How the UK 'Brexit' vote is already impacting Apple

Where's the silver lining?

Apple, Brexit, UK, computer industry, EU, Macs, iPhones

Apple's Covent Garden, UK retail store is one of its nicer stores, but will a weak pound drive consumers away?

Credit: Apple

Apple has big challenges and some opportunities following the UK ‘Brexit’ decision to exit EU, Europe accounted for 21.5% of its revenue in FY 2015.

Watching the news

Brexit is a big deal, so much so that web traffic has been unpredictable. The decision has driven more traffic to news sites (and away from other sites) than any other event this year, bar the tragic Orlando shooting, said mobile intelligence platform, Apteligent. The vote drove “almost 70 percent more traffic than normal,” they said.

Mobile news traffic has been up 18 percent since the beginning of the year, largely due to the US political season, they said. To put this into perspective, the UK decision to exit the EU drove more traffic than any recent US political event, including the naming of the Republican nominee.

UK impacts

A surge in interest around news reporting isn’t the only impact the UK’s decision will have. With no structured EU exit plan in place and no clear leadership to create one, and with many who voted to exist doing so in response to feelings of alienation with the existing UK political process, industry leaders face an unpredictable business environment.

Matt Hunt, CEO of leading UK app developer, Apadmi Enterprise says: “There is now a high level of risk and uncertainty over our future and questions are being asked as to how will we be able to build on our success and further grow without the support of the EU.”

Responding to the UK’s snub, EU governments are already working to attract UK-based technology companies to their own tech hubs, with Berlin already an up-&-coming star. Given business leaders seek stable, competent government and economic stability it’s likely they will have some success, given the situation. What are the likely impacts on Apple?

Product pricing

In the short term the company will be looking to currency markets in order to ensure its existing UK pricing is sustainable. With the pound at its lowest level in 31-years and a big chance it will fall beneath its current $1.3:£1 support position importers in every category will likely need to price in the risk of further price falls. They will also seek out ways to reduce the cost of doing business in an unstable economy – will the UK be forced to implement even deeper cuts to corporation tax while raising the burden of personal taxation? If it does do this then what impact will this have on tech markets and what comfort zone do firms need to price in in response? If we assume a 30 percent sustained decline in the value of the pound then we can assume fairly hefty price increases across Apple products, from apps to Macs – and how might this impact product sales? Where is the sweet spot between sustainable pricing and consumer demand? How much impact can the company sustain on its bottom line? Other tech firms are likely to share this pain.

Taxation

There is a chance Apple might profit from the instability. “Apple can move its international headquarters from Ireland to the UK, and be assured of being out from under the thumb of EU regulation,” said Mark Hibben. While doing so could help the company avoid EU demands for back taxes, it seems highly unlikely given Apple’s long association and deep connections with Ireland. Apple is also unlikely to want to base its European HQ in a non-European state, so may instead focus operations around new European hubs.

Bonds and debt

A weak pound may also be an opportunity for the company to issue bonds and debt at low, low prices in the UK. Conversely, UK consumers seeking loans may find credit limits negatively impacted by local economic uncertainty, and the UK’s financial sector is likely to shed at least some jobs in Europe’s favor.

Sales

Apple has a strong foothold in the creative industry, where the Brexit impact is already being felt. I’ve heard that some film shoots are being cancelled in response to the decision, while creative industry heads are also concerned at loss of EU skills, training and funding as explained here.

These instabilities will likely lead Apple’s bedrock of creative customers to delay technology purchases while they work out what’s happening. Of course, any negative impact on UK consumer wages will impact sales of everything from apps to iPads. With 39 retail stores across the UK, Apple is directly exposed to any softness in consumer demand.

R&D

We don’t yet know how the UK’s anticipated isolationist immigration rules will make it difficult to attract or retain skilled candidates from across the EU and elsewhere. This is important to many tech firms. Apple has key partners like ARM in the UK. It also has critical r&d hubs based in Cambridge, UK, including for Siri and Maps. Will the company be able to attract or retain key staff for these projects in the context of less open borders, high prices and low value currency?

Developing markets

One direct response to any weakness in UK market will be a redoubling of efforts to generate revenue in the world’s developing markets, China, India, Brazil. Apple is already active in all of these markets, and it’s likely the company will continue to ramp up activities there as it attempts to maintain growth. This means new opportunities and product design decisions will begin to focus more on the talents and aesthetics of the up-&-coming economies.

Summing up

Like everyone, Apple now faces big UK challenges across the next few years, but with EU leaders clearly better prepared for the decision than their UK counterparts, Europe is likely to recover. In the short term, UK consumers can look forward to price increases and recruitment freezes, and while these economic challenges may stabilize it’s unclear when, particularly in the irresponsible absence of any clear exit strategy or competent government.

NB: Some of these predictions may not apply to Scotland.

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