The UK and Germany: A new post-Brexit partnership

8 minute read
24 January 2018


Read this Article in German.

For decades, Germany has been one of the biggest foreign investors in the UK. While the British love to talk about their ‘special relationship’ with the United States, there is now every chance that, in a post-Brexit world, Germany will become the UK’s new priority.

According to the UK's Department for International Trade, German investors backed 100 projects in Great Britain in 2016-2017, and were responsible for creating more than 5,800 jobs in the UK market. When measured by job creation, that means Germany lags behind only the United States and France in significance as a foreign investor into the UK, and there is every sign that its importance is growing.

The British have a long-standing history with the United States, and like to think that the two countries enjoy special ties. Indeed, it is the hope of expanding those trading links that led many voters to opt for Brexit, pursuing a notion that trade negotiations with America would be more fruitful if the UK were negotiating alone, rather than as a member of a bloc.

But early indications are that it is the Americans, and not the Europeans, that will rein back their foreign direct investment (FDI) in the UK as a result of Brexit. According to EY's annual Attractiveness Survey, published in May 2017, the proportion of UK FDI projects generated from the European Economic Area was the highest ever at 39% last year, up from 32% in 2007, while the proportion of investment in 2016 from the US - historically the UK's most important FDI region - fell to its lowest level in the past decade.

The report also highlighted that the top three origins of UK FDI were Ireland (+79%), France (+37%) and Germany (+31%). While these figures do not include a full year of activity since the Brexit vote, and take into account deals done before the vote as well as others agreed while Brexit's implications were yet to be seen, they do support a hypothesis that Germany's track record of investments into the UK might yet result in a new 'special relationship' between the two countries in the post-Brexit environment.

Unlike American investors, German corporates have never been interested in securing UK assets as a gateway into Europe, but have rather been keen on the UK for the UK's sake. German investors are keen to tap into the UK market, and have historically favoured projects in the industrial heartland of the country, where German investment has supported projects and jobs in sectors including automotive, information and communications technology, business services and machinery and equipment. Germany may stand to benefit from Brexit if it becomes a new gateway into Europe for US investors, while Britain still hopes that it will also prosper and remain an important investment destination for Americans looking for European assets.

In the automotive industry in particular, Germany has dominated inbound investment into the UK for many years (and indeed the automotive industry has been the UK's most successful manufacturing sector for attracting FDI). Between 2011 and 2015, Germany was responsible for 31 UK automotive projects, out of a total of 152, and was equal only to Japan for the scale of its activity. Again, there are signs that Japanese investment in the sector might be most at risk from Brexit, according to Mark Gregory, chief economist, UK and Ireland, at EY. He argues that much of Germany's investment in the UK automotive industry is in established UK operations such as Bentley, Rolls Royce and Mini, while Japanese investors have clear alternatives. Toyota has made six plant investments in France in the last five years, and Nissan has done the same in Spain.

In the car industry, the UK and Germany share a common strength, and one where there may be mutually-beneficial opportunities ahead. On 20 October 2017, General Motors closed the doors on its car manufacturing plant in Australia, as that country produced its last vehicle and ended its long history as a vehicle manufacturer. In Europe, Germany, France, Spain and the UK all featured in the world's top 15 motor vehicle producing countries in 2016, and the UK industry survives because it exports eight out of every ten cars it manufactures (in 2016, that was 1.35 million of the 1.7 million produced). While no-one knows what a post-Brexit world will look like when it comes to the specifics of free movement of goods, tariffs and trading relationships, there is a real possibility that - when released from the shackles of EU legislation - the UK's new freedoms might open up competitive advantages that German investors will wish to capitalise on.

There are also signs that the British government is pursuing an increasingly German-friendly Industrial Strategy, focusing attention on building its real industrial strengths outside its capital city. To balance the risk of London losing market share as global financial centre, the government has turned its sights on achieving export-led growth. In turn, it has prioritised growth in two of its key regions - the Northern Powerhouse around Leeds, Manchester, Liverpool, Sheffield, Hull and Newcastle, and the Midlands Engine, uniting the East and West Midlands and featuring key cities including Birmingham, Nottingham, Derby and Leicester.

It is too early to predict how this government policy might play out once Brexit becomes a reality, but it is not unthinkable that the UK might introduce special economic areas outside of London with tax advantages, something that might be of great interest to German investors already keen on manufacturing and industrial projects in the regions. There is every possibility that German investors might up the ante to secure assets in a UK free from European diktats, with a view to benefiting from its new status.

Irrespective of how the Brexit negotiations play out, most of the businesses that we speak with in Germany remain confident that the UK has a critical long-term role to play in international trade. Whatever its form and relationship with the EU, Britain remains a key trading partner for many of the world's great nations, and benefits from numerous strengths, not least the dominance and reliability of its legal system.

In such a context, the importance of the Anglo-German axis looks set to be a beneficiary of the upheaval. A poll last year by the DIHK, Germany's chamber of commerce, found that 21 per cent of British companies with German subsidiaries planned to invest more in Germany, and almost one in four intended to hire more employees. So, there are many positive signs about what lies ahead for the UK/German corridor.

Since the EU referendum result, the political rhetoric has been hard to read regarding how Germany and Britain might work together in the long run, but there have been some positive signs. Some German politicians have talked about a special arrangement for the UK, given its size, significance and long membership of the Union, and we all remain hopeful that sensible provisions will be made on areas such as trade.

While none of us can deny that trade flows into and around Europe look set to change fundamentally, as trading partners with long histories and strong ties, I remain hopeful that Brexit will strengthen the levels of corporate activity between the UK and Germany.

Andreas Woelfle is a Partner and Head of Corporate/M&A in Germany at Gowling WLG

This article was, slightly altered, first published in the "Law firms" (Wirtschaftskanzleien) supplement of Börsenzeitung of 6 December 2017

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