Brexit – A Geo-Political Reality Check for Global Businesses

nair2
Posted: 07/21/2016

The much anticipated UK referendum results showed the UK voting in favor of the "British Exit" from the European Union (EU); not by a convincing majority, but a majority nonetheless. The pro-EU voices of Scotland, Northern Ireland, and London couldn't save the day with the rest of England and Wales supporting the exit.

So what was a big question mark is now a reality that has brought people and businesses closer to some more realities, but again amidst questions.

European Event of the Decade?                                       

Deemed as one of the most prominent European political events of the decade, Brexit is considered an unfavorable situation by many and without doubt, there are many on the losing side. Economic repercussions for Britain will be big with high chances of a recession. David Cameron and George Osborne have already been on the receiving end, and the whole vision of an integrated Europe is now more obscure. It will be interesting to see how the relationship between the UK and the EU-27 will be organized in future. The exit procedure is still unclear, mainly because something like this hasn't been put to test previously. It is going to take at least two years for the UK to actually leave the EU, after its government serves the notice (activation of Article 50 of the Lisbon Treaty).

Geo-politically, these are some highly turbulent times for Europe. Countries with close trade relationships with the UK will be among the most hit, take for example Ireland and Luxembourg. The EU-27 also will have to compensate for the UK's contribution to the European budget. Investor sentiment is also likely to remain shaky for a good amount of time post Brexit.

What are the Major Worries for Businesses?

Even when the referendum was impending, businesses globally were raising concerns regarding Brexit, which was projected to have a huge impact in general.

Big Worry Number 1 – Currency Volatility

The Euro, albeit highly protected through fiscal measures post the 2010 Eurozone crisis over Greece worries, is also not really safe. Many economists say that if the Pound Sterling (GBP) takes a plunge, it will  take down the Euro with it. And going down it is, at least for now. On 24 June 2016, Sterling fell nearly 5% against the US Dollar (USD) and the Euro also registered a decline of about 2% against the USD. Sterling also declined by 2.82% against the Euro.

Other noteworthy currency comparisons in the outsourcing context are GBP's weakening against the Indian Rupee (-6.35%), Philippine Peso (-3.72%), Chinese Yuan (-4.27%), Brazilian Real (-8.25%), Mexican Peso (-2.35%), Malaysian Ringgit (-2.06%), and Vietnamese Dong (-2.07%).

Let's take a specific example, say India, which has significant outsourcing relationships with both the UK and the EU. Many Indian companies such as Tech Mahindra, Tata Consultancy Services, HCL, and Infosys have about 20-30% of their exports going to Europe. The fall in the value of both GBP and Euro against the Indian Rupee could hit these Indian outsourcing service providers, unless existing contracts are renegotiated. Also, the uncertainty that the future brings could also have a marked impact on upcoming engagements. The slight relief for these suppliers comes from the fact that the appreciation of the US Dollar will have a partially offsetting impact. It should be noted that, at present, there are about 800 Indian IT companies in the UK, with a workforce of about 110,000 employees.

Big Worry Number 2 – Movement of People

Many EU workers are employed in the UK currently. Brexit means the freedom of entry into the country will either be completely taken off or be subject to some limitations. The same holds true for British workers employed in the EU-27 and how soon will these changes happen also add to the uncertainties.

Questions have been raised on how easy or difficult would it be to fill vacancies in the UK. Does it have adequate IT-BPO talent to sustain the industry in the long-run?

Another issue that is yet to be concluded is the impending caps on migration for non-EU workers coming into the UK, mostly from China and India.

Big Worry Number 3 – Change in Business Regulations

Many believe that this could be the end to the red tape and the exhaustive EU regulations. But again, it may not be easy to predict what the future holds here. The UK Government may just decide to keep a major chunk of the regulations from the EU handbook as opposed to the expectations of a more customized regulation.

There are also queries on whether employment laws will undergo a change post Brexit. Chances are that it may not happen immediately, and even if there are changes, they are likely to be small in the short-term.

Data privacy laws in the UK could also undergo a change and the EU may choose to no longer consider the UK as a safe country, which would require businesses in the EU to revisit the passage of the data to and from the UK, meaning fresh efforts and expenses. Moreover, it is quite likely that UK companies may have to keep personal data of their EU customers in an EU data center only and of course, EU's "Digital Single Market" project which had plans to bring in uniform rules and regulations for everything ranging from user privacy to e-commerce, will not have the UK supporting it now.

Other Gray Areas

And if the above mentioned uncertainties aren't big enough, here are some more that could prove to be quite daunting for companies.

Not only will the movement of people be affected, chances are that it is also going to get much more expensive. Mobile phone roaming costs and airfares both are likely to increase in the short to medium term.

Not to forget the changes that the UK's banking and financial system will undergo, which means changes have to be brought in by these companies as well.

Also, what about all those firms that had their physical EU headquarters in the UK? How soon should they start looking for spaces in the EU-27? And what happens to the ones whose building rental/lease agreements in the UK are quite long-term? Should they have a separate office and team in the EU? How heavy is the taxation going to be in the UK?

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Amidst all these uncertainties, those who saw it coming and did their due diligence might be heaving that big sigh of relief and for those who didn't, it may not be too late. While some urgent, unavoidable measures may have to be taken, there's still time for the exit to actually happen. So this time around, it is better to avoid crying over spilled milk and instead, take sustainable action.

Additionally, it is also important not to forget that while this political event did shake the world quite hard, there are more coming. Needless to say, watch out for the US elections in November, but at the same time questions like, "How long will the United Kingdom remain united?", "Will more countries make an EU exit?", "Will the new Philippine Government be as effective as its predecessor?", "How much influence has China got on the world?" etc. should also not be forgotten.

Note: This article was first published on Supply Wisdom's blog.  Reposted here with the kind permission of Neo Group.

nair2
Posted: 07/21/2016

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