How the Financial Sector Hinders Manufacturing

As 2018 approaches, the UK’s economic future seems as uncertain as ever. I think we can conclude with conviction that our country is anything but ‘strong and stable’ and the mantra that Brexit means Brexit has been shown up for what it is: a cover up for complete uncertainty over any future plans whatsoever. However, tempting though it is to make this end of year post a tirade about our political masters, I will refrain, and focus instead on matters that are, possibly, less political. Industry.

November saw the launch of the Industrial Strategy White Paper, preceded by the somewhat punchier Industrial Strategy Commission Final Report. I wrote about educational aspirations in the White Paper before. Here I want to focus on underpinning aspects of UK’s industrial manufacturing base in the context of our long decline on this front. This decline is well-described in demoralising detail in a recent book by Tom Brown, an industrialist who has worked in and run many engineering companies over the past 50 years. Tragedy and Challenge: An inside view of UK engineer’s decline and the challenge of the Brexit economy records his despairing thoughts about what has gone wrong with the engineering sector. I don’t usually buy books on the recommendation of the Evening Standard – indeed I cannot remember ever reading any book review previously in that paper, but then I only pick it up occasionally as I rush through Kings Cross of an evening after some long day in London. However, having read this review my interest was sufficiently piqued to buy the book, and the Christmas break has provided me enough time to finish reading it.

It makes gloomy reading, particularly in the light of the aspirations of the Industrial Strategy White Paper. Brown – most recently CEO for Cambridge solar energy spin-outs (from Cavendish Professor Richard Friend’s lab) of Eight19 and Azuri Technologies – delineates exactly why the greed and short-termism of the city financiers has driven many once-proud UK engineering companies into the ground. If you want to understand better the way fund-managers operate; or why (corporate) tax incentives introduced by successive UK governments since the Big Bang of the Thatcher years, massively damage our manufacturing base you cannot do better than this book by way of a simple introduction. It is eye-opening and jaw-droppingly worrying if you haven’t had to consider these matters before.

I first became aware of the damage financial instruments could do to blue chip companies back in the 1990’s. ICI, a company I worked with and was funded by over a number of years to study various aspects of polymers, had to fight off a hostile bid from the well-known asset stripping company Hanson. ICI survived that, but in order to be able to defend itself from future attempts by similar companies it sold off parts of its business. Further, it divested itself (‘demerged’) of its more biological businesses: notably pharmaceuticals, agrochemicals and seeds, forming a new company Zeneca. This new company thrived, in turn merging to form the highly successful company AstraZeneca, now in the process of moving its main research labs to Cambridge. But in doing all this, ICI became a ‘rump’ of a company. It still possessed some commodity plastic businesses based in Middlesbrough and its paint businesses (Dulux and Crown paints mainly based in Slough), plus a few other smaller businesses. In attempting to move away simply from bulk chemicals it bought National Starch from Unilever at an inflated and completely unaffordable price. All these moves, which had more to do with share-holder value than materials development or any sort of ‘industrial strategy’, ultimately led to its complete demise. ICI as a company no longer exists, its last (paint) businesses subsumed within AkzoNobel. For 30 odd years I had worked with different parts of the company and it was tragic to watch measures that were all done to satisfy the financial markets and not to produce genuine manufacturing ‘value’, innovation – let alone disruptive technologies or any of the other encouraging words you can find in the White Paper – kill the company off, business by business.

Being no economist I always attributed this decease to ‘short-termism’ without really exactly knowing what this meant in strict accounting terms. The Tom Brown book is excellent in explaining exactly why companies felt they needed to behave this way in order to keep share-holders, including big fund-managers, happy. Also he spells out exactly why things are so different in German manufacturing, a sector he also had worked in. In Germany, where many companies remain family-owned, owners see themselves as in it for the long term. In turn this means they are more willing to invest in the necessary capital equipment to keep businesses cutting edge plus in training for their workers. It is hard not to see these measures as feeding into their much higher overall productivity than the UK manages.

It wasn’t at all clear to me after reading the White Paper, and after reading the book it is even less clear to me, that anything the Government is proposing will really alter the fundamental control the financiers have over our present and future manufacturing industries. Investment in sectors is excellent as a concept, but…unless there are changes to the financial incentives that drive mergers and acquisitions or the bonuses fund managers receive for doing not very much then nothing substantive is likely to change in most manufacturing industries. Brown has nothing good to say about fund managers and their (lack of) skills. Take the sentence

‘institutional fund managers [do] not understand the companies in which they invest and frequently put them under pressure to behave against the companies’ long term interests…’

as indicative of his views.

Although the book could have done with substantial editing, and its prose is not particularly beautiful, I would thoroughly recommend this book for an eye-opening description of UK practice (not least contrasted with Germany) to accompany the aspirations of the White Paper. It would be reassuring to think Brown’s book is also on our Prime Minister’s and Chancellor’s Christmas reading list (never mind those beings inhabiting DExEU).

(As an aside, being as I say no economist, let me take this opportunity not only to welcome the well-respected economist Diane Coyle to Churchill College and POLIS in Cambridge in March when she joins us as the Bennett Professor of Public Policy, but also to congratulate her on her CBE in the New Year’s Honours. Diane co-authored the Industrial Strategy Commission Final Report. One of her co-authors, my friend the physicist Richard Jones, has written extensively on his own blog about some of the flaws in current government approaches to industrial policy, including analysing why the Life Sciences isn’t a sector, despite receiving a sector deal, and about why the Government has need to refocus on an industrial strategy after all these years of actively being laissez faire on this front.)