THE BSCC BREXIT WHITE PAPER
Curated by Haig Simonian, Vice President of The British-Swiss Chamber of Commerce
THE BSCC BREXIT WHITE PAPER Foreword from our President, Anne-Marie de Weck With one year to go until the UK formally exits the EU, The British-Swiss Chamber of Commerce has utilised the skill and dedication of our Vice-President, Haig Simonian, to interview eight companies and an academic for a White Paper on attitudes to Brexit and the opportunities for Anglo-Swiss business and trade. All the company participants are highly active in UK-Swiss trade, and all but two are existing BSCC members.
“Thank you to our Patrons and contributors to this BREXIT White Paper.”
It is the belief of The BSCC, that the voice of British-Swiss business on the opportunities and risks of Brexit be articulated from our neutral platform. We make no judgement on Brexit itself, we simply aim to raise awareness to decision makers on both sides, that there is a desire from business for greater clarity and ambition for the post-Brexit trade relations between the UK and Switzerland. The two countries are already great trading partners. We seek to focus the discussion on the opportunity, not simply the risk. How ambitious dare we be? Please join the debate and contribute your feedback to us on how you would like to see the future of British-Swiss trade.
Foreword from our Secretary General, James Woodeson On joining The BSCC in May 2017, Anne-Marie made clear her ambition that delivering content, originated from our Patrons and Members, was a priority for the evolution of the Chamber. It has been a fulfilling and enjoyable experience to work with Haig Simonian and our valued, expert contributors to produce what we expect to be the first in a new series of original pieces of content, curated in partnership with our key stakeholders. Our ambition is to raise the voice of BritishSwiss business from British, Swiss and international firms who have an interest in the future of trade relations. This will be across the 12 industry sectors from which we draw membership and on a variety of subjects which are topical and relevant to you. I invite our Patrons and Members to volunteer their thought leadership to support us in this endeavour.
“Content from our Patrons and members is a key focus for us to raise the voice of British-Swiss business.”
THE BSCC BREXIT WHITE PAPER Introduction Between September and December 2017 The BSCC contacted eight multinational companies and one academic for a White Paper on attitudes to Brexit and the opportunities for Anglo-Swiss business and trade. All the company participants are highly active in UK-Swiss trade, and all but two are BSCC members. Two respondents requested anonymity, both personally and for their companies, while a third asked that only their company be named. A list, by name and company, features in an appendix to this White Paper. The interviews were conducted in person or by phone, with five core questions to all concerned: • What are your main hopes and fears around Brexit? • What is the regulatory impact of Brexit on different industries (i.e. manufacturing, pharmaceuticals, air travel, financial services, insurance, human capital)? • What are the key messages you would give to decision makers? • What are the simple steps which should be taken now? • Do you have any other concerns or issues? Some participants raised additional points, which were covered more concisely, and are mentioned here where relevant. Each interview lasted approximately 45 minutes.
