Jun 2016 Financial News

From London to Tokyo, business leaders tally Brexit fallout

Jun 24, 2016

From London to Paris to Tokyo, business leaders reacted with dismay to the U.K.’s vote to leave the European Union, with some of them warning the decision would slow economic activity and prompt them to reduce investments in the country.

As the pound and stocks plunged Friday in response to the vote, companies in industries like travel, advertising and automobiles, which are heavily exposed to swings in currencies, said they would reassess their strategies. Prior to the vote, most corporate leaders who had spoken out on the issue had expressed support for remaining in the EU.

“This is a lose-lose ‎result for both, Britain and Europe,” said Airbus Group SE Chief Executive Officer Thomas Enders, which makes the wings for all of its aircraft in the U.K. “Britain will suffer, but I’m sure it will focus even more now on the competitiveness of its economy vis-a-vis the EU and the world at large. But of course we will review our U.K. investment strategy, like everybody else will.”

For U.K. voters, Brexit may have been about local concerns, but the responses from corporate leaders around the world show how the fallout is global. The “leave” vote could slow everything from the flow of U.K. tourists to Mediterranean beach resorts to acquisitions of U.K. companies.

The result sent stock prices plunging across Europe, with French auto maker Renault SA losing as much as 20 per cent, Spanish phone operator Telefonica SA dropping 19 per cent and U.K. staffing company PageGroup Plc plunging 61 per cent.

Among the hardest hit in the U.K. were retail chains such as electronics merchant Dixons Carphone Plc, book retailer WH Smith Plc, apparel merchant Next Plc and Associated British Foods Plc, owner of budget fashion retailer Primark. Shares of all of those companies fell more than 30 per cent in early London trading.

The vote to leave the 28-country bloc will cause two or three years of “rollercoaster” effects on the European advertising market, Maurice Levy, chief executive officer of French advertising giant Publicis Groupe SA, said. That could cause the company to reassess U.K. investment plans, he added.

“We could have set up some centers in the U.K.,” he said. “Now, it’s out of the question. The advertising market will surely suffer.”

Slower Decision-Making

Martin Sorrell, his rival at U.K. ad firm WPP Plc, said, there will be considerable uncertainty, which “will obviously slow decision-making and deter activity.”

The U.K. withdrawal could cut car maker earnings by more than €8-billion ($8.9-billion), reduce sales in the country about 14 per cent and cause a 2.5 per cent decline in vehicle production in the EU, Arndt Ellinghorst, a London-based analyst for Evercore ISI, wrote in a note.

Trouble in the auto business could be exacerbated by turmoil in the currency market, where the decline in the pound caused a sharp upturn in Asian currencies, especially the yen. Japanese auto makers, along with car– and electronics-parts makers, have gotten an export and profit boost in recent years from a weak yen. Now they’re looking at a reversal.

Hankook Tire Worldwide Co. of South Korea will respond by “diversifying global production capability,” said Vice President Park Hyun Min. Japanese car parts maker Exedy Corp. may have to consider moving its U.K. office to continental Europe, board member Hiroshi Toyohara said.

“That may affect employees we are currently hiring in the U.K.,” Toyohara said.

Exporter Boost

Companies that export from the U.K., on the other hand, could get a short-term boost from the weaker pound. One of those is Minebea Co. of Japan, a maker of ball bearings and industrial motors, which has a plant in Lincoln, England.

“If the pound gets cheaper, it is a big advantage for us as the manufacturing costs can go down,” Minebea President Yoshihisa Kainuma said.

Japanese companies, which have been investing overseas heavily in recent years, reacted with alarm to the prospect of uncertainty in Europe. The vote could affect mergers and acquisitions activity in the region, analysts said.

“This will have an inevitable impact on how Asian corporates view doing business in the EU,” said Jacky Scanlan-Dyas, a corporate partner at law firm Hogan Lovells in Tokyo. “From an outbound M&A perspective I’m expecting it to be depressed as uncertainty continues.”

Airline Slump

Among airlines, IAG, parent company of British Airways and Iberia, will be worst hit, according to a note from RBC Capital Markets. That’s because the airline is heavily focused on London Heathrow airport. IAG dropped as much as 34 per cent, the biggest intraday decline on record.

For U.K. travelers, air fares will go up and vacations will become more expensive, said Kenny Jacobs, marketing chief at low-cost carrier Ryanair Holdings Plc, which had lobbied for a vote to remain in the EU. Brexit could change the dynamics of air travel, with passengers on trans-Atlantic routes possibly choosing Dublin rather than London as an entry point to Europe, he said on Bloomberg Television.

Some reactions were more sanguine. Domino’s Pizza Group Plc CEO David Wild said his business is in good shape to weather any slowdown in consumer spending.

“People will still want to eat pizzas,” he said

 

Source:
Eric Pfanner
Bloomberg News
Published Friday, Jun. 24, 2016 5:26AM EDT
Last updated Friday, Jun. 24, 2016 7:48AM EDT

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