It’s been two months since UK voters chose to exit the European Union. After an initial flurry of intense speculation, heated commentary, and a short period of British political turbulence, much of the world press has turned their attention to the next spectacle. However, certain Brexit realities remain: the current conservative government in Westminster is committed to moving – more rapidly than initially expected – toward a split via Article 50 and economic uncertainty is an ongoing problem in both the UK and the broader EU market. The pound sterling has shown some signs of stabilization in recent weeks but is still significantly below its pre-Brexit value, where it is likely to remain at least until separation is finally formalized – a process that could take years.
For UK businesses, the road ahead is a little murky, as many were caught flat-footed when the “yes” vote pulled ahead at the polls. Just prior to the June vote, Simon-Kucher & Partners conducted a survey of more than 100 senior business executives at its London pricing forum to gauge their preparedness for a Brexit victory. The vast majority (76%) of responding companies claimed they did not have a detailed Brexit pricing plan in place. In addition, 50% of executives felt their costs would go up in the event of a yes vote and 88% stated they would raise prices to cover some of the expected increase in costs.
With the pound likely to remain depressed for the foreseeable future, it‘s more than reasonable to assume that costs – especially for companies with far-flung supply chains – will rise. But the impact will spread far beyond Britain. Given the relative heft of the UK in the overall European – and global – economy, all firms doing business in the UK market will need to adjust to this new reality.
One area of concern is the automotive industry, with potential impacts for both European and American manufacturers.
According to the Wall Street Journal, almost 19% of all 2015 car sales in Europe were generated in the UK. The UK is not a major car manufacturer so most cars on the road are imported brands. Out of the Big Three US manufacturers, only GM has a full assembly plant in the UK. Chrysler has none and Ford only makes certain components. The major European brands tend to base almost all their European manufacturing in their country of origin, with some operations in lower-wage European companies.
In the current circumstances, demand for automobiles will likely become depressed across one-fifth of the European car market for the near future. Given that manufacturing is generally happening elsewhere, there will be little labor cost savings to gain from a deflated pound — and no real incentive to move production from lower-wage European countries given the uncertainty around the pound’s future performance.
The likely outcome will be a production shift toward cheaper, highly fuel efficient models for the UK (as petrol is now more expensive for British drivers), resulting in lower revenue for manufacturers.
In this type of environment, pricing becomes an increasingly important lever to protect margins and maintain growth. Whether it’s automotive, auto parts, or any other type of manufacturing, UK companies (and international businesses selling in the UK market) need to start re-evaluating their pricing strategy and execution tactics to address what may be several years – and perhaps more – of weakened consumer purchasing power in Europe’s second-largest economy.