UK's Unclear Road to Brexit Makes Industry Investments Ever Harder

The UK government's “unclear” negotiating position on Brexit, nearly two years after the country voted to leave the EU, is stopping companies from undertaking long-term investment decisions and making them anxious about their future, according to the CFO at German chemical major BASF.

Hans-Ulrich Engel added that there is a risk the UK government will prioritise a good post-Brexit deal for its powerful financial services that would be detrimental for the already weak manufacturing industries in the country.

The CFO added that while BASF and other chemical companies are “asking questions” of the UK government about its EU exit plans, the answers they are getting are not satisfactory, a state of affairs he hoped would “quickly” change.

Engel spoke to ICIS on the sidelines of BASF’s annual results presentation on 27 February. In its annual report, the company said that it has prepared a cross-divisional Brexit team to prepare for “various exit scenarios” which would enable it to react to political decisions.

In a press conference, BASF’s CEO Kurt Bock also said that uncertainty surrounding Brexit could be one of the “wild cards” to deal with in 2018, adding that he hoped in the end the two sides could reach a trade agreement which would stop commerce falling under World Trade Organisation (WTO) rules, which would imply tariffs for goods.

Under that worst-case scenario, the company said it could take a financial hit in the range of €42-60m, although further effects down the line – the state of the economy and how it affects other actors in the supply chain, for instance – could cause further damage, BASF said.

CFO Engel said: “The lack of plan [from the UK] makes it extremely difficult to negotiate… There are quite a few questions that we are asking to the government: What do they actually have in mind, and what they want to do.”

Asked whether the UK government was actually listening to those questions posed by BASF and other chemical companies, the CFO said: “At this point in time, that is, to describe it diplomatically, unclear.”

The UK government has said it plans to officially exit the EU in March 2019. However, the country only agreed its “divorce terms” in December 2017, and time is running out to agree on the future relationship with the EU post-Brexit. The country’s prime minister Teresa May is due to give a speech on 2 March which would set the pace for those negotiations.

“Companies like BASF, who are here for the long term, who invest in chemical plants for the next 25, 30, up to 50 years, they need some planning, a framework that allows them to make their business decision. At this point in time, [in the UK] you just can’t [make those plans], because you don’t know what the outcome of these political discussions will be,” said Engel, pictured.

“In fact, from our point of view, there is not much of a plan, or a clear negotiating position, from the UK side, and we just hope that changes quickly.”

Business leaders in the rest of the EU have gone through different phases in the Brexit process. They woke up on 24 June 2016 to a referendum result they did not expect.

Once the UK triggered the EU Treaty’s Article 50 to start the exit process, in March 2017, the EU’s position became clearer while that of the UK blurred.

In June 2017, the country was called to a general election which left a weakened government and more disarray among the governing Conservative party on what Brexit strategy to adopt.

The UK's chemical industry trade group CIA, of which BASF's arm in the country is a member of, has repeatedly said that its priority is "frictionless" trade with the EU. Jointly with its EU peer Cefic, they have argued that a no-deal scenario, falling to WTO terms, would be the "worst possible" outcome of the negotiations.

Among the manufacturing sectors, the lack of a clear plan has caused concerns that the UK’s powerful financial services, which fuel growth in the south, could get a better deal in a potential trade agreement post-Brexit, which would be detrimental to the more industry-focused areas in the north.

Engel shared those worries, and delivered a reflection about how the industrial revolution’s country of birth is becoming a shadow of its former self.

“That could be the case, yes [services getting a better deal than manufacturing]. If you think about the UK [manufacturing sectors], at times the country already looks like a deindustrialised zone,” said Engel.

“If that [loss of manufacturing base] continues, I think it [can create] a very, very difficult situation, in particular with regards to employment and, as a result of that, [with regards to] the inflow of taxes [to the state coffers],” he said.