Feb 13 2018

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Navigating the political and economic risk of Brexit

Welcome to our second roundtable discussion on International Trade. In the first blog we looked at the risks of expanding trade horizons post-Brexit. Here, we talk about the specific risk of too much political interference in the negotiations.

Brexit was never going to be easy. Some have compared it to trying to remove an egg from an omelette. But every day, another politician adds to the uncertainty and therefore risk. Whether it’s Brussels making threats or Farage backing a second referendum, it all creates turmoil. In England, voices from the left and right are tearing parties to shreds. And in the EU, business leaders are drowned out by politicians wanting to deny Britain an easy ride.

“We’re politicking; we’re not negotiating,” says Mike Punter from Innovecom. Yet so far, SMEs have dealt with this turbulence pretty well. Peter Marchbank from Rotary Precision Instruments summarised, “Everybody’s getting involved in this political football that actually has no impact on day-to-day business.”

Beverley Ford from RotaVal added, “When we had the referendum, our industry went very quiet – most of the global projects went on-hold. But the major global businesses are now saying, ‘We’re not going to wait for you politicians to decide. We’re just going ahead.’”

Another delegate agreed, and offered, “It’s not in the business discussion. In the Netherlands, in the US, in Japan…they’re just not interested.”

So far, so good. Or is it really?

Head-hunting head-winds

There’s already strong evidence of a ‘Brexodus’ with net migration falling by a third in the year after the referendum (and the number of EU citizens leaving the UK rising by 29%). So it’s no surprise that the supply of labour already seems to be getting people bothered.

As Jason Glew from Altran says, “We’ve found it increasingly difficult to recruit over the last year, especially in aerospace.” A delegate in the tech sector agreed: “Talent is a real challenge. We have to look around the UK now.”

And it’s not just recruitment – retention is becoming a tricky issue as Beverley Ford says: “We’ve got Europeans that are now questioning whether they’re going to stay. If they decide that they’ve had enough, how do we cope with succession planning?”

Of course, this won’t just be felt in HR, but eventually Finance too: “You might find your cost base rising,” said another delegate. “Where there’s a shortage, prices will rise.”

Riding the political storm

Confidence is crucial. So far, the cataclysmic fallout from Brexit has been avoided, specifically because confidence has remained relatively high – both in the British economy and the prospect of a decent deal. There’s been no colossal exodus of business yet – indeed, investment has shown steady growth.

But herein lies the real risk: that a bad deal, or no deal, will happen simply because political agendas can’t align and political goals are put above economic ones.

“We cannot continue along this line of brinkmanship,” says Mike Punter, ‘otherwise, we’ll be into that soft issue around confidence that none of us can afford.”

At that point, big decisions have to be made by the big players.

Will the jumbos divert?

While the politicians wrangle, global operators are getting more and more tetchy. It’s in the news every day, how some of the world’s biggest entities are waiting to decide their UK futures – whether it’s Unilever delaying a decision on its HQ being here or in Holland, or car-makers weighing up where to build their next-generation models. Meanwhile, financial sector players like Goldman Sachs are already activating contingency plans.

They can’t be as agile as SMEs. With huge scale projects, they need security – of supply chain, resources, funding – much further ahead. But ultimately, many SMEs depend on these big businesses.

These decisions that could be the real game-changer. As Lawrence Rosedale from Volaris Group warned, “The current inactivity of many large global businesses generates an environment of uncertainty. Some kind of trickle-down effect is unavoidable.”

Funding forecast: cloudy with a few juicy meatballs

The general opinion is that SMEs have to take fate into their own hands, which means embracing a more international outlook instead of clinging to the European model. Of course, it all costs money as Peter Marchbank says of export, “…it is a much bigger investment, even setting up distributors in different countries. But it’s got to be part of your strategy.”

So as Katharine Mortimer from Royds Withy King asks, “I suppose question number one is: Where is your funding coming from now – and do you see that as likely to change?”

Banks are notoriously difficult – “They want your left kidney,” says Mike Punter, summing up the wider sentiment. Venture capitalists only look at “sexy businesses” according to Peter Marchbank. He also notes the problems with the time taken to access grant funding: “You can’t tie your senior team up in managing that kind of exercise.”

So again, SMEs are having to think out of the box. Peer-to-peer? Folk2Folk? Well, yes according to one delegate, “We’ve used lending circles. It’s quick, easy, a reasonable rate. And we can get on with growing our business.” Though he admits, “Ideally we could have done with four, five times the amount. But nobody’s willing to take that risk.”

Mike Punter looks to trade relationships to break the funding deadlock: “Trade credit and trade sponsorship – both on the client side and the supply side.” It’s a strategy Peter Marchbank thinks works well for UK businesses, “You’re using your suppliers. UK PLC is so well regarded. The risk they perceive in placing business with you and helping you fund that is not so bad.”

Fasten your seat-belts

The bottom-line is, leaving the EU is affecting some people badly and some people well. But in reality, if politicians don’t stop creating turbulence, then it can only be bad. As businesses we need to continue to lobby for more certainty. Other than that, we can only stay innovative – finding the right markets, international partners and funding.

As Peter Marchbank summarises, “The politicians are going to do what the politicians do. It’s just another business challenge we need to overcome.”

For more information on how HGKC can help you to innovate and grow despite – or in spite of – Brexit – get in touch now. The coffee (or tea) is on us.

Author Peter Quintana