And yet it happened. Manufacturing output in the second quarter of 1990 had reached an all-time peak, 10.6 per cent above the previous peak in 1979 and 34 per cent above the trough in 1981. The rate of company failures was edging up, industrial profitability had slipped from 10.6 per cent in 1988 to 8 per cent, but there was widepread confidence that this time the soft, service-based South would be hammered, while the hardened manufacturing North would escape.
This time was in contrast to last time, the early 1980s, when two million manufacturing jobs had been wiped out, profitability had slumped to 3 per cent and the whole industrial structure had been shaken to its core. It seemed inconceivable that anything remotely as bad could be visited on industry less than a decade later.
But by the end of 1990, the mood had suddenly switched to one of deep gloom. Figures were published showing that manufacturing output had fallen by 1.8 per cent in the third quarter, the sharpest drop since 1981. Business failures were 90 per cent higher than a year before. The industrial economy of the West Midlands, which had been growing at a Far Eastern 9 per cent in early 1989, was now contracting at 2 per cent a year.
Now, as the recession finally seems to be lifting, it is commonplace to hear manufacturers say that this time was worse than last time, that it was 'the worst recession since the Thirties'. For some companies this is unambiguously true: anyone who supplied the construction trade, and some consumer goods makers, were hit much harder than they were in the early Eighties.
Overall, though, this recession was not as deep. Manufacturing volume then fell by 18.5 per cent from peak to trough; this time by less than 8 per cent. Mechanical engineering output slumped by 27 per cent then; by 19 per cent this time. Production of cars and car parts dropped by more than 50 per cent then; by 18 per cent this time. The pattern is the same in textiles, while the chemical industry, where production dropped by 22 per cent in the early Eighties, has hardly seen a dip this time: it had other problems, which is why its companies are so hard-pressed.
But the charts show something else: that the collapse was less precipitous this time, or to put it another way, that it dragged on longer. That caused its own problems: companies that had high debts to service (of which there were many) found themselves worn down by attrition, and some collapsed. Factories were closed, too, when they might not have been. 'A lot of plants that were shut last time were probably hopeless,' a senior engineering manager says. 'This time we have shut factories that could have recovered.'
The 1979-81 recession was a structural one for manufacturing, and had a brutal purgative effect. When recession began in earnest in April 1980, announced by a collapse in car sales, industry responded like a set of skittles. Only government subsidy kept British Steel, British Leyland and ICL in existence: hundreds of factories closed. In August 1980, 20,000 redundancies a week were being announced - all in manufacturing.
The cruel truth was that many of the companies that went out of business, and many of the managers who lost their jobs, got their just deserts. British industry was overmanned and in large part poorly managed. By the middle of 1981, the recession was already lifting, and company bosses - some newly in place, others terrified into action - realised something must be done. Throughout the Eighties, the quality of the manufacturing base improved greatly: proper financial controls were introduced, factories were overhauled, so were industrial relations.
The industrial base did not, however, grow: managers bought companies, not equipment, and by the end of the decade it was still too small. As consumer demand surged, British industry was unable either to satisfy it or to balance imports with exports; interest rates were pushed up to damp spending, and the economy slipped.
The first manufacturers to feel the effect were suppliers to the building trade: for them the downturn started in 1988, soon after the housing bubble had burst. Nigel Rudd, chairman of Williams, which with its Crown and Berger subsidiaries was the second biggest paintmaker in the country, was surprised by the speed with which the market dropped. He had assumed that as people stopped moving house, they would spend more doing up their homes. They did not: most of the paint was bought within months of a house move.
Slowly, consumer goods makers felt the squeeze. The first manufacturing victim of the recession was probably Hinari, a Scottish television assembler which, in the spirit of the times, had adopted a Japanese name to boost sales. It went into receivership in October 1989. Coloroll followed soon after. One of the fastest-growing companies of the Eighties, it had accumulated a mountain of debt alongside a huge home furnishing business. When it collapsed, many saw it as a healthy sign that the chickens of the Eighties were coming home to roost.
By the spring of 1990 economists were clucking with worry, but in the manufacturing heartlands optimism persisted. 'We got to June before people started to become concerned,' said Philip Shepheard of the Birmingham stockbroker Smith Keen Cutler later. 'I was really wondering if we might squeeze through without a downturn.'
Even when manufacturers saw the jaws of recession closing, they felt they could escape harsh punishment. For one thing, they could compensate by exporting, especially to the buoyant Continent. A reasonable exchange rate gave them an escape route they had not had in 1980: export volumes at the beginning of 1990 were 20 per cent higher than two years earlier.
