The recent vote by the United Kingdom (UK) to leave the European Union - known as Brexit - has created many risks for global supply chains, particularly in Europe, according to a new report from Resilinc. Risks include currency movement, labor uncertainty, trading rules and regulatory revisions, and global financial impact. But despite the risks, it also opened up opportunities at the micro and macro levels, which include locking in lower prices with suppliers particularly for high-spend components originating in the UK due to the current currency value.
In the near term, a “reduction in currency value should benefit high-tech OEM customers sourcing expensive semiconductor components from the UK,” said Resilinc. “Companies that have mapped their supply chain and can immediately identify components originating in the UK can initiate potential cost-saving discussions with their suppliers. Smart companies can also lock in low prices by purchasing forward contracts locking in lower prices.”
But the report, Brexit Global Supply Chain Impact Analysis, also warns against using “opportunities to exploit suppliers and negotiate unfair price reductions that put undue pressure on suppliers and jeopardize their existence, which not only hurt the suppliers, but also hurt themselves.”
And instead recommends “close supplier collaboration and a willingness to be a good partner, negotiate fairly and be willing to prop up a struggling supplier with better payment terms etc. to help them out of a tough macroeconomic environment.”
Bindiya Vakil, founder and CEO, Resilinc, explained to EPS News that purchasers shouldn’t be so quick to squeeze suppliers for the best cost without understanding how financially robust the company is. “Ninety-five percent of the high-tech component companies in the UK are classified as small and medium-sized enterprises. They may be getting squeezed on raw materials costs right now so asking them for cost savings may put them into a stress situation.”
In comparison, a multi-national, high-tech electronics supplier with factories around the world who builds a part in the UK is probably in a better position not to be financially distressed if a key customer squeezes them for a cost savings, she added. “These are two very different scenarios.”
She believes the risk of financial distress is real for small to medium-sized suppliers in the UK that supply parts that are single sourced. “You have to understand your supplier and you have to understand how robust their financial situation is and how widespread the risks are to their operations before you start to take advantage of the currency movement.”
Resilinc recommends that “companies map their suppliers’ footprints, identify exactly which parts originate from the UK, look at the possibility of finding an alternate source and qualifying them, particularly if a low spend part is used on a high revenue product / product line.”
If you buy a part that is single sourced out of the UK for a high-revenue product that is now a high risk part, explained Vikal. “There are many suppliers in the UK that provide very difficult products to second source like connectors for example. Who would think a connector could create such a huge problem. But we see a lot of custom and semi-custom connector suppliers where the OEM pays for the tooling and no one else can make it exactly the same way. Connectors aren’t typically one of the most expensive components on the board but it could support a very high revenue impacting product, which means it’s a very critical component all of a sudden.”
Making sure that these types of suppliers in the UK are doing well financially and are operationally resilient to withstand the next couple of months or years is important, Vikal said.
In some cases, customers book capacity and pre-pay a supplier to help cash flow to help them through difficult times, while at the same time securing inventory and a supply line for the foreseeable future, said Vikal.
“For every company there is a different situation. It’s not one size fits all. It depends on the nature of your business - how much is imported versus exported; how much is your dependence on the UK; how tied are all of your operations to the UK. All of these things can have different consequences for companies,” she continued. “It really depends on what you’re buying, selling, importing, and exporting, and how that plays into your business. But the currency movement can go one way or another.”
Specifically looking at the high-tech electronics industry Resilinc’s database shows that within the electronics industry, nearly all key categories are sourced and manufactured in the UK. This means hundreds of Tier 1 supplier and sub-tier supplier sites make semiconductor components, including memory, analog, communication, linear, and FPGAs. They also supply other electronic components such as passives, diodes, discretes, cables and cable assemblies, printed circuit boards and PCB assembly, connectors, power and thermal components, storage devices, mechanical components and fabricated parts (custom/semi-custom), motors, packaging and labels. All of these devices range from easily second-sourced devices to difficult to source parts.
In addition, semiconductor companies, including Freescale, Atmel, Analog Devices, Intel, IR, NXP, Texas Instruments, Diodes, and Oclaro, operate wafer fabrication facilities in the UK. Resilinc said semiconductor wafer fab companies generally have deep relationships with the locations where they operate.
“Risks depend on who you are talking about,” said Vikal. “If you’re talking about a semiconductor supplier who has a wafer fab in the UK then you have to deal with a lot of the challenges because as a wafer fab you can’t move out. You have to live through the period of uncertainty of not knowing how things will shape up in the future. These are component suppliers who are going to be selling their die all over the world. They are importing materials and exporting quite a lot.”
OEM manufacturers also should look at where their contract manufacturers source critical materials from the UK and identify sub-tier suppliers. The report finds that “some companies may find they are now paying taxes multiple times, as components which are imported into the UK will be subject to inbound customs duties and semi-finished components exported face additional duties. The total landed cost of a complex supply chain footprint might be very high.”
In addition, companies also need to keep their eyes and ears open to restructuring moves by their suppliers to become more resilient. These include selling or spinning off a product line, which could open up acquisition opportunities. “You may have very critical suppliers who you wouldn’t think about acquiring but suddenly because of currency and various reasons the supplier may be looking to sell or spin-off a product line. This can create tremendous upheaval as the acquiring company may not value the product that you purchase as highly as you do,” said Vikal.
“So talking to your suppliers that are based and manufacturing parts in the UK is the most important recommendation, and also looking at acquisition opportunities whether you want to secure your own product’s supply continuity or disrupt a competitor who is dependent on the supplier as a way to keep competition out,” added Vikal. “It’s always a good strategy. Not everybody looks at competition and supply as a competitive weapon but it really is.”
“Apple did it extremely successfully in the tablet market. In 2011, they bought a $4-billion capacity option on touchscreen display capacity and they drove competition out of the market for two and one-half years where nobody could get enough touchscreen supply for their tablets so iPad pretty much captured the market,” said Vikal. “It really is a good strategy.”
“These are the types of macroeconomic situations, which can sometimes make these types of strategies affordable. But having that knowledge of the supplier base and sub-tier relationship dependencies can be critical in order to act on these types of strategies,” she added.
The industry also has to be part of the solution, said Vikal. “The politics of Brexit needs to tend to business concerns and we need industry to actively participate in making sure that our needs as it relates to trade, sourcing, procurement, shipping and transportation are properly represented in the new scenario that we have to operate in. This means in negotiations with the EU, the US and other key trading partners, making sure the companies that are operating and shipping out of the UK or importing into the UK have good terms and fast custom clearance capabilities, which will be very critical.”
Overall, Resilinc recommends that manufacturers map their supply chains to understand where their tier 1 suppliers are located and which sub-tier suppliers they depend on. They also need to keep a close eye on their performance and financial health, particularly for single-sourced suppliers even if they are low spend.
The report evaluates four key areas of impact – currency movement impact, labor uncertainty risk, trading rules and regulatory revisions and global financial risk - providing recommendations for both the short and medium term. For the complete outlook, click here.