British businesses could potentially take advantage of Brexit, but it will depend on agreements between the UK and the EU, the robustness of individual companies, and the scope of their ambition. While change in business often presents opportunities, the degree of difficulty and uncertainty could be insurmountable for many companies already weighed down by other concerns.
If negotiations do not markedly improve, the United Kingdom is heading for a calamitous exit from the European Union (EU) on January 1st 2021. This could spell disaster for any number of companies, particularly those exposed to more friction at borders and the resumption of World Trade Organization rules regarding tariffs.
Unprepared for greater friction
In a UK staring down the barrel of a disorderly Brexit, a recent survey of more than 500 companies by the British Chambers of Commerce found that 51% had not taken any of the eight steps recommended by the UK government to prepare for changes in the movement of goods to and from the EU.
On the other side of The Channel, three major European industry bodies came together in June to warn of the “significant negative consequences” of a no-deal scenario wreaking havoc on the trade process through tariffs and disrupted supply chains.
“These can be expected to include a major decrease in export volumes from the EU to the UK, a significant fall in revenue, and consequential job losses. The impact on SMEs, farmers and agri cooperatives would be particularly detrimental,” said the joint statement from the European farmers body Copa-Cogeca, the agri-food trade body Celcaa, and the industry confederation FoodDrinkEurope.
The ongoing Covid-19 pandemic further complicates the situation and exacerbates the possible economic harm that companies and the public will face over the next few years. Some companies, such as Sony, have already announced plans to relocate headquarters out of the UK to avoid aggravated disruption to their operations.
Industries worst affected
Beyond job cuts, food prices in the UK will probably be where many citizens feel the sting of changing regulations. With 79% of imported food in UK supermarkets coming from the EU, households will quickly notice the difference.
Sectors worst affected by the exit are likely to be agriculture, the automotive industry, and financial services – all of those for whom customs and duties changes will constrict international areas of business.
With so many complicating factors at play, British businesses cannot afford any of the conventional problems that hinder company performance at the best of times. The security printer De La Rue, which produces currency and passports, has been showing signs of strain. Commentators have highlighted financial difficulty and disruption at the top, with the company making changes to its directorate in a bid to stem the tide.
“The business seems to have fallen flat on its face as a result of poor management decisions at a time when it needed superior leadership to navigate difficult market challenges,” said Russ Mould, an investment director at AJ Bell, speaking last year after De La Rue cut its dividend. “One has to wonder how long De La Rue can survive without a radical change to its business model,” he added.
In the years since the 2016 Brexit referendum, the company has suffered multiple setbacks including two profit warnings, a (now-dropped) corruption investigation in South Sudan, and a failure to secure the contract to print the UK’s new post-Brexit passports. Soaring debt and revenue losses make the prospect of a Brexit winter all too concerning.
In the banking industry, the regulatory changes are going to have a massive impact. A number of banks including Barclays announced recently that they will no longer be able to provide services overseas. UK lenders will lose their EU banking licenses, making operations in certain countries prohibitively expensive. The resulting loss of customers could be harmful to business.
In particular, Barclays has a series of other non-trivial concerns. The company’s shares are dropping, its online banking services are proving temperamental, and the press coverage of the high court legal dispute with the financier Amanda Staveley is grabbing attention for all the wrong reasons. A year-on-year shares drop of 43 percent has seen the company’s future thrown into doubt due to the coronavirus pandemic. When combined with a no-deal Brexit, the future looks bleak.
Not everyone will suffer
There are some industries that will demonstrate strong resilience in the face of a Covid-exacerbated Brexit. In particular, the UK’s (more specifically, London’s) technology sector. London has around 45 unicorn startups – those that reach a valuation of at least $1 billion – 4 times the number of the next leading tech hub, Berlin, which has just 10.
While Brexit will undoubtedly affect the flow of tech talent from the continent, and the combined harm of the virus and the exit will punish the economic capital – London will carry this technology sector advantage going forward. Given the contrarian success story of technology companies’ financial performances amid the economic trauma of a pandemic, UK companies in this sector will probably find their way to a winning position, even after the British departure from the EU.