HEREFORD, England Above a factory floor of machines carving metal to within a millionth of a metre, Stephen Cheetham is preparing his company for the unknown: a British exit from the European Union.
Since the government announced a referendum on Britain’s future in Europe, Cheetham has deferred investment decisions, put off expensive hiring and even bought equipment with his own money to avoid straining the balance sheet.
The aim is to prepare his company, which makes parts for first-class airline seats and intricate scientific equipment, for what he fears will be a slump in business if Britain votes to leave the world’s biggest trading bloc.
“It is extremely difficult to prepare for and it worries me witless,” said the owner of PK Engineering. “But our disaster plan is very clear: if all the kit is paid for, we hang on to it and we ditch everybody apart from the core.”
Britain’s big listed companies have appointed lawyers and strategists to identify the risks of a British exit, or Brexit. Wary of meddling in politics, however, they have largely not detailed their plans for the June 23 vote.
But smaller companies in the manufacturing heartlands, crucial to the economy and often inextricably linked to continental Europe, are formulating contingency plans that illustrate the risks facing businesses across the country and the steps being taken to mitigate them.
At the start of 2015, almost half of Britain’s private-sector turnover came from firms that employed fewer than 249 people, according to the Department for Business.
For Cheetham his “disaster plan” involves jettisoning nearly half of his 30 employees if a Brexit compounds the drag from an already slowing global economy at his firm in the English rural town of Hereford.
Across the nearby Welsh border, Gareth Jenkins, who runs a toolmaking firm, has identified which major customers in Europe are likely to abandon him should they have to accept higher costs or slower delivery times that might come from new border controls with EU countries if Britain leaves the bloc.
He has calculated the financial impact and says in a worst-case scenario he could lose 25 percent of his turnover. He plans to tell his 91 employees in the next couple of weeks that a vote to leave could force him to lay off a quarter of staff.
Very little is clear ahead of the referendum called by Prime Minister David Cameron, with British voters divided on membership and both sides in the debate arguing Britain would be financially better off if their cause succeeds.
The fears of business owners like Cheetham and Jenkins are driven by what most Britons – on either side of the debate – accept is unchartered economic territory should Britain vote to leave the group it joined 43 years ago.
The terms of any divorce would be subject to two years of negotiations with the EU, with no guarantees of how the new order would look.
At present British companies trading with other EU nations do not face customs tariffs, costly paperwork such as certificates of origin or VAT – sales tax – on imports.
Should it opt to leave, Britain may negotiate continued tariff-free access but additional administrative burdens will almost certainly apply, making exporting to and importing from the EU more costly, say business owners and lawyers.
They also fear any restrictions on European workers and a prolonged period of a volatile pound, while the effect on the EU of losing its second-largest economy is unclear.
Adam Shuter, head of haulier Exact Logistics, is investigating whether he should set up a German office, which he thinks could cost less than the additional taxes and paperwork of serving EU customers from outside the bloc.
“For a small business, it’s quite a bit of investment,” he said. “It just adds a layer of administration.”
He is also gauging the extra customs costs his British customers might incur outside the EU, using non-members Norway and Switzerland as guides, and looking at how much it would cost to set up expensive software to handle border clearances.
He charges an additional 50 to 60 pounds ($70-85) per consignment for customs clearance into those two countries, on top of a typical European delivery cost of 40 to 50 pounds.
A spokesman for Vote Leave, one of the groups campaigning for Britain to leave the EU, said the concerns were unfounded.
The group argues companies would benefit from fewer regulations imposed by Brussels, while the government could be more nimble in agreeing trade deals with the likes of India, China and the United States.
“The UK is the EU’s largest market so every incentive exists for the UK to strike a free trade deal with the EU while using its new-found control to also strike free trade deals across the world,” it said.
Cheetham’s focus is closer to home. He bought PK Engineering in Hereford, close to England’s border with Wales, four years ago after a career in the automotive and finance industry.
With its 1.5 million pound ($2.2 million) turnover and 10,000 square ft factory, he says he is too small to employ consultants or lawyers ahead of the vote.
Like many of Britain’s high-precision manufacturers, most of PK’s goods – 90 percent – are exported to global supply chains, ending up at the likes of Boeing’s factory in Seattle or Airbus’s base in Toulouse.
