One year to Brexit: How businesses in the most economically exposed region of the UK are coping

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A sword of Damocles hangs over the economy of the North-east of England. That at least is the implication of the government’s own economic analysis when it comes to Brexit. 

Internal research leaked from Whitehall earlier this year suggested the North-east’s economy could take a hit of up to 16 per cent from an ultra-hard Brexit, in which the UK crashed out of the European Union with no trade deal. That’s compared to the 8 per cent injury estimated for the UK as a whole.

And that’s a projection of the economic damage over the course of 15 years, relative to staying in the EU. This highly export-reliant region could be damaged even more grievously in the short term if the UK-EU negotiations fail, and tariff barriers and customs inspections come crashing down, rupturing the arteries of our trade, in March 2019.

Yet the North-east was also one of the UK regions with the largest proportion of Leave votes in the June 2016 referendum, with 58 per cent opting to get out, versus 42 per cent for Remain. Just about every division of the wider region – from Sunderland to Stockton, from Darlington to Durham – voted out. And most did so by a wide margin. Only cosmopolitan Newcastle came down in favour of staying, and that was by a slim 1 per cent of the vote.

So the North-east has a decent claim to be the economic “ground zero” of a hard Brexit. Yet it’s also one of the heartlands of Leave.

With just 12 months to go until Brexit, The Independent travelled to the region to see how firms there are coping with both the sharp weapon hanging over their heads and also the deep social and economic contradictions exposed by that fateful popular vote back in 2016.

 

Driven to distraction

In ancient Greek theatre a “deus ex machina” – or “god from the machine” – would emerge to bring resolution to a tragic human drama.

In the North-east of the 1980s, hollowed out by the secular decline of shipbuilding, coal mining and steel making, Nissan played something akin to that role. A deus ex machina to make machines.

The Japanese carmaker was courted heavily by Margaret Thatcher; promised all sorts of tax breaks. But much of the allure for Nissan was the promise of unimpeded access to the vast European market. It’s that access which is now, of course, in jeopardy, much to the alarm of the Japanese.

But for 30 years the deus did seem to work miracles. Nissan’s Sunderland plant has been one of the most admired inward investment projects in British post-war history. 

The factory is considered the most efficient in Europe, churning out half a million vehicles every year, most of which are exported to the EU.

Nissan directly employs around 7,000 people but that’s a grossly inadequate measure of the firm’s economic importance to the region. An ecosystem of local suppliers has sprung up around it, supporting as many as 50,000 more jobs in the region by some accounts.

Nissan declined to talk to The Independent for this article. Yet Steve Bush, a gregarious officer currently in charge of automotive for the Unite union, who liaises with union representatives from Sunderland daily, is happy to emphasise the importance of the broader car industry for the region.

“It’s on a monumental scale – and I don’t use that word lightly,” he says at the union’s Newcastle office. “If there was any hit to the North-east automotive industry it would have a huge detrimental effect on the economy. I think everybody appreciates that. When I speak with tier-one and tier-two supplier firms, the first thing they talk about is Brexit. All companies are aware of what the stakes are.”

Nissan’s worst nightmare is official government policy; namely Theresa May’s promise to quit the EU customs union. This threatens to play havoc with its cross-border supply chains. Components used in the manufacture of cars at Sunderland often travel across EU member-state borders multiple times. Tariffs imposed on each trip into the UK would obviously push up costs. But the bigger threat is delays due to new customs checks. The Sunderland plant operates a “just-in-time” manufacturing process, with minimal stocks of components held at the plant. That means even the most modest of hold-ups in deliveries could wreck its hyper-efficient operating model.

Nissan last year attempted to induce its overseas suppliers to shift to the UK to help mitigate the problem. The government is helping to fund an International Advanced Manufacturing Park, situated right next to the Sunderland plant, to host them. And Nissan did agree to produce a couple of new models there in the immediate wake of the Brexit vote after receiving various mysterious assurances of support from ministers. That should keep the plant running until 2022. But no one in the region believes the factory’s long-term future is anything like secure.

Neil Warwick is a lawyer for Newcastle-based Square One Law. The EU specialist is highly sought after and has worked with many manufacturers in the region. Warwick, whose superficially dour demeanour periodically breaks into a conspiratorial grin, says the administrative burden of a hard border could ultimately prompt the Japanese firm to take a brutal decision.

He points out that one of their car engines crosses borders 18 times before it’s manufactured. “Is it just easier to do everything in France and ship it back once?” he asks. “The only hard border you need to worry about is the UK.”

Such a move, Warwick stresses, would be abysmal news for the region. “It would regress the plant back to effectively a screwdriver assembly plant. It’s hugely bad for the supply chain.”

