Business

Brexit and tech: Three scenarios from alright to awful

Leaving the European Union is likely to be tough for the UK's tech sector. The question is: How tough will it get?

Written by Steve Ranger, Global News Director June 30, 2016 at 8:09 a.m. PT

It's still hugely unclear how the UK's exit from the European Union is going to be managed (or if it will even take place), but market-watchers are trying to sketch out how the breakup is likely to impact the tech industry.

Analyst IDC said there is a tendency to curb or stop discretionary investments, including non-essential IT investments and projects "very quickly in these types of situation". Their most positive -- but least likely scenario -- has UK tech spending bouncing back by 2017, while under their most pessimistic model, it won't bounce back until 2020.

Although IDC said UK IT spending forecast will likely drop by more than 2 percent by 2020, overall European IT spending should remain largely unaffected.

The analyst house has set out three Brexit scenarios:

1. Challenging - 70 percent probability

This scenario plots a downward drop in UK GDP, which will then see a slight drop in UK IT spending in 2017 and 2018, but demand will recover in 2019 and 2020, and the UK IT market will return to its pre-Brexit levels by 2020. The scenarios also sees IDC revise IT spending forecasts downward by more than 2 percent through to 2020. Western European IT spending is expected to remain fairly stable. IDC believes that this is the most-likely scenario.

2. Disruptive - 20 percent probability

This is the most pessimistic scenario, in which political confusion, more referenda, and "immense pressure" on the EU creates further economic uncertainty. IT spending in this scenario is expected to significantly decline in the short term and struggles to rebound by 2020. If that happens, then IT spending could drop by close to 5 percent through to 2020. Also, under this scenario, Brexit will have "more far reaching consequences, including headquarter, workforce, and factory relocations impacting IT spending", the analysts warned.

3. Swift - 10 percent probability

This assumes strong leadership and an orderly Brexit process occurring that avoids short-term turmoil and drives economic growth in the medium term. IT spending is mildly affected in the UK in 2016 but rebounds quickly in 2017 and beyond. Europe IT spending is unaffected.

Another tech analyst, Canalys, took a grimmer view. It said IT spending forecast in the UK -- expected to be between $90bn and $100bn in 2016 -- could drop by up to 10 percent, based on the public sector and businesses cutting expenditure to reduce risk.

Canalys Principal Analyst Matthew Ball said: 'The outlook for 2017 could be even worse, with up to a 15 percent decline as IT budgets are set lower on the prediction of a tough year ahead and ongoing uncertainty."

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Ted Smith, a partner at tech investment bank Union Square Advisors, said the UK is usually the first international market US tech companies target after North America, so the Brexit vote will mean greater uncertainty, especially for the stability of the European component of international sales, as well as challenges in pursuing international expansion. But the vote might also make UK tech companies acquisition-targets as turmoil drives down values.

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"UK companies that are potential acquisition targets could become more attractive due to their having gotten cheaper overnight -- but offset by greater business uncertainty in their home market. Acquirers will have to balance the opportunity to purchase attractive assets at better prices with a recognition of the likelihood of ongoing revenue challenges for potentially meaningful components of those businesses," he said.

Meanwhile, TechUK, which represents tech vendors, has published a five-point plan to help get the sector "back on track" after the UK leaves the EU. It said access to the European single market must be "the primary objective of any UK negotiation".

It also warned the government to work hard on retaining and attracting talent from Europe: "If the UK can no longer benefit from free movement, then a new 'smart immigration' policy needs to be put in place that prioritises the needs to the UK's fast growing and high-value tech sector. This isn't just about getting the bureaucracy right. These people must also feel that they are welcome and valued in the UK."

TechUK said the UK's data protection laws will have to make sure that the ability of data to flow freely to and from the EU is not impeded. "Urgent consideration should be given to the relative merits of maintaining, adapting, or completely re-legislating the UK's data protection laws," it warned, adding that the controversial Investigatory Powers Bill, which is working its way through parliament, may have to be amended. And it said the government's new digital Strategy, which was was expected to be published shortly, will now need to be re-written.