The outlook for the United Kingdom’s tech industry and its customers is murkier at best in the wake of the recent majority decision by the country’s electorate to leave the European Union (a.k.a. Brexit). Brexit has given the UK’s business and tech communities reason to wring their hands collectively given the climate of uncertainty that engulfs it and the country at large. PAC believes Britain’s business outlook is worse given the impending Brexit, and as a result we have eased our growth expectations for the UK market.
In 2016, PAC expects spending on software and IT services (SITS) to rise by 1.3% - down from our previous forecast of 3.2%. We have also dialled down our mid-term outlook, with the expectation of a CAGR between 2015-2019 of 1.9%, down from 2.8%.
There are several reasons for a decidedly pessimistic post-Brexit outlook for Britain besides the downward spiral the pound has taken since the Leave camp won the day.
First, risk-averse multinational companies will be forced to consider moving global or regional headquarters elsewhere in Europe given the uncertain post-Brexit operating environment. Even though Britain will not leave the EU for at least two years, the question of whether companies will plan for or start to move operations out of Britain, or possibly scale back plans for expansion, because they are less confident about what would happen after 2018 is now a reality. Already, Siemens has warned its plans to export wind turbine blades from the UK will have to be put on hold. Even British companies, such as Vodafone UK, have said they may need to relocate headquarters in the wake of Brexit. While Huawei has assured the British Government its £1.3bn investment in UK operations is safe, PAC believes we’re likelier to see more statements from the likes of Siemens and Vodafone in future given the current uncertainty.
A bank is perhaps likeliest to flee or move part of its operations to another European country. This is so given the potential post-Brexit loss of the banking passport system, which will undoubtedly force the collective hands of UK / London-based financial services firms that have benefitted from the automatic right to sell services across the 28-nation EU with low costs and a single set of rules unless Britain is allowed to continue as such. This is possible though no other non-EU member has full banking passport rights. However, Britain could negotiate a deal that in effect makes its banking rules and regulations equivalent to those of the EU.
In either case, the likeliest net beneficiaries of any relocation efforts are France, Germany and the Netherlands - in particular large cities like Paris, Amsterdam, Berlin or Frankfurt - given their appetite for economic and IT investment coupled with their ability to handle the considerable influx of people that comes with such a proposition. Companies could export hundreds of thousands of administrative, sales and production jobs from the UK to the aforementioned countries if the UK is no longer deemed to be a satisfactory banking headquarter by the members of the financial services community. This would obviously be a significant blow to the UK economy and is now more than a discussion point given recent developments. PAC expects decisions from the likes of Vodafone and London-based financial services companies to be made sooner rather than later as companies won’t want to be left with depreciating assets (i.e. real estate) in the wake of potential mass departures.
Should financial services companies move operations elsewhere, a ‘knock on’ effect is likely to occur as innovative UK-based start-ups (i.e. fintech) that need easy access to their biggest customers may feel the need to move with them.
A related issue is that of overall investment in the UK, given that expected stricter trade rules can harm Britain and the rest of Europe given the additional restraints both sides are likely to place on each other. Britain, for example, probably won’t want to include the free movement of workers as is allowed today in a new agreement with European Union member states, as it would be politically challenging to do so for the British government negotiating the post-Brexit relationship.
A third potential problem for post-Brexit Britain involves labour, as mobility thereof will likely be more restrictive. The EU and the UK will be sufficiently motivated to restrict labour in addition to goods given the current political climate in the UK. This is a harmful development especially for the technology sector as UK-based tech companies need specialised skills to thrive. Clearly this will make talent recruitment more difficult; migrant workers could shy away from job prospects without assurances they’ll be able to stay for the long term. Ideally, UK tech companies post-Brexit will be able to hire EU nationals with the same ease. However this is unlikely as it’ll be a difficult proposition to sell for a ruling government in the UK given the vote to Brexit.
End-user organisations will have to deal with the fall out as well; how data are protected and hosted for example will need to be decided. Britain’s data protection laws post-Brexit vis-a-vis the EU and its General Data Protection Regulation (GDPR), aimed at unifying data protection and managing the flow of personal data of each EU member state, will need to be decided. Even if it is not a part of the EU when the GDPR is enacted in 2018, its dependence on trade with continental partners and the global trend towards stronger data protection laws could bring Britain closer to the EU. This is so as British businesses will need to protect their customer data in addition to meeting certain EU data protection standards if it’s to maintain relatively free digital trade relationships with its European neighbours. However, access to the European Digital Single Market, designed to promote common data protection laws, better access to products and services at reduced costs across the EU, and generally increase adoption and acceptance of digital services is potentially jeopardised for UK businesses post-Brexit. In such a case, PAC believes there will be an outflow of data to EU countries from Britain due to security and data privacy regulations.
Specific to the tech sector, Brexit and the corresponding sharp decline of the pound, which dropped to a 31-year-low again versus the US$, won’t help its cause. It will lead to a smaller UK market that’s expected to trail Germany when revenue is considered, PAC believes.
Demand for hardware and infrastructure software in the UK will relent in line with the country’s lower overall expected economic growth given the rapid decline in the value of the pound against the American dollar. This decline will lead to slightly higher prices of enterprise tech products and services in pounds, which PAC expects to cause purchasing delays. This is so because companies operating in the UK set IT budgets in pounds, which means customers will not be able to absorb the aforementioned net price increase of products and services leading to investment delays. In the short term at least, the length of agreements tech suppliers strike with customers at least may have to change as organisations seek to minimise risk.
While the Brexit aftermath will be far reaching for the UK and its tech sector, all is far from lost. Turmoil and uncertainty can equate to opportunity. For example, foreign tech suppliers with UK operations can benefit from lower short-term operating costs given the decline of the pound post-Brexit vote. That said, the agreements that legislators hammer out over the next two years will determine the long-term implications for the tech industry which gives the UK ample time to lay the best the possible groundwork for tech companies and their business peers post-Brexit.
PAC expects plenty of tech-related Brexit developments in the months to come that will merit further commentary. To start, PAC will detail cloud computing / data centre-specific implications of Britain’s impending Brexit in a separate post.
For further information regarding Tier 2 General Visa sponsorship and hiring a Non-EU national or if you are a Skilled Non-EU national into IT and looking to work in the UK do get it touch. Consult@mavisas.co.uk.
Thanks for reading
Mason Alexander