There would probably be major negative downstream effects for local services firms too. Tony Roxburgh is the commercial director of North Shields-based Calibre Secured Networks, which installs IT wiring for schools, offices and call centres. His company would expect to be commissioned to do work at the new Sunderland manufacturing park if it takes off. But the future of that project, of course, all comes back to Nissan. “If Brexit had an impact on Nissan, the fallout from that is sure to have an affect on every business in the North-east,” he says.

 

Heads in the sand

Earlier this month the Chambers of Commerce hosted a private roundtable meeting at the Hardwick Hall Hotel in the County Durham countryside. In attendance were 20 large local supply chain companies to talk about their Brexit preparations. Warwick of Square One Law, who chaired the session, recalls his opening question. “I said ‘how many people have got a Brexit plan and how far along are you with implementing it?’”

The result was disturbing. Not a single company even had a plan, never mind putting it into action.

One participant at the meeting described it as “head in the sand syndrome”.

Small firms, and not only those in the North-east, are especially exposed to the economic disruption of a customs border. Some 134,000 small- and medium-size companies in the UK are estimated to have only ever exported to the EU. “The worrying thing is that we’re not even sure if they know what’s going to hit them,” says Warwick.

Julie Underwood, head of international trade at the North East England Chamber of Commerce, tends to agree. “How are firms preparing? Not particularly well, in truth,” she says. “The whole area of customs compliance doesn’t tend to get a focus, even now.”

Exports are the economic lifeblood of the North-east. And Europe is a big market. Official data shows that the value of its exports to the continent added up to £5.6bn in 2017. Divided by the region’s 2.6 million population gives exports per head of £2,100, the highest of any region in the UK.

And it’s not only cars, chemicals and machinery. Half of the North-east’s services exports went to the EU in 2015, again the largest share of any UK region.

These raw facts on trade are the primary reason why the government’s modelling exercise paints such a uniquely bleak economic picture for the North-east due to Brexit.

But all this gloom about plummeting GDP and rising tariffs barriers: isn’t this “project fear” all over again?

Graham Robb, the founder of a Darlington-based public relations firm Recognition and deputy chair of the local entrepreneurs forum, thinks so. Back in the 1990s Robb stood as the Conservative candidate for Hartlepool, losing out to one Peter Mandelson. And he took his lead in the Brexit campaign from the former Tory chancellor, George Osborne.

“I advocated Remain with a great deal of passion,” he says. “But I publicly recanted last year because a lot of the stuff we were told didn’t come about. I felt foolish.”

On the latest government analysis, showing that 16 per cent hit, Robb says: “Once bitten twice shy. The same people who produced that analysis were the people who gave us the analysis that it was going to go wrong before.”

Robb, who has clients across the region, says he has spoken to lots of property developers who are interested in investing in the region, regardless of Brexit. He also discerns a divide between entrepreneurs and big companies when it comes to the opportunities of leaving the EU. “Amongst my peer group of owners I’d say there is a much less passionate Remain stance than there would be among more corporate entities,” he says.

Warwick of Square One Law accepts the point, but adds that entrepreneurs can also be somewhat naive too.

“The entrepreneurs, yes, by their nature, they spot gaps, they see opportunities. But there’s also a certain amount of ignorance,” he says, citing the case of one “very famous entrepreneur” who was intensely pro-Brexit until he learned that one of the components in his manufacturing business came from Poland. “The knock-on effect on his business just hadn’t occurred to him.”

 

People power

Everything is enormous in Northumberland’s Port of Blyth. Fifteen-metre high rolls of undersea cable, which will be laid to connect offshore wind farms to the mainline, line the perimeter of the South Harbour. Even more massive pieces of trench-digging equipment litter the sprawling dockyard, like the carcasses of brontosaurus.

Biggest of all are the two jack-up barges for digging oil wells squatting at the sea-edge of the harbour; four crane-like legs towering-up above each of them.

What must it be like working among such intimidatingly colossal chunks of metal? “You get used to it, but when I saw the even bigger ship that the jack-up barge came in on (the 34,000-tonne Albatross), even I thought ‘wow’,” laughs Brendon Hayward, managing director of the subsea engineering company Osbit, which has a warehouse on the port.

With his blue Jaguar car, sharp-cut three-piece suit and brown winklepicker brogues, Hayward seems more like a football agent than an engineer. Hayward founded Osbit seven years ago to provide bespoke engineering solutions for offshore players such as Gulf Marine Services, DeepOcean and Van Oord. The GSM jack-up rig boasts a vast, bright-yellow exit ladder, specially designed and manufactured by Osbit. But Hayward’s Brexit concern relates to the people who bash the pieces of metal that he exports.

Official data shows that the North-east has the lowest proportion of EU workers in England. They account for just 1.8 per cent of population, less than half the 5.5 per cent average for the UK. Such figures suggest that the North-east would be relatively unscathed if the government clamped down on EU migration in the coming years, something UKIP-types insist was the clear “will of the people” revealed by the Brexit vote.

