Business after Brexit: Time to pick some winners

Looking beyond the short-term …

My objective in writing this series of blogs is to step back from the day-to-day noise around Brexit and take a longer-term perspective on what leaving the EU will mean for businesses in the UK. This is centred around two main questions. What are the opportunities and challenges that lie ahead? And what are the responses that the UK should consider? 

… the landscape is confused …

While the Brexit process dominates the news, it is not the only driver of change in the UK economy. Demographic shifts and technological developments are likely to be major influences on future outcomes impacting and the scale of the challenge to protect our environment from climate change is becoming ever clearer. 

At the same time, the political backdrop is becoming more complex. Concerns over the impact of globalisation and immigration have led to questioning of the pro-market, open economy consensus that has prevailed for over three decades. The associated clash between liberal and conservative views on social policy also has implications for businesses as they are under pressure to take account of their wider impact on society. Business strategies for post-Brexit Britain will need to be designed to meet the future economic, social and political environments.

… and the risks are becoming clearer …

EY’s 2019 UK Attractiveness Survey confirmed many of the concerns I had expressed in my earlier blogs in this series. Investors clearly perceive there to be significant risk in the UK economy and, while they are still willing to undertake M&A, capital expenditure is being cut back or paused. Business investment fell 2.7% in 2018 and FDI fell by 13% with manufacturing down 35% and R&D falling 15% year on year – major declines. The consequences of this collapse in FDI were felt most in the North and Midlands as these are areas most reliant on manufacturing activity. By contrast, London and the South East showed themselves to be much more resilient to the fall in foreign investor confidence in the UK.

The responses to our survey of over 450 foreign investors illustrated very clearly the issues facing the UK. Investor perceptions of both the level of social stability in the UK and the degree of political predictability and transparency have collapsed from pre-referendum levels and there are real concerns about future trade and customs arrangements and access to skills. As a result, 15% of investors have paused projects since 2016, with nearly a quarter of digital sector investors having done so.

… but opportunity remains …

The fact that projects have been paused rather than cancelled does offer a glimmer of hope that they can be rescued. In addition, investors remain very positive about the UK’s long-term potential in the digital and financial and business services sectors. However, the UK’s potential in cleantech, life sciences and automotive lags the appeal of Europe to investors in these sectors. As the last three sectors are at the core of the Grand Challenges outlined in the UK Industrial Strategy more needs to be done here.

Investors are not planning to flee the UK, only 6% of investors expect to move assets in the next three years. What is more likely, without an immediate and effective response, is that the UK will slow gradually as it fails to attract the level of capital investment required to position it for operating in a post-Brexit world. Whatever the rhetoric, investors are clear that they believe Brexit will reduce the UK’s appeal and strategies are likely to evolve that downgrade the role of Britain in global supply chains and knowledge networks. My worry is that we become “Branch office Britain”, a market that companies sell to but don’t commit their high value capital or capabilities to.

… and clearly defined areas to respond in.

There is still time to act and the priorities are clear. The immediate concerns over trade and migration post-Brexit need to be addressed as soon as possible and negotiators should be in no doubt that failing to preserve the current frictionless supply chains will be critical to maintaining and attracting future manufacturing investment.

Beyond the Brexit process, skills and infrastructure remain the two factors that investors are most influenced by. The challenge is to ensure that resources are allocated to activities that will make a difference to business and investors. Process-wise this requires more collaboration between business and policy makers and citizens and this should start at the local level, building up to aggregated sector plans rather than be driven by centrally planned initiatives.

The UK does need to identify the sectors likely to be the “winners” in the future economy and to identify the investment required to ensure the UK is competitive in these areas. The Industrial Strategy is currently too generic and lacks clarity. A more precise approach is required that seeks to create opportunities in chosen sectors across the country.

Based on the analysis we have undertaken, the sectors with the potential nationally require:

• A major effort on digital nationwide with a commitment to adopt an approach for economy wide digital skills development on the lines of the “Made Smarter” proposals for digital manufacturing;
• Development of a UK “Green Deal” and a UK “Health Deal” as two specific programmes separating these from the existing Industrial Strategy and enabling the leadership to develop specific plans;
• A manufacturing strategy that identifies the skills and infrastructure required on a bottom-up basis. Allowing for investment in skills on a local sector basis such as food processing in the North East, light engineering in Yorkshire and ceramics in Stoke-on-Trent.

The future remains uncertain but continuing to fail to act at the scale and intensity required is only going to make things worse.