“You think we’re a rural business?” asks Cheetham of his 27-year-old firm based on a small industrial park nestled in rolling countryside 190 km (120 miles) west of London.
“If we screw up, Boeing in Seattle stops or Airbus in Toulouse stops … it’s all interconnected.”
Clutching a component of an airline seat in his right hand, the 58-year-old details how the aluminium came from Finland and the fittings from Germany to meet an order from a French customer in Wales who will send it on to Toulouse or Seattle.
To his left is a large folder detailing the certification process the firm went through to allow it to win work in the aerospace sector. Known as the Aerospace Quality Certification AS9100C, the six-month process cost about 20,000 pounds.
The EU contributed to that cost in its bid to improve productivity and competitiveness in the bloc and Cheetham said it would have taken much longer to complete had he needed to stump up all the cash.
Leaving the bloc, Cheetham worries that his firm could miss out on this kind of advantage and become less competitive.
“Our ability to increase prices is very limited – whenever we try, we lose work,” he said.
He has pushed back the hiring of a new senior engineer until after the vote.
“If we do vote for Brexit we will have a prolonged period of uncertainty and everything will grind to a halt, he said. “And we don’t want to be caught holding the debt.”
‘MAPPED OUT IN MY MIND’
Any move that led to British manufacturing firms losing their place in global supply chains would deal a major blow to the British economy; the sector accounts for a tenth of its output and employs 2.65 million people, the vast majority in small and medium-sized firms.
Just over one hour’s drive from Hereford through country lanes decked with daffodils stands Jenkins’ 55,000 square ft toolmaking factory, a Welsh firm entwined in similar networks.
Like Cheetham, 59-year-old Jenkins has been studying contracts and trying to work out whether three of his biggest clients, all based in Germany, would be able to cope if they had to accept higher costs or slower delivery times.
He estimates that one if not two would stop using his FSG Tool and Die, Europe’s largest privately owned design and build toolmaking firm.
“I have mapped this out in my mind,” he says, in a room off the spotless factory where tools are being built to make everything from yoghurt pots to replacement hips and car parts.
“The minute we vote to leave customers will say there’s a risk here and we need to mitigate it. We ship tools from here on Monday that they’ll be using by Thursday. What happens if that is disrupted?” he said, fearing that they will look elsewhere.
Jenkins fears losing the close links he has developed with other EU firms should a vote to leave exclude it from the free movement and trade that has made the alliances work.
Up against the might of low-cost centres such as China, he teamed up with firms in Germany, Sweden and elsewhere to train one another’s apprentices, refer sales, bid for emerging market work and hire a rep in Singapore to cover all their needs.
“It’s a bit like a life raft,” he said.
The customs issues are perhaps most crucial for hauliers such as Shuter’s Exact Logistics, which delivers across Europe from its base in Rugby, central England.
While lawyers and business owners say any new tariffs could be low, they worry that deliveries could be delayed by customs clearance and additional paperwork, including certificates of origin and export tax declaration documents.
Shuter and one of his clients, Pete Churchill from Robert Welch Designs, estimate that the additional paperwork could mean the cost of a consignment jumps to between 150 to 200 pounds from the current 50 pounds.
That compares with the value of the consignment which can sometimes be as little as 500 pounds.
Sitting in an office crammed with filing cabinets and maps of Europe, Shuter is investigating how much it would cost to buy a new software system that could clear consignments with European tax and border authorities if Britain were to operate under different rules.
“You’re probably talking in the region of 10-20,000 pounds, so it’s relatively significant,” he said.
British importers also fear they will have to pay VAT sales tax when they take delivery of goods from the EU – rather than at the point of sale – making cashflow harder to manage.
Facing so many unknowns, business owners such as Cheetham are struggling to plan for the future. Back in Hereford he lets his frustration show.
Normally a supporter of Cameron’s Conservatives, he says he is furious at the position the government has put business owners in.
“They are playing roulette with the economic future of the country,” he says, hands gripping the table. “We’re just hoping for the best. I’m almost in denial.”
($1 = 0.6933 pounds)
(Additional reporting by Tom Bergin and Paul Sandle; editing by Guy Faulconbridge and Pravin Char)