Yet many businesses in the North-east agree that workers from mainland Europe have an outsize importance to region’s economy.

“The thing that I could entirely see hampering the North Sea supply chain is if the labour changes,” says Hayward, whose business model is based on its promise to turn around projects very quickly. One of the local steel suppliers that Osbit used last year has a workforce which, he reckons, is 30 to 40 per cent made up of Eastern Europeans.

“If our suppliers lose 30 per cent of the workforce, and we ask for a 21-week turnaround, maybe they turn around and say, ‘We can’t do it.’ The time element is really key to us. The client needed the system in 21 weeks. If we’d quoted 30 weeks I think they would probably have ordered it in Europe.”

“Currently we can deliver really cost-effective new technology all made in the North-east and we can ship it all around the world. That is absolutely determined by available labour. If our suppliers lose that labour capability we have a problem.”

If that happens, Hayward warns that Osbit could be forced to manufacture outside the UK.

Steve Bush, from the Unite union, issues a similar warning about the high proportion of Lithuanians who work for Lear Corporation, one of Nissan’s local car-seat suppliers.

But the North-east is not all engineering and manufacturing. Ryder Architecture was founded in Newcastle in the 1950s. Its elegant headquarters is a converted 19th-century horse and carriage repository – what partner Paul Bell describes as a “horse car park” – close to the city’s central train station. Bell, dressed in a grey jumper over a pink shirt, explains how his own business relies on overseas talent, including from Europe.

“Being able to bring in the best talent from around the world is an advantage to our industry. There’s not an issue within our profession of UK jobs being under threat from immigration,” he says. “Some of our colleagues from Europe have been here a number of years and they are genuinely concerned about their ability to stay.”

Ignazio Cabras, professor of entrepreneurship at Northumbria University, doesn’t have that problem personally. Though he was born in Italy, he has been a British citizen for the past 10 to 15 years. “I don’t even remember how long,” he laughs. But for many of Cabras’ colleagues Brexit is no joke.

“A significant number of academics in all the five universities and colleges in the region are from the EU,” he says. “We’re worried. There are already concerns that a significant number might reconsider their residence in the UK.” For a region that aspires to grow its knowledge economy and cement itself as a high-tech skills production centre, such a brain drain is an ominous prospect.

 

Global Britain?

Nigel Mills and his dad built a mini newsagent empire in the North-east. Mills junior sold his 77 corner shops to Tesco in 2010, making the lanky former accountant a wealthy man. But now he’s mainly interested in alcohol.

Mills’ new venture is a Cumbrian whisky distiller called The Lakes Distillery. Exports are a big hope for the young premium drinks brand. But Brexit is already an obstacle.

“The biggest problem with trade is making sure that your brand meets the local regulations,” he explains. “That’s one of the things with Europe at the moment – we all adopt the legislation and there’s no issue. For me it’s that compatibility that’s as important, if not more important, than tariffs. So it was frustrating when the Brexiteers were saying, ‘Let’s get rid of all the red tape.’ OK, now you can’t export because your product doesn’t comply!”

But shouldn’t Mills be rubbing his hands together at the promise of a new free trade deal with the United States, often promised by Brexiteers? Think of all those thirsty American Scotch drinkers, waiting to be introduced to the Lakes’ new single malt. The problem here, Mills points out, is that there are already zero US tariffs on whisky imports. The barrier is local regulation, not levies.

And Mills isn’t expecting the US to lower its “non-tariff barriers” for whisky.

“Because of Prohibition in America (in the 1920s) it is highly regulated. There’s a complex three-stage process to get alcohol into America. You’ve got to have an importer, a distributor and then a retailer. I don’t think they’re going to dismantle their monitoring system,” he says, with a shrug of resignation.

 

Disconnected

Back up in a factory in Blyth, they’re building something that looks and moves a bit like a R2D2. Tharsus is a robotics firm responsible for the wireless-controlled automatons which whiz up and down rails in Ocado’s new packing warehouse.

A growing number of robots trundle off the Tharsus production line every day. And with Ocado, which owns the intellectual property for the system, starting to sell it to other grocery groups abroad, demand could explode, keeping Tharsus very busy indeed.

Some of those Tharsus shop-floor workers almost certainly voted for Brexit. Why? It seems like an act of self-harm, given the region’s reliance on EU trade. Many say it’s because people in the North-east felt “left behind” and were venting their frustration.

Gross value added per head in the North-east – a very rough estimate of income – is the lowest of any region of the UK, except Wales, at £19,542 a year. The figure in London is £45,000. Poverty in some wards of the region is very high relative to the UK average. So is the share of the population with health problems.

