Opportunities And Risk Brexit
Introduction
On 23rd June 2016, Britain as a country made the vote to leave the European Union (EU). This would cause huge waves to the economy and to multinational corporations (MNC’s) residing in Britain. The EU consists of 28 countries with the purpose of being more competitive in the global marketplace (Amadeo, 2019). The EU was formed on November 1st, 1993 by the Maastricht treaty, which was signed to form an economic integration by creating a single currency, to create stability and peace in the world, to have common citizenship rights and to advance cooperation in the areas of immigration, asylum and judicial affairs (Gabel, 2019). Therefore, Brexit will cause instability in Europe and Great Britain, which will cause uncertainty in Britain. Therefore, the purpose of this report is to weigh-in the potential opportunities and risks to MNC’s based on UK’s decision to leave the EU.
Opportunities
Brexit could have a positive economic impact to the MNC’s by the lower pounds against the Euro. This would help Multinational companies in the UK especially in the exporting industry. Companies such as General Motors would benefit from it. The low currency would boost UK auto industry output by over 1. 8 million units (Bailey and De Propris, 2017). Companies such as Rimmel, Paul Smith and the BBC which are in the UK but has high export volume to the EU will gain the most from the devaluation of currency. EU citizens will be buying these types of goods at 10-15% less. (Ardley, 2018) This would increase sales of these type of goods as it is cheaper to buy it in Europe.
Furthermore, A speech made by Michael Gove (2019) at the House of Commons, has provide further insights to the benefits of Brexit. He stated that “London has become the best place in the world for tech investment”. He provided evidences to support his statement by saying “Boeing opened a new factory in Sheffield, Chanel moved from France to London in order to establish a new corporate headquarters. When Starbucks moved from Amsterdam to London in order to ensure more investment in jobs. All of this, despite Brexit. ” (Gove, 2019) This implies that Multinationals are not worried by the uncertainty Brexit may produce, instead multinationals are still optimistic about the prospect of Britain after Brexit. Having additional foreign investments amid Brexit sends a signal to other firms that they should be more optimistic of the post-Brexit era.
Consequences of having additional Foreign Direct Investment in the UK would be favourable as they would most likely be using British commodities for their supply chain hence increasing investment in the MNC’s. In addition to that, Brexit will allow the United Kingdom to be set free from the EU. The British parliament does not have to contribute to the EU if Brexit successfully happens. This would mean that the UK could use its money on other things such as subsidies to Multinational Corporations or improving infrastructure, which will be good to the big MNC’s. (Longworth, 2017) Being the second highest contributor to the EU, with a yearly amount of 13 Billion pounds. (Keep, 2018). Britain would have a hefty amount of yearly surplus to be used on other projects in the country.
Moreover, Britain could benefit from Brexit by striking deals with EU and other countries. Britain will need a free trade agreement with the EU in the manufacturing sector as it has huge exports and imports volume there and must then retain the benefits of Customs Union to be profitable post-Brexit based on the analysis done by Linda Yueh. The EU must allow Britain to strike multiple trade deals with other countries such as the US and China for it to be better off from Brexit (YUEH, 2018). This would be helpful to manufacturing firms and multinational companies who can now look at the prospects of having tariff free trades with other countries outside the EU, such as India, China or Africa which are all growing economies with huge potential.
As of 2017, Britain only exports 7. 2 Billion pounds to Africa (Romei and Cocco, 2018). This would increase exports for multinationals and it could significantly reduce the cost of production as MNC’s could create a supply chain with these countries. Africa has huge amounts of low skilled, low wage workers which would cut costs for the businesses. Risks Brexit has caused the British economy to be slower than previous years. This would have an impact on local car sales in the UK, which would lead to profits and revenues to fall. PA Consulting has estimated that car sales would drop by 5-10% in the coming months. Adding on to the lower revenue, car manufacturers face another problem, the increase in the price of imports. (SMMT, 2016) has shown that on average, only 40% of components are sourced locally as against 60% in Germany (Bailey and De Propris, 2017). This proves that car manufacturers in the UK are heavily depended on imports coming from the EU, which could lead to lower profit margins if tariffs are imposed.
Another problem for the car manufacturers would be from the increase in security checks. Car Manufacturers in the UK uses a method called “Just in Time Delivery”, due to the low regulations as benefits in the customs union from the EU, car manufacturers could practice this method at ease. However, Brexit might cause an increase in security checks which might delay delivery time from EU to the factory. Any delay from the imports could cost Jaguar Land Rovers 1. 25 million an hour if they would halt the factory. (Henley, 2018) Moreover, Airbus has decided to shut down its factory in the UK post-Brexit (Blanchflower, 2018).
This could cause an adverse effect to Multinationals who are supplying Airbus in the UK such as a company called Aero Fabrications Ltd. They would then lose a big chunk of their revenue, and Airbus will most likely move their factory in the EU and will use other suppliers. In addition to that, Britain’s economy would be severely impacted by the exit costs Britain has to pay to the EU. This could range from £15-60 Billion. This would lead to governments having less finance to ensure that multinationals remain competitive and would lead to an increase in corporate tax to pay for the exit cost. Similarly, a figure on appendix 1 shows Britain’s main importing and exporting country. Without any agreement post Brexit with the EU, Britain would be subjected to a 5. 5% tariff across all goods (Chang, 2017). This would have negative implications for MNC’s as they will now face lower exports as a result of rising prices caused by tariffs on UK goods from the EU. Furthermore, Brexit will cause UK brands to be viewed in a different light.
In the long run, consumers might associate the brands based on the origin country. (Ahmed & d’Astou) This would lead to EU consumers viewing UK brands such as Topshop, Hunter and Burberry to be viewed as insular, which would have negative impacts on such brands, hence reducing consumption by such consumers. It is considered an asset when the brand’s image is positive, whereas a liability when the brand image is negative (Ardley, 2018). In the worst-case scenario, the EU might even boycott UK products as they do not see it as an ally but would rather purchase local goods against competing countries such as the UK. Brexit has made Chief Financial Officers in the UK to be more pessimistic about the future. This is based on a study done by Deloitte, which shows that firms are worried of future relationships with the EU could be disrupted, causing them to be more careful.
The survey showed that 79% of CFO’s stating that the business environment would be worst due to Brexit, an increase from 75% in the second quarter of 2018. Large companies are reducing capital spending, with only 12% of the CFO’s are willing to take risk, whereas 44% of the CFO’s are expecting their capital spending to be lower over the next three years (Wearden, 2018). This would then lead to an overall decrease in the productivity of the country and could also have a harmful effect on the quality and innovation on the goods. MNC’s might lose out on innovation as they are investing less, making their products inferior to goods in the US. This would cause a negative long-term effect on the products.
Conclusion
Based on the evidence provided, Brexit has already had negative consequences to MNC’s and firms especially to Wolseley Plc on the 17th January 2017 with an investment return of -3. 2% (Breinlich et al. , 2018). The uncertainty caused by Brexit has proved to be a major factor to the investors. Even to this day, we are still unsure by the deal agreement between Britain and the EU, with no deal being the highest likely alternative. However, we must not rule out the possible alternative of a soft Brexit where Britain stays in the Customs Union, which will help the economy overall. This can’t be concluded at this very time as there are still uncertainties glooming Great Britain.
