A Brexit supporter recently told me that he wanted Brexit to mean the removal of as many tariff and non-tariff barriers as possible, so we would have cheap imports and the UK would become once again “the most prosperous nation on earth, as it had been in the 19th century”. Free trade in the 19th century prodded the British economy of the industrial revolution to the services based economy we are now. But it has taken a century to work through, and we still worry about the impact of globalization on an industrial and agricultural workforce who cannot easily or willingly switch to service sector jobs.
In the 19th century, the flood of cheap imports was paid for by the profits from the UK’s investment in foreign railways and other industries overseas and our management of trade routes – particularly in relation to the British Empire. Up until 2011 the UK continued to pay for its trade deficit by making more money from its overseas investments than foreign investors were making from investments in the UK. Since 2011 the UK is no longer making enough money from its overseas investments to make up the deficit. The current account deficit is financed by the continued growth of foreign investment into the UK on the capital account.
So Brexit supporters have proposed three non-mutually exclusive ways to reinvent 19th century free trade prosperity for the UK, absent an Empire we can exploit. One is to compensate for any loss from no longer being members of the Single Market by making the UK as low cost and deregulated a place to do business as possible to attract more foreign investment (the Singapore option). Another option is for British businesses to expand into further flung overseas territories that they have for some reason been neglecting up until now. Or there is the “innovative jam” option, where we identify manufacturing or services that the UK has comparative advantage in and can export more of.
Japanese investment has been a key component of foreign investment into the UK, with greenfield manufacturing investments in the 1970s and 1980s like Nissan, Toyota and Honda but in the past 20 years has been more to do with acquisition or building up service sector presence such as banking and insurance. Some of the acquisitions built up a supply chain within the Single Market (particularly the automotive parts suppliers such as Denso/Marston/Excelsior, Calsonic Kansei/Llanelli Radiators) and others have been pure service sector market share acquisitions (such as Itochu buying KwikFit) or to buy up creative and technological expertise (Dentsu/Aegis, Softbank/ARM). So apart from the automotive sector, lack of access to the Single Market might not be such a blow to these acquisitions. Nonetheless, I know from my own experience that is not low cost or lack of regulations that are the most attractive for Japanese companies who invested in the UK – they were looking for stability and a skilled workforce, for long term sustainability, not short term profit. Brexit and the loss of regulatory predictability makes the UK less stable, and it also seems we might cut off access to the non-UK EU wide skilled workforce, who make up around 30-40% of the employees of some of my clients.
Alex Brummer, City Editor of the Daily Mail and author of “Britain For Sale – British Companies in Foreign Hands – The Hidden Threat to Our Economy” wrote in the Daily Mail regarding the multibillion dollar writedown arising from the Toshiba profit inflation scandal that “Toshiba shows the foolishness of relying on foreign owners, who put their domestic agenda first, ploughing money into Britain” and “corporate Japan operates to very different accounting and governance standards to Britain” (citing Olympus) and that this should worry the UK because Toshiba has investments in the UK nuclear power industry.
He then goes on to point at Dentsu‘s overtime related suicide scandal (although he doesn’t mention Dentsu’s earlier overcharging scandal) and how Dentsu has bought up Aegis, a UK advertising agency. He asserts that the CEO, who has now resigned, may have taken his eye off the ball due to his global expansion ambitions. He also laments the acquisition by Softbank of Cambridge based chip designer ARM.
“When command and control of our infrastructure, technology and creative industries is passed to decision makers far away, we all suffer.” he concludes. No evidence of this suffering is given. Presumably the worry is that Toshiba will have to pull out of the 50 per cent stake in NuGen it acquired from Spain’s Iberdrola, which is looking at building a 3.6 gigawatt nuclear power plant near Sellafield in Cumbria. No mention is made of Hitachi, who acquired the stakes in Horizon Nuclear Power after German utilities E.ON and RWE pulled out a few years’ ago – and have transferred their global rail HQ to the UK. I’m also not clear how Dentsu’s domestic woes are supposed to impact Dentsu Aegis Network. Nor what the issue might be with Softbank acquiring ARM, as Softbank’s CEO Masayoshi Son has promised to dramatically increase employment in the UK rather than asset strip. The trend I have seen with these acquisitions over the past decade or so is that Japanese companies have given up trying to manage everything from Japan and as with Dentsu Aegis Network, or Hitachi Rail, or Japan Tobacco, the international headquarters has moved to Europe.
I would argue that it is globalization and foreign acquisitions which have forced Japanese companies to become more transparent in many cases (Olympus acquiring Keymed, and thereby whistleblowing CEO Michael Woodford coming on board, or Toshiba making a mess of acquiring Westinghouse and CB&I Stone & Webster), and as a result, Japanese corporate governance is improving, albeit slowly. The majority of corporate governance scandals both in Japan and the UK are in the domestic services sector – certain British retailers for example, or banks – indeed Alex Brummer’s other book is “Bad Banks – Greed, Incompetence and the Next Global Crisis”. It was RBS’s acquisition of ABN Amro, and HSBC’s compliance issues in the USA, Switzerland and Mexico that exposed their lack of proper governance and management capability, and Rolls Royce had to pay fines to US and Brazilian regulators for their corrupt activities there.
Given that the Daily Mail and Alex Brummer are pro Brexit, is the implication that Brexit should not lead as other Brexiteers suggest to the UK becoming the new Singapore, but an opportunity to put an end to any further foreign direct investment in key industries, and maybe even try to kick out the current foreign investors in our infrastructure, technology and creative industries? At least that way our corruption and incompetence will be purely domestic and less prone to being exposed globally, because I would imagine other investor countries will retaliate by blocking British investment and erecting non-tariff barriers too, which might make doing any deals with China or Japan tricky. And if we don’t concede on immigration, a trade partnership seems unlikely with India, so that leaves other former colonies in the Commonwealth and the Anglosphere, for whom I doubt 19th century relationships with the UK feature much in their visions for the 21st century, with the possible exception of Trump.
Or there’s the “innovative” jam option. We will have to find alternative export sectors to build up, because the export sector we really had an advantage in after decades of free trade and EU membership – providing the professional services to support multinational industries (law, design, IT, engineering, research & development, finance, insurance, consulting, advertising, accounting, education) will fade away. If this kind of Brexit nativism really takes hold, multinationals will take their business elsewhere, swiftly followed by most of the EU professionals themselves. Still, at least we get back control.
For more content like this, subscribe to the free Rudlin Consulting Newsletter.