What Brexit means for aerospace and defence

11 January 2017


Latest industry figures reveal the significant contribution the aerospace and defence sector is making to UK productivity levels, with aircraft producers on track for a record-breaking year. So, how will the road to Brexit impact on the health of this important part of the UK economy?

The immediate reaction has been pretty neutral and this is probably explained by a couple of factors. Firstly, the long-term nature of contracts in this sector means that businesses are focussing on the job in hand. Secondly, businesses don't yet know what the post-Brexit regulatory and trading environment will look like and, without greater clarity, this makes it difficult to plan for.

Our research shows the majority of US-based aerospace and defence companies have adopted a similar position and have not yet made any changes to their investment strategy in the wake of the UK's EU referendum. However, perhaps in anticipation of what "hard" Brexit might look like, a significant proportion (41%) say uncertainty around the UK's regulatory environment is having a negative impact on their trade and investment decisions.

In this climate of uncertainty, aerospace and defence companies in the UK are looking for answers. Like most other sectors, their key concerns focus on three specific issues: retaining a skilled workforce, preserving research & development levels, and the impact of tariffs.

The aerospace and defence sector is heavily dependent on a highly skilled workforce - one that is drawn from across Europe and other parts of the world to support the many high profile innovation and design improvement projects being led from the UK. For such projects to continue to be based in the UK, there must be a supportive environment for R&D. According to the industry body, ADS, every £1 invested in aerospace R&D generates £7 for the wider UK economy - it effectively feeds growth. So, it was encouraging to see a new innovation fund as a central plank of the government's recent Autumn Statement, along with a proposed review of tax relief for R&D activities.

The private sector is also playing its part in supporting future innovation. BAE recently invested £15.6m in a new training academy, which will be used to train its own apprentices to work on the Eurofighter Typhoon and the US F-35 warplane, as well as supporting other companies in the sector in training their new recruits. It also has plans to build another training facility to support the production of its submarines. This type of investment from the private sector is to be applauded, but there will be many who worry if the current level of funding - much of which comes from European grants - can be sustained by the government and private sector sources.

Much has been discussed about the impact of financial tariffs on export levels, but for the aerospace and defence sector the concerns focus just as much around the non-financial aspects of such tariffs. An added layer of red tape, whereby companies have to identify the origin of the hundreds of components making up a jet engine, will add unnecessary time and cost to business - thereby impacting on competitiveness.

These issues are not unique to aerospace and defence companies, and are the issues keeping most CEOs awake when it comes to Brexit. This is where the government needs to focus its efforts in reassuring businesses to maintain the UK's world-leading position in its strongest sectors. The EU currently acts as a gateway for the UK in so many regulatory and trade agreements and a smooth transition is vital for supporting continued growth and innovation.

Clark Sargent is a partner and head of the aerospace and defence sector at Gowling WLG.

The following graphs highlight how US businesses with a turnover of $13 million or above are already reacting and preparing for Brexit.

Do you think the delay of up to two years (or possibly longer) for the UK to negotiate an exit from the EU will have a negative impact on your business?

34% Yes, it will have a negative impact, 40% No, it will have a positive impact, 26% It won't have any impact.

Is uncertainty about the future regulatory environment affecting decisions you are making about trade and investment with the UK right now?

41% Yes, it is having a negative impact on such decisions, 29% Yes, it is having a positive impact on such decisions, 30% No, it isn't having any impact on such decisions.

If you have a base in the UK, are you considering moving it to elsewhere in the EU as a result of Brexit?

24% We don't have a base in the UK, 32% Yes, 44% No.

Are you more likely to bypass the UK in order to do business with the rest of the EU as a result of the Brexit vote?

59% No, 41% Yes.

Would you favour a direct trade deal between the US and UK?

16% No, 84% Yes.

Estimate the value (in %) that the uncertainty over the Brexit negotiations has had on your EU investment strategy

56% No change, 28% Increased, 16% Decreased

Other than a change to tariffs, what factors would encourage you to continue trading and/or investing/providing services into the UK following Brexit?

24% Size, composition and preferences of the UK Market, 37% Regulatory stability, 52% A trusted legal and insitutional framework, 19% The £/$ exchange rate, 25% Common language, 15% Mobility of capital, 16% Ease and cost of establishment in the UK, 24% Access to capital, 12% Lack of opportunities in the US domestic market, 19% UK workforce, 25% Mobility of labour, 16% US governmentsubsidies to facilitate production or export financing, 2% Nothing would encourage me to continue trading and/or investing/providing services into the UK following Brexit.

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