Most important, industrialists were confident that having lived through the last recession, they were much better equipped to cope with whatever was thrown at them - certainly better equipped than advertising agencies and retailers that had never known hard times.
Sterling was brought into Europe's Ex change Rate Mechanism in October 1990. Few industrialists complained about the DM2.95 rate, even though they believed it was a little high: it was acceptable as a quid pro quo for stability. But even as Britain joined this brave new world, which restricted the Government's ability to take unilateral economic measures, the danger signals were flashing.
Glynwed International, a Birmingham-based engineering group that was a good barometer for the industrial economy, announced interim profits down from pounds 45.9m to pounds 40.4m. This was hardly a collapse, but it did mark the end of a seven-year run of 20 per cent-plus earnings growth. In September and October, orders suddenly dried up. Had the collapse arrived? No one was sure. 'This may not be a full stop. It could be just a semi-colon,' said Nick Boucher, Glynwed's planning manager. John Richards, managing director of the Birmingham car-paint maker PPG Industries, was similarly uncertain. 'If the Government does nothing to reverse the slide, it could look pretty horrible in six months' time,' he said. 'We are now just hovering on the edge, cutting overtime and investment. If that doesn't work, we will see a significant increase in unemployment.'
The next spring, even as Mr Richards's worst fears were being realised, many people believed the slide would soon be halted. Interest rates had started to fall, and there was a feeling that if consumers could just be given a little confidence, they would start to spend and the recession would lift. The first obvious opportunity for this had been the end of the Gulf crisis, in February 1991, and there was indeed a surge of optimism after it. A CBI survey produced tentative signs the manufacturing recession had bottomed out; Sir Brian Corby, the CBI president, said: 'The worst is probably behind us'.
The Engineering Employers Federation was not convinced. It said 100,000 engineering jobs could be lost in 1991, and the same again in 1992. 'Companies made redundancies last autumn and thought that would be enough,' the EEF's economic adviser said. 'Now they are having to do it again.'
Its pessimism was justified. The biggest fall ever in consumer spending was registered in May 1991, while car sales were 31 per cent lower than a year before. Overall car production was holding up remarkably well, as the motor giants used slack UK factories to fill the insatiable demand of the Germans.
Germany saved the bacon of many British companies. In the summer of 1990, eastern Germans had been give one Deutschmark for each Ostmark. It was a recipe for trouble ahead, but in the short run could have only one result: a surge in consumer spending and great opportunities for anyone who could take advantage of it. The big winner was the motor industry. Even as UK car sales plunged, cars were rushed across the Channel and into German showrooms. General Motors had stopped exporting from its British Vauxhall factories in the early Eighties, saying quality was not good enough, and for much of the decade the Luton factory was little more than an assembly plant for German-built cars. Now the tables were turned: Vauxhall starting exporting in 1991.
Luxury car makers were not so lucky: they found sales had collapsed by 50 per cent or more. Rolls-Royce sales dropped from 3,200 in 1990 to 1,500 the following year, pushing its parent, Vickers, into loss. Aston Martin, Jaguar and Lotus survived only because in an unwise rush to buy prestige brands in the late Eighties, Ford and General Motors had taken them under their wing. Jaguar's troubles were enough to cause a big hole in Ford UK's finances; it lost pounds 587m in 1991.
Up-market motor companies belonged to the unfortunate group that was feeling the pain as badly now as it had in 1980. Chemical companies were there too, though they were suffering not so much from poor demand as from oversupply. In the late Eighties, demand was booming and companies started to build new capacity. The result, as the recession bit, was that they found demand heading one way and supply the other. Yet the nature of the industry meant it was difficult to cut capacity: no one wanted to be the first to write off expensive plant, leaving others to reap the rewards of better margins. The answer must be to cut capacity by agreement - but much red ink would have to flow before that would happen.
British Steel faced an almost identical dilemma. In 1980 it had got into the Guinness Book of Records as the most unprofitable company ever, clocking up a pounds 1.8bn loss. Only unwilling government intervention had kept it going. Ten years later, British Steel was reckoned to be one of the most efficient steelmakers in the world - thanks to ruthless streamlining - yet once again it found itself in the red. The loss was comparatively modest - pounds 55m in 1991 - but highlighted the chronic problems of the European steel industry. The Germans were only now tackling overcapacity, and were meeting fierce union resistance, while the state-owned steelmakers of southern Europe refused to cut back.
