Post Article 50: What does a hard Brexit mean for techland?

For all the speculation and debate, it’s happened. Theresa May has triggered Article 50: Britain will leave the European Union.

It’s no secret that the majority of techland advocated a ‘Remain’ result in the June 2016 referendum. Nevertheless, the ramifications of a hard Brexit - one which will likely see Britain make a clean break from Europe on key issues such as freedom of movement, access to the single market, and tariffs on goods and services - cannot be swept aside.

There’s no going back. So, what does the forward look like?

Will people stick around?

Pre-referendum, a mass exodus of tech companies abandoning the UK was feared. And while there has been talk of businesses moving or reducing their UK operations -  the venerable Lloyd's of London, startup TransferWise and Microsoft to name a few - these have been countered with strong statements of support from tech giants Google and Facebook, both of whom announced UK expansion plans towards the end of 2016.

However, Article 50 could be merely the trigger of a chain of events yet to be felt in full. Simon Black, chief executive of the high-growth fintech business PPRO Group, warns that the exodus is only just beginning, with a snowball effect to be expected by 2018: “I don't know of a licenced fintech company in the UK that isn’t looking at options.”

Russ Shaw, founder of Tech London Advocates, suggests businesses take a cautious approach, advising those who are concerned to consider opening a single EU office rather than rushing headfirst into a dramatic - and potentially irreversible -  HQ move.

While our Brexit will likely be ‘hard’, it certainly won’t be fast. There are still numerous question marks hovering over the next negotiation phases, which could take up to two years. And with the licence application process for opening an EU office taking between six and 18 months, the fear is that many won’t stick around long enough to find out what a post-Brexit British techland looks like.

Even those whose immediate reaction isn’t ‘leave or be left behind’ could potentially be swayed by the loud and public calls of encouragement from European leaders. French presidential candidate Emmanuel Macron has appealed directly to UK startups and businesses to choose France, while Berlin has been anything but subtle in its attempts to lure British startups away from London.

But there is reason to remain positive, too. Snapchat’s recent decision to set up an international HQ in London adds weight to the public and global display of post-Brexit support already displayed by the likes of Google and Facebook.

Movement of Labor

The key sticking point for the tech industry, at home and abroad, is movement of labor. The potential ramifications of EU citizens no longer being able to freely work and reside in the UK - of a brain drain at best, innovation stagnation at worst - are dramatically stated, but not altogether unwarranted for an industry that relies on diversity of talent. According to the Tech Nation 2016 report, 19.3% of digital tech businesses source talent from the EU, and 15.6% from countries outside the EU.

With a hard Brexit now a likely reality, there is little room for speculation: UK and EU citizens are both likely to lose freedom of movement - if not entirely, at least as we currently know it. While we don’t yet know exactly how negotiations will play out over the next two years - such as to what extent free movement will be restricted and whether there will be concessions for certain sectors - hiring from any talent pool other than its own is likely to become more difficult for UK tech businesses.

EU tech companies, too, may no longer be able to easily poach British tech talent for their own. In the short-term at least, it’s possible that London’s loss will be America’s gain if greater numbers of UK tech workers are wooed by the bright lights of Silicon Valley. The US, while currently experiencing its own moment of political uncertainty, is probably unlikely to curtail travel and worker restrictions for UK citizens any time soon.

At its core, the problem lies with the UK’s undeniable digital skills shortage. Although there are 1.56 million jobs in the UK’s digital tech economy, Tech London Advocates founder, Russ Shaw, describes how “there is simply not enough talent to meet ongoing growth needs”. Backing this up, a UKCES report - ‘Skills and performance challenges in the digital and creative sector’ shows that in the digital sub-sector in particular, 28% of vacancies are skills shortage ones.

So, what plans are afoot to encourage digital skills in the UK?

The UK government recently published its Digital Strategy Document which outlines plans to upskill four million by 2020 and goes some way towards protecting the UK’s status as a global tech hub by focusing on initiatives to nurture home-grown talent.

Meanwhile, the Government’s Tech Talent Charter details collaborations with some of the biggest tech players to assist in this sizeable task. Google has pledged to run a summer skills programme across coastal towns; Barclays will teach coding to 45,000 children; while Accenture, Cisco and others are to launch and extend a variety of digital skills programmes.

Is any of this enough to compensate for the potential loss of accessible EU talent? In the short term, perhaps not. Many, including tech expert Chris Pennell of market intelligence business Ovum, claim the document doesn’t go far enough, with much more investment needed in education and digital skills.

But it’s a start - if the UK is to continue to compete as a global tech hub, prioritizing its digital skills agenda is clearly necessary

Follow the money

Despite the majority of economists predicting disastrous financial consequences as a result of Brexit, it hasn’t yet been the doomsday scenario many expected. Pre-referendum, a report from the Centre for Economic Performance predicted that Brexit was likely to reduce foreign direct investment to the UK by around 22%.

It is true that the pound, having foundered in the uncertainty leading up to the referendum, took a sharp fall in the immediate aftermath of the Brexit vote. Since then, it has wavered and held in equal measure, and is likely to tumble and climb many times more in between now and final withdrawal negotiations.

Assuming the pound remains low, particularly against the Euro and the dollar, it signals good news for incoming investors who will likely be attracted by getting more value for their money.

Hugh Campbell, co-founder of tech investment bank GP Bullhound, says that the falling value of sterling has resulted in UK assets being around 15-20% cheaper, resulting in the upshot of a wall of capital actively looking for opportunities. For investors and those seeking investment, Brexit uncertainty may be advantageous. In 2016, there were 40% more tech deals - to the tune of more than £6.7 billion - compared to 2015. And although there was an overall slowdown in the second part of the year, 35% of those deals concluded after - and despite - the vote to leave.

Until Britain has physically left the EU building - likely to be summer 2019 - uncertainty will continue, potentially leading to fiercer negotiations between tech entrepreneurs and investors on both sides. That’s not necessarily a bad thing: while deals could take longer to finalise, competition could stimulate much needed investment and build confidence.

A UK/US trade deal

One of the biggest question marks surrounding a hard Brexit is the issue of passporting rights. Until the UK reaches the end of its Brexit negotiations, it will keep access to the single market. After that, we’re in unchartered territory. The question is, on what terms will the UK be able to do business with the rest of the EU, and indeed the rest of the world? Conversely, what kind of a picture does that paint for US firms trading the other way?

In leaving the EU, the UK is currently working from a blank slate - it needs new trade deals for continued stability and growth, that much is clear. In theory, that could leave the UK open to strike more favorable deals with countries outside of the EU. The problem is its undeniably weak bargaining position.

At the moment, we don’t have any specifics, but the right noises are being made on both sides of the Atlantic which suggest a potential US/UK trade deal could be in the pipeline.

There’s mutual - if unequal - benefit to such a deal. Granted, the UK will have more riding on it, but while there’s less urgency for Trump, the special relationship is still likely to facilitate a deal. There will undoubtedly be regulatory obstacles to overcome, but the final outcome could well determine the benefits of internationalism for US firms in the UK: increasing collaboration, trade, and investment between tech communities on both sides of the Atlantic.

But, as always, there’s a caveat.  Daniel Hamilton from the John Hopkins School of Advanced and International Studies suggests that the UK may first need to negotiate new trade deals with the EU prior to any new American agreement. "US companies are based in the UK because of its role as a gateway to the Single Market," he told The Telegraph. "US negotiators will want to know how open, wide and strong that gateway will be after Brexit."

This means US/UK trade deal could potentially be delayed by up to six years.

It’s not always easy to see the positives of a hard Brexit, and many have likened its impact to a superstorm - one which we’re currently in the center of.

But the signs are encouraging that the tech sector is well equipped to weather any temporary damage: investment is strong, expansion is healthy, and in the midst of everything there are still opportunities to be had for tech businesses. For US companies in particular, now might be the time to jump right in.

While initial signs of health don’t always guarantee long-term recovery, tech businesses should be further buoyed by recent news that the Organization for Economic Cooperation and Development raised its UK growth forecast for 2017 from 1.2% to 1.6%.

Time alone will tell for sure, but for now, businesses should take a measured approach, carefully weighing the implications of a hard Brexit against their individual goals for internationalisation. Whatever happens, Britain will still be a strong market with plenty of commercial opportunity for those ready to take part.

Unsure of where your tech business stands in the wake of Article 50? Talk to us.