Last month’s decision by the citizens of the United Kingdom to leave the European Union sent shockwaves throughout the global economy. Within just 24 hours after the results of the Brexit referendum were announced, the British Pound lost nearly nine percent of its value against both the Euro and the Dollar and more than $2 trillion in wealth was wiped out of the world’s financial markets as the news blindsided panicked investors. While markets have stabilized in the weeks following the vote, there is still a great amount of uncertainty about the future of Great Britain’s economy and the trickle-down effect it could have on the rest of Europe and the world.
Given that a number of the world’s leading suppliers of security equipment are based in Europe and the UK, there are also concerns about the impact Brexit could potentially have on the security industry.
Marcus Kneen, CEO of Scottish-based video surveillance firm IndigoVision, says that his company prepared for either outcome of the vote and he remains optimistic about their prospects moving forward.
“IndigoVision does not anticipate disruption either within Europe or globally,” Kneen says. “The security issues that IndigoVision's solutions serve transcend the politics.”
And while some companies, particularly those in the financial services sector, have discussed the possibility of leaving the UK on the heels of Brexit, Kneen says that’s not even a consideration for IndigoVision.
“The UK is a fantastic base from which to trade globally,” Kneen adds. “In my opinion, it is the most business friendly environment in the whole of Europe.”
Short- and Long-Term Implications of Brexit
According to analysts, the short-term outlook for the market should be relatively unaffected by the vote as the process for leaving the EU would take at least two years to complete depending upon when – or if – new British Prime Minister Theresa May invokes Article 50, which initiates the formal procedure. However, what is more uncertain, analysts say, is what Brexit may mean for the region if the UK is unable to negotiate favorable exit terms.
Many pundits have speculated that the EU, fearing other nations may look to leave the bloc in a similar fashion, will seek to make an example out of the UK as a way to send a message to other members. But, Jim Dearing, analyst for security and building technologies at IHS Markit, says that because the EU is made of member states with competing interests, a softer exit for the UK is a more likely scenario.
“One thing to remember here is that the EU does not consist of just France and Germany. Many of the EU states have differing opinions and self-interests and simply cannot agree among themselves how to deal with the UK,” Dearing says.
If, however, the EU does decide to make the split exceedingly difficult for Great Britain, Dearing says they are likely to use several different “weapons of choice” to achieve their goal including:
- Import tariffs on UK goods
- Visa requirements for UK citizens to enter their country
- Additional taxes on UK flights
- In the most extreme scenario, trade sanctions or incentives not to trade with the UK.
If the value of the pound continues to fall, Dearing says UK-based manufacturers could see their cost of sales increasing as importing raw materials and components becomes more expensive. The declining value of the pound also leaves UK firms more susceptible to acquisition as the currency of foreign firms will be able to go further, according to Dearing.
“Additionally, public traded company’s share prices are determined (among other things) by shareholders expectations of future profits. In the case of a hard Brexit, shareholders expectations are likely to be significantly dampened and share prices will suffer, this would also make UK companies more ‘affordable’ for foreign investors,” he says. “However, due to the uncertainty in the UK market, this is fairly unlikely as it remains to be seen if any foreign investors believe they could get value out of a potential ‘discount.’
Conversely, UK firms could also benefit from a small boost in demand as their prices become more favorable to those outside the country.
“The main short term benefit to UK-based exporters is the currency swing, a 10 percent drop in the pound vs the Euro results in a £1,000 video surveillance system now being 10 percent cheaper for Eurozone consumers,” Dearing adds.
Another potential silver lining over the long-term, according to Dearing, is if UK suppliers are no longer bound to adhering to EU regulations, it could potentially help them get their products to market faster.
For those companies that export security products to the UK, Dearing says they are likely to be impacted by two factors as a result of Brexit: Weekend demand and higher sales cost.
“Assuming they price their product in their own local currency, they will face weakened demand from UK customers if they fail to adjust prices downward to reflect the change in exchange rates between their local currency and the British Pound,” Dearing Explains. “If the UK fails to negotiate staying in the free trade zone they will have to pay import tariffs which would increase their cost of sales.”
While it’s anybody’s guess as to what the long-term impact of Brexit will be on the security industry, the UK, Europe, or the global economy for that matter, Dearing believes it will all come down to the looming negotiations between the British government and the EU. “If they end up with a ‘hard exit,’ it very well could lead us back down into the depths of a deep recession,” he says.