The UK's decision to leave the European Union has led to predictions of doom for the region's tech industry. TechRadar reported how the move could cripple the sector by removing EU talent and funding, cut off access to data and markets, and complicate trading and data privacy laws for years.
American tech industry investors might see fit to cheer the weakening of international competition, but in truth they have little reason to celebrate: the effects of Brexit on the US tech industry strike a harsh financial blow, and could have long-term ramifications on US businesses, from tech giants to fledgling startups.
Through our own research and a conversation with Stanford University adjunct professor and technology forecaster Paul Saffo, we set out to determine just how unfavorable these events will be to US tech businesses, and whether there's any silver lining to Brexit's chaotic impact on the technological economy.
Strong dollar = weak foreign profits
Financial markets reacted violently to the news of Brexit, with the pound decreasing to a 31-year low, the euro similarly plummeting and the dollar rising 6.3% in one day, its fastest rise in 50 years.
This trend is, somewhat counter-intuitively, terrible for US businesses, as foreign consumers and businesses will avoid purchasing increasingly expensive US goods. CNN Money reports that the strong dollar has already cost American companies tens of thousands of jobs from reduced foreign sales in early 2016, and this will only become exacerbated post-Brexit. Worse, any sales already made, paid in pounds and euros, become less valuable by the second until businesses have the chance to exchange the currency.
Silicon Valley tech companies do huge business in Europe, and this has shown in their soaring profit and stock losses, both in recent months and immediately after Brexit. Apple, for example, lost $2.3 billion in profits due to weakening foreign currency this past quarter, and its stocks fell another 3% just one day after Brexit. Microsoft's stocks fell 4% on June 24, and another 3% on Monday. Facebook, which gets a quarter of its revenue from Europe, fell 3% Tuesday.
"Nobody in Silicon Valley just has a company in Silicon Valley," says Saffo of the globalized tech market. Companies from giants to startups tend to branch out throughout international markets; the fact that London has traditionally been the bridge to the rest of Europe means almost the entire Valley is facing scrutiny and worry from investors after Brexit. Saffo notes that Apple, which located its main EU headquarters in Ireland, "looks really smart right now."
Strangely, the biggest financial winners of Brexit might be British companies that deal primarily with US firms and consumers. Market Watch points to Arm Holdings PLC, a British supplier of silicon for Apple microchips, which soared in the stock market because its profits primarily stem from US currency. Thus, we could see more British companies trying to export to American businesses in future, so long as the EU market and currency remain in turmoil.
A lost ally on data and privacy
Europe has an antagonistic relationship with America's biggest tech companies, to put it mildly. Microsoft was fined $2.5 billion in an EU-based antitrust lawsuit in 2013. Last year, the EU court system invalidated the Safe Harbor data agreement that allowed Google, Facebook and others to collect and monetize EU citizens' data because it allowed the US government to surveille EU citizens. Google specifically has faced EU antitrust lawsuits for Android monopolizing the EU mobile market and for its unfair paid search results in 2016 alone.
Saffo is highly critical of the EU's policies on data privacy, calling its laws "strict" and detrimental to companies while offering no benefit to consumers.
Britain has mostly gone against the grain of its EU allies, frequently taking pro-business stances and defending the rights of US businesses to claim citizens' data and operate freely. But, after Brexit, the other 27 EU nations will likely fight tooth and nail against any perceived Big Brother business tactics. Saffo believes the EU will see this as an excellent way to "stick it to the UK" for leaving, which will "do nothing to help the digital marketplace."
Ben Thompson, founder of tech newsletter Stratechery, told the New York Times that Brexit "is likely to give more power to France and Germany, which have been more hawkish in pushing for new regulatory scrutiny against the likes of Facebook and Google."
Thompson also emphasized that US companies' European offices mostly reside in London, which used to provide outreach to the rest of the EU. As BBC News reported, if Britain fully leaves the Union, the EU may restrict shipping and enact costly tariffs on UK goods — particularly goods that originate outside the UK, such as American tech products — as long as the UK forbids unrestricted immigration from EU nations.
