Brexit: Indian companies must pay close attention now

In about four months’ time — March 29, 2019, to be exact — the people of the United Kingdom will go back to being “The Offshore Islanders”, the title of popular historian Paul Johnson’s book on the history of the English people. Negotiations over the UK’s exit from the European Union (EU) — Brexit — will become final on that day. Indian companies in the UK — and particularly those using the UK as a gateway to the EU — face some important strategic and operational decisions.

British Prime Minister Theresa May could have pulled the UK completely out of Europe’s single market and customs union. But that would have required her either to build a customs border across Ireland, or to create a de facto customs border in the Irish sea. Ireland, backed by the rest of the EU, refused to accept the former. Many people of Northern Ireland, including May’s coalition partners, the Democratic Unionist Party, refused to accept the latter. As a result, May has opted to stay inside the customs union, more or less, as a temporary measure, until something can be negotiated.

Brexiteers, who promoted this debacle, are angry because the deal means that Britain is indefinitely obliged to follow the rules of the European single market, yet will be unable to shape them. Anti-Brexit campaigners are furious because the deal leaves Britain weaker and less influential than before.

India’s trade with the EU — minus the UK — has more than trebled since 2000; India’s exports to the EU in the April-December period were $38 billion, compared with $47.3 billion in 2016-17. In the same period, India’s imports from the EU were $35.2 billion and $42.3 billion, respectively. By comparison, India-UK trade has remained largely stable; India’s trade with the UK is about $14 billion a year. The EU, even without the UK, is the third largest market for Indian companies.

About 800 Indian companies use the UK as a gateway to the EU. Media reports say that over 1,10,000 people are employed for this geography in those companies, including Tata Motors and several IT companies. Europe is the second largest market for India’s IT industry, accounting for almost a third of the industry’s $150 billion revenue.

As the IT industry association Nasscom has pointed out, “uncertainty surrounding protracted negotiations on the terms of exit and/or future engagement with EU could impact decision-making for large projects”. It’s not just IT companies either. The lack of clarity over the future course of Brexit negotiations creates uncertainty that Indian companies can well do without.

An important segment of the automobile industry is also nervous about the post-Brexit world. For Tata Motors’ Jaguar Land Rover (JLR), Europe is an important market, accounting for 25% of global sales. Another company similarly impacted is Motherson Sumi, which receives about 50% of its consolidated revenues from the UK and the EU, to name a couple.

Pharmaceutical firms

Consider pharmaceutical companies. Next to the US, Europe is the largest market for medicines in the world. In May 2017, the European Medicines Agency (EMA), which manages drug approvals for EU member countries, issued a directive for the companies to manage their activities within member nations post-2019.

This will be essential for products that are currently manufactured, marketed and/or distributed from the UK to the EU. Presently, a filing in the UK is valid for several European markets, but going by the directive, that will change post-March 2019. Under EU law, rules require that marketing authorisation holders be established in EU countries.

Some activities related to pharmacovigilance, manufacturing, imports, etc., must be undertaken within the EU. By implication, that could mean duplication of tests and trials for hundreds of products. It translates into higher costs for drug-makers.

The EMA has recommended that drug manufacturers — of both innovative medicines and generics — make sure that their current approvals remain valid after Brexit; this call by the agency suggests that the EU wants to ensure continuous and reliable supply of medicines into member countries. From a regulatory perspective, the EMA — earlier headquartered in London — is now relocated within the EU, which will almost certainly increase lead times for approvals and marketing across the EU.

For the global pharmaceutical and life sciences companies — for which India is clearly an important part — two concerns are emerging even as the post-Brexit landscape is evolving: supply chain and the impact of regulation. Relationships between suppliers, distributors and third-party customers will have to be revisited.

With less than a year left for Brexit to become final, the task becomes even more urgent. The EU’s Brexit guidance for companies — like the recommendations issued by the EMA for pharmaceutical firms — does not mention any transition period before the UK becomes a “third country”. Companies may need to relocate offices (currently in the UK) and change procedures in preparation for the UK’s withdrawal from the EU.

Ireland, which is a significant manufacturing hub for the industry, and which will stay in the EU, is examining Brexit implications from customs duty and value-added tax (VAT) perspectives. It has been a magnet for the global pharmaceutical industry, and attracted a significant level of FDI in pharmaceuticals and medical devices or life sciences.

The IT, automobile and pharmaceutical industries may be among the most prominent for which Brexit poses some special challenges. But other industries — garments, chemicals, polymers, consumer goods, etc — while smaller, will also have to review their strategies for a post-Brexit EU. Setting up offices in multiple EU countries is likely to be an expensive and complex exercise, and therefore the need for companies to identify the one, right location within the EU that works for them.

Recent media reports seem to suggest that negotiations might be extended, or that at the very least, provide for a longer transition time for the UK. Being prepared in time, however, may be the wiser course. As William Shakespeare said, better three hours too soon than a minute too late.

(The writer is Country Director of IDA Ireland in India)