City: ICI steers away from road to oblivion

IMPERIAL Chemical Industries, Britain's largest manufacturing company, often used to be characterised as dull and boring, an industrial dinosaur incapable of evolving very much and, as a consequence doomed ultimately to extinction - rich pickings for the new generation of fast-moving smaller reptiles growing up around it. With ICI now moving full steam ahead with radical plans to split itself into two separately quoted ventures, the fashionable view these days is rather the other way round.

The general thrust of press and political comment last week, as ICI announced details of the demerger proposal, was: hang on a moment - hasn't ICI worked rather well as an integrated whole? Isn't it one of the few British examples of a world leader in its field, and if it is, what on earth is it doing breaking itself up? Certainly, the view of many of ICI's continental peers is that it must be mad. To them, it looks like industrial iconoclasm of the worst sort - a view that seemed to be reinforced by the coincidental announcement of 9,000 job losses and huge provisions for restructuring and rationalisation.

If it ain't broke, why fix it? people were saying. Those who dreamt up the demerger idea were condemned as asset-strippers and financial engineers whose worship at the feet of shareholder value is destroying Britain's industry and sense of long-term purpose. ICI directors could be forgiven for thinking they just can't win.

So what's the truth? Is this an unnecessary and potentially disastrous leap in the dark for ICI, or should we believe the message emanating from ICI's Millbank headquarters that this is the way forward - the best way to develop these businesses and an example that others will shortly be forced to follow?

Certainly, the job losses are a bit of a red herring, though the timing of their announcement could hardly have been more unfortunate. The Financial Times cited them as an example of 'a self-reinforcing spiral of pessimism' in British industry. The jobs would probably have gone anyway, regardless of demerger, but with conditions in the wider economy so miserable, they rammed home the prevailing mood of despair with brutal force. ICI's virtual admission that it wants out of petrochemicals also looked defeatist in the extreme. If ICI is saying that it can't or doesn't want to compete in this very basic industry, what hope for our future as a manufacturing power?

In truth however, ICI's grand demerger strategy has little or nothing to do with financial engineering, and everything to do with the realities of the changing world chemical industry. It was a business decision, not a financial one. The act of demerger alone won't do anything for shareholder value. If anything, its effects are negative in the short term. And that wonderful image of ICI as some kind of jewel of British industry that shouldn't under any circumstances be tampered with is little more than a delusion. ICI is extremely good at some of the things it does, but by no means everything. If ICI had stayed in its present form, it would have continued on its path of long decline, gazing back over its shoulder at a glorious imperial past and, a bit like Britain, unsure about how to move into the future.

The idea behind the demerger is that it will allow the businesses to become better focused - to develop the things they are really good at more coherently and effectively, while discarding the dead wood and baggage that presently hold them back. The truth of the matter is that there is no major world chemical company which is successful in all its activities - not Bayer or BASF of Germany, DuPont of the US, Rhone-Poulenc of France, nor anyone else for that matter. Slowly but surely, they are all being forced to recognise that. They may not be planning anything as radical as the ICI split yet, but they are moving in that direction. The days of the giant integrated chemical multinationals are numbered.

ICI's chosen route may not be the only one, it may not even be the best one, but you can certainly no longer accuse management of being asleep at the wheel. Nor can you accuse the City of failing to do its bit. By coughing up pounds 1.3bn of new equity, the Square Mile is putting the two sons of ICI on a sound financial footing, ready to take advantage of the opportunities that lie ahead.