Senior Vice President, Head of Western US
As Brexit approaches, uncertainty continues to surround the potential exit of the United Kingdom from the European Union. While there are far reaching implications, taxes and trading systems are just two considerations that will impact American chip and system engineers and their employers. The situation is complex and becomes more challenging as each day passes. Strong trade bonds tie Europe and the US - data from the Office of the U.S. Trade Representative shows that the EU/US bilateral trade flow is the biggest in the world, far bigger than that between the US and China. In 2018, the U.S. imported $683.9 billion of EU goods compared with $557.9 imported from China. U.S. exports reached $574.5 billion to Europe while only $179.2 billion was imported to China. (Source: https://www.cnbc.com/2019/08/22/why-a-us-trade-war-with-europe-would-be-more-damaging-than-china.html ) Trade with the UK is significant, the U.S. accounted for 19% of U.K. exports and 11% of imports. (source: https://www.cnbc.com/2019/08/23/economists-quick-us-trade-deal-wont-help-britain-avoid-brexit-damage.html)
In the event of a "hard" Brexit on October 31, the UK would leave the EU without any trade agreements in place for the movement of goods, services and people around Europe and no trade agreement between the US and UK. This means that once the UK is outside of the central markets, completely new trade agreements have to be made. These agreements can be lengthy and complicated to negotiate. With varying degrees, any U.S. company with an office in the UK or selling to customers in Europe will be impacted.
Just exactly how technology fares will differ, with software getting harder hit than hardware. Fortunately, American hardware companies won't be as strongly impacted by Brexit as financial services, automotive, agriculture, plastics, and so many other industries. Still, there are a host of key issues that engineering managers and hardware companies should consider:
A hard Brexit complicates the supply chain for hardware companies because U.S. firms with UK operations don’t know what the new method of operation would be. Without any other plans in place, agreements revert to the World Trade Organization's Information Technology Agreement, which encourages open markets for chips and electronics. Alternatively, these agreements could be covered by a yet-to-be-determined trade pact. Such confusion complicates the planning of efficient supply chain flows.
In general, U.S. chip and system companies with UK operations won't see devastating tax impacts. With little manufacturing done in the UK, Asia is still the typical production center. But this isn't the case for semiconductor firms headquartered in the UK. Companies with design centers there could have IP transfer issues that are yet to be determined. To protect their IP from the worst-case scenarios, some American hardware companies have moved their design centers to EU locations such as Ireland or the Netherlands.
A hard Brexit would end the free flow of people throughout Europe. This makes hiring skilled tech workers in the UK one of the most critical issues. American engineering execs overseeing UK design or research teams should heed the warnings from recruiters who caution about the significant reduction in candidates from the EU and elsewhere. A visa system could be instituted in the UK for non-citizens that would impact any U.S. company with EU citizens based in their UK office.
The software space faces uncertainty as well. Two-thirds of UK CIOs in a recent study said the UK is in danger of losing its development talent post-Brexit. This dearth of talent is compounded by a brain drain in top UK graduate schools, which are now seeing many fewer applicants from elsewhere and a surge of relocating professors.
The UK government has discussed establishing special visas for tech workers, but the parameters of these visas are unknown. Europe has maintained a large international transient technology workforce for years. However, as Brexit looms, desirable candidates are questioning their employment futures there.
Tech investors traditionally shy away from turmoil and uncertainty. It makes sense, then, that the uncertainty of Brexit has investors moving even more cautiously. Let’s take, for example, Horizon 2020, the biggest research and innovation program in EU history and a significant funding source for fledgling tech and research companies. As a result of its volatile political climate, the UK was downgraded as if it were a lesser country. This downgrade reduced its ability to fully tap Horizon 2020’s €80 billion in funding.
To assist its tech community, the UK has pledged to pay its researchers who might lose this funding after October 31, but many observers don’t view this as an optimal long-term solution. Having "third-country" status also puts the UK in a more challenging position when it comes to Horizon 2020's successor, Horizon Europe.
Many U.S. hardware companies with UK offices have the option of setting up an EU engineering hub to augment their British location. This will help in hiring tech staff and dealing with unforeseen IP issues. Maintaining sales and support offices in the UK still makes sense in working with customers there and handling the new tariffs and laws post-Brexit.
The best strategy in selecting the optimal EU hub is due diligence. Many of the top semiconductor companies have operations in Ireland, including Intel, Analog Devices, Maxim Integrated, Xilinx, OnSemiconductor, Microsemi, Synopsys, Texas Instruments, Lam Research, Applied Materials and Cypress Semiconductor, while exports of electronic circuit components there have increased over 432% since 2013.
The ideal EU location should have elements that support a successful engineering operation, including such proven factors as a demonstrated business-friendly government, a large supply of educated workers, thriving educational and R&D sectors and, of course, a positive history of hosting American chip and system companies.
Paraic Hayes is president of the Northern California office of IDA Ireland, an organization of the Irish government that assists U.S. companies in opening offices there.
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