Bigger is better for Britain's battered industry: Our industrial decline is by no means terminal but, says David Bowen, UK factories are far too cautious when it comes to expansion

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The Independent Online
BERNARD Robinson, a stocky north-easterner with a penchant for large cigars, is an unusual British businessman. His company, Tallent Engineering of Newton Aycliffe, Co Durham, has increased its sales and its staff by 50 per cent in the past two years. As it supplies recession-battered motor manufacturers, this is quite an achievement.

'It's been hard but it's been progressive,' Robinson says. He has accelerated his investment programme during the recession because, he says, 'we have to achieve world-class performance'.

Robinson believes that big is beautiful: that the larger a company, the better chance it has of taking on the rest of the world and winning. He wants Tallent to have sales of pounds 100m by the middle of the decade.

If all Britain's companies were run by Bernard Robinsons, we would probably be experiencing the problems of Japan: an embarrassing trade surplus and more wealth than we knew what to do with.

But they are not. Even as the recession continues to bite, the trade deficit is showing an alarming acceleration. Last week's trade figures showed that exports, which had been holding up well during the recession, fell by 3.5 per cent in May.

Imports, which fell sharply as the recession bit, have started to move ahead again. In the first six months of the year, the visible trade deficit excluding oil and erratic items was pounds 7.3bn, against pounds 6.5bn in the same period last year. If this is happening as consumer spending remains deeply depressed, the prospects for the trade balance - and thus for the economy as a whole - as the recession lifts are not happy.

The problem is simple: Britain's manufacturing industry appears to be incapable of keeping exports and imports in long-term balance. And it is manufacturing that is the key: services may be of growing importance to the economy, but only 20 per cent of them are tradeable. You cannot pay for Japanese cars with British hairdressing.

Until the early Eighties, the root problem was that the industrial base was big enough but not good enough: in many areas it failed to expand when it should have done. Then there was a massive recession, which shook it out and shrank it. The quality of the manufacturing base improved immeasurably - but it was now too small. As a result, exploding consumer demand at home was satisfied to an alarming extent by foreign factories.

The immediate challenge is to survive this extraordinarily lengthy recession. But for the Nineties the need is to make British industry big enough while maintaining its quality. It is a huge challenge, but not an impossible one.

The charts on this page tell the tale. It is not a story of export failure, but of an inability to cope with competition from abroad. Although exports have picked up well in the past three years, over the long term they have shown little growth; imports, on the other hand, have rocketed.

In 1960, the idea of a British manufacturing deficit would have been unthinkable. British factories accounted for about 18 per cent of all the manufactured products being traded around the world. We still had a number of semi-captive imperial markets, there was little competition, and post-war economic growth made sure that there was enough demand to snap up everything Britain's factories could produce. But it was not long before danger signs appeared.

As countries started to industrialise (or in Japan's case reindustrialise), they began with labour-intensive products, where their low wages gave them an advantage. They sold to rich and open countries, such as Britain. So it was that imports of toys, shoes and clothes started to lift off in the early 1960s. Exports kept up with the growth of imports until the early Seventies. Then the trouble really started, as foreign manufacturers declared open season on their inefficient British rivals.

The recession of 1980-81 made things much worse, at least in the short term. It knocked out 2 million manufacturing jobs, hundreds of factories and dozens of famous names. In shoes, imports rose relentlessly, from pounds 300m in 1970 to pounds 700m in 1979 and pounds 1.2bn in 1990 (all figures are at 1990 prices). Exports meanwhile scuttled along a horizontal line.

More and more clothes started flooding in from the Far East, and although British manufacturers kept hold in certain upmarket niches (and were sustained at home by the patriotism of Marks & Spencer), the deficit grew and grew. By 1989 it was pounds 4bn, second only to that of the car industry. The British were no longer clothed by Lancashire mills, but by factories in Indonesia, Taiwan and China.

Some of the most famous names in the toy industry were killed by the last recession. Lesney, maker of Matchbox toys, Dunbee-Combex-Marx (Scalextric and Hornby) and Airfix all went under. So, after a last-minute rescue attempt by the Maharishi Mahesh Yogi, did Meccano. Some of these brands have survived (Meccano, for example, is still made - in France). The story was repeated in furniture and carpets.

Shipbuilding declined fast and early. In 1950, Britain was the leading exporter of ships, selling 38 per cent of the world total. But only six years later, it had already been overtaken by Germany and Japan, and its share was down to 14 per cent. A failure to modernise, bad industrial relations and amateur management combined in sabotage.

Now only three British yards are capable of building merchant ships. Orders are rising worldwide, but British yards will be unable to take advantage of them. The only comfort comes from the knowledge that other European countries, whose shipbuilders have also been decimated, are in the same boat.

No such excuse exists for the British motor industry, which by 1988 accounted for almost a third of the trade deficit. The collapse was remarkable; almost as remarkable as the likelihood that Britain will be back in surplus by the late Nineties.

In the mid-1950s, 70 per cent of all the motorcycles in the world were British. The great names - Triumph, Norton, Villiers, BSA - dominated world markets. The first real invaders were the Italians, sending Vespas and Lambrettas to carry Mods to Brighton. Then, during the Sixties, the Japanese moved in, first at the bottom of the market, then gradually moving up. As the Japanese brought in a new machine, the British would look at it, decide they could not compete, and retreat upmarket.

By the end of the Sixties, they were concentrating on big bikes. Then the Japanese went for that market too. Even as the Americans embarked on a love affair with powerful machines, the British, who had dominated the market, failed to capitalise on it. While their US sales stayed at 30,000 a year, those of the Japanese shot from 27,000 to 218,000.

