Brexit and the waning days of the United Kingdom

[Sheilbh]

I mean I work in a bit of that - 90% of what I do is European law which was, in retrospect, a bold career choice - and a lot of that certainly in my area has already been done. There's been hundreds of regulations put on the books that basically just say "As of x Day the x Regulation shall be incorporated into UK Law, with the following changes:..." I'm sure there's lots of stuff that's been missed but luckily this was mainly in the hands of government lawyers, not Ministers and spads

But you're totally right. My point is the government's plans are for such a minimal, trade only deal - that even if they get a deal the difference between what we have now (quasi membership) and that is enormous. The difference between a fairly minimal, trade only deal and no deal is, in comparison, tiny. I think that's why there's actually quite a high risk of no deal in general because the marginal benefit for a deal v no deal is really low given their plans (as opposed to the May plan which was basically customs union v no deal - which is a huge difference).

So at the moment the best case scenario (unless this 80 seat majority government collapses) is almost no deal and the worst case is no deal.

But I think you're both right I think in a way the Government will be seeing a post-coronavirus, hard Brexit UK as the biggest opportunity to fundamentally shape the UK economy since the post-war Labour government.

[Sheilbh]

On-shoring of many supply chains just isn't economical.
As I always repeat, there's 2 companies in the world making brakes for 90% of cars. Other minor car bits are similar.  If its a question of all these parts builders having to set up factories in the UK or the assembly plants in the UK moving to Europe, then the smart answer is clearly to get out of Britain.

And not to go full mercantilist but isn't it problematic that globally 2 companies have that much dominance of the market - especially if, say, they're based in China and there's shock event there? And in terms of certain medical equipment especially around testing and PPE don't we need uneconomical domestic production just like we sort of need uneconomical domestic defence manufacturing?

I get what you're saying but my view is that I think this crisis may increase tolerance for more inefficiency and uneconomical decisions (which may be encouraged by government). Because I think there's a fragility v resilience point. Really complex, just-in-time supply chains are economical and efficient but they are fundamentally fragile because a crisis somewhere can impact them and have global impact. Slightly thicker supply chains or building up a stock rather than just-in-time is uneconomical and inefficient, but it is resilient.

I think we may be looking at a world, after this, which values resilience over economy and efficiency for a while. Personally I also think we probably need to build in resilience because I think we're going to see escalating crises and disruption because of the climate.

[Iormlund]

On-shoring makes sense for strategic items (PPE, medicines, essential chemicals). Doesn't make much sense for anything else, though. However off-shoring current production might need much stronger numbers.

[The Brain]

Wouldn't it be cheaper to stockpile essential crap rather than keeping inefficient domestic production afloat? Non-rhetorical, I don't know what the numbers say even though I instinctually dislike inefficient organizations.

In the 80s we had tons of stuff in storage for use when the Russians invaded, but I don't know the economics of that.

[Sheilbh]

Yeah - for what it's worth I know a little bit about onshoring in tech and IT where it has been happening for a while, in part because the cost benefit isn't there as strongly but also I think there's been more concerns in that world about business continuity, security etc for a while.

I think that'll probably continue (and possibly speed up), but I wonder if it'll spread to other sectors as they sort of look at the real cost benefits and other risks

I'm not saying I think it'll happen for everything for everywhere but I do think we've possibly reached the peak of very lengthy supply chains and off-shoring.

[Josquius]

Resilience makes sense in some ways, but I can't see many businesses going for it. The way the auto industry works is all about increasing efficiencies to the max. Corona has shown the danger of this of course, but then it hasn't happened to any company in isolation, it has hit all of them.
Its feasible if we get into a situation where its expected there'll be regular lock downs for many years to come then the resilience route could make sense for them, but I really do see the big impetus to be to get back to business as usual, competing against each other to trim their margins and maximise efficiency. Being the one to choose the resilience route is a gamble that I can't see any taking.

As to the problems with just two companies dominating a particular segment of an industry... the trouble there is its such a specialised area with low margins and they've put billions of research into it. Breaking into this market would require substantial resources and the numbers just don't add up vs. trying to get into other markets.
The way to overturn such industries is massive innovations, like smartphones upending the mobile phone industry. But...when you're talking about such basic and simple things its hard to see anything beating gradual refinement over the years.

[Sheilbh]

I think that's all fair, but this is where I wonder if government will come in. So in financial services the regulators require regulated companies to have lots of plans in place for various scenarios, I wonder if you could see something like that for certain sectors: how do you (PPE supplier or reagent) keep operating if there's severe disruption to your supply chain due to an external event? It might be building up stocks, some of it might be onshoring, some of it might be having multiple suppliers which is probably a lot more expensive than picking one.

And given the experience we've had with this - so the event most likely to affect your supply chain is some form of global crisis, that's also the event most likely to cause, say, foreign governments to requisition your deliveries. We've seen that happen all over where PPE is being requisitioned despite x already paying for it. So I can definitely see governments wanting to say actually we need either permanent strategic stockpiles of this or we need a manufacturing base here, or we need manufacturers who can shift production pretty quickly.