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THE BSCC BREXIT WHITE PAPER The Importance of Anglo-Swiss Trade Switzerland is a global top 10 export market for the UK, taking 2.8% of all exports, amounting to £20.7bn in 2016. That made Switzerland the UK’s third largest non-EU export market for goods after the US and China. By way of context: sales to Switzerland were larger than those to India and Canada combined; 70 % larger than to Japan, more than twice the size of Australia, almost twice as big as South Korea and larger than to India, South Africa, Nigeria and New Zealand combined. In 2017, the top five UK goods sold to Switzerland were precious stones and metals (70.1%), works of art, collectors’ pieces and antiques (7.2%), pharmaceutical products (3.2%) and machinery and mechanical appliances (3.1%) and vehicles other than railway or tramway stock (2.9%). Exports of services are as important. In 2016, Switzerland moved from fifth to fourth most important market for British exports of services, with a total volume of £12.3bn - more than three times the corresponding figure for China. Exports of services to Switzerland were larger than to Australia, Canada, India and New Zealand combined, more than twice as large as to Australia or Canada and five times as large as India. Trade in the opposite direction is as active. Switzerland accounted for some 2.3% of UK imports, worth about £14bn in 2016, and ranked 11th overall. The top 5 UK goods bought from Switzerland in 2017 were precious stones and metals (37.6%), pharmaceutical products (29.5%), clocks, watches and associated components (6.8%) and machinery and mechanical appliances (5.6%) Total trade in goods and services (exports plus imports) between the two countries reached £34.6bn in 2016. Of all UK exports to Switzerland in 2016, £8.4bn (40.6%) comprised goods and £12.3bn (59.4%) services. Of all UK imports from Switzerland in 2016, £10.1bn (72.4%) were goods and £3.9bn (27.6%) services. That meant the UK had a trade in goods deficit with Switzerland of £1.7bn and a trade in services surplus of £8.4bn. Overall, the UK recorded a surplus with Switzerland of £6.7bn, compared to £8.1bn in 2015. Foreign direct investment between the two countries is a further key link. Historically, Switzerland has been among the biggest investors in the UK, ranking seventh overall, with a total stock of net inward investment in 2016 estimated at £45bn and amounting to 3.8% of total UK inward FDI stock.
Swiss companies have been particularly important sources of jobs in high-value added industries, with almost 100,000 UK jobs created over the years. Conversely, the stock of UK FDI in Switzerland amounted to £22.1bn in 2016, accounting for 1.8% of total UK outward FDI stock.
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THE BSCC BREXIT WHITE PAPER What are the Opportunities? It is evident that the bilateral trading relationship is extremely close. Most participants in the BSCC survey envisaged considerable further potential, both in terms of trade and investment. ABB’s Ian Funnell, for example, was positive about prospects for a post Brexit “global Britain.” Subject to caveats about exchange rates, he felt that UK based companies would continue to do well competitively once matters had stabilised in a post Brexit world. Others remained open to the opportunities, though less outspoken. A handful of participants pointed out the potential trade benefits of a bilateral UK-Swiss Free Trade Agreement. Representatives from financial services in particular noted there would be significant opportunities for London and Bern jointly to champion reforms in international bodies. However, there were also caveats because, while there were “higher level” similarities in financial regulation, the two countries had traditionally been “fierce competitors” too. One respondent suggested the UK, once out of the EU, might be able to act more energetically in this regard. Another called for Britain to take a leaf out of Switzerland’s book and press ahead after Brexit to secure as many FTAs as possible. More specifically, Moritz Oberli of PwC Switzerland called for a bilateral free trade deal including services as well as goods, given what he saw as “huge opportunities” for his firm’s practices in both Switzerland and the UK. He noted the very high levels of expertise in professional services in both countries and the potential to break new ground, notably in innovative areas like cybersecurity. While relations between PwC’s UK and Swiss partnerships were already close, there was “potential for more.” Mr Oberli floated, for example, a centre of expertise on cybersecurity and on artificial intelligence, ideally operating on a global level, given the high existing degrees of company expertise on both sides and the likely rise in demand from clients.
But Short Term Uncertainties Prevail Respondents’ broadly positive sentiment was, inevitably, overshadowed by deep concerns about a “cliff edge” - a sudden and unprepared shift from membership of the EU single market and customs union to an unspecified limbo, in which World Trade Organisation rules, at best, would apply. The March 2018 agreement in principle over a - relatively short - 21 month period may have only partly allowed such fears.
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THE BSCC BREXIT WHITE PAPER The “nightmare scenario” of ultra “hard” Brexit was most acute for manufacturers reliant on elaborate cross border supply chains, where complex pieces of equipment are assembled in one location, but comprise crucial parts from many others. Even limited disruption, let alone vast lorry queues at ports or border crossings pending inspection, was widely feared, with untold consequences for investment and jobs. An executive of a large US multinational that exports 85% of its UK production, 30% of it to the EU, reckoned some form of electronic goods inspection system would be a solution. But any system would take at least 18 months to implement. “We needed to start two years ago”, he says.
