Manufacturing Matters 94: When the small guy deserves a leg-up: Government must do more to bolster the growth of small companies which account for up to a third of our economy. Roger Trapp reports

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The Independent Online
COUNTAX is that apparent rarity: a British manufacturing company that is expanding. In the highly competitive field of tractor lawnmowers, it has seen its turnover rise by a third to about pounds 10m in the past year, while it now employs nearly 100 more people than the 35 it did at the beginning of this decade.

Although the latest figures from the Forum of Private Business suggest that its manufacturing sector is growing much stronger than the overall membership, it is still hard to find companies to emulate Oxfordshire-based Countax's performance.

The forum's chief executive, Stan Mendham, says it is time the Government recognised that efficient small manufacturers are showing their larger brethren the way out of recession. But his members do not sound so bullish.

Echoing a mood that seems to exist everywhere but in the corridors of power, John Humphrey, managing director of H Griffiths Engineering of Dunstable, Bedfordshire, says: 'There doesn't seem to be a lot of confidence there. The interest-rate rise was like another nail in the coffin.'

A look at the precision engineering company's recent history suggests the premonitions of death may not be far off the mark. While Countax has been expanding, Mr Humphrey's company has been contracting. In 1990, it had a turnover of pounds 1.1m. Last year that was down to pounds 700,000.

At the same time, the workforce has been reduced by about a fifth to just 20. 'We're still around, but we came out the other side with no resources,' he says, adding that the company had not made a profit for the past two years.

So, what should - or could - the Government do to resuscitate the likes of H Griffiths while encouraging Countax and the others that are convincing a growing section of the population that owner-managed businesses are where the future lies?

The first thing is to acknowledge that they exist. Many involved in this sector complain that ministers and officials act as if there are small firms and large publicly quoted corporations, with nothing in between.

But while two-thirds of the companies belonging to the Forum of Private Business have fewer than 10 employees, and the average employs five people producing a turnover of pounds 300,000, many companies outside the stock market are far larger.

A recent survey of the 'middle market' by Coopers & Lybrand, the accountants and management consultants, attracted responses from companies with turnover ranging from pounds 8m to more than pounds 200m.

Comparing the situation with Germany, where the 'Mittelstand' is said to be much more valued, Patrick McHugh, a Coopers partner, says: 'It's a third of our economy and no one focuses on them.'

Mr McHugh, who is speaking at the 'Manufacturing Matters' conference at the end of this month, adds that most companies feel that the Government should do something.

Furthermore, support should be targeted at traditional industrial sectors, such as aerospace and mechanical engineering, rather than, say, food manufacturing.

Within this, though, the main concerns are financial. As the Confederation of British Industry pointed out in its recent Budget submission, 'The smaller firms sector is potentially the greatest provider of new jobs. Yet smaller companies are also the most vulnerable.

'Even minor and temporary changes in the economic environment can have major implications for firms operating on tight cash flows.'

It is for this reason that late payment of debt has assumed such importance for small firms. With the practice becoming increasingly widespread, small companies are typically at the end of the line, with only increasingly reluctant banks and factoring companies to call on for help.

Because hundreds like Mr Humphrey claim they are being 'killed' by interest payments - as a result of customers delaying payment by two to three months - the Forum of Private Business is continuing its campaign for the introduction of statutory interest on overdue bills. This is despite the Government's rejection of the idea last year.

The small business community also advocates measures such as holding down employers' national insurance contributions and business rates at the same time as increasing incentives for investing in the business.

The CBI's smaller firms division, for instance, wants an extension to the recently introduced Enterprise Investment Scheme and a widening of the scope of venture capital trusts, so that investing in this way is 'at least as attractive as placing money in PEPS or pension funds'.

Likewise, the organisation's proposal to give companies a 100 per cent first-year depreciation allowance against the first pounds 200,000 of a year's capital spending - or 25 per cent of total investment in plant and machinery, whichever is the higher - would help the likes of H Griffiths, which would like to buy equipment to take advantage of fresh opportunities but cannot afford to.

It would also encourage Countax and others that have consistently invested a high proportion of profits in plant and research and development.

Others call for reductions in regulation and greater use of such initiatives as the Loan Guarantee Scheme. Under this arrangement the Government gives banks a guarantee on specific loans made to potentially viable firms that cannot obtain finance otherwise - mainly because of a lack of security - in return for the firms paying an interest-rate premium.

But perhaps more important than all these particular measures is the provision of the appropriate environment. At Countax, interest rates are of critical importance, says John Moy, the finance director. This is because the company makes the tractors in the winter and does not get paid for them until they are sold in the spring and summer.

So, while he accepts that interest rates are going to rise, he wants the matter dealt with 'in a steady way rather than in a knee-jerk way'.

At the same time, he is looking for a stable currency. Since 30 per cent of the annual production of about 10,000 tractors is exported, mainly to Germany, it was a sad day for the company when Britain left the European exchange rate mechanism.

For Mr Humphrey, however, the right background comes down to something far more fundamental - encouraging people into engineering.

Having moved from serving the aerospace industry until it entered its present trough to dealing with several teams in Formula One motor racing, he has learnt to be fleet-footed. But he is confident that there is work out there. The problem is - somewhat ironically, considering the unemployment rate - finding people to do it.

Accepting that the company possibly cut back too far in the recession, he says he thought experienced staff could be easily taken on again when business improved. That has not been the case. The older, properly trained engineering workers have moved into other areas, while the younger ones are not up to standard.

He wants some sort of incentive to encourage the large companies to reintroduce apprenticeships and he would like to see schools bring back old-style metalwork and woodwork.

If he could find the sort of workers he needs, he would not have to consider buying the milling machine that can be operated by a less skilled person but that the company cannot afford.

'The people coming through have been on government courses and they are useless,' he said. 'They ask us to give them a chance. But that's no good. It's too costly to give people a try.'

The Manufacturing Matters conference is being held on 31 October at the Queen Elizabeth II Hall, London SW1. Ring 071 976 0682 for details.

(Photograph omitted)

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