Berlin Rules: Book Review for OMFIF

If you plan to read Paul Lever’s book, Berlin Rules: Europe and the German Way, to enjoy a bit of good old fashioned German bashing, and to confirm your anxieties about a Europe run by Germany, you might be disappointed at times and reassured at others.

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As published on omfif.org – September 2017

In just over a decade, Germany has been transformed from the ‘sick man of Europe’ into a domineering and threatening force, according to some. Given the UK’s decision to leave the EU and the negotiations about the terms of Brexit, there is renewed interest in all things German, and British authors have responded.

Read the review in full – download PDF.
Berlin Rules - Book Review by Bob Bischof/OMFIF

Shooting the Messenger

Exports row masks corporate governance issues

Liam Fox, the British secretary of state for international trade appointed by Prime Minister Theresa May to lead post-Brexit trade negotiations along with Boris Johnson and David Davis, put his finger squarely – but not fairly – on the biggest headache Britain has had for years last week.

In comments to the right-wing Conservative Way Forward group, he referred to the anaemic export performance of Britain’s major companies, calling their bosses ‘fat’ and ‘lazy’, and claiming they would rather play golf than open up new markets with new products. The Times, which first published the comments, accompanied an opinion piece with the headline, ‘Don’t shoot the clumsy messenger‘.

The comments prompted an expected backlash from business leaders, but the facts themselves are evident. Former Chancellor of the Exchequer George Osborne’s ‘march of the manufacturers’ and the goal he set of doubling exports to £1tn by 2020 look further away than ever – exports of £510.3bn in 2015 were below 2014’s figure of £511.7bn.

Will Brexit make a difference? Sterling’s approximate 10% devaluation since 23 June has prompted hopes of a boost to UK exports. But while there may be anecdotal evidence to suggest this has already happened, the decline will have only a limited effect if sterling’s 25% fall in 2008-09 has any lessons for today.

British managers are not lazier than their German counterparts. But in many ways they have a much harder – if not impossible – job. They do not spend their time on golf courses these days, but rather use it to present quarterly return figures in such a way that they satisfy shareholders and/or optimise their profit- and often share price-related bonuses.

Many of the best British companies sit on large cash piles. They do not spend them on product development or opening up export markets in the Far East, for fear of an adverse reaction affecting their share price. They prefer to ‘return cash to shareholders’ through share buy-backs or look for mergers and acquisitions, rather than growing their companies organically. If all else fails, they can ‘bring the company into play’ and sell it at a premium.

The Anglo-Saxon corporate governance model puts British businesses at a disadvantage compared with their European and Asian competitors. More than 85% of German businesses – the famous Mittelstand – are not quoted on the stock market. Managers can afford to think and act long-term without fear of a takeover, being dismissed or losing out on remuneration.

Chief executives of listed companies are shielded by their supervisory boards, which include worker and frequently customer representation. This acts as a practical defence against takeovers and over-adventurous board directors, and is a useful tool for communicating with workers.

May – like Angela Merkel, the German chancellor, a scientist by training – appears to have a better handle on the root causes of the UK’s export malaise than Fox, a medical doctor with no business experience. She fired a first salvo in the right direction shortly before taking office by suggesting worker participation on company boards, as well as an overhaul of the UK company takeover code and remuneration practices in British boardrooms. It is ironic that, just as the UK turns its back on Europe, its prime minister wants it to adopt a more continental-looking business model.

Changing the UK’s shareholder value model will not be easy. Tony Blair talked in 1995 about the stakeholder economy model, similar to Germany’s social market economy or ‘Rhineland capitalism’, and was very quickly stopped in his tracks. Let’s hope May’s attempts to address the root causes of the problem, rather than its symptoms, are more successful.

The Globalist: Economic Lessons from the UK’s Olympic Success

There can be no doubt that there is enough talent in the United Kingdom to compete with the best – but the system has to be right. Brexit or no Brexit, the UK has a choice to make. It can follow an Olympic strategy or stay with the calamitous football set-up, which has all the glitz and none of the glory.

This article was first published on The Globalist website 25 August 2016

2016 were the most successful Olympic Games ever for the United Kingdom. With 27 gold medals (and 67 medals overall), Team UK came in second place, ranking only behind the United States.

In spectacular fashion, the UK beat both China (3rd) and Russia (4th), as well as Germany (5th ) in the overall standings.

What makes this very special Olympic glory so noteworthy is the contrast to the Olympic Games two decades earlier. In Atlanