Will Brexit Lead To A Techxit? by Edelman

WILL BREXIT LEAD TO A TECHXIT?

WHAT DOES THE EU REFERENDUM RESULT MEAN FOR THE UK’S TECHNOLOGY BUSINESSES?

OVERVIEW “When you come out of the storm, you won’t be the same person who walked in. That’s what this storm’s all about” wrote Haruki Murakami, in Kafka on the Shore. Tech businesses in a post-Brexit world would do well to take on board such an outlook, because the world appears more tempestuous than ever. Fortunately, few sectors are better equipped to manage. This is an industry used to driving change, not just adapting to it. Make no mistake though. We are in a storm. The UK’s credit rating has been downgraded and recently the pound fell to a 31 year low. Gartner’s forecast, issued one day before the referendum, predicted 1.7

per cent growth in UK technology investment. Today, estimates are between two and five per cent lower. Why? Because from smartphones to servers, consumers and businesses alike delay purchases in uncertain times. Especially when overall spending power is being squeezed by rising import prices. Major strategic decisions are similarly deferred, with companies either abandoning or pausing M&A activity and expansion plans - which typically drive investment in enterprise technology, such as datacentres and cloud computing. Yet this is just the beginning for the potential issues and sectors affected by Brexit.

Tech Talent & The UK Skills Gap The UK’s technology skills shortage is widely documented, with businesses needing to actively recruit staff from across Europe to plug the gap. A member survey by Tech London Advocates – an industry group representing approximately 3,000 senior business people in the capital’s tech scene, found 87 per cent opposed Brexit due to fears it would make it harder for British companies to employ overseas talent.

With, for example, some of the best developers coming from places like Bulgaria and Romania in Eastern Europe – not having free trade and movement agreements with these countries could raise the cost of hiring and reduce the attractiveness of London. Highly skilled migrants could seek ‘easier’ placements in other European tech hubs such as Munich, Lisbon and Dublin.

Data, Privacy, Cybersecurity & Compliance The General Data Protection Regulation (GDPR) standards come into force in 2018 and any UK business processing data from EU citizens will need to comply. Until then, the 1998 UK Data Protection Act still applies. If GDPR does not produce the desired results and needs to be adjusted, the UK will no longer be able to influence those discussions, but UK businesses will still need to comply with the outcomes if they want to continue doing business in the EU. For UK citizen’s data, we will at least have a choice whether to adopt similar regulation to GDPR or do something different. It was hoped the recently approved Privacy Shield agreement would provide UK-based companies with legal certainty around the transfer of data between the EU and US. Now though, while businesses could sign up to the new mechanism, it is void once the UK officially leaves the EU. Nor can the UK begin negotiations with the US now to sign its own data transfer deal, because it gave the EU Commission the mandate to negotiate on its behalf. This means

waiting until the UK has officially left, and even then will be no easy feat. It took years for the US to convince EU officials it would sufficiently protect EU citizens’ privacy, given reports of mass surveillance programmes by the NSA. Now the UK too will have to convince the EU it offers “adequate” protection, in spite of reports of similar programmes run by the Government Communications Headquarters (GCHQ). As it stands, the UK’s Information Commissioner has said the UK may have to adopt EU data protection rules to trade, post-Brexit. It remains to be seen whether the UK Cabinet will choose to stay the course in the upcoming EU-wide 2016 National Cyber Security Strategy. Nor does the UK have long (two and a half years) to transpose The Cybersecurity Directive (NIS) into law, following its official publication, due this summer. This will bind UK-based companies to new data breach notification requirements. The point here is that UK businesses had a fair amount of digital red tape to wrangle before the referendum. This will only add to and complicate the burden.

Telecoms, Roaming Charges & Head Office Moves From June 2017, citizens of the European Union will be able to travel between member states without having to worry about mobile roaming charges. Brexit could send the UK back to the beginning of a 10-year battle to curb the cost of mobile connectivity when abroad. EE recently said the U.K.’s EU membership historically allowed it to “offer our customers lower charges”, although there’s no

confirmation as yet if charges will increase. Vodafone has said it is considering moving its headquarters out of the UK, because of the company’s desire to retain access to the EU’s free movement of people, capital and goods. This could signal the start of a wider trend for telco, tech and fintech businesses moving out of London to more favourable markets such as Dublin, Frankfurt and Paris.

FinTech, Blockchain & Investment There is concern in some sectors, particularly financial services, that access to investors and funding could become more difficult. For example, there has been a recent trend of European insurance companies actively investing in London-based FinTech start-ups. Only time will tell if this will continue – it will certainly depend on what incentives the government will now put into place to make the UK an attractive place to do business and invest.

For emerging technologies such as Blockchain, there could be a realisation that the market expansion and funding opportunities may not be in Europe after all. Thus Brexit could be something of an opportunity for US and APAC blockchain companies seeking investment.

CleanTech, the Paris Agreement & Engaging the 52 per cent Around 70% of the UK’s environmental safeguards are legislated by the EU, so Brexit also creates great uncertainty for companies (both home grown and international) that use the UK as a test bed for CleanTech commercialisation. The EU’s hard won and valuable common framework for managing climate change, is also at risk. Fortunately, the Fifth Carbon Budget – signed less than a week after the Brexit vote, will ensure the UK does not immediately abandon its science-based targets for addressing climate change, yet a plan is now needed

to deliver upon those targets. Speaking of valuable agreements, the 2015 Paris Climate Accord provided a great deal of the certainty needed to drive inward investment in CleanTech. What happens now will depend upon whether the incoming UK Government agrees – as a single entity – to match the commitments made by Europe as part of the Paris agreement. It certainly should, for reasons both foreign and domestic – the UK’s low carbon economy is a national success story, accounting for more than £120 billion in annual sales and employing nearly 1 million people.

Conclusions & Recommendations For now, the only scenarios we can predict with any confidence are short term – and the current business and economic perception of Brexit’s short term impact is predominantly negative. Yet there could be positives too. Even a falling pound can be good news for exporters if it helps increase demand, and the tech sector has a great many, from hardware to IP and gaming. Legendary inventor and entrepreneur Sir James Dyson believes leaving the EU will help him recruit more top engineering talent from outside Europe to come and work in the UK, nor does he believe trade will be adversely affected. Also, as previously mentioned – many investors, analysts and founders take the view that the tech sector is well-poised to weather Brexit, and as is often the case in business – to the survivors go the spoils. The only certainty now is change, and more of it than usual. It is how well UK tech businesses can adapt

which will define their success. Whatever your ideology, it’s time to evolve. How to do so, is far clearer than you might expect. Whether discussing a low carbon economy or predictive data and technology – politicians and business people alike must do a far better job of engaging more of our society. There is little doubt that for many of the 52 per cent of UK citizens that voted leave, they were expressing their disillusionment with our current political and economic system – AKA ‘the establishment’. Given the likely impact of the EU referendum on the UK’s tech companies – it’s a resounding example of why we cannot afford to neglect engagement with the wider public, any more. All of the UK’s business and political leaders must now focus on listening and responding to a more diverse range of the nation’s populace. This is the only way to secure a mutually agreed and beneficial way forward in a post-Brexit world.

FURTHER INFORMATION Justin Westcott Managing Director Technology Practice Edelman UK Justin.Westcott@edelman.com +44 203 047 7274