These impending tariffs have tech companies and distributors worried. Case in point: Forbes reports how Amazon, which has treated the UK as a "shipping hub" to the rest of Europe, now has $6.3 billion invested in distribution centers that might no longer serve that purpose.
More trade barriers [are] bad for Silicon Valley, hands down - Paul Saffo
Britain hasn't left the EU yet, but we could see an exodus of American companies from London to Paris, Berlin or other potential European tech hubs before it does in order to preempt issues of restricted trade. When asked about the biggest problem facing Silicon Valley from Brexit, Saffo replies: "More trade barriers [are] bad for Silicon Valley, hands down."
Brexit proponents argue that these trade fears are overblown, and that separating from the EU and its draconian laws will turn the UK into a data haven that will keep its tech sector thriving. But Saffo finds it highly unlikely that this will be enough to keep US companies interested in the London market without Europe's markets attached to it. "California's economy is basically the same as the UK in size. So even if London becomes a data haven, it won't actually be that valuable or intriguing to Bay Area companies. Britain will have to work like crazy to preserve trade connections."
Small business opportunities - and stagnation
Prior to Brexit, experts nicknamed London the "Silicon Roundabout," seeing it as friendly ground for tech startups that pulled in talent from nations throughout the EU. But Brexit will cripple the city's access to European markets and tech workers, and cities from Berlin to Dublin to Amsterdam are jockeying to replace London as Europe's new tech hub.
For the many Silicon Valley tech startups that have branched out to London, this represents a major problem. US research firm CB Insights declared that London, once so attractive to US tech businesses because of its high EU immigrant population, resulting in a huge talent pool, will now suffer a "brain drain".
Berlin and other European cities want to poach those workers, but Saffo predicts many of them will go west instead. "We're going to see lots of frustrated expats leaving London for Silicon Valley. It's a high-cost place to do business, but there are benefits that offset the costs."
And where the talent and business flows, Saffo says, the investors will follow. The billionaires and venture capitalists currently investing their fortunes in British tech will need to find a new, lower-risk investment outside of the European market turmoil, which means a potential influx of cash for companies big and small in the Valley.
London's woes might appear to be Silicon Valley's gain at first glance, but Saffo is quick to note that not all money is a good thing for technological innovation. "There's already too much money going into the Valley and too few companies doing anything new or valuable. So we have investors putting their fortunes into companies with no real prospects."
US startups may benefit temporarily, but financing means little if the foundational ideas don't lead to anything interesting to consumers. Or, as Saffo summarizes, "Dumb money is bad for the Valley."
The price of uncertainty
Right now, every interested party - from tech CEOs to expats in the industry to billionaire investors to startup founders - is watching the Brexit fallout closely, gambling on whether Britain will really go through with its article 50 threat to leave the EU.
"I think it's dawning on [British leaders] that this is a cock up," speculates Saffo. "So now they need to find a way to save face, to back away from this and find a way to keep their relationship with the EU as close as possible to how it is now."
However, he recognizes that this might be optimistic, and companies can't base their economic futures on false hopes. "I would hate to be a company trying to decide whether or not to move to the Continent or to Ireland or stay in the UK." Saffo says that businesses will want to stay "ahead of the curve" and act decisively, but that they also don't want to "jump the gun" over a false alarm.
We'll soon see whether US tech firms begin a UK exodus, or decide to batten down the hatches and hope for a political reversal.
In the end, Saffo says it's the uncertainty of the whole situation that's causing more problems than Brexit itself. As long as the uncertainty remains, cash flow issues and currency unpredictability will persist, consumer spending on tech goods will continue to drop, and tech workers will be left in a state of limbo.
Top image: Credit: Rlevente/Source: Wikimedia Commons/License: CC BY-SA 4.0
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Michael Hicks began his freelance writing career with TechRadar in 2016, covering emerging tech like VR and self-driving cars. Nowadays, he works as a staff editor for Android Central, but still writes occasional TR reviews, how-tos and explainers on phones, tablets, smart home devices, and other tech.