CEO and founder Crisis Team
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UK tech sector to suffer three knockout PunCHes

Bill Mew predicts the UK tech sector to sustain three knockout PunCHes (Privacy, Covid and Huawei) – all of which are self-inflicted wounds.

6th Oct 2020
CEO and founder Crisis Team
Columnist
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Unlike previous downturns that affected all sectors similarly, travel, tourism and hospitality have suffered most at the hands of the coronavirus pandemic. But with the new reliance on remote working, the tech sector was one of the lucky few to benefit from the outbreak. 

 But now the UK tech sector faces three knockout PunCHes that could knock it off its feet and provide a set-back for some time to come. The three knockout PunCHes relate to Privacy, Covid and Huawei:

1. Privacy

Two years after enacting GDPR, the EU is finally starting to enforce it. Following a court ruling known as Schrems II, the transatlantic data sharing agreement between the EU and US was overturned. Local regulators are now stepping up a gear with the Irish DPA set to ban Facebook from moving data to the US. 

The mass surveillance laws have undermined the ability of US tech firms to provide privacy assurances to their EU clients. Yet post-Brexit remains the real threat to the UK when its own GDPR adequacy will be assessed – and the Investigatory Powers Act is little better than US surveillance laws. 

The UK faces problems sharing data across both the Atlantic and the English Channel. Failing to agree on a Brexit deal and/or breaking its promises on the withdrawal agreement will undermine its chances of striking a data sharing agreement with the EU. Either way, striking data sharing agreements with both the EU and US is almost impossible, given their opposing views on mass surveillance. 

The UK will be isolated from either the EU or US or possibly both. Whilst Brexit impacts the entire UK economy, the risk of data sharing isolation is the aspect of Brexit that will hit the Tech sector most. No longer will the UK be a location for inward technology investment, as a testing ground or bridging station for European expansion.

2. Covid-19

The coronavirus pandemic is a global phenomenon, impacting every global economy and all their trading partners as well. Some countries and economies have fared better than others. Of the G7 economies, the UK has probably fared worst of all. Covid has massively increased the debt burden in terms of government borrowing (which will mean higher taxes) and corporate debt. 

Unless a dramatic upturn occurs, around a quarter of all European businesses with over 20 employees will have exhausted their reserves and borrowing capacity by the end of the year. Those that avoid collapse may limp on as zombie enterprises for years to come. The pandemic is consequently dampening the ability of firms to invest whilst skewing any investment they make. 

While freezing investment plans, firms are accelerating their move towards cloud computing and remote workforce enablement. The problem is that the main beneficiaries will be the US tech giants and not the UK tech sector, which has few major tech players of its own. 

Major projects being frozen would have benefited local MSPs, VARs, SIs and their skilled workforces. Cloud and SaaS players have skeleton operations in the UK with their higher skilled tasks being performed either in the US or in low wage economies like India. 

While German and French governments have championed Gaia-X – an initiative to support local cloud players like OVHCloud – the UK government has paid little more than lip service to its commitment to local tech SMEs.

HMRC, which once hosted its operations with Datacentred, a Salford-based SME created with seed funding from the local council, chose to switch its operations abruptly to AWS. This put the local tech SME out of business, lost the local council its seed funding and gave the revenue instead to a firm that pays almost no UK tax. 

The added irony is that under the Shrems II ruling, HMRC now needs to consider moving its business away from hyperscalers like AWS. A local firm like Datacentred would be the ideal alternative if HMRC hadn’t previously put them out of business. On the continent, of course, firms like OVHCloud will be well placed to capitalise on the Schrems II ruling.

3. Huawei

The government originally allowed Huawei to participate in the UK 5G rollout. In 30 years of Huawei’s support of UK telecoms, no major security incidents had ever occurred. No vulnerabilities had ever been found relating to Huawei equipment. Due to a great deal of scaremongering and pressure from the US government, the UK has now excluded Huawei from the rollout. 

However, it is not the US government that will have to foot the bill for replacing all the Huawei equipment. Nor will it compensate the UK for the considerable financial impact that the decision will cause. Independent analyst firm Assembly Research reckons a three-year delay to the rollout of 5G could cost the UK economy up to £18.2bn. 

On top of this, the UK would lose its current competitive advantage and global leadership position in 5G. But if the removal of Huawei equipment is brought earlier than 2027, as has been threatened, this would further delay the 5G rollout at a higher cost to operators and the UK economy. 

“As a result of further restrictions on Huawei in the US, the UK mobile operators are set to incur billions of pounds worth of cost stripping out equipment from their networks,” commented Assembly principal analyst & founder and one of the report’s authors Matthew Howett. 

This report reaffirms there is also an untold cost in terms of the economy and impact on productivity a delayed 5G rollout will have, the scale of which the UK can ill afford given the current economic circumstances.”

Brexit disaster?

Some see Brexit as a mere distraction from the UK’s real economic woes and the need to focus on its deeper problems, such as productivity, if it is to rebuild its position as a powerhouse. Either way, UK tech firms face a challenging enough market, even without the wider economy reeling from the costs and impact of both Covid and Brexit. 

These three additional knockout PunCHes could be enough to put them on their backs. How long they take to get back on their feet after this is anyone’s guess.

With concerning stories about the impact on Brexit on the City and on the automotive sector, the last thing that the UK economy can afford is for the digital economy to stutter or stumble.

 

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