With the United Kingdom’s withdrawal from the European Union less than a year away, American companies with European bases in the U.K. should take note, if they haven’t already.
“When it came to Brexit, I really thought that I would have a lot of phone calls and emails asking, ‘Where do I go from here?’” says Darcy Paschino, vice president and country manager covering Europe, Russia and Japan for U.S. Bank. “But so far, the concern has been minimal,” Paschino says.
That’s despite the possible consequences of Brexit. For instance, while the U.K. takes in 9 percent of the EU’s exports, the EU takes in nearly half of the United Kingdom’s exports in four main sectors: automotive, consumer, technology and healthcare.
Any operation based in the U.S. with designs on increased market share abroad will feel the effects of Brexit.
Here are four ways Brexit can influence your European expansion.
Some enterprises may want to rethink keeping the U.K. as a European base, especially if there’s a “hard Brexit” that would immediately sever all trade agreements between the U.K. and the EU.
“The problem is that we still don’t know if it will be a hard Brexit, with no trade agreement, or a soft Brexit,” says Alex Woodhead, partner on the banking team at Baringa Partners, a financial services and business advisory firm in London. The problem Woodhead notes, is the uncertainty — companies lack a clear roadmap about what to do next.
A hard Brexit means Britain withdraws from the EU single market economy in a single stroke, introducing its own rules for immigration and trade. That would result in stricter border controls from EU countries, as well as tariffs on goods shipped from the U.K. Conversely, a “soft” Brexit entails a slower process with time to negotiate agreements, nation by nation.
For U.S. enterprises with U.K. subsidiaries, a hard Brexit could make expansion difficult. As a result, moving operations to Continental Europe has become a more viable option for American companies.
Foreign exchange volatility has been the norm since the Brexit referendum. After strengthening to $1.04 against the euro in December 2016, the U.S. dollar weakened to $1.20 in September 2017 — although it did recoup some of those losses, trading back lower to $1.17 as of June 2018.
In this current environment of heightened foreign exchange volatility, the U.S. dollar has weakened 12.5 percent since its 2017 high. This means American goods are cheaper in Europe, but also that European organizations are more expensive for American enterprises looking to acquire market share.
In addition, U.K.-based operations may no longer have EU market access. This could make European targets even more expensive, as demand rises for these companies at the expense of British rivals. As a result, companies that want to buy market share in Europe could possibly consider organic growth or joint ventures, especially with the dollar weak against the euro.
Brexit will create operational problems in expansion plans. For instance, if you’re based in the U.K. and your expansion plan entails moving goods or people across borders to do business, expect costly delays.
Also, data residency rules and the new General Data Protection Regulation (GDPR) in the EU set strict requirements for where and how personal data can be stored. The final rule on Brexit will determine whether data can flow freely between the U.K. and the EU; if data can’t flow freely, companies will need to evaluate how and where they store data.
While it may feel as if the Brexit referendum vote just happened, the official 21-month implementation period — from March 29, 2019 until the end of 2020 — begins in less than a year.
Despite that rapidly approaching withdrawal and indications of how Brexit will affect U.S. companies, some businesses that use the U.K. as an EU springboard haven’t taken next steps. “A lot of businesses are keeping their strategy the same, waiting on what will happen,” Paschino says. “We’ve only had one or two clients move their headquarters from London into other parts of Europe.”
To be clear, planning and taking the next step depends on the likelihood of a hard versus soft Brexit. Though signs are leaning toward a hard Brexit, planning is made far more difficult by the uncertainty of either outcome. While it’s simplistic to suggest that a hard Brexit mandates moving your European operations from London to Paris, for instance, it’s essential to have a plan and be prepared to carry it out soon.
“It’s all about risk management,” Woodhead says. Keep pace with Brexit as it evolves, make decisions based on the outcomes that seem most likely, and proceed from there.
Talk to an international banking representative about the challenges and opportunities Brexit may present for your organization. Foreign exchange markets remain volatile and reactive to global news. A foreign exchange specialist can help your organization navigate currency concerns, whether pertaining to the euro, pound sterling or any other currency.