Eight months ago, just before the Referendum, I anticipated the implications of a Leave vote for the sector. Today sees the publication of the first results of the Hogan Lovells “Brexometer”, which will track the attitudes of global business to Brexit through the Article 50 process.
What does the Brexometer tell us about the TMT sector?
Like other sectors TMT respondents were generally pessimistic. 53% of TMT respondents globally saw Brexit as a threat to the UK and 23% as a threat to the EU.
TMT respondents appear more concerned than most about the impact on their own businesses. They expect the greatest negative impact on profits over a 5 year period of any sector – on average a 1.9% fall. Nearly a third see Brexit as a threat to their own company against a survey wide figure of a quarter.
Why might this be?
TMT is a sector in which regulation is important and the law is central, particularly in the form of IP. In my original post, I identified some of the legal and regulatory areas which might be impacted significantly. It isn’t therefore surprising to find that TMT businesses ranked legal/regulatory policy as the top priority Brexit issue for them.
What is, perhaps, more striking is that TMT easily outscores all other sectors in ranking access to people and skills as being almost as significant issue as law and regulation. This reiterates the message we have heard in many of our conversations with business in the sector.
How important are the negotiations?
Digging deeper into our results emphasises both the importance — and challenges — of the negotiating process. With the ability to move data or run an e-commerce platform seamlessly between the major European markets at stake, not surprisingly the gap between the anticipated impact of the best and worst case scenarios is significant. 90% of TMT businesses anticipate that their worst case outcome would require them to re-evaluate their strategy (the highest for any sector) compared with 43% in a “best case Brexit”.
Strikingly however in TMT the potential impact is not just on the UK.
In the TMT “best case” 63% of respondents expect to invest more in the EU and 53% in the UK; in the worst case these figures both fall – to 43% and 17% respectively. So more respondents expect TMT to invest in the EU than in the UK even in a best case Brexit. But a worst case Brexit doesn’t simply shift more investment from the UK to the EU; it markedly reduces investment levels on both sides of the channel. (The only other sector in which we saw this impact is Life Sciences – another high tech, high talent driven industry.)
In short, a successful outcome to the negotiations is critical to the TMT sector in both the UK and EU.
What makes TMT special?
These figures suggest that in many ways TMT is more vulnerable to Brexit than other industry sectors. On its face this is a surprising result, notwithstanding the role of IP, regulation and talent in the sector. There may however be one other important factor at play here. TMT is, relative to other industries, young and highly dynamic. Unlike the banks, oil majors or pharma giants whose histories stretch back to the early 1900’s, there is little, even distant, legacy of a pre-EU world in companies like Vodafone, Google or Amazon. And yet whilst TMT “majors” are creatures of a world in which the UK’s membership of the EU is a given, they also face a highly dynamic regulatory environment – meaning there is relatively little shared “DNA” to be carried forward into the future EU and UK regulatory systems as they start to diverge.
So it is perhaps natural that TMT businesses worry about the impact of Brexit on their European businesses as a whole, not just on the UK.
Is there any light in the tunnel?
As reported in our main Brexometer paper, we found a clear trend that those groups that are relatively well prepared for Brexit tend to be more confident about the potential outcomes. The survey indicated that TMT, as an industry, is relatively ill-prepared compared with most other sectors, which suggests that there is a considerable opportunity for the sector to improve its level of confidence with further preparation.
Overall, the first edition of the Brexometer brings into sharp focus the potential risks which Brexit carries for TMT across Europe. For a young industry which has grown up with the EU and is heavily influenced by coordinated regulation and free movement of talent, concern is inevitable. But it also suggests that, if the industry increases engagement with the Brexit process, there is a real opportunity to manage these risks.