THE REGULATORY IMPACT OF BREXIT ON MANUFACTURERS The BSCC spoke to representatives of ABB and a top US manufacturer - prime examples of closely knit multinational industrial groups - and Nestlé, similarly integrated in foods and beverages. Their views on Brexit were strikingly alike. All stressed the need to avoid as far as possible any disruption to trade, and drew attention to the influence of regulations, even down to basic specifications of goods, and the need for continuing harmonisation. As in other sectors, they also stressed the presence and value of British regulators in EU bodies. Ian Funnell, managing director of ABB in the UK and leader of the group’s Brexit task force, highlighted the UK’s role as a “thought leader” on subjects such as health and safety and expressed some concern about the loss of influence likely once UK experts left crucial EU regulatory committees. For the US multinational, the biggest worry was the risk the UK might introduce its own standards, on top of already slightly differing US and EU norms, adding complexity. Even companies less exposed to cross border manufacturing voiced profound concerns about a “hard” Brexit. That applied in particular to those operating in highly regulated environments, such as air transport and pharmaceuticals. In aviation, uncertainty or disruption to crucial trade treaties governing cross border links would be a major threat due to the dependence of aviation on trade volumes. Any economic downturn because of Brexit would affect air transport negatively. The question of continued UK membership of the European Air Safety Agency, an independent body linked to the EU, also remains open. That is of considerable relevance, as UK based airlines and regulators have traditionally been a driving force in innovation, safety and reform, noted Swiss International Air Lines.
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THE BSCC BREXIT WHITE PAPER THE REGULATORY IMPACT OF BREXIT ON AIR TRAVEL Connections between Switzerland and the UK are a crucial part of business for Swiss, the national carrier now part of the Lufthansa Group. No less than 63 flights a day operate from Switzerland to the UK – more than the number of Inter City trains between Zurich and Bern. Some 1.7m people fly from Zurich to London’s airports annually, compared with about 1m on the busy Zurich to Berlin route, according to the Swiss Federal Statistical Bureau. Covering all national destinations, about 3m people fly annually from Switzerland to the UK, compared with 2.4m from Switzerland to Germany. In 2016, the figure for two way Swiss-UK traffic was 6.47m in 2016, according to Britain’s Civil Aviation Authority. Flights between Zurich, Geneva and London are by far Swiss’s most frequented - overshadowing even its links to major German cities. They are also particularly valuable to profitability because of the relatively large numbers of high margin business class passengers. While Swiss reveals no figures by route, the UK accounts for a “significant” share of passengers and revenues. Likewise in pharma, a long term business par excellence, stability and predictability are paramount. More than 5,000 different medicines are supplied from manufacturing sites in the EU to the UK or from the UK to the EU. Any trade disruption or introduction of tariffs could have impact on patients receiving their medicines. Also, the transfer of the European Medicines Agency from London to Amsterdam spells significant disruption. The sheer challenge of moving the key regulator for European pharmaceuticals manufacturers, along with the likelihood of many EMA staffers choosing not to relocate, raises the possibility of delays or other implications, notes Petra Keil of Novartis.
