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Episode 22 – Preparing for BREXIT

Site Selectors Guild
Episode 22 - Preparing for BREXIT

Rick Weddle: Welcome to “Site Selection Matters,” where we take a closer look at the art and science of site selection decision-making. I’m your host, Rick Weddle, president the Site Selectors Guild. In each episode, we introduce you to top leaders in the world of corporate site selection and economic development. We speak with members of the Guild, our economic development partners, and corporate decision-makers to provide you with deep insight into the best and next practices in our profession.

In this episode, we have as our guest, Elias van Herwaarden, principle with Locationperspectives. In this capacity, Elias assists companies in building and restructuring their business internationally. This includes a wide range of services and location selection, footprint optimization, and globalization [inaudible 00:00:48] helping companies successfully adapt their products and services to local markets. Today Elias will talk with us about Brexit, and what it means, and what we can expect in the coming year. Join me as we welcome Elias van Herwaarden to “Site Selection Matters.”

Elias, almost three and a half years after the cliffhanger June 2016 Brexit referendum, the British people overwhelmingly voted in favor of Prime Minister Johnson’s plan to take the UK out of the European Union by 2021. Before we get into the details of that, and what comes next, however, why don’t you take a minute or two and explain to our listeners just what Brexit is?

Elias van Herwaarden: Thanks for the question, Rick. If I knew I’d be really different from all the other Europeans, be they British or Continentals. Because the only thing we do know is that the UK population voted to leave the European Union and that process is called Brexit. But what it will entail for all of us, we just don’t know. The decision has been made finally after long and very difficult years, but what it means to business will all be decided, God willing, between now and December 31. Because December 31, Rick, that’s the date when the UK Prime Minister Johnson said we will leave the European Union. But the terms of that, and so the terms of what Brexit actually means, have yet to be [inaudible 00:02:30] negotiated.

Rick: That’s really interesting. You know, Elias, I’ve often said that business can deal with just about anything but uncertainty. And it sounds like you’re suggesting or that it’s obvious that we have before us a full year runway of uncertainty.

Elias: I wish it were different, Rick, but I’m afraid your conclusion is just right. I mean, for the last three years businesses globally, and particularly Europe have been worried about well are we going to have Brexit? And what is it going to look like? Well, we passed the first hurdle, we know we’re going to have Brexit that is absolutely a done deal. There’s no doubt about it. But now the second doubt emerges, what is it going to look like? And will there be a lot of uncertainty? Absolutely, yes. Absolutely, yes. I mean, there has been a deal proposed by Prime Minister May and that deal has kind of been enforced to a certain extent by the current Prime Minister Johnson, but the details of the deal are still going to be negotiated, God willing, over the next 12 months. But even on that next 12 months, I mean, I know we’re looking for certainty as business people, but today already the EU High Commissioner, the president of the EU, European Union, Ursula von der Leyen, said, well, we may need to extend the December 31 deadline. And she didn’t do that for fun. She didn’t do that out of politic gold maneuvering. She did that because she will realize that there were many unknown unknowns to be negotiated. So indeed, I think that as much as I would like it to be different, we’re just replacing one uncertainty with the other.

Rick: Very, very interesting. Well, we know that it’s uncertain, going to be a lot of stuff up in the air, but there does seem to be an electoral mandate to do this. So, let’s in the time we have now take a little time and unpack it as best we can, Elias, the deal if you will, and talk a little bit about what exactly it might mean, as opposed to will mean for economic activity moving both in and out of the UK.

Elias: Yeah, yeah, multiple thoughts, multiple thoughts. And if I may say as a starter, I mean, there have been surveys across the European Union, including UK, business readiness for Brexit. And even if I was privileged to sit in rooms with 40 experts of major banks all trying to figure out dates back from 12-18 months, still, at least 40% of the businesses that are located across the European Union, be they foreign owned, U.S. corporations, Japanese corporations, European corporations, 40% of them does not have a contingency plan, which is a bit sad. Because we all have BCP planning for our operations globally, but when it comes to Brexit, maybe a lot of people just sit in their sandpit and waited for the evil thing to happen and then start panicking and how to solve it.

Rick: Do you think some of that is maybe they weren’t sure that it was going to happen at all or something, just the amount of uncertainty so they figured, well, that’ll be plenty of time to get ready? Although it seems like it’s now time to be ready, and everybody should have a contingency plan.

Elias: Well, I think that the people I’ve been speaking to, and also looking at the surveys because I mean, you just need to get a wider view on this. Like you said yourself, companies do not like uncertainty and in fact, they try to avoid it very significantly. And sometimes avoiding is simply ignoring, but that doesn’t solve the problem. There’s a portion of company says, yes, we reckon this is a problem, but we simply do not have the budget to hire people internally or externally to help us sharpen our thoughts around this. We do know that in terms of free movement of people, which was the hallmark of the EU as we have it back in U.S., that will be restricted. We just do not know how much. We do not know whether UK citizens can still reside in Europe. We do not know where the EU workers under which conditions can still work in the UK, but the outlook is great. And we should not forget that UK, throughout history, I’m talking centuries here, has thrived upon its ability to attract talent internationally. That’s how they became an empire. And that’s how they became and remained a world power for a long while. So, talent, in addition to [inaudible 00:07:05] is the second thing that businesses should be worried about.

Then it’s about regulations. Now, I know that in U.S. we’ve got our type of plugs, continental Europe, which are different from the ones in the UK, and that’s the simple thing. But what about guarantees liability regulations on provision of services? Guarantees and other obligations of companies as they ship their products in the UK? Will that be in different environment? Will there be difficult technical specifications requiring different production or service delivery models? At this point in time, we, unfortunately, do not know, but there will be a change in regulations.

