While bidding for the leadership of the Conservative Party in the aftermath of the Brexit referendum, British Prime Minister Theresa May, in her first official campaign speech, said: “It is hard to think of an industry of greater strategic importance to Britain than its pharmaceutical industry…” She was ruminating on U.S. pharma giant Pfizer’s proposed takeover of U.K.-based AstraZeneca. The U.K.’s automotive industry is now being given the same priority with the government’s assurance to carmakers Nissan and Toyota on Britain continuing as a major hub for manufacturers.
These actions indicate that the continuity of key industries in the U.K. will be critical to the country’s growth post-Brexit. The Brexit series developed by WNS DecisionPoint™ provides an analysis of all possible Brexit scenarios and what it means for industries in the U.K.
In my previous blog, I had discussed the implications of Brexit on the aviation and financial sectors in the U.K. This blog is about the automotive and healthcare industries.
The U.K. enjoys a symbiotic relationship with the European Union (EU) in this sector. The EU represents 81 percent and 52.8 percent of U.K.’s import and export volumes of vehicles respectively. Not finding an alternative system could imply the introduction of automotive tariffs of 10 percent on passenger cars, 10-22 percent on commercial vehicles and 3-4 percent on average for automotive parts.
The recent fall of the pound sterling against the Euro has been both a boon and threat for the automotive sector. On the one hand, it will make U.K. exports more competitive in the long run. On the other, it will increase the cost of imported components from the EU which account for 60 percent of parts in U.K.-manufactured cars.
The depreciation of the pound sterling has put a tab on commercial vehicle registrations in 2017 by tightening consumer and investment spending. We foresee a steady increase in vehicle registrations in 2019-2021 due to countering forces such as declining oil prices and increased competitiveness of exports. However, the quantum will depend on whether it is a hard Brexit or a soft Brexit situation.
Another piece of the puzzle for the automotive industry is access to skills. There is a 5000-people skill gap in the U.K. automotive sector, particularly in design and production engineering. High labor flexibility across the EU has so far allowed manufacturers to scale easily, and be agile by moving employees across locations in the EU for work or training. This might change with Brexit, creating challenges for automotive manufacturers.
The U.K. represents only 6-7 percent of the global pharmaceutical market. Hence, for global companies to remain vested in the U.K. post-Brexit, four imperatives will need to be looked at closely.
First is the common regulatory framework of the EU which regulates how medical technologies are developed, manufactured and delivered. This system was developed with significant influence and expertise from the U.K. However, with Brexit, the U.K. may either deviate from the common framework or incur significant costs in duplicating it. Also, the European Medicines Agency (EMA), which is currently London-based, will potentially relocate. Pharma companies will need to recalibrate their relationship with the EMA and any domestic regulatory agency that the U.K. might constitute.
Second is the terms of trade which currently facilitate the movement of goods and capitals across borders, taxation, cash flow costs and control of falsified medicines. Notable among the trade agreements is the European Falsified Medicines Directive (FMD) and Free Trade Agreements (FTA). The alternative trade terms under which the U.K. operates post-Brexit will decide if patients can have access to medical technologies without any increase in costs. Stepping away from these trade terms may create threats. However, it might also be a boon in allowing the U.K. freedom from the EU state-aid laws, and the opportunity to amend the VAT legislation to benefit the life sciences industry.
Third is the access to key talent, a challenge similar to the automotive sector we discussed earlier. Approximately 17 percent of STEM academics at U.K. research institutions are represented by non-U.K. EU nationals. The immigration policies of post-Brexit U.K. will decide the ability of global companies, which have their European headquarters in the U.K., to attract talent.
Fourth is the research funding beyond Horizon 2020. There is a short-term reassurance with the Treasury’s commitment to underwrite the funding for Horizon 2020 projects which were secured while the U.K. was an EU member. However, life sciences projects have long research cycles. For top scientists to continue research activities in the U.K., a long-term funding solution will be required. Private investment might also get impacted with the U.K. Venture Capitalist (VC) funding possibly losing access to the European Investment Bank (EIB) and European Investment Fund (EIF). EIB and EIF constitute a significant 25-40 percent of VC funds.
Brexit will have significant impact on the people of U.K., global businesses and the EU itself. A key part of the transition will then be to find ways to neutralize the threats and capitalize on the opportunities that it presents.
For more detailed analysis, read the Brexit Series by WNS DecisionPointTM