Creating the marketplace is more important than managing a factory

Click to follow
The Independent Online

Now it is the turn of the Germans. The bid for Orange is one of a clutch of German investments in the UK, of which the most important in industrial terms has been the takeover of Rover, and the highest profile the buying of Rolls-Royce and Bentley cars. But arguably more significant than either of these ventures was the purchase of two of our top merchant banks, Warburg and Morgan Grenfell, the best part of a decade ago.

Now it is the turn of the Germans. The bid for Orange is one of a clutch of German investments in the UK, of which the most important in industrial terms has been the takeover of Rover, and the highest profile the buying of Rolls-Royce and Bentley cars. But arguably more significant than either of these ventures was the purchase of two of our top merchant banks, Warburg and Morgan Grenfell, the best part of a decade ago.

Why so? The normal debate about the virtues of inward investment centres on two propositions. The first is that when foreign investment means setting up a new British plants - such as the Japanese building Toyotas here - this should be welcomed. The second is that when foreign investment means taking over a British company this should be regarded with a slight suspicion.

It is an understandable way of looking at things, but a rather myopic one. A lot of the money to build the new foreign plants comes from the British taxpayer, raising the question of whether it is really a good idea to take money from ordinary Britons in order to give it to the shareholders of foreign companies. As for foreign take-overs, we are being paid for something that we are willing to sell. We then have the money to buy something else, which may or may not become worth much more than the thing we have sold.

So the big question underlying not just this latest burst of inward investment in the UK from Germany, but the whole way in which large swaths of our economy have passed into foreign control is surely this. Is management control more important than ownership?

Surely they are the same? No, they are not. When BMW took over Rover, there was a certain frisson of concern about the loss of management control of the last UK-owned car company. In reality the sale was a triumph for British Aerospace, which managed to unload its problem child on unsuspecting foreigners. Much the same applies to the takeover of Jaguar by Ford. Both businesses have consumed enormous amounts of investment and while Jaguar is showing positive results, Rover has yet to do so.

From a narrow nationalistic point of view loss of management control in both those instances has been a mercy. We have the money, they have the problems.

We tend to forget this latter point, that when a business passes into foreign hands, UK investors have the cash to buy something else. We lose management control of Rover (which of course we managed appallingly badly) but we become owners of assets elsewhere in the world. If management control matters then this is bad news. But if ownership matters, it is fine. If we seem to be quite good sellers, we may be quite good buyers too.

The stock of assets that Britain owns abroad is roughly the same value as the stock of assets owned here by other countries: the two piles are sufficiently close together to be pushed into surplus or deficit by the fluctuations of the value of the pound. A couple of years ago we were in modest surplus. Now, thanks to the rise of sterling, the balance sheet is in debit. But the flow of funds from these investments is enormous - sufficient to push the current account into surplus last year despite the yawning trade gap.

True, that was slightly freakish, but the general point stands that we seem to be very good overseas investors in the sense that we earn much more from our foreign assets than foreign companies earn from their UK assets, despite the fact that the two pots are about the same size.

Now back to the question: which matters more, management or ownership?

If it were management, there would be quite serious long-term implications from the growing proportion of UK plc that is owned abroad. Key decisions about plant location, size and nature of investments, product development and so on would all be taken elsewhere - just as they are for Rover now, or will be for Orange in the future.

That does not mean that the decisions will be wrong. You can argue that where a country cannot manage a sector well, to sub-contract the management to foreign interests is the wisest thing to do. If in addition those interests are prepared to pay for the privilege, better still. But we should not kid ourselves that these decisions will take into account UK long-term interests, whatever those might be. The decisions will be taken for the benefit of the shareholders of the group concerned.

But we, as UK investors, may also be these shareholders. If ownership matters most, then the key skill for the 21st century will be portfolio management: the ability to spot undervalued assets and skilled management and use the cash resources to buy the assets and back the management.

We have become accustomed to the notion that money is something that washes around the world chasing the best returns. We know that technology crosses national boundaries with the speed of light. We are beginning to become accustomed to the idea that management is simply a commodity that you go out and buy. If it becomes harder are harder to achieve a competitive advantage by more money, better technology and even better management, what skills are left?

The answer is the "soft" skills, like creativity, entrepreneurship and the market skills of knowing when to buy and when to sell.

And that is why the German purchases of our two key merchant banks was so significant, much more so than that of Rover or Orange. In purely financial terms those take-overs have been a bit of disaster, but they have helped anchor international fund management into London.

London dominates cross-border investment management. If this is becoming a more important power in the world (and I believe it is) that the fact that this should be anchored here is much more important than the fact that many British companies should be foreign-owned. Creating the marketplace is more important than managing the factory.

Indeed the whole Orange experience is quite a good lesson in itself of the value of creating a marketplace. Orange is only British in the sense that Hong Kong used to be British, and its owners came here from Hong Kong because the UK created a relatively deregulated marketplace for mobile telecommunications earlier than most of the rest of Europe.

Create a brand, muck it up, then sell it to the Germans - that was the Rover model. Create a marketplace, attract overseas talent and money, let that combination create a brand, then sell it to the Germans - that is the Orange model. If ownership matters more than management, then both were wise moves.

Comments