Then there was the textile sector; here again, recession was only part of the problem. Britain's market share in textiles has been falling for more than a century: the inevitably high labour content created a chronic disadvantage for industrialised countries. Because the low-cost countries of Asia had currencies linked to the dollar, exchange rates were at least as critical as economic activity. Britain's textile output went into free fall as the pound strengthened in 1979; in the mid-Eighties, as the pound sank towards parity with the dollar, there was talk of a great revival; then production slipped again as sterling recovered. The slowdown in consumer spending added to the pain, but by the end of 1990, when the rest of manufacturing was starting to plunge, textiles had reached bottom.
For the most part, though, it was companies which had escaped the scythe last time that found themselves in deepest trouble. Figures from the credit insurer Trade Indemnity showed that 30 per cent of business failures in 1991 were in building and construction; retailers added another 14 per cent.
Defence manufacturers had also ridden the last recession; now they were coping, not with recession, but with the end of the Cold War. With one exception: in September 1991 British Aerospace, the UK's biggest exporter, found itself with a problem that was intimately linked to the downturn.
BAe flew through the 1980 recession with the help of cosy military contracts. Later, with peace breaking out and defence contracts more competitive, Sir Roland Smith, the chairman, decided he needed pounds 1bn to streamline its factories. This could come, he reckoned, from the funds generated by redeveloping sites as they closed. The strategy was ingenious, but relied on a buoyant property market.
This, from 1988, he did not have. As property prices collapsed, BAe found itself with acres of unsellable land and no way of paying for its rationalisation programme. Meanwhile Rover, which it had bought in 1988, as well as the civil aircraft division, had been pushed into loss by recession. A few days before a rights issue in September, the group announced profits would be pounds 150m, not the pounds 220m it had indicated. The City was thrown into confusion, the rights issue was chaotic, and Sir Roland resigned soon after.
By the spring of 1992, industrial managers across the board were getting desperate. Winter had been a miserable time. In February, manufacturing output had fallen by an alarming 0.7 per cent, and unemployment had jumped by more than 40,000. March car sales were at their lowest level for 15 years.
Companies throughout Britain were cutting back, not just to the bone, but into it. The share of engineering collapses in the total was creeping up steadily - from 17 per cent in 1989 to 22 per cent in 1991.
Sterling Tubes of Walsall was typical of companies that were just keeping themselves out of these statistics. The only British maker of stainless steel tubing, like many manufacturers it had doubled its productivity in the preceding few years. In contrast to many in 1980, it had little fat to shed.
Bill Good, the managing director, first felt the effects of recession at the end of 1990. His Swedish parent company instructed him to use aggressive pricing to hold on to its market share: though the world market for stainless steel product fell by 20 per cent, Sterling restricted its volume fall to only 10 per cent. It paid the price, suffering a pounds 1m loss in 1991.
Mr Good had been convinced the economy would recover at the beginning of 1992. He did not change his mind until May, when stockists reported the order intake was going down when it should have been going up. 'That was when we had to look very carefully at survival mode,' he said. He closed the canteen and the in-house newspaper, and made the personnel director and 50 others redundant. His was an international industry - companies worldwide were under pressure - and he knew the trick was to be slightly less vulnerable to closure than someone else.
By midsummer, he was deeply gloomy. The pound was heading towards dollars 2, threatening to ruin his effort to expand into the US market. 'It was very painful,' he said. 'There was no light at the end of the tunnel.'
But then something happened that, in retrospect, did more to lift industry out of recession than anything else. Britain left the European Exchange Rate Mechanism.
Events in Germany had made this inevitable. In June, the great unification bubble had burst. Engineering orders stopped almost overnight, as the Bundesbank pushed interest up in an attempt to choke off inflation. The Germans suddenly found themselves with the same unpleasant cocktail that the British had sampled 12 years earlier: high interest rates, a strong currency, and a world recession.
The pound, tied to the mark through the ERM, found itself under intense pressure, and on 15 September it was withdrawn from the mechanism and dropped by 15 per cent against most currencies. Economists and politicians called the day 'Black Wednesday'. Most manufacturers were delighted. Many companies decided the devaluation would give them the breathing space they needed. Bill Good was as relieved as anyone. After the devaluation, he said, there would still have to be a shake-out in the industry, 'but now we are in a better position to survive than some of our competitors.'
A senior manager in another engineering group verged on the sanguine. Despite the collapse in the German market, he said, there were still plenty of opportunities for foreign suppliers: 'German companies are in trouble - we'll take work off them.'
