Should we stay or should we go?

It has only been a week since we learned the results of the British EU-Referendum. Voters, politicians and business people are slowly coming to terms with the decision to leave the European Union. Although we can’t foresee all of the implications yet, it is quite obvious that the amount of change will be tremendous.

That’s especially true for firms that rely on accessing the European Single Market (e.g. Vodafone, the telecommunications company, or EasyJet, the low budget airline). Both Vodafone and Easyjet are headquartered in the UK, for now. Given that the UK might lose its access to the single market, these firms have, among others, announced that they could be forced to relocate their headquarters, should it be necessary for their businesses.

This news also got my editors interested. Ideally, they want me to find a company that will not wait whether and when Article 50 – the official start of the British divorce from Europe – is triggered, but that will be moving to Continental Europe any time soon. So far, I haven’t managed to find such a company.

According to what a German lawyer told me on Thursday, the reason for this is simple. Relocating your headquarters is a complex, time consuming and expensive business, not something you would do just in case, as a precautionary measure. “The starting shot will only be fired once we have clarity over the progress of the negotiations”, Marcel Hagemann, a partner at CMS Legal, told me.

Assuming that Article 50 will be triggered towards the end of the year, the UK has two years, until the end of 2018, to come to an agreement with the EU. His expectation is that by the end of 2017, we should see companies starting to relocate to the EU.

“You need some notice for this”, Hagemann said. From the legal side of things, it takes about a year to move a company from the UK to Europe, depending on what kind of legal process you want to undergo. According to the lawyer, there are two core solutions to this issue.

Firstly, there is the merger between the UK entity and a Continental European entity. For this, you can either establish a new company in Europe or buy an existing one. The only important thing is to merge this one with your British entity, making sure that the headquarter of the new entity is based outside of Britain. This is, Hagemann said, a relatively simple process, assuming that your company is not listed in Britain. If it is, it will lose its listing here in the UK (as it is not longer headquartered here).

The second solution to the problem is the creation of a European public company, a Societas Europaea (abbreviated SE). So far, the UK only has 34 of these whereas Germany has 350 SE-style companies. According to the lawyer, an SE is functioning similarly to a PLC. Whereas the founding of an SE is a bit complicated, moving the headquarters from the UK to Continental Europe should be relatively straight forward – as long as you finish the process before the UK officially leaves the EU.

When asked how expensive the whole process might be, Hagemann shrugged. Obviously, he did not want to be nailed down to a specific number. “It varies a lot, depending on the size of the company and the amount of people that will have to move”, he stated. Whereas he does not think that anyone will officially move their headquarters before the end of 2017, many firms have started searching for alternative locations.

Duesseldorf, where Hagemann is based, has already rolled out the red carpet to British telecommunication firms such as Vodafone. “They already have their German office there, so maybe this would be a good choice for the group headquarters as well”, Hagemann said.

Although the outcome of the referendum did surprise him, the German is still hopeful. “In the past, the British have been very good at negotiating in their favour”, he said. Plus: “Don’t forget that Germany has an interest in keeping them in the Single Market. We do have a strong voice here.”

Firms however will have to prepare for the worst. If they only learned one thing since the British referendum, it is that politicians don’t tend to stick to what they said before. Thus, they’d better be prepared if Britain’s EU negotiations break down in late 2018, leaving them with the prospect of a hard Brexit.

Some firms have already reacted. Siemens for example, the German industrials company, will not make further investments here in the UK before they have clarity over where the country might be heading. Two days ago, Virgin cancelled a deal that would have seen them take over 3000 staff. UOB, the Singaporean bank, stopped providing financing for British real estate projects.

According to Hagemann, we will see much more of this – but only once it is clear whether Britain remains part of the Single Market or not. “German companies will not start closing their factories straight away”, the lawyer said.

What a great relief. So watch out for 2017.

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German firms before the referendum

It’s a no-brainer. June 23rd will not only be an important date for British, but also for German firms. Over the years, these firms have invested billions of pounds in the UK and employ around 500.000 staff at their sites and plants. There are strong ties between Germany and the UK in machinery and plant construction, in the automotive sector and in the financial and insurance industry. German companies are among the biggest foreign investors in the UK, with 2.500 subsidiaries as stated by German Industry UK, a private organisation of around 100 chief executives of companies in Britain with a German majority shareholding.

According to the consulting firm h&z, the UK is the third-most important trading partner for German exports. With regard to imports, the country ranks sixth. Despite this, only 20 percent of German firms have already done their Brexit-planning, a recent survey by h&z found. About a fourth of all German companies will be affected by a potential vote for leave, the estimate goes.