THE REGULATORY IMPACT OF BREXIT ON PHARMACEUTICALS Regulation is crucial in every stage of the pharmaceuticals industry, from early stage testing, through clinical trials to final approval and eventual manufacturing. Particularly worrying for manufacturers is that about four in 10 EMA approvals – by far the greatest single country contribution - have strong involvement of the UK regulator. So UK “disassociation” is a real danger. The hope is that, post Brexit, the UK’s regulatory authority and its EU counterpart will remain closely aligned. There are also significant bureaucratic issues regarding transfers of drugs licences to new jurisdictions, and concerning the certification and control of manufacturing plants or quality releases in individual countries. 7
THE BSCC BREXIT WHITE PAPER While the impact of regulation on core operations was widely shared across industries, most respondents expressed particular concern about Brexit’s impact on human capital, notably recruitment and staff transfers. Virtually all said their companies were concerned and looking closely at future constraints on freedom to hire and move staff, whether EU, UK or non EU nationals. How concerned respondents were depended largely on the “multiculturalism” of their businesses. PwC Switzerland’s Moritz Oberli noted that auditing and tax are still local or national affairs. By contrast consulting regularly involved international project teams. So any impediments to staff movement would be very serious. British expertise - not least stemming from the UK’s pioneering role in public private financing initiatives and the like - meant UK based British consultants were often important elements of multinational teams operating elsewhere in Europe. At Zurich Insurance Group, about 3% of UK based staff are EU citizens, while a slightly smaller proportion of Britons work for the company in continental Europe. Those figures are dwarfed at ABB and Nestlé. The latter, for example, draws about 8% of its 8,000 UK employees from the European Economic Area. “Expatriates are particularly important for the Swiss foods group for filling relatively senior, specialist roles in engineering and food science in the UK market”, notes Dean Gargano, the Swiss group’s senior public affairs manager in Britain.
“It’s going to be harder to attract the people now” Pater Hawkins, Professor of Leadership at Henley Business School and Chairman of Renewal Associates. Geoffrey Matthews, formerly Nestlé’s Vevey based executive in charge of corporate total rewards, adds an important point, particularly relevant to the far flung Swiss group, but also apposite for others. "For Nestlé, which is present in 191 countries around the world", staff secondments are very much a part of the corporate management progression model. “Moving people around is a crucial part of talent management for us”, he noted. Some companies observed preliminary signs of unease among non UK executives (notably continental Europeans) and their families about moving to Britain, given all the Brexit uncertainties. There were already diffuse signs of “some reluctance” among non British families to move, reported Novartis’s Petra Keil. “It just generates discussions we didn’t have before.”
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THE BSCC BREXIT WHITE PAPER Financial Services Exposed Not surprisingly given the extensive publicity, the biggest single sector showing Brexit unease was financial services. Despite progress on trade in goods and on Britain’s likely ongoing financial contributions to the EU, the likelihood of an agreement allowing British banks and financial groups to service continental European clients from London - so called “passporting” - remains elusive, with obvious impactions for investment, jobs and the City of London. The respondents from one large Swiss bank noted the existence of rules on “equivalence”, which Brexit optimists have taken as grounds for hopes that disruption will prove minimal. However, our respondents stressed there was no certainty, and contingency planning had therefore to be based on worse case scenarios. The bank also noted the need for clarity long before the March 2019 Brexit deadline to allow for essential planning.
THE REGULATORY IMPACT OF BREXIT ON FINANCIAL SERVICES AND INSURANCE A London based Brexit guru at a Swiss bank summed up sector sentiment in stressing the hope for uniform regulation and avoiding the fragmentation of financial markets that would constrain the optimum deployment of capital. “Alignment of jurisdictions across borders is fundamental”, he said. Market access remains a key – and still unresolved – issue, with markedly different perspectives in London and Brussels (amid widespread suggestions in the UK that EU member states are exploiting matters for competitive advantage). As with airlines and pharmaceuticals, the bank also raised the fact that the UK had traditionally been a force seeking pragmatic solutions in regulation. “London’s voice will be somewhat diminished”, he noted. It was with some relief that the “a high degree of trust” at least existed between the relevant authorities in the UK and Switzerland. Gary Shaughnessy of Zurich Insurance Group acknowledged matters were less extreme for his sector, as many UK and Swiss insurers had established EU subsidiaries, limiting potential disruption. But significant risks remained, not least the possible lost business opportunities if ideas for pan European pensions were thwarted, or a new regulatory landscape posed greater threats to data and data security,
His main warning was that “the world is bigger than the EU, the UK or Switzerland.” Insurers, he predicted, would gravitate towards “whatever solution is optimum for financial efficiency. Capital is fungible; insurance can travel. Customers and capital will focus elsewhere, be that New York, Hong Kong, Singapore or wherever.”