And I think it may only last a few years because of this experience, but in the last 10-20 years alone we've had this, SARS, MERS, H1N1 - we've just been lucky that only one of them has actually escaped the initial containment and gone global. But I could definitely see it being like after great depression there's all sorts of controls on banks and the financial sector and then after many years of not having another crash they start to get whittled away because they're not that necessary and, anyway, we've developed cleverer ways of managing risk. Then there's another financial crisis and we build up loads of new controls on banks - repeate and rinse forever.

[Zanza]

The company I work for has extremely complex global supply chains. So far the talk I heard is not about building resilience into the supply chain, but rather move from fixed costs to variable costs, which is probably the opposite direction. Make sure that you can scale production easier, so that supply and demand disruptions like now don't damage the company as badly financially.

[Tamas]

I mean I work in a bit of that - 90% of what I do is European law which was, in retrospect, a bold career choice - and a lot of that certainly in my area has already been done. There's been hundreds of regulations put on the books that basically just say "As of x Day the x Regulation shall be incorporated into UK Law, with the following changes:..." I'm sure there's lots of stuff that's been missed but luckily this was mainly in the hands of government lawyers, not Ministers and spads

That's a good point actually: present legislation says that we take such things over from EU law and then the relevant ministries can change them, does it not? I remember a bit of a scandal over this some years ago.

Good luck to us with the likes of Priti Patel deciding on how shit will be done.

[Sheilbh]

I mean I work in a bit of that - 90% of what I do is European law which was, in retrospect, a bold career choice - and a lot of that certainly in my area has already been done. There's been hundreds of regulations put on the books that basically just say "As of x Day the x Regulation shall be incorporated into UK Law, with the following changes:..." I'm sure there's lots of stuff that's been missed but luckily this was mainly in the hands of government lawyers, not Ministers and spads

That's a good point actually: present legislation says that we take such things over from EU law and then the relevant ministries can change them, does it not? I remember a bit of a scandal over this some years ago.

It depends - but yeah that's true for a lot of it. Some stuff, like what I deal with was done through an Act so you'd need a new Act of Parliament to change it. But yeah my understanding is there's not a cliff-edge for loads of laws, but they'll change in the future - so in my area even after no deal nothing changes from a UK perspective (because the law stays the same and the government's already said they don't intend to treat the EU as a third country for this area), it's slightly more difficult from a European perspective (the law stays the same but the UK will be a third country) but in the future the UK may diverge which makes things more complicated.

Good luck to us with the likes of Priti Patel deciding on how shit will be done.

Quite.

[Sheilbh]

FT editorial on the whole efficiency v resilience debate:

Companies should shift from 'just in time' to 'just in case'
Pandemic has shown that businesses neglected vital safety margins
THE EDITORIAL BOARD Add to myFT

The Covid-19 outbreak has exposed the thin margins on which much of global business runs. Highly indebted companies, working from lean inventory, supported by just-in-time supply chains and staffed by short-term contractors, have borne the brunt of the sudden blow. They will now suffer the rolling, longer-term impact of its unpredictable consequences. Too late, many executives and owners have realised that by pursuing the holy grail of ever greater efficiency, they sacrificed robustness, resilience and effectiveness. In many cases, they will turn out to have sacrificed the business itself.

As managers wrestle with how to restart production lines and restaff offices, they must also consider how to prepare for inevitable future shocks. These include not just a resurgence of this virus but different, perhaps more dangerous, pandemics, or the longer-term disruption of climate change. Like the banks after the global financial crisis, businesses will need to build thicker buffers against shocks. If they do not, governments and regulators will need to find ways to encourage or oblige them to shore up their defences.

At least in the short term, investors will help by shunning fragile business models. Equity and bond markets are already discriminating sharply in favour of fundraising requests from companies with strong balance sheets and high credit ratings. Jim Chanos, the US investor, warned last month he was shorting the stock of companies that relied on "gig workers", on the basis that the crisis would change social and political attitudes to businesses relying on this precarious workforce.

Ideally, companies should aim for what Nassim Nicholas Taleb has called an "antifragile" approach, going "beyond resilience and robustness" so that they can adapt to, and even thrive on, disorder.

Having survived, though, their first priority should be to rebuild cash reserves. For many businesses, this will be achieved with government help, in the form of backing for furloughed employees, loans, and direct subsidies. Some governments are rightly tying such aid to short-term restrictions on dividend and bonus payouts. The EU, for example, is planning to forbid subsidised businesses from taking "excessive risks" or engaging in "aggressive commercial expansion".

How long such constraints extend beyond the acute phase of the crisis will be one important question for governments and regulators as economies edge out of lockdown and companies start to seek competitive advantage by jettisoning cash cushions.

Banks, which have learnt since 2008 to operate under higher requirements for adequate regulatory capital, share a responsibility here to help customers bring levels of gearing down.

Second, companies must transform their supply chains from "just in time" to "just in case" models. The pandemic has underlined the need for suppliers and customers to work together. Afterwards, it will be up to larger survivors, in particular, to help support the smaller and weaker components of their supply chains, rather than pursuing a beggar-thy-neighbour approach that destroys the chain altogether.

Finally, businesses need to reinforce the networks of people that underpin their success. This will be a challenge when many will have to lay off staff just to survive. But it is arguably the most crucial element of a post-crisis strategy. Just as companies built purely on the brittle web of the gig economy may collapse, so those that have maintained a safety net of loyal and adaptable full-time workers are more likely to pull through — and will be better prepared to ride out future disruption.

[Josquius]

I hope its right. It does sound like a better deal for the workers. And  if investors start to push that way it could make the difference. But I remain skeptical that anything will be learned and the drive won't be to get back to business as usual.

[Iormlund]

That's just not going to happen. Just in time dominates because it's inherently cheaper. CEOs are not going to become uncompetitive planning for a black swan event that chances are will not hit during their short terms at the helm. We have countless examples of this.

[Sheilbh]

That's just not going to happen. Just in time dominates because it's inherently cheaper. CEOs are not going to become uncompetitive planning for a black swan event that chances are will not hit during their short terms at the helm. We have countless examples of this.

I mean I'm still not sure.

I'm not sure this is a black swan event. Just looking at the last twenty years there have been three or four new diseases that have become epidemics, the majority were able to be contained in one reason and then ended. But, given that we are in a more connected world it doesn't seem a wildly unpredictable fact that there'll be new epidemics that may go global and we may not be able to contain. It's probably unlikely that we'll all go into lockdown around the world again, but I think it's likely that certain regions will and that, in any event, the consequence will be heightened demand either globally or in a region for pharma capacity, PPE etc. But I struggle to see after SARS, MERS, H1N1, ebola, films like Contagion that we can really say a global pandemic is a black swan event any more than climate change is. It may have an extreme impact but it is to be expected and in the regular course of human existence.

We've seen disruptions to supply chains before in response to other acts of God like natural disasters (and again they're not predictable, but they're not a surprise) but they have tended to have an impact on specific sectors. I've been impressed with how well the food supply chain has held up in Europe and the US (in the UK, I know part of this is down to supermarket Brexit planning) but other industries have been worse hit. I think there will be companies that collapse from this because they were a little bit too efficient and that will be a lesson. And I think climate will also be the focus because we're now seeing the impact of an always predictable event unfolding in the way that experts would expect it to unfold - as Chris Whitty says the chart of covid-19 is something you could see in chapter 1 of a textbook on epidemiology. I'd expect that companies in certain sectors will need to start looking at the predicted impact climate change will have on bits of their business and what's their continuity plan.

But I also think there'll be a shift from regulators and government. Part of this is just that supply chains have become political already - we see that in the US with Trump, but we also see it in the UK where the great Remainer argument was due to supply chains we need to stay in - so they're in the political arena. It also makes me think of a lot of the shift in behaviour by the banks after the crash, which wasn't the banks learning their lessons or even a regulatory change but in the UK a lot was driven by the government and BofE wanting transparency so they can see risks and that required a lot of changes in the banks for them to understand their own risks.. Actually having to look at and identify their risks changed behaviour because before they were out of sight. I can see something similar happening in certain strategic sectors where the government doesn't necessarily want businesses to do anything but they want, for example, to understand what's the risk in the food sector, pharma, some manufacturing which may make those businesses more aware of the risks in their supply chain (as I say I think it's striking that the food retail sector which has probably done most Brexit prep in the economy is holding up very well).

But also I think this crisis has exposed, from a purely British perspective, our weakness in manufacturing. Because the R&D output is there - we were one of the first countries to develope tests for this, we have two vaccine projects, there are multiple clinical trials going on. What we lack is the capacity to actually manufacture  based on that R&D. I don't think we'll go fully to "national champions" but I think there'll be pressure and subsidies from government to remedy that.

[Legbiter]

I'm not sure this is a black swan event. Just looking at the last twenty years there have been three or four new diseases that have become epidemics, the majority were able to be contained in one reason and then ended. But, given that we are in a more connected world it doesn't seem a wildly unpredictable fact that there'll be new epidemics that may go global and we may not be able to contain. It's probably unlikely that we'll all go into lockdown around the world again, but I think it's likely that certain regions will and that, in any event, the consequence will be heightened demand either globally or in a region for pharma capacity, PPE etc. But I struggle to see after SARS, MERS, H1N1, ebola, films like Contagion that we can really say a global pandemic is a black swan event any more than climate change is. It may have an extreme impact but it is to be expected and in the regular course of human existence

Yeah the world before corona was accidentally set up to facilitate something like it spreading rapidly. We're globally sampling the very worst pathogens and presenting them with a free buffet. Not sure people will want to be unemployed in quarantine again next time someone in China eats the wrong bat/pangolin. There has to be supply chain on-shoring, migration controls and in general circuit breakers to kick in rapidly. And no international alphabet soup organization will protect you.