What Brexit means for the electronics industry

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European flags in BrusselsBritish tech companies and electronics manufacturers face a number of opportunities and threats in the near and long term future.

Since the Brexit vote the electronics sector, as well as the economy more generally, has performed better than many economists predicted.

Now, after Theresa May has put a little more flesh on the bones of her Brexit plan, what should we expect going forwards?

More orders

Earlier this month the UK Manufacturing Purchasing Managers Index (PMI) for December rose to 56.1, posting the strongest reading since June 2014. Up from 53.6 in November, the value exceeded everybody’s expectations.

The increase was fuelled by new orders from domestic and overseas clients. Strong production gains were registered across the consumer, intermediate and investment goods industries, according to the Markit report.

Overseas sales are driven in a large part by the changing value of the pound, which has been a feature of the post-Brexit period.

Against the Euro, the Pound has been trading considerably lower than its pre-Brexit level. In January, the currency hit a fresh floor before rallying on the Prime Minister’s speech yesterday.

Of course, UK companies’ ability to trade across international borders will probably be affected after Britain leaves the EU. At the moment, the EU is Britain’s biggest trade partner and at this stage, it is difficult to imagine any trading arrangement that will boost trade with the EU rather than worsening the situation.

On the other hand, Britain will be more free to trade with other countries around the world.

This will be one of the key debates to unfold throughout the negotiations with the EU.

Rising cost pressures

The negative side of the Pound coin’s slip means that electronics and tech companies face rising cost pressures now and in the future.

Inflation statistics released yesterday showed a 1.6% increase in the Consumer Price Index. Producer price inflation also rose by 1.8% in December compared to the previous month.

Separate inflation figures showed that the price of goods bought from factories rose 2.7% in December compared with a year previous. This reflected moves by manufacturers to pass on their higher input costs.

All this means that costs of production are rising at the same time as domestic customers have less money to spend. This might make it difficult for manufacturers to pass on price increases to their customers.

Cliff edge

Looking further ahead, to when Britain completes its divorce from the EU, some industry chiefs worried about a disruptive changeover from EU Britain to post-EU Britain (or Global Britain).

The Prime Minister’s speech yesterday allayed some of this worry, saying she wanted to avoid a “cliff edge” for businesses. Antony Walker, Deputy CEO of industry group techUK said:

“The UK tech sector is highly integrated with suppliers and customers across Europe and depends everyday on laws and regulations set at European level. Leaving the Single Market will have a bigger impact on tech than the rest of the UK economy.

“That is why it is essential that the government does everything that it can to secure a soft landing for Brexit. The Prime Minister’s objective to reach an agreement on a future partnership arrangement within two years followed by a period for phased implementation appears a sensible approach.”

“The risk of falling off a regulatory cliff edge in two years’ time has not gone away. However if a smooth and orderly exit can be achieved from the EU then the UK’s thriving tech sector can go on to be the powerhouse of Global Britain”.

Quality conformity

Conformity is another question that tech and electronics companies must answer in the future. One of the key ideas behind setting up the European customs union was cutting red tape that nations needed to trade with each other.

Yesterday, Theresa May signalled that the UK would not seek full customs union membership. This throws up some questions, because it means that UK goods would, in theory, no longer need to meet some common European standards.

If, however, that product is to be sold in Europe, then it will need European approval.

So far it is not clear whether the UK will impose a new standard (more in line with the US), keep the European standard or leave the decision up to individual companies.

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