The British manufacturers reacted by banding together, and by 1975 they were crowded together into one sprawling group, Norton Villiers Triumph. They could not compete. Honda and Suzuki each employed about 1,000 people in research and development; the entire British industry had 100.

Cars and lorries did not fare much better. In the early Sixties BMW based its new models on the 'executive cars' pioneered in Britain: the Triumph and Rover 2000. But it had a coherent strategy, a good relationship with its workers, and was well managed: qualities lacking in the British motor industry. In 1950, the British car worker produced 3.3 vehicles on average, while his German counterpart made 2.2 cars. By 1965, the Briton produced 5.8 cars, but the German made 7.1.

In 1956 we imported 6,885 cars and exported 335,397. In 1975, the year British Leyland was bailed out by the government, the car trade went into deficit for the first time, and four years later the UK imported more than a million cars. Exports had risen to 410,000.

The United Kingdom used to be one of the biggest lorry producers in the world. Now Leyland is part of a Dutch company, Daf; Bedford became AWD and folded two weeks ago. Most other names vanished long ago.

Another area of almost unmitigated disaster is the so-called white goods industry. Based in one of the wealthiest countries in the world when kitchen gadgets started to appear in the shops, British companies should have been well placed. And in the Fifties, names such as Kelvinator, Prestcold and Colston did dominate kitchens.

But as the charts show, they were quite unable to sustain their market share when continental makers moved in in the late Sixties. Now the names under the worktops are Zanussi, Philips and AEG. There are British manufacturers, such as Creda and GEC's Hotpoint, but they are ineffective breakwaters against the flood of imports. The only real breakwater has been the recession; when this is removed, the flood will resume.

To say that the story of British manufacturing is one of relentless despair is quite misleading, for three reasons.

First, not every industry rolled over on its back in the face of foreign competition. Imports of chemicals rose through the Seventies and Eighties - but so did exports. By its nature, the chemical industry is efficient: liquids are pumped through pipes, staffing is minimal, and success depends on the ability to build large plants. ICI could keep up as well as anybody. Pharmaceuticals is another success story. The explosion of Glaxo with its extraordinary anti-ulcer drug Zantac is one of the business phenomena of the post-war world. Wellcome is also notably successful. Britain's success may well be related to the British admiration for cleverness (needed to make drugs) as opposed to competence (to make cars).

Given that Britain has not produced a full-size airliner since the VC10, the relative success of the aircraft industry might come as a surprise. But Britain does have the second biggest arms industry in the world, and a good part of it is linked to aerospace.

More positively, companies such as Dowty, Smiths Industries and Lucas have moved away from low-value car parts to high-value aircraft parts. For example, Lucas is a leading producer of the powerful electric motors that make the flaps flap on Boeing aircraft, while Dowty will supply Boeing with sophisticated fuel and electronics systems for its new 777. Not all this equipment will be made in Britain; but some of it will.

Imports of aircraft have recently been highly erratic: this distortion is caused by the inclusion of leased aircraft.

The second cause for hope arises out of the 1980-81 recession, which acted as a gigantic enema for some parts of industry, clearing out ineffective management and startling those who remained into rethinking their entire operations. They introduced proper financial controls, streamlined their marketing and discovered how to make products efficiently and without the quality problems that had so devalued Made in Britain.

They travelled around the world, discovering how other people (notably the Japanese) made high-quality products so cheaply, and brought the techniques back to their own factories. The buzzwords of the new manufacturing - Total Quality, Right First Time - started to creep into fusty British boardrooms and in some, such as Tallent Engineering's, were adopted with enthusiasm.

This conversion did not touch every sector of industry. There was little it could do to counter the decline of clothing and other labour-intensive sectors, while motorcycles and washing machines seem to be beyond redemption. But it did stabilise the machine tool industry, which contrary to widely held belief managed to more or less match imports with exports through the Eighties. Whether it will be able to slow the strangulation by the current recession is, unfortunately, moot.

The car industry stands to gain most from the new dynamism. Virtually all European manufacturers have been adopting Japanese systems, forcing their own factories and those of their suppliers to upgrade quality and productivity. The British benefited more than most: they had more room for improvement, and their lower labour costs provided a natural competitive advantage.

This in part accounts for the lift-off in car exports from the mid-Eighties. Direct Japanese investment - the third cause for optimism - accounts for the rest. Nissan's plant in Sunderland exports most of its cars to Europe; the Honda and Toyota factories will be doing so shortly. Dozens of foreign-owned factories are springing up to supply them. Last year exports were boosted by exceptional demand from Germany; this year they will fall and the gap will widen.

Then Japanese production should start to cut in in a big way. According to DRI Europe, the consultants, UK car production, which was about 1.3m last year, will hit 1.8m by 1995. About 60 per cent of the increase will come from Japanese-owned factories. Shortly after this, the motor industry should finally move back into the black.

If this sounds hopelessly optimistic, have a look at the trade pattern for colour televisions. There is not a single British-owned television manufacturer, but thanks to eight Japanese-owned factories, the trade surplus has been rocketing for the past four years. There is a similar pattern in video recorders and other consumer electronics.

If - when - the recession eases, however, it will be dangerous to rely on Japanese investment to lift British manufacturing capacity. With the lowest wage costs in Western Europe and increasingly competent management, there is no reason why British-owned factories should not expand - except perhaps for an over-cautious attitude to growth, both in the factories and in the City. To use the jargon of the Eighties, British business is too 'risk-averse'. That needs to change.

Research by Samir Shah.

(Photographs and graphs omitted)