But Brian Palmer, Tharsus’ compact and wiry chief executive, feels “left behind” isn’t the right phrase. “I would say disconnection,” he says. “There’s a sense that London’s a long away and it’s a different world.”

Paul Bell, the architect, agrees. “One of my concerns about Brexit is that the focus on Brexit means other initiatives such as the Northern Powerhouse move down the agenda,” he says, referencing the government’s northern regeneration project, which many in the North-east already sense has become unfairly focused on Manchester and Liverpool.

Some fear Brexit will make any kind of catch-up for the North-east more difficult. Because of its relatively low income per capita, the region has qualified for development funds from the EU. In the 2014-20 round of funding the region was awarded £425m from two pots of EU cash, the European Social Fund and the European Regional Development Fund.

In recent years, money from Brussels has helped finance Newcastle University’s 24-acre “Science Central” innovation hub and also the Baltic arts centre in Gateshead, converted from an old flour mill.

Before the referendum, the Newcastle Chronicle calculated that people in the North-east had received twice the amount of EU funding per head as in any other part of England since 2007.

“You have to find another way of kick-starting the development,” says Bell.

But can Westminster be counted on to fill the gap after 2020?

Trust feels in short supply, even close to home. Nissan had warned that it could reduce investment in the event of a Leave vote. But many of their own workers voted out, regardless. Many were baffled by that, since industrial relations in the plant, and indeed across the region, were regarded as exemplary. Some suspect that they weren’t as good as they were made out to be, and that workers were itching to give two fingers to management.

But Steve Bush of Unite doesn’t think this is the explanation. For him, many workers were misled by the mass media, particularly tabloid newspapers.

“I’ve spoken with workers and said, ‘Why have you voted out?’ and they say ‘immigration’. But then you say, ‘What about the guy who works in the plant with you, or lives in the next street, or next village?’ and they say, ‘I’m not talking about them, I’m talking about the guy on the front page of The Sun who’s brought his family over etc’. And I say ‘hang on a minute…’”

Yet to John Elliot, the 75-year-old founder of dehumidifier and washing machine maker Ebac, it’s perfectly obvious why people voted for Brexit. It’s because the UK economy is up the spout and not working for ordinary people.

From his Newton Aycliffe factory, Elliot dismisses the “people were misled” argument as patronising. Elliot, who left school without any qualifications, has developed some extensive, yet esoteric, views about what ails the British economy.

And one of his convictions is that tariff protection for UK manufacturers is necessary. “You’ve got to have a trade war. And you’ve got to have some casualties,” he says, excitedly, sounding like a Pitmatic Steve Bannon.

That might seem to be a position that serves Elliot’s own business. If foreign washing machines are kept out, Britons might have to buy his models instead.

Yet Elliot freely admits that components for his own washing machines are imported from the EU. “The electric motor in there is from France, the pump is from Italy, the motor there is actually from Spain,” he says, gesturing to a demonstration unit in an unpretentious upstairs meeting room.

Ebac also exports water coolers to the US and the EU. So isn’t Elliot’s firm directly in the line of fire if the kind of global trade war he advocates breaks out?

“If we’re going to change things for the better there’s going to be some casualties and if that’s us, tough! I would rather be that casualty if the economy was going to become better. Why? Because I live here and I’d like the UK to do well. We could make these things in Poland and make an extra dollar but I don’t want to. I’d rather make a reasonable profit here than a bigger profit in Poland.”

And though Elliot is a local champion of Leave, he doesn’t actually think Brexit itself is the main prize. “If someone said we’ll sort it [the economy] out if we stay in the EU, I’d say ‘stay in the EU’. I’d live with that.”

 

Doomed to partnership

Like the enormous jack-up rigs in Blyth harbour, the economic threat of Brexit looms large in the North-east. The threats to trade, the potential jeopardy of the supply of skilled labour, the disappearing EU funds, the sheer difficulty for firms in planning ahead when the future is as clouded as the bottom of the Tyne on a murky day.

But also looming large is a question of inequality, raised by John Elliot. Why, if the North-east region is such a successful exporter, as everyone accepts, are incomes so low relative to the rest of the UK? Where are those rewards going?

And there’s the balancing act: the difficulty of weighing the needs of multinational firms with the palpable yearning among many local people for a greater degree of control over their lives; a control to be wrestled back from Westminster just as much as from Brussels.

Business leaders are in the middle of the tug of war. Those to whom The Independent spoke are proud Geordies, Mackems or Northumbrians, with a genuine feeling of loyalty to the North-east region. They sense the dangers to their businesses, but also the frustration of many of their employees.

The emotions run high, from Leavers who resent what they see as economic defeatism, to EU nationals anxious about their future. Somehow, businesses and the communities in which they are embedded must find their way through. They are doomed to partnership.

But with one year to go, the task of navigating the agonising trade-offs, confusions and contradictions of Brexit has not become any easier.