Emerging opportunities for UK companies facing Brexit
Since the United Kingdom’s (UK) decision in June 2016 to leave the European Union (EU), ‘economic uncertainty’ has dominated boardrooms, rattled capital markets, and plunged the pound to record lows. It has also forced both UK and European companies, regardless of size or sector, to decipher in vain how the future UK-EU relationship will impact their domestic and/or international business operations. Yet, while Brexit remains the focus of attention, Toby Tanner from APCO argues that UK companies should also devote significant attention to China’s slowing domestic economy and how it could accelerate commercial opportunities in strategic industries such as artificial intelligence (AI) and financial technology (fintech).
Economic issues accelerate demand for innovation
China is fighting battles on two fronts. Internationally, the country is tackling issues such as unprecedented pushback against its trade practices, strategic acquisitions abroad, and ambitions to internationalise the renminbi, to name but a few. Domestically, China is faced with the reality of an economic slowdown, with Q2 2019 GDP growth slowing to the lowest in 27 years after three decades of rapid economic growth. To overcome these challenges, the State Council has introduced stimulus measures to boost domestic consumption, strengthen capacity in high-end industries and promote the services sector. While these measures are dominated by the motive to strengthen domestic enterprises, the need to address short-term challenges has also accelerated the need for market liberalisation, creating opportunities for companies in strategic industries such as AI and fintech. This piece will outline two examples of such opportunities from a UK perspective.
New free trade zones: opportunities for British AI companies
The State Council recently announced plans to double the size of the Shanghai Free Trade Zone through an investment in the Lingang New Area, as well as plans to introduce six new pilot free trade zones (FTZs) in Shandong, Jiangsu, Guangxi, Hebei, Yunnan and Heilongjiang. The former includes measures to reduce corporate tax rates for companies in “key areas” such as artificial intelligence, biomedicine and civil aviation, as well as provide tax breaks to attract top talent and offer visa fast-tracks for overseas students to set up companies in the area. The latter includes high-level ambitions to facilitate ‘overseas innovation incubation centres’ and ‘entrepreneurship bases’, coupled with specific regional development focuses such as positioning Shandong FTZ to develop AI for improving social governance.
While the UK’s investment in AI has reached record levels, reaching United States dollars (USD) 1.06 billion (British pounds (GBP) 859.1 million) in H1 2019 compared to a total of USD 1.02 billion (GBP 826.7 million) for 2018, research shows that 89 per cent of the UK’s AI companies have 50 or fewer employees, compared to China, where over 53 per cent of companies have more than 50 employees. Although in its nascent stage, the tax incentives from the Lingang FTZ or the focus on AI for social governance in the Shandong FTZ could offer opportunities for smaller AI companies or research institutions to scale up, build a global network, and pursue international partnerships.
Financial opening: opportunities for UK fintech
To counter risks from growing financial instability and market speculation, China has accelerated financial liberalisation measures in recent months. The State Council outlined 11 measures to facilitate increased foreign investment in July 2019, which will remove foreign ownership limits on securities companies, futures companies and fund management companies by 2020, as well as make it more convenient for foreign institutional investors to access China’s bond markets. The implementation of these ambitious goals will stimulate demand for companies that can offer a value-add to the management of China’s financial markets and financial services industries. This trend offers a potential market niche for UK companies in fintech.
China’s fintech ecosystem has significant barriers to foreign participation. However, in August 2019, the People’s Bank of China (PBOC) released China’s Fintech Development Plan (2019–2021), which includes a pledge to “[d]rive China’s fintech development to be at the international forefront”. Currently, the UK ranks No. 1 globally in terms of growth in investment in its fintech sector, achieving investment of GBP 4.5 billion between 2015 and 2018. UK companies also have strong capabilities in sub-sectors such as regulatory technology, which complements China’s ambitions to create a more mature ecosystem. The UK’s commercial strength in fintech is coupled with current political mechanisms such as the UK-China FinTech Bridge, which includes a regulatory cooperation agreement between the UK’s Financial Conduct Authority (FCA) and the PBOC that enables both organisations to share best practices in how to regulate financial services innovations.
UK companies planning for post-Brexit should consider how to leverage future demand in China for niche services that can support the development of the country’s relatively nascent fintech regulatory ecosystem.
Look beyond the politics
While Brexit contingency planning will remain the priority for UK businesses and many European firms in the lead up to 31st October (or potentially longer), forward-looking enterprises should anticipate growing demand from China into their plans. China needs to stimulate the domestic economy, which could accelerate demand for expertise in areas such as AI and fintech, as well as other industries. European companies, regardless of whether they are based in the UK or the 27 EU member states, should stay on top of the latest macro-level initiatives, blueprints and plans which come out of China to place themselves in a strong position to capitalise. Those which position themselves as an innovative value-add to China’s economic new normal have an excellent opportunity to get ahead of the curve, regardless of deal or no-deal.
Toby Tanner is an associate consultant in the Beijing office of advisory and advocacy communications consultancy, APCO Worldwide. APCO Worldwide helps leading public and private sector organisations to act with agility, and build organisational reputations, brands, relationships and solutions to succeed. APCO is an independent and majority women-owned business.
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