Above a factory floor of machines carving metal to within one-millionth of a meter, Stephen Cheetham is preparing his company for the unknown: a British exit from the EU.
Since the British government announced a referendum on Britain’s future in Europe, Cheetham has deferred investment decisions, put off expensive hiring and even bought equipment with his own money to avoid straining the balance sheet.
The aim is to prepare his company, which makes parts for first-class airline seats and intricate scientific equipment, for what he fears would be a slump in business if Britain votes to leave the world’s biggest trading bloc.
“It is extremely difficult to prepare for and it worries me witless, but our disaster plan is very clear: If all the kit is paid for, we hang on to it and we ditch everybody apart from the core,” said Cheetham, the owner of PK Engineering.
Britain’s big listed companies have appointed lawyers and strategists to identify the risks of a British exit, or Brexit. However, wary of meddling in politics, they have largely not detailed their plans for the June 23 vote, but smaller companies in the manufacturing heartlands, crucial to the economy and often inextricably linked to continental Europe, are formulating contingency plans that illustrate the risks facing businesses across the nation and the steps being taken to mitigate them.
At the start of last year, almost half of Britain’s private-sector turnover came from firms that employed fewer than 249 people, according to the UK Department for Business.
For Cheetham, his “disaster plan” involves jettisoning nearly half of his 30 employees if a Brexit compounds the drag from an already slowing global economy at his firm in the English rural town of Hereford.
Across the nearby Welsh border, Gareth Jenkins, who runs a toolmaking firm, has identified which major customers in Europe are likely to abandon him should they have to accept higher costs or slower delivery times that might come from new border controls with EU nations if Britain leaves the bloc.
He has calculated the financial impact and said, in a worst-case scenario, he could lose 25 percent of his turnover. He plans to tell his 91 employees in the next couple of weeks that a vote to leave could force him to lay off one-quarter of staff.
POOR VISIBILITY
Very little is clear ahead of the referendum called by British Prime Minister David Cameron, with British voters divided on membership and both sides in the debate saying Britain would be financially better off if their cause succeeds.
The fears of business owners like Cheetham and Jenkins are driven by what most Britons — on either side of the debate — accept is unchartered economic territory should Britain vote to leave the group it joined 43 years ago.
The terms of any divorce would be subject to two years of negotiations with the EU, with no guarantees of how the new order would look.
At present, British companies trading with other EU nations do not face customs tariffs, costly paperwork, such as certificates of origin, or VAT — sales tax — on imports.
Should it opt to leave, Britain might negotiate continued tariff-free access, but additional administrative burdens would almost certainly apply, making exporting to and importing from the EU more costly, say business owners and lawyers.
They also fear any restrictions on European workers and a prolonged period of a volatile pound, while the effect on the EU of losing its second-largest economy is unclear.
Adam Shuter, head of haulier Exact Logistics, is investigating whether he should set up a German office, which he thinks could cost less than the additional taxes and paperwork of serving EU customers from outside the bloc.
“For a small business, it is quite a bit of investment,” he said. “It just adds a layer of administration.”
He is also gauging the extra customs costs his British customers might incur outside the EU, using non-members Norway and Switzerland as guides, and looking at how much it would cost to set up expensive software to handle border clearances.
He charges an additional ￡50 (US$70) to ￡60 per consignment for customs clearance into those two nations, on top of a typical European delivery cost of ￡40 to ￡50.
A spokesman for Vote Leave, one of the groups campaigning for Britain to leave the EU, said the concerns are unfounded.
The group said companies would benefit from fewer regulations imposed by Brussels, while the government could be more nimble in agreeing trade deals with the likes of India, China and the US.
“The UK is the EU’s largest market, so every incentive exists for the UK to strike a free-trade deal with the EU, while using its newfound control to also strike free-trade deals across the world,” it said.
GLOBAL TIES
Cheetham’s focus is closer to home. He bought PK Engineering four years ago after a career in the automotive and finance industry.
With its ￡1.5 million turnover and 929m2 factory, he said he is too small to employ consultants or lawyers ahead of the vote.
