The United Kingdom's vote in favor of leaving the European Union initially took the market by surprise, sending stocks tumbling and the value of the pound crashing.
In the week since, the market seems to have stabilized, but uncertainty—and a strong dollar—remains. Both of those can be significant bumps in the road for U.S. businesses, especially manufacturers that do a lot of exporting. And there's no indication of when that uncertainty will lift, as it could be quite a while before the so-called Brexit becomes reality.
Mark Sniderman, executive in residence at Case Western Reserve University's Weatherhead School of Management, said he can't think of anything like this in recent history, as the split “opens the door that's been closed for a really, really long time.” The world has been moving to a more open global market, but this vote signals a small retreat from that approach.
Still, Sniderman thinks companies shouldn't overreact. Instead, they should examine their operations for risks, he said.
It sounds like that's what companies in Northeast Ohio are doing, regardless of their exposure to the European market.
Electronic writing tablet maker Kent Displays Inc., for instance, doesn't sell much directly to the U.K., but CEO Albert Green said in an email that it will be watching the effects of the falling value of the pound.
On the other hand, the U.K. is an important market for Akron-based tiremaker Goodyear Tire and Rubber Co. But the wait-and-see approach will be the same, according to an email from Keith Price, director of national media relations and business communications.
North Canton-based A.T.M. maker Diebold Inc. also said it was too early to know how Brexit could affect its business in the U.K., but senior director of corporate communications Mike Jacobsen said in an email that the vote isn't expected to affect its pending deal to buy German rival Wincor Nixdorf for $1.8 billion.
For advanced materials company Materion Corp. in Mayfield Heights, it's too early to talk about how Brexit could affect exchange rates or regulatory matters, said spokesman Patrick Carpenter. But the U.K. and Europe are significant markets for Materion in a few ways. Close to 40 percent of company revenue in 2015 came from international sales, primarily in Europe and Asia, and Materion has operations employing about 90 people in Europe.
Materion and Diebold are far from alone in watching and wondering what will happen to their overseas counterparts. David Silk, chairman emeritus of the local British American Chamber of Commerce, said there are a number of Ohio-based companies, like paintmaker Sherwin-Williams Co. and law firm Jones Day, both in Cleveland, with operations in the U.K. And there are more than 500 U.K. subsidiaries in Ohio, employing about 20,000 to 30,000 Ohioans, he added.
One of the biggest potential problems for Northeast Ohio companies, especially manufacturers, is the affect the combination of a weak pound and a strong dollar could have on exports and imports.
In 2015, there was about $1.8 billion in exports of everything from aerospace components to chemicals from Ohio to the U.K., Silk said. The chamber helps facilitate trade between the U.S. and the U.K., said Silk, who also is a partner with SGI Global Business Advisors L.L.C.
The pain caused by a strong dollar is nothing new to U.S. manufacturers, which have been facing the effects of a strong dollar against foreign currencies in recent years. Sniderman thinks there could even be a “third-party effect” where countries outside of the European Union, like Japan, could see their currency strengthen.
“It's just one more issue manufacturers are having to face,” said Chad Moutray, chief economist for the National Association of Manufacturers in Washington, D.C.
There had been signs that the manufacturing sector was stabilizing, he said, but the uncertainty caused by Brexit throws a “monkey wrench” into that progress. He does think the market drop immediately after the vote was due to overreaction, but that it will be something to monitor, especially as it relates to any renegotiated trade deals.
The market has already largely been on pause—aside from the strong automotive and building construction markets—because it's an election year, when people tend to sit on cash until they see who takes office, said Matt Hlavin, CEO of plastic injection molder Thogus in Avon Lake. Thogus was able to grow through the last recession, but it's important to know what the financial implications of a global event like this are.
But it might not all be negative. Sniderman said there may be a way for companies to turn this to their advantage, if they look to expand their supply chain and source components in the now less expensive U.K. And Mekael Teshome, economist with Pittsburgh-based PNC Financial Services Group, thinks this could delay the Federal Reserve's timeline for raising interest rates from the summer to December, keeping borrowing rates low.
Overall, Teshome said he believes the direct impact of Brexit on local companies will be limited, and that the negative indirect impacts, like a stronger U.S. dollar and weak trade, will just exacerbate problems that already existed. He thinks that with low interest rates, companies will be able to maintain a steady pace of growth, as most growth drivers right now are domestic anyway.
“The sky's not going to fall in,” Teshome said.