Trade Risks

Beware the Ides of Brexit

  • Why it matters

    Why it matters

    If Britain opts for a rapid, “hard” Brexit from the European Union, it could have greater-than-expected negative consequences for some German companies, according to a new study.

  • Facts

    Facts

    • German firms are underestimating the risks to their balance sheets from a hard “Brexit,” according to a new study by Deloitte.
    • The German logistics and transport industry is the largest German employer in Britain, with roughly 96,000 workers.
    • BMW is one of Germany’s largest corporate employers in Britain, and its Mini car line is still based on the island. Eight in 10 cars BMW makes in Britain are exported off the island.
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    Audio

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Britain Prepares For Brexit Deadline
German companies are underestimating the risks to their balance sheets from Brexit, according to a new study by Deloitte. Source: Bloomberg / Luke MacGregor

Almost every day in Britain, the consequences of the country’s approaching Brexit from the European Union are discussed publicly within business, government and social circles. Experts fear the costs to British industry could run into the billions of euros. But German businesses also have a lot to lose from a “hard Brexit,” the sudden withdrawal of Britain from the European common market, according to a new survey by Deloitte.

“The British market is the second-largest market in the European Union — no business that exports can afford to ignore Brexit,” said Alexander Börsch, the chief economist and head of research at Deloitte, in an interview with Handelsblatt. In recent years, the growth rates of German exports to Britain have risen dramatically, which is only raising the stakes for German firms. Despite the potential costs, many German companies are taking a dangerous wait-and-see attitude toward Britain’s departure from the E.U.

To be sure, the subject of Brexit is high on the agendas of many German exporters — but other companies in Europe’s largest economy should be paying more attention. “The more the negotiations proceed, the more visible the consequences of Brexit will become. Then the bargaining pressure will increase,” Mr. Börsch said.

Brexit
BMW is one of Germany's largest employers in Britain and the Mini is still headquartered in the U.K. Source: DPA / Marc Tirl

The actual negotiations over the terms of Brexit haven’t started yet. By the end of March, Prime Minister Theresa May intends to submit Britain’s formal application to leave the 28-bloc, which is expected to open a period of two or more years of talks with E.U. negotiators.

Companies like Deutsche Post, Deutsche Bahn, BASF and BMW have traditionally done good business in Britain. Twenty-eight of the 30 DAX firms have at least one British subsidiary. Last year, German firms exported goods worth more than €90 billion to the island nation.

The German automobile industry is especially invested in the British market. German automakers generate more than a quarter of their sales in Britain. BMW alone employs more than 24,000 workers in Britain and is one of the three largest automakers in the market. Two BMW auto brands — Rolls-Royce and Mini — are headquartered in Britain because of their British roots. Eight of 10 cars that BMW makes in Britain are exported off the island.

“The British market is the second-largest market in the European Union -- no business that exports can afford to ignore Brexit.”

Alexander Börsch, Chief Economist and Head of Research at Deloitte

According to Deloitte, German automakers generate about €40 billion in annual sales in Britain — the most of any industry. German utility companies are close behind, with estimated annual sales of €24.3 billion, followed by transport and logistics companies, with €20.6 billion in sales. Those industries are followed by the financial, insurance and trading sectors.

Deloitte analyzed data from 160 companies — with headquarters in Germany, but at least one U.K. subsidiary and at least 100 employees — for its study. The results were extrapolated for individual industry branches.

According to Deloitte, German banks have much to gain from a Brexit.

London could lose its influence as Europe’s top financial center if its banks lose the legal rights to sell their products on the European mainland following a Brexit, but other branches could be affected too that aren’t as much in the limelight until now.

It's not just about the export or trade in physical goods. Even business-critical data will have to be handled differently, which could pose much more formidable obstacles than punitive tariffs.

Among the roughly 400,000 Britons who work for German companies there are about 36,000 in the automobile industry and 25,000 working in the energy sector, according to Deloitte. But it is Germany’s transport and logistics companies — with roughly 96,000 employees in Britain — who lead all categories. “Employees in this sector will be significantly affected by Brexit,” according to the study.

But having strong businesses with large sales in Britain doesn’t necessary mean bad news for German companies. That could for example be the case with Deutsche Post. The yellow vans of Deutsche Post’s delivery unit, DHL, can be seen throughout Britain. Companies like Deutsche Post could actually profit from a Brexit by offering customs services in Britain.

In a survey by the Institutes of German Industry at the beginning of the year, 90 percent of 2,900 companies surveyed said they expected no “strong effect” on their businesses as a result of Brexit. Only a tiny portion of companies — 2 to 3 percent — expected strongly negative consequences for their investment and employment levels,” according to IW expert Jürgen Mattes.

Even the question of trade with the U.K. isn’t troubling most companies.  Only 10 percent expected to export significantly fewer goods to the island; a further 30 percent anticipated only a slight decrease in exports.

According to IW, a quarter of firms surveyed expected a positive effect following Brexit, and some even saw potential benefit from trade barriers, which could actually slow or eliminate their British competitors in other parts of Europe.

Mr. Börsch, the Deloitte expert, warned against underestimating the potential consequences of Brexit.  “The risk posed by Brexit is historically singular, which makes it extremely difficult to predict the outcome,” he told Handelsblatt. Many companies hoped for a “soft” gradual Brexit before the new year, but the current mood in Britain suggests that is no longer on the table.

So, German managers must think carefully about what is to come. It’s not just about the export or trade in physical goods. Even business-critical data will have to be handled differently, which could pose much more formidable obstacles than punitive tariffs.

“This is not just about the relocation of production,” Mr. Börsch said. “Think about data security requirements. After Brexit, Britain will be considered a ‘third country’, and it remains unclear what data will be transferable. The changing regulations will most likely increase administrative fees and costs.” This doesn’t apply to just one company.

 

Kerstin Leitel is a Handelsblatt editor in London. To reach her: leitel@handelsblatt.com

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