit doesn’t just need to be fed into the politicians for their conversation. It needs to be held in conversations between businesses in the UK and in Europe.
Clearly, there are conversations already under way between the Confederation of British Industry and its counterparts in other European countries. We’ve heard, for example, from the German business organisations that they are very keen to retain the relationship with UK businesses that they currently have on an economic basis. In terms of those operational conversations, accountants have another very important role to play.
We should also be talking to organisations like the International Chamber of Commerce, the Council of British Chambers of Commerce in Europe and the British Chambers of Commerce. They should be engaging much more closely with the accountancy profession.
We are researching – as are our counterparts – the views of our members all the time. The impact on our members of what we see so far from the Brexit negotiations. From that, we are looking into what kind of futures might be available to our members and their businesses on the back of the discussions that are happening.
The fundamental role here for the accountancy profession is to be the voice of pragmatism. There is a lot, for obvious reasons, of political language around Brexit. There is relatively little clear, unequivocal, pragmatic: “If this is done, then this will be the result.” The voice of pragmatism actually resides with the accountancy profession.
The Accountant: Are you being consulted at the moment?
Williams: Not enough. I suppose the better way to say it is that we believe that we have substantially more that we can provide to the government, which will help not only the scope and nature of the Brexit negotiations, but actually the cohesiveness of the outcome.
The Accountant: What is the nature of the consultation at the moment?
Williams: There are conversations under way all the time with a number of different government figures. We’re the secretariat for the All Party Parliamentary Group for Trade & Investment, for example. So we talk to a number of politicians who feed into the government’s policy on trade and investment.
We talk to other politicians because either they are members of ACCA or our constituents have connected us with them. There is no formal mechanism at the level and scale to which we could contribute in place so far. We would welcome that.
When we think about the economic impact of Brexit, the accountancy profession will itself experience an economic impact [See box out on opposite page]. It has a driving interest in our achieving the optimum outcome for UK plc in these conversations.
I use the phrase UK plc deliberately because it is quite important for us to recognise that the Brexit conversation is both political and economic. It will be negotiated by politicians, but it is that economic outcome which will affect the lives not just the businesses and organisations but the lives of individuals in the UK.
The Accountant: Speaking of individuals, do you think there is any possibility that they would be better off with the UK outside the EU in terms of prices and living standards?
Williams: So the question is: is Brexit a good idea or not? Absolutely nobody knows that. I’m not merely saying that to avoid answering the questions. Actually, there isn’t an answer to the question. In a way it’s almost the wrong question, because the decision has been taken. The referendum has been done. To all intents and purposes, we are now on the road to Brexit.
In a way, the right question would be: how do we optimise the result of the referendum? Not just for the UK, because we will have an ongoing relationship forever, effectively, with the EU. That relationship will change, because that is the nature of Brexit. It’s not like we’re never, ever going to be seeing or talking to each other again. We need to have an outcome from this which enables us to continue to trade, to visit, to engage with, to be part of Europe as a geographical entity, even if we are not part of the EU.
We as the UK occupy a unique position in terms of being the entry portal to Europe for the rest of the world’s business. Many of the inward investors that have come to the UK have done so because of our access to Europe as a marketplace. Partly language, partly the sophistication of the UK economy, the resources available and financial and professional terms in the UK, and standing on the doorstep of a market the size of Europe. We need to retain that position in the eyes of the world’s businesses as the gateway to Europe.
Consequently, the conversations that we have need to retain a relationship with Europe that doesn’t result in fracture.
The Accountant: That’s the optimum scenario for the UK but, realistically, why would it be for the EU?
Williams: It needs to be optimum for Europe and for the rest of the EU as well of course. There will be lots and lots of individual interest among the countries of the EU. As with any disambiguation or disaggregation, there will be elements that certain parties will want to hang on to, to take, to keep.
The most important thing for Europe as a whole here, is that Europe remains seen as an economic power, as an economic entity in the world. Actually, the strength of Europe’s economy comes from its cohesion and cohesiveness. That’s why I think the discussions in Brussels around Brexit probably need to satisfy, as far as is possible, the economic outcomes desired by both the UK and the other 27 countries.
The Accountant: Any further comments?
Williams: You asked earlier what kind of engagement we were getting with government. I wanted to add that we have a MoU with the Department for International Trade. That allows us to provide access for our members to the support programmes provided by the Department for International Trade. It gives them access to UK export finance opportunities that they would not otherwise have.
It also provides a feedback loop, back into the Department for International Trade, of information, knowledge and data, around the impact of international trade support on businesses and organisations in the UK.
I actually have a meeting tomorrow with Antonia Romeo, who is the chief executive for the Department for International Trade, to talk to her about how we can more deeply integrate with them.
Some of the ways in which we can do that – and this picks up not just the European engagement but the broader global engagement – is if we think about trade delegations, for example. The UK has a continual flow of trade delegations going out to various places around the world, including to Europe, to help UK businesses do business.
We have almost 700,000 ACCA members and students around the world, pretty much all of whom are in a position to support a trade delegation into their country as a potential purchaser, a potential provider, a partner, supplier, adviser, whatever. Our members and students are an immediate, barrier-free community who can be accessed to help businesses do business in those countries.
Those 700,000 people is a bigger resource than the Department for International Trade has. We’ve got a contribution to make to UK’s international trade performance through our membership. That will include European countries as well as non-European countries.
I mentioned that we are the secretariat for the All Party Parliamentary Group for Trade & Investment. We have, as part of that, put together 11 sector advisory groups for all the major sectors within the UK economy. They will be contributing their views, both as consultation responses and active submissions of “this is what we want to see in terms of support for UK trade, internationally, both post-Brexit and between now and then”.
Nobody else, I think, has that kind of direct engagement with that many sectors, covering that much of the economy, feeding into the government’s conversations about trade.
The Accountant: There is an ethical question when the accountancy profession starts advising government. What guarantee do we have that it is for the best interest of the public, rather than best for the accountancy profession?
Williams: The answer to that is, I deliberately use the term “accountancy profession” and not any particular accountancy firm. Frankly, every business has an accountant. The public sector has finance and accountancy professionals. So the accountancy profession has no vested interest, because it actually touches and is embedded within every single sector, every single organisation, every single business. When we speak for the accountancy profession, if it’s around a matter of tax or a tariff on a border, we are speaking on behalf of the whole economy, not merely the vested interests of one company, or even one sector.
We only have the interests of the whole membership, which means the interests of the whole economy and the whole of society. It’s the perfect objective view. And the fact that we can take a global view means that we can think about what is best for the UK economy and society, and the global as well as the European economy and society, from the point of view of a profession that is seated everywhere within it.