Brexit as an opportunity

The sheer breadth of Indian business in the U.K. leaves Prime Minister Theresa May with a challenging task on her India visit: to address anxieties about the direction of Brexit negotiations

CHANGING LANDSCAPE: “While the likes of Tata Steel and
Jaguar Land Rover remain stalwarts and big employers in the
U.K., other Indian businesses have been growing rapidly.
” Workers leaving the Tata Steel plant in Motherwell, Scotland

For over a year now, ever since it began eyeing international expansion, Bengaluru-based education start-up BRAINSTARS India has been considering the U.K. The company, which develops maths, science and English products for six- to 14-year-olds, had thought Britain attractive for a number of reasons: a well-established and predictable school education system, and a strong university tradition of research and development.

The June 23 referendum result — in which Britain voted to leave the European Union — has done little to dent the enthusiasm of co-founder and CEO Ravi Shankar, who is headed to London on a reconnaissance trip next week. Even setting aside the weakening of the pound, which has made Britain a decidedly cheaper place to invest for Indian companies, it has thrown up opportunities, with the company attracting interest from other regions of the U.K. such as Wales, and the European continent, he says. “If you take a small business like us that does very niche work, we are now looking at a more competitive situation.” His belief that school policy is unlikely to change fundamentally in the wake of Brexit, as it might in other areas, also gives him a level of predictability perhaps not so widely experienced.

India Inc.’s expanding footprint

Since the morning of June 24, the question of what the impact of Brexit will be on Indian businesses in the U.K. — or those looking to invest — remains a major and perhaps unanswerable one. There are over 800 companies from India that have operations in the U.K., with a large number of others with deep connections to the country. In the last few decades, the Indian business landscape in the U.K. has changed significantly: while the likes of Tata Steel and Jaguar Land Rover (JLR) remain stalwarts and big employers, others have been growing rapidly. Bharti Airtel, HCL Technologies, Emcure Pharmaceuticals and Apollo Tyres were among the businesses identified as growing at a particularly high rate by consultancy Grant Thornton earlier this year.

“Indian companies are in a huge variety of sectors from pharmaceuticals to the creative industries, manufacturing and financial services. So when one talks about the impact of Brexit, they are facing a very similar situation across the board to U.K. businesses,” says Manoj Ladwa, the founder of Indiaincorporated.com and political strategist. “There is certainly some degree of anxiety about whether there will be a hard Brexit or a soft Brexit with some open market access.”

According to Acting High Commissioner Dinesh Patnaik, companies are already in the process of gaining the necessary licences and other factors needed to operate in Europe, should the need for separate ones arise. “For companies, Brexit has already happened.”

The serious plight of some sectors has already been taken into account to some degree: last weekend the government sought to allay fears about the car industry, which is not only dependent on a cross-European supply chain but also exports much of its product to the continent. Business Secretary Greg Clark said he had pledged to push for a tariff-free relationship for the sector, as well as provide as much support for the industry as it was able to without breaching tough EU aid rules. However, whether it will be enough to convince JLR, which has a number of decisions over the location for production of upcoming models in the next several years still to be made, remains to be seen.

Questions across sectors

There are even bigger questions for the rest of Britain’s manufacturing industry and sectors such as steel: industry body UK Steel has pointed out that not only is the steel sector heavily dependent on the EU (around half of its steel exports annually go to the continent), but it is also dependent on coordinated action with the EU when it comes to anti-dumping tariffs on produce from China and beyond. For a long time, Britain voted against or abstained when it came to the anti-dumping levy, so its enthusiasm for doing so in a Brexit Britain remains questionable.

Similar uncertainty hovers over the pharmaceutical sector, says Anuj Chande of Grant Thornton, pointing to the London-headquartered European Medical Agency. “The question is of course where the headquarters would be under a hard Brexit, and that could potentially hit pharmaceutical companies and their access to European registration for their drugs. The devil will be in the detail.”

He draws a distinction between firms attracted by the U.K. with specific conditions — for its design and technology, for example — against those for whom it has been a launch pad. For the former, it has been businesses as usual or in some cases a more attractive market, with the near 20 per cent weakening of the pound. He points to the recent Mahindra & Mahindra purchase of motorcycle maker BSA Company, and believes there will be more to come. “We have a number of businesses selling in the food manufacturing and distribution industry and we are seeing Indian interest primarily because it’s a cheap acquisition,” he says.

One of the industries most significantly impacted is likely to be the IT sector — and on a number of levels. In a policy paper ahead of the referendum, Indian IT industry body Nasscom spelt out the sector’s concerns which included the decline of the pound, which would render existing contracts “losing propositions” unless renegotiated. It also pointed to the uncertainty over the free movement of people across the EU, given the fact that the IT sector relies on being able to move skilled workers across the EU from London headquarters.

While the large players have largely remained silent, for some in the sector the change in the exchange rate has already begun to impact decisions. Anil Mudumbi, an Indian-origin entrepreneur who founded Amalytics, which develops software for financial institutions in the U.K. and has developers in both India and the U.K., says initial plans to hire developers in India in its next round of expansion were being reconsidered with the currency movement making Britain a more affordable option. “Companies are certainly reviewing their offshoring strategy, and to what extent it makes sense any more,” he says.

A challenging task

The sheer breadth of Indian business in the U.K. will leave British Prime Minister Theresa May with a challenging task when she embarks on her visit to India at the weekend. The visit is being seen as a chance for her to showcase and provide reassurances for industry not just from India but across the world, concerned about the direction of Brexit negotiations.

“Most businesses recognise the fact that the government cannot fully disclose its negotiating hand but at the same time there needs to be more meat on the bone,” says Mr. Ladwa, who is critical of the sector-by-sector approach to reassurances currently embarked upon. “May has to be as clear, open and frank as possible to give the Indian and international business community a clear vision.”

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