A vote for Brexit will not remain without consequences. Earlier this year, a survey of 700 businesses by the Bertelsmann Foundation found that 29 percent of British and German companies, almost one in three, said they would either reduce capacities in the UK or relocate altogether in the event of a Brexit. Since then, many have declined to speak about their contingency planning in greater detail. This is understandable, given that their strategic decisions in the case of a Brexit will depend a lot on whether and what kind of agreement will exist be between the UK and the EU.

So what now, now that the referendum is only 20 days away? What should German firms in the UK be doing? Many of them, as I learned on Tuesday at the Annual Dinner of the British-German Association (BGA) in the House of Commons, are planning final rounds of meetings and talks with their employees before the vote on the 23rd of June.

One of the first firms to reach out to its staff in the UK was the car manufacturer BMW. At the beginning of March, the management sent out a letter to the employees of Rolls-Royce Motor Cars and Mini here in the UK, warning about the potential impact of a Brexit for the business in the UK. The firm’s “employment base could (…) be affected”, Rolls-Royce Motorcars chief executive Torsten Muller-Otvos wrote. Trade tariffs would drive up costs and prices.

Widely reported at the time, the letter also caused some bitter criticism. This was an act of interference, some media outlets concluded. It seems that because of this incident, other German firms that operate in the UK have been more cautious recently. They have held, for example, as the heads of Bayer and BASF told me, a wide range of events and so called town hall meetings where the whole firm gathers and debates. These internal get-togethers appear to be the format of choice when talking Brexit.

“Yes, we need to speak out”, Bayer-CEO Alexander Moscho told me after the Annual Dinner in the House of Commons. “But we don’t want to be seen as interfering.” Instead of trying to win his 1.000 staff members over, Moscho seems keen to provide enough information for everybody to make up their minds. He now plans a social media campaign, maybe a YouTube video, for the remainder of the campaign. “I hope we will find the means for a balanced discussion”, Moscho said.

BASF, another German chemicals company that operates in the UK, has followed the same route. AS UK/Ireland-CEO Richard J. Carter explained to me on Tuesday, the company has conducted a so-called roadshow with 25 events across all of its ten manufacturing sites in the UK, trying to reach as many of their 1.300 employees as possible. About one third of the workforce took part, Carter said. “We are hoping for the multiplier effect”, he explained. For BASF, it’s more about informing people than about trying to influece them. “We said clearly that we are not talking about reductions at this stage”, CEO Carter pointed out.

Bosch too has been reaching out to its staff. “If we get high turn-out, the danger is that among blue-collar voters, many might be led by emotions”, said Carl Arntzen, Managing Director at Bosch Thermotechnology Ltd. He has spoken to all his 600 blue-collar workers on the shop floor. “Immigration is the topic that comes up first”, Arntzen found.

For all these German firms in the UK, it is now important to keep the momentum going. Twenty days is a long time for a decision that is – according to the most recent polls – so close. “We need to repeat and repeat our message”, said Caroline Fairbairn, the Director General of the Confederation of British Industry (CBI) on Tuesday. “Many of our members think they have already done enough. That is not the case.” I guess she is right. “Say it again, say it agan and say it again. In simple language, talk to employees. Now is the time”, Fairbairn stated.

This might actually tip the balance: After friends and family, employers are the next most important source of information for people, she said.

 

Brexit: Implications for London

It’s been nearly three years since I moved back to London from Shanghai. For its part, London, the city in which I studied, pretended I had never really left. Not much had changed in 2012 and 2013, so I quickly got back in to my London life.

Since then, the city has been doing well. During the past three years, I have watched London’s population grow to over 8,6 million, a new peacetime record. I have observed the completion of the Walkie Talkie and the Cheese Grater, two stellar new skyscrapers in the City of London, and learned that there are more than new 400 high-rises under planning here in London – a sign of the huge architectural change that the city is undergoing.

I have heard it called “the greatest city on earth”, a description that ex-mayor Boris Johnson used when advertising the city to foreign investors. I have seen the night skies illuminated by numerous red lights, a testimony to all the construction work going on in London. I have seen house prices rise ever more (they are now at levels beyond most people’s reach) and noticed Chinese, Kuwaiti and Russian billionaires pouring money into London real estate and assets.

These are all indications that London is an attractive, thriving international city that stands out in comparison to other European cities. Londoners of course don’t compare their city with the likes of Berlin, Frankfurt or Paris. It’s New York and Hong Kong that they refer to when talking about other great, international cities.

However, a vote for Brexit could fundamentally change London. Over time, the capital could lose some of its great attractions for people, businesses and investors for whom London has been an easy entry-point into the continent, a bridgehead into Europe. “We would survive – but we would be diminished as a country and as city”, London’s new mayor Sadiq Khan said on Thursday.

