Joe Aherne,CEO of Leading Edge Group in Cork, suggests that SMEs need to make significant productivity gains and that Brexit, in whatever form it eventually takes, poses a once in a generation challenge for small business.
While the media focus has been firmly trained on the growing probability of a hard Brexit, the fact remains that the UK’s departure from the EU represents bad news for Irish business regardless of how it comes about.
Withdrawal agreement or not, the UK will become a third-world country whether at the end of a transition period or in the coming months. This will mean a hard border somewhere, either on the Irish Sea or on the border with Northern Ireland. It will mean customs duties and tariffs. It will mean customs declarations, delays at ports and disruptions to trade flows.
Most significantly, it means increased costs. Most Irish exporters to the UK will have to supply their UK customers on a duty paid basis following Brexit. In other words, the price on the invoice is inclusive of duties and tariffs.
Unfortunately, it is highly unlikely that the price paid by UK customers post Brexit will be any different to what it was before the UK’s departure from the EU. In fact, it is quite possible that major UK buyers of Irish goods will seek to apply downward price pressure on their smaller Irish suppliers in an effort to make up for Brexit induced cost increases elsewhere in their businesses.
And that’s just the beginning of the problem. Irish exporters will also have to bear the costs of customs declarations, either through broker fees or hiring new staff and installing new systems of their own, as well as higher transport overheads incurred as a result of delays at ports.
The choices facing Irish companies are fairly stark in this scenario: try to absorb the cost increases through reduced margins or find new customers. The former may simply not be possible for Irish commodity food producers and other low margin businesses. This is likely to create further disruption on the domestic market.
Companies forced out of the UK market could look for new outlets for their products here on the home market. The resulting product dumping will put pressure on other Irish suppliers with the potential for damaging price wars.
Finding new markets either in the EU or further afield is clearly the better option for all concerned. This, of course, is easier said than done. Products that appeal to UK customers may not go down quite as well in France or Germany.
Cheddar cheese is a classic of differing food tastes. Once you go beyond the English Channel demand for this staple of British and Irish diets practically disappears. Much the same can be said for Irish sausages and other meat products. And when it comes to non-food products expensive design tweaks and packaging revisions may be required before they are suitable for other European markets. The issues mount the further you get from home while transport and distribution costs continue to rise.
And that’s before firms start dealing with the duties and tariffs applicable to exports to non-EU countries.
These are the reasons the EU Single Market and Customs Union were established in first place and it does make you wonder why any group of people in their right mind would wilfully want to exclude themselves from them.
But that is the situation we face, and no amount of wishful thinking will make it go away. But there is some good news out there and it comes in the form of recent bad news for Irish SMEs.
Earlier this year the OECD produced a report which highlighted the widening productivity gap between Irish SMEs and the FDI sector in this country. This is nothing new and both the Government and the National Competitiveness Council have been raising the issue for some years.
In July of this year, the Taoiseach addressed SME & Entrepreneurship Strategy Conference in Dublin where he said: “Today’s focus is productivity, and we want to drive productivity growth across the economy, particularly amongst SMEs. So, this morning is a good place to launch the Productivity Pillar of Future Jobs Ireland which does exactly that.
“Recent analysis conducted by the OECD and the Department of Finance shows Ireland performs well on productivity compared with other EU member states”, he continued. “However, this is driven by some very productive global firms and the productivity gap between these leaders and our own domestic indigenous firms is widening. Of most relevance to you today, we have set a target of increasing domestic productivity by 1% per year.”
Speaking at the same conference, OECD deputy secretary-general Ulrik Vestergaard said: “Indigenous companies can play a bigger role in Ireland's economy, but they need to boost productivity to the levels seen at multinationals. SMEs and start-ups benefit from a favourable business environment in Ireland. However, the productivity gains for lots of SMEs have been stagnant. Boosting productivity will be crucial.”
It is naturally a cause for concern that Irish SMEs are falling behind multinational companies when it comes to productivity gains. However, it can also be seen as a reason for optimism; or hope at any rate.
The OECD finding indicates that there is ample scope for improvement in terms of SME productivity and this means there is potential to offset the increased cost burden imposed by Brexit through efficiency gains.
The question is how Irish SMEs can go about making those gains. According to the OECD one way is to improve skills and capability across a range of areas including overall management, digitalisation, and Lean manufacturing processes. The issue facing many Irish SMEs is how to access expertise in those areas.
But there is further good news here. Enterprise Ireland has a range of supports available to companies to assist them to hire expert consultants to support them in these areas. In addition, the government has announced two new funds worth a combined €3 million, aimed at enhancing the productivity of firms throughout the country. Both funds will be operated through the network of Local Enterprise Offices (LEOs), which means that they will reach even the smallest indigenous businesses.
The first is the €2.5 million Competitive Fund which will support projects to address themes such as innovation, Brexit readiness or market diversification. The second is the Productivity Challenge Fund worth €500,000. This is for businesses who are not currently LEO clients. The funding will be used to address productivity gaps, including through the adoption of Lean business practices. It will also incorporate business opportunities in the green economy.
These and other forms of assistance can help bridge the resource gap between SMEs and their multinational counterparts and give them access to the expertise they need to make the productivity gains which will enable them to continue to compete in the post-Brexit world.