Jeremy Warner's Outlook: Shame about Marconi, but Britain's let the markets decide approach has worked well

British Telecom's decision to award its entire £10bn order for network renewal to overseas contractors, snubbing the indigenous supplier, Marconi, in the process, is likely to become one of the defining business stories of the year. In some respects, this is an even greater industrial disaster than MG Rover, whose final demise, though shocking enough when it finally came, was never in any doubt.

Marconi, by contrast, was one of the bubble stocks of the last boom, widely written about back then as at the forefront of the sort of cutting-edge telecommunications technology that would forge the New Economy. True enough, the company eventually went bust, but that was because of reckless, overpriced acquisition making. Few doubted the strength or durability of the underlying assets.

Yet there were no mercy missions by Cabinet ministers, no why oh who speeches, no promises of state aid, no bridging loans or high level phone calls to China to greet BT's final coup de grace. Nor indeed does there appear to have been any government intervention at any stage in what amounts to one of the biggest infrastructure investment projects of the next five years.

In part, that's because the 2,000 or more job losses that will stem from this decision will be more diffusely spread than they were at Rover, where the workforce was concentrated largely at one site, Longbridge. They are also likely to be staggered over months and years, as the present workload of orders from BT falls away until eventually Marconi is making little or nothing for its once largest customer. Pain spread is pain that goes unnoticed, even in the middle of an election campaign. As headline news, the story struggled to make it off the business pages, and while Longbridge will live on in popular memory for years to come, it is hard to imagine Marconi gaining anything like the same resonance.

Yet in many respects this is a more important story, not just because of Britain's apparent inability to compete at the cutting edge of high value added product development, but also because of what it tells us about the fast changing telecommunications market. These are the sort of technically complex, post industrial manufacturing jobs that the Government hoped to preserve and nurture, yet even these are falling to the commodity producers of the Far East.

The origins of Marconi's telecommunications interests go back to a company called Plessey, which grew rich on the back of what were still in those days essentially government contracts. This was a time when Britain still had an "industrial policy". British Telecom, then state-owned, was expected to support British technology and jobs by placing its orders firmly with British suppliers.

Winning these orders was as much about political influence as superior technology and better prices. It was no coincidence that the big telecom equipment suppliers tended also to be defence contractors. It was the same sort of game and when BT undertook the conversion from analogue to digital, Plessey was at the heart of it with a peculiarly British design for digital exchanges, System X.

Then the world changed. British Telecom was privatised, and over time the telecommunications market was opened up to all comers. The contract that existed between government and company, under which in return for monopoly the company would do whatever the politicians demanded of it, broke down. Imagine the conversation. Patricia Hewitt, Secretary of State for Trade and Industry, to Sir Christopher Bland, chairman of BT: "Now come on, Christopher, surely you can see your way to giving Marconi just a little bit of a leg-up? I know you are a Tory, but there might even be a place in the House of Lords in it for you."

Sir Christopher: "No can do. We have to compete with everyone else for our customers these days, and regrettably the foreigners are just much better at this sort of stuff than the Brits. You brought this on yourself, minister. You cannot have it both ways - vibrant competition and the ability to dictate who buys what. If you really want the knowledge-based economy you aspire to, then we must have the most competitive telecommunications infrastructure in the world to service it, and that, with a little help from our friends in China, is what I'm proposing to build".

Though they are quite different in genesis and circumstance, there are some spooky connections between the MG Rover and Marconi stories, not least that of Lord Simpson of Dunkeld, who made his name at Rover before moving onto Lucas, also now largely deceased. Along the way he sold Leyland trucks to Daf, which then promptly went bust.

Eventually he was recruited to succeed Lord Weinstock at GEC, which he demerged, selling the defence business to British Aerospace and keeping the telecoms equipment interests for himself as Marconi. This was a business he never properly understood. The acquisition spree of little heard of technology companies that followed eventually came to an inglorious end when the dot.com bubble burst leaving the company with insufficient revenues to service its debts. One way or another, Lord Simpson has cut quite a swathe through British industry.

Those that think there's no such thing as coincidence might reflect on the fact that the head of communications as Marconi careered out of control was one Martin Sixsmith, who then went on to become chief press officer under Stephen Byers at the Department of Transport. Disaster, it seems, is infectious.

Nor do the parallels with MG Rover end there. Like the Longbridge car maker, Marconi too was talking to the Chinese about the possibility of joint ventures. And as with MG Rover, as soon as the Chinese had got what they wanted, they disappeared over the horizon. Huawei, the Chinese company Marconi's chief executive, Mike Parton, was hoping to link with is to be one of the biggest beneficiaries of BT's contract.

If Britain still has an industrial policy, it can be summarised as "let the markets decide". The essential elements of this Thatcherite legacy have lived on under Labour, and though it can be a brutal taskmaster, it has also served Britain extraordinarily well over the past 20 years, carving out from the wreckage of Britain's industrial past a bright new, service based future. Many of the old protections, by contrast, continue to exist on the Continent, both in the labour market and the business landscape more generally. Just as jobs protected means fewer jobs created, business that is indulged with special favours means correspondingly less capital for innovation and start-ups.

In both Germany and France, the incumbent telecom operators are still state-controlled, and it is certain beyond all doubt that when they come to place their own orders for the next generation of network technology, the lion's share of the work will go to local producers. For those that think this a better way of saving and creating jobs, just look at the unemployment figures - Britain at 5 per cent, France and Germany at 10.

Government still has a role to play in industry and business, if only because it is such a large proportion of the economy and therefore a major purchaser. Yet across the piste, we seem to be getting it more right than the Continent. Britain's Pharmaceuticals Price Regulation Scheme, for instance, which rewards drug companies according to the amount of research and development they undertake in the UK, has been hugely instrumental in preserving and attracting top pharma jobs to these shores, so much so that even the Continentals are now scrambling to follow it.

John Devaney, chairman of Marconi, says he cannot understand why BT ostracised his company. To his mind, they've made the wrong decision. Perhaps they have. The market isn't always right, yet it's more likely to make the right choices on capital allocation than the politicians. As long as that lasts, Britain will continue to reap the benefits of its market-driven approach to industrial policy.