And then finally, what it all boils down to. So where do you want to be at as a business? I mean, we know for a fact that [inaudible 00:08:00] going to split out of this common market, even if the economy is a bit low and gruesome on the prospect of a hard Brexit, which could happen still at the end of December, but it’s still a marketplace where money can be made. So, the question for many companies is, well, do I need to locate or expand my business in the UK right here right now before the final curtain falls? And before the final curtain calls, let me expand on that, Rick, if I might because there’s one thing we do know. We do know that till December 31, of 2020, the UK will abide by EU rules, which means that even if there’s uncertainty about what’s going to happen on January 1st, 2021, we do know that the regulative system that has been applicable across these 27 countries of the European Union will still apply to UK.

Rick: Very interesting. Okay, so, Elias, we’ve talked about free trade zone, tariff structure, free movement of people, ability to recruit talent, regulations, and what to do now. If companies really aren’t prepared for this though, they don’t have long even though they’ve got a year to get ready, what advice would you give companies specifically about what they need to do to get their ducks in a row for this?

Elias: Rick, I’d like to take you back to a session we had at the Site Selectors Guild back in Tucson, Arizona, around one and a half year ago, where a group of my great colleagues expanded on the new focus of site selection. And that new focus was a lot about risk assessment. What is the chance that something will occur and what would the impact be? Bottom line, is there risk of revenue decimation? Is there a risk of shareholder value? What is the likelihood of that risk occurring? As far as we know now that likelihood is on a scale from 1 to 10 is at least 5. I would really think that it belongs to all of us in the business community, be it the corporate executives, or their advisors, site selectors and beyond, to help understand that risk and what it really means to business. And depending on what the impact of the risk could be, then indeed location strategies can be formulated. For some companies, I mean, the other day I visit with a carpet manufacturer back here on continental Europe and I said, well, what about your Brexit strategy? Oh, we haven’t got one. Said, what, is the UK important for us? For you guys? And they say, well, actually 40% of cost of product sold is going to the UK, I said, and you don’t have a Brexit strategy? So, for one of their 6 business lines, 40% of the revenue was in potential jeopardy, and they had no plans. And so, I think the message here is that from one company to the other, that risk assessment should be happening and then the opportunity assessment as well. Because if the UK is going to be a different marketplace, there might be opportunities, there might be lower cost, there might be lower taxes, there might be an even freer labor code that might offer opportunities not just to service UK, but also the countries that it will develop good trade relationships with.

Rick: Very, very interesting. You know, from a location perspective, Elias, put on your crystal ball a little bit, you look at the coming year, will you think there would be more opportunities for business investment in the U.S. or the UK just in advance of this? Any thoughts on that?

Elias: Rick, it’s absolutely a fair question, more business opportunities. I think that if I might take UK-directed question first, more? No. The UK is heading for [inaudible 00:12:00]. Look at what the Confederation of British industries is saying. Look what at the Bank of England is saying. They are absolutely not optimistic. There is fundamental change to the economy going on, and to society. Because as some of us will know, Brexit was like a demographic divide between people that were above 35 years of age who will never leave the Brexit, and people that were actually in favor of remaining below 35 years of age. So, there are a lot of stresses on a social cohesion in economic cohesion for the UK, coming at least at us for the next 12 months, if not a longer period. So is the UK an easy market, a good market? I would suggest that if we’re talking about global corporations, there are other opportunities out there with lesser risk. So that’s one.

Now, you asked about U.S. investment. Well, if you look at the most active four cross-border investor countries, globally, we’re talking about the U.S., we’re talking about Asia-Pacific, and we’re talking about Europe. Now, the more popular destination globally is APEC first, then it’s wider European area and that’s really going from Cork in Ireland, to Novosibirsk in Russia is second very closely followed by the U.S. So, I think that since all companies have duties to make money for the shareholders, they will look where to invest their money. And then for all the rapid growth that Asia has to offer, it does not offer one thing that United States of America and the European Union have in common, which is a common rule of law, a common set of values, a common set of regulations. So, I could well imagine that if already and we saw this in the Site Selectors Guild conference just last year, I think that with UK being a less favorite or potentially less favorite place for at least next 12 months [inaudible 00:14:08] up, where does the money need to go? It could go to Asia, but fragmented economies, different political systems. If the alternative is going to the United States of America where we got a relatively stable economy, I know what my shareholders would ask me to do, and that indeed could lead to a conclusion that actually could be positive for the U.S. But as we all know, there are some geopolitical tensions playing that cast a certain level of risk in the perception of international entrepreneurs on the United States. But then, on the other hand, risk has been there always. And you just go for the minimal risk solution. And so, I think that indeed, we will see to continue the trend we witnessed at the Guild’s Conferences over the last couple of years and UK’s [inaudible 00:15:01] is only going to contribute to that.

Rick: Well, that’s interesting. You know, Elias, you’ve really given us a lot to think about today, what a great conversation and really ending on an opportunity, I think for investment flows toward the U.S. But that’s all the time we have today. So, let me say thanks to Elias van Herwaarden with Locationperspectives, talking today about Brexit on this episode of “Site Selection Matters.”

Elias: It’s been a pleasure, Rick, thank you very much.

Rick: Thanks for listening to this episode of “Site Selection Matters.” And a special thanks today to Elias van Herwaarden for helping us get inside and better understand the impact that Brexit will have on investment and site location in the coming year. What an informative discussion that leaves us with a lot to think about. This podcast episode presents my views and the views of my guests, and they do not necessarily represent the views or opinions of the Site Selectors Guild or its membership. Again, I’m Rick Weddle, president of Site Selectors Guild. We hope you will subscribe to the “Site Selection Matters” podcast on Apple Podcast, Stitcher, Spotify, or wherever you listen to your podcast. We look forward to bringing you some great discussions in the year ahead. Until next time, good day.