Like many of Britain’s high-precision manufacturers, most of PK’s goods — 90 percent — are exported to global supply chains, ending up at the likes of Boeing’s factory in Seattle or Airbus’ base in Toulouse, France.
“You think we are a rural business?” asked Cheetham of his 27-year-old firm based on a small industrial park nestled in rolling countryside 190km west of London.
“If we screw up, Boeing in Seattle stops or Airbus in Toulouse stops... It is all interconnected,” he said.
Clutching a component of an airline seat in his right hand, the 58-year-old detailed how the aluminum came from Finland and the fittings from Germany to meet an order from a French customer in Wales, who will send it on to Toulouse or Seattle.
To his left is a large folder detailing the certification process the firm went through to allow it to win work in the aerospace sector. Known as the Aerospace Quality Certification AS9100C, the six-month process cost about ￡20,000.
The EU contributed to that cost in its bid to improve productivity and competitiveness in the bloc and Cheetham said it would have taken much longer to complete had he needed to stump up all the cash.
Leaving the bloc, Cheetham worries that his firm could miss out on this kind of advantage and become less competitive.
“Our ability to increase prices is very limited — whenever we try, we lose work,” he said.
He has pushed back the hiring of a new senior engineer until after the vote.
“If we do vote for Brexit, we will have a prolonged period of uncertainty and everything will grind to a halt, and we do not want to be caught holding the debt,” he said.
‘MAPPED OUT IN MY MIND’
Any move that led to British manufacturing firms losing their place in global supply chains would deal a major blow to the British economy; the sector accounts for one-tenth of its output and employs 2.65 million people, the vast majority in small and medium-sized firms.
A little more than one hour’s drive from Hereford, through country lanes decked with daffodils, stands Jenkins’ 5,110m2 toolmaking factory, a Welsh firm entwined in similar networks.
Like Cheetham, the 59-year-old Jenkins has been studying contracts and trying to work out whether three of his biggest clients, all based in Germany, would be able to cope if they had to accept higher costs or slower delivery times.
He estimates that one, if not two, would stop using his FSG Tool and Die, Europe’s largest privately owned design and build toolmaking firm.
“I have mapped this out in my mind,” he said, in a room off the spotless factory where tools are being built to make everything from yoghurt pots to replacement hips and car parts.
“The minute we vote to leave, customers will say there is a risk here and we need to mitigate it. We ship tools from here on Monday that they will be using by Thursday. What happens if that is disrupted?” he said, fearing that they would look elsewhere.
Jenkins fears losing the close links he has developed with other EU firms should a vote to leave exclude it from the free movement and trade that has made the alliances work.
Up against the might of low-cost centers such as China, he teamed up with firms in Germany, Sweden and elsewhere to train one another’s apprentices, refer sales, bid for emerging-market work and hire a representative in Singapore to cover all their needs.
“It is a bit like a life raft,” he said.
CUSTOMS CONUNDRUM
The customs issues are perhaps most crucial for hauliers such as Shuter’s Exact Logistics, which delivers across Europe from its base in Rugby, England.
While lawyers and business owners say any new tariffs could be low, they worry that deliveries could be delayed by customs clearance and additional paperwork, including certificates of origin and export tax declaration documents.
Shuter and one of his clients, Pete Churchill from Robert Welch Designs, estimate that the additional paperwork could mean the cost of a consignment increases to between ￡150 to ￡200 from ￡50.
That compares with the value of the consignment, which can sometimes be as little as ￡500.
Sitting in an office crammed with filing cabinets and maps of Europe, Shuter is investigating how much it would cost to buy a new software system that could clear consignments with European tax and border authorities if Britain were to operate under different rules.
“You are probably talking in the region of ￡10,000 to ￡20,000, so it is relatively significant,” he said.
British importers also fear they would have to pay VAT sales tax when they take delivery of goods from the EU — rather than at the point of sale — making cash flow harder to manage.
Facing so many unknowns, business owners such as Cheetham are struggling to plan for the future. Back in Hereford he lets his frustration show.
Normally a supporter of Cameron’s Conservative Party, he said he is furious at the position the government has put business owners in.
“They are playing roulette with the economic future of the country,” Cheetham said, hands gripping the table. “We are just hoping for the best. I am almost in denial.”
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