This confidence was born not only out of the lower costs (British wages were about half those in Germany) but from the belief that the German buyers were no longer likely to reject British products as inferior. Audi, Volkswagen's up-market division, bought its first British components in 1992, and the purchasing director said he was actively looking for other UK suppliers. The lower cost was an advantage, he said, but the real reason was that quality here was now as good as he could find at home. The British were benefiting from their past incompetence, he added, because they had been prepared to learn from the Japanese: the proud Germans were only just realising they would have to do the same.
Some British managers had been learning from the Japanese for 10 years, adopting a host of techniques to streamline their factories and improve quality. Most were in the car components industry. An early learner was Bernard Robinson, chief executive of Tallent Engineering in Newton Aycliffe, County Durham. He had taken Japanese ideas such as total quality and teamworking very seriously, and was now reaping the rewards. Tallent had increased its sales and staff by 50 per cent during the recession. 'It's been hard but it's been progressive,' he said.
According to a motor industry expert, Dan Jones of Cardiff Business School, the 'real action' to install Japanese-style techniques had started only in 1990. Partly this was because Toyota and Honda - due to open their British factories in 1992 - were adding to pressure for better quality already applied by Nissan. But the recession played a part. John Parnaby, the manufacturing guru at Lucas Industries, said this was because the introduction of the systems would in any case lead to a cut in numbers, as inspectors were made redundant and workers were trained to do each others' jobs. So if staff had to be cut for cost reasons, it made sense to convert factories at the same time.
As the recession of the early Eighties bit, the pressure for the Government to do something had become ever fiercer. In the summer of 1981, Margaret Thatcher faced a full-scale Cabinet revolt, with ministers demanding an industrial strategy that would haul manufacturing out of its abyss. She fought it off, and the phrase 'industrial strategy' was banished from the Tory lexicon.
There were, however, politicians in the party who harboured a fondness for it. Michael Heseltine, who resigned from the Cabinet in 1986 over the Westland affair, was explicit. He wrote that he believed the Government should, for example, give more support to research and development. John Major, for most of the Eighties a backbencher, apparently had similar inclinations.
In April 1992, Mr Major won the general election and appointed Mr Heseltine to head the Department of Trade and Industry. Immediately business people formed groups to draw up their own industrial strategies, and waited for Mr Heseltine to back them. He was slow to show his colours, but at the Tory conference in October, he raised them with ostentation. 'If I have to intervene to help British companies, like the French government helps French companies, the German government German companies, the Japanese government Japanese companies,' he said, 'I tell you I will intervene before breakfast, before lunch, before tea and before dinner.'
The first tangible evidence of this new approach came in the Autumn Statement in November, when the Chancellor increased capital equipment tax allowances and extended credit insurance cover (this arcane area was a good indicator of the political wind, for the Treasury made no secret of its wish to banish export support). Later Richard Needham, Mr Heseltine's deputy in charge of trade policy, made it clear that the Government now regarded it as part of its job to make sure British companies were given every assistance to win big contracts abroad.
The last recession started to ease just as pressure for an industrial strategy was becoming irresistible. This time, it seems to have eased just as the Government starts to put one in place. 'When the history books are written,' says Nigel Rudd of Williams, 'I think they will say the recession lifted in October or November 1992.' Last month , the CBI found order books were at their highest level for three years, and predicted manufacturing output would grow by 3 per cent this year.
The darkest side of this recession shows in the trade balance. In 1980-81, it moved into the black - as it should when consumer spending is depressed. This time, it did not. In 1989, the trade deficit was pounds 24.6bn. It fell to pounds 10.3bn in 1991, then started to rise again, reaching pounds 13.8bn in 1992.
That is a real worry. Though the percentage of the manufacturing base to be destroyed has been tiny in comparison with 1980-81, the economy cannot afford to lose any of it. The imperative now is to make sure industry grows. There may be some role for government in this (though the history of interventionism in Britain gives little hope of a miracle), and there is certainly a role for the banks and the City. But the bulk of responsibility must lie with industry itself. Enough companies have been dragged from the slurry by a combination of hard work and common sense to prove conclusively that there is no substitute for plain good management. What we need now is for that management to spread - and to be touched with a certain zeal to invest.
Adapted from the updated edition of 'Shaking the Iron Universe - British Industry in the 1980s'. Available from St David's Business Books at pounds 17.95 (Fax 081-299 0432).
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