Capital under pressure…
Brexit has not yet created the economic turmoil some feared but EY’s latest survey of Global and UK businesses, EY’s 15th Capital Confidence Barometer, highlights the risks that the uncertainty created by Brexit poses for the UK’s attractiveness to capital. For the first time in our survey’s history, global businesses did not place the UK in the top 5 investment destinations.. At the same time UK businesses have downgraded both their intention to undertake M&A and their plans for capital expenditure in the coming year.
…with clear Brexit related concerns…
Confidence in the UK economic outlook moved down from ‘positive’ to ‘stable’ six months ago and the vote to leave the EU has not had much effect. When we probe further, labour (both recruitment and retention) consistently emerges as one of the biggest post-Brexit anxieties. The survey shows that 92% of UK respondents expect Brexit to affect their ability to hire skilled workers and 69% expect problems in hiring unskilled workers. Retention of unskilled workers is a less significant concern, but 69% are concerned about retaining skilled employees.
…but Brexit is not the only issue.
The economic consequences of Brexit are not the only issue weighing on corporate minds. At the board level, our survey highlights that the challenges of digital technology are top of mind with a third of respondents highlighting this as their top concern. In addition, sector convergence is also exercising minds amongst UK businesses. Yes, Brexit is capturing the headlines but businesses are facing major challenges in their day-to-day operations.
Is digital the problem or the solution?
Digital is clearly a hot topic for UK businesses but one that is proving difficult to address. Our previous analysis identified that the move to digital is still at an experimental stage. Businesses are experimenting with business models that combine their legacy assets and new digitally based approaches. CCB15 confirms this: UK respondents say their previous attempts at automation were unsuccessful and 35% of companies still duplicate manual and digital processes. There are clearly significant opportunities available to improve the UK’s output and efficiency if companies are willing to invest and can identify the appropriate business model.
In this context, around 40% of UK respondents say that they are looking to acquire start-ups with digital technology and 30% are looking to acquire talent. One third of respondents see digital as the top board priority this year and, as we have seen in other surveys, M&A provides the fastest route to acquire capability.
Is Brexit the catalyst for change?
So we have a situation where corporates are facing uncertainty caused by Brexit at a time when their core business is under threat from the rise of digitally based competitors. There is a potential paradox: the uncertainty created by Brexit is leading to a slowdown in investment intentions but the challenge of digital requires more expenditure.
There could be a win-win:
- If there are increasing challenges in attracting and retaining labour as the result of the threat of Brexit, then labour-saving digital capability could be very beneficial.
- If Brexit slows growth and increases input costs due to higher import costs from the lower sterling rate, accelerating the move to digital could drive greater efficiency.
The risk to this positive scenario is that the lower exchange rate will make digital capital equipment more expensive making the decision to invest more finely balanced. Although this could potentially hasten UK investment in the digital supply chain to “reshore” some activity to the UK.
Time to review the digital investment plan.
The classic response to economic uncertainty is to reduce capital expenditure and UK businesses do seem to be reacting to Brexit in this way. However, at a time of significant change, this approach may not be sustainable.
Accelerating the move to digital offers the potential to improve the economics of the current situation by eliminating duplication while at the same time addressing key Brexit-related challenges such as possible labour shortages. Running parallel operations is not the long-term solution and in a time of a squeeze on capital, rationalising the legacy business faster than is currently planned might be the way to turn Brexit from a risk into an opportunity.