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THE BSCC BREXIT WHITE PAPER Conclusions All our respondents hoped Britain and the EU would ultimately reach a sensible deal preventing the worst disruption. All called for a “soft” Brexit, with a decent transition period (of indeterminate length). “Our hope is for agreements that, while not as close as the current ones, will be clear and concise”, summed up one. But many feared a deal would come only at the last minute, or, at the very least, at a very late stage in the game. This means, for actions with long lead times, preparations would have to be for a worst case, with resources used and decision taken that would not be reversed, even if the situation in the end were a balanced one. As Professor Hawkins put it: “The aim should be to create a partnership with joint purpose across boundaries. It’s like a divorce agreement: the partners should focus on the children, not on punishing each other.” Another respondent added: “Our motto is: keep calm and carry on.” More than one company raised fears about Swiss-EU relations being “left behind” as Brussels focused on Brexit. Another warned the 27 remaining EU members might turn more “inward looking” - a euphemism for protectionism - post Brexit. Arguably, the recent ructions between Bern and Brussels over the limited one year recognition granted by the EU to the Swiss stock market under the EU’s equivalence rules could be an early warning sign.
Next steps The next step is to gather feedback for future content on Brexit which we will share with political decision makers. Key questions we would like to get answers to are: •How ambitious can British and Swiss authorities be for a post-Brexit agreement? •What would you like to see in this agreement for your industry? The BSCC values your feedback and welcomes you to contact us at info@bscc.co.uk and share your ideas, views and suggestions.
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THE BSCC BREXIT WHITE PAPER Contributors Ian Furnell Managing Director, ABB UK and Group Brexit Taskforce Peter Hawkins Professor of Leadership Henley Business School & Chairman, Renewal Associates Dean Gargano
Senior Public Affairs Manager, Nestlé UK Geoffrey Matthews Former Vice President, Corporate Total Rewards, Nestlé Petra Keil Head of Government and Public Affairs Europe, Novartis Moritz Oberli Partner, Industry Leader Public Sector Services, PwC Gary Shaughnessy CEO Europe, Middle East & Africa, Zurich Insurance Group Anonymous, Swiss International Air Lines Large Swiss Bank Leading Multinational Manufacturing Company
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THE BSCC BREXIT WHITE PAPER With special thanks to our curator Haig Simonian, Vice-President BSCC Haig Simonian is not only the Vice President of the Chamber, but he is the brainchild behind this project. Brexit has presented a real opportunity for the Chamber to connect with its members and understand how they fit within the changing economic landscape. Haig got to work to select a cross section of individuals and firms in key sectors primarily within our network. He interviewed the individuals and then created the paper you now see before you. An event was held to share The White Paper with our Patrons and gather any additional insights and updates. The White Paper has been supported by both The British and Swiss Embassies and other political decision makers – and thanks to Haig we have been able present this summary with you, our members. Haig was clearly well positioned to undertake this task. Outside of the Chamber he undertakes extensive broadcasting and conference work as well as having contributed a monthly column for Switzerland’s NZZ am Sonntag newspaper. He is regularly on Swiss radio and television (in German, French and Italian), he makes TV appearances in Germany as well participating in regular radio slots in the UK. He studied Philosophy, Politics and Economics at Oxford University. After writing a doctoral thesis on French and German politics (later published by Oxford University Press), he went briefly into investment banking before turning to journalism. He started as a financial journalist at The Economist in 1984, then moved to be Frankfurt Correspondent of the Financial Times in 1987. Subsequent postings included Milan and Paris. In 1999, he moved to Berlin as the FT’s chief German correspondent, before coming to Zurich to cover Switzerland and Austria in late 2003. In summer 2012, he stepped down to become a freelance writer. We take this opportunity to thank Haig for his significant contributions and thought leadership of The White Paper.
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THE BSCC BREXIT WHITE PAPER