Standing below a 1.5 ton piece of art (the so-called “flying table”) hanging from the ceiling in the “Second Home”, a co-working space in London, he explained to around 200 guests the potential consequences of a Brexit for London. According to Khan, the son of Pakistani immigrants, the capital has always been an open city, a city that welcomed otherness, new ideas and different approaches. “A Brexit would have serious consequences for London as a city”, Khan said.

That not only refers to the huge amount of continental Europeans who are working in London, thanks to the freedom of movement (I am a beneficiary as well). It also refers to those businesses in London that are doing business with the continent and that will be in limbo after a Brexit-vote on the 23rd of June, given that it is far from clear what kind of economic relationship the UK and the EU would have after a vote to leave.

One of the sectors that might be hit hardest is the financial industry. It creates around eight percent of national GDP and contributes around 13 percent of UK corporation tax receipts. Of the over than one million jobs in the British financial industry, one third is in London, in the City and in Canary Wharf – right across the street from where I work. In contrast to countries like Germany, under Margaret Thatcher the UK decided that services and banking, not industrial production and manufacturing, would be the basis of the UK economy. That has led to a significantly different structure than that of for example Germany where manufacturing still plays a much more important role.

The centre of this economy is London, Europe’s leading financial hub. Other financial centres, such as Luxemburg, Paris or Frankfurt, look pale against the dominance of London. “Nearly 40% of European assets under management are managed here. We’re home to around 40% of the world’s foreign exchange trading and 50% of derivatives trading”, Jonathan Hill pointed out last Monday at the London School of Economics (LSE).

The EU Commissioner for Financial Stability, Financial Services and the Capital Markets Union was quite clear in his assessment. “Last year, London was once again rated by the Global Financial Centres Index as the world’s most competitive financial centre – hardly a sign (by the way) of a City drowned or strangled in red tape as is sometimes claimed”, the Brit stated.

The key to London’s success is not just its historic role as the leading trading hub for Europe, but also the Single Market and the EU-passporting regime. Thanks to this, British firms and banks can do business wherever they choose in Europe. From their base in the UK, they can provide services and capital to 27 other EU-countries. “They can lend freely into the single market, and they do”, Lord Hill stated. In 2015 alone, British banks lent over one trillion euros and took deposits of over one million euros across the EU.

The scheme also works the other way around. It not only provides access to the EU, but also to the UK, and to the City of London in particular. Due to that, 20 percent of banks operating in the UK are headquartered elsewhere in Europe. American, Asian and African banks use London as their European headquarter and trade into Europe from here. “Half the world’s financial firms have chosen to base their European headquarter in the UK”, Hill said.

As a result of this integration, the surplus from Britain’s trade in financial services has more than doubled – from 23 billion pounds in 2014 to 58 billion ten years later. “This (…) is a success story of which we should be proud, and which we should be keen to keep”, the Commissioner reiterated.

It is exactly this which is at stake. According to economists, London risks losing some of its weight as the leading financial centre in Europe. A country that did not join the Euro and still uses the pound, the UK has nevertheless been able to attract a lot of transactions denominated in Euro. In case of a Brexit, this could change – why bother going via London if the UK does no longer use the passporting system?

As a consequence, many banks could move at least some of their business to continental Europe in order for them to make sure that they are able to access the single market. “There are 75 foreign banks in London”, a female CEO of a financial fund told me last week, “just guess how many of them would move?”

It’s a tricky question, given that many banks have gone quiet on this recently. However, a few have stated what they are planning to do. HSBC for example would relocate around 1000 bankers to Paris whereas Deutsche Bank has announced that they would move parts of their business from London to Frankfurt, should there be a vote for Brexit.

“The American banks would move to Dublin, the German ones to Germany, the French ones to France”, the CEO of the fund mentioned earlier explained to me. Add to that the uncertainty – it will take at least two years if not longer for the UK to negotiate it’s exit – and you end up with a pretty bleak short term outlook for the City of London. PwC estimates that there will at least be 70.000 to 100.000 fewer jobs the British financial industry by 2020, should there be vote for Brexit.

The problem with this is that it could take years, if not decades until we are able to investigate the size of the damage that a Brexit would do to the City of London. There are not just European competitors like Frankfurt, Paris and Dublin that want to increase their share but also international financial centres like Hong Kong, New York and Singapore that might benefit from a gradual decline of the City.

I don’t have a crystal ball. I am not a forecaster. But I do think that British voters should be aware that these days, nothing is carved in stone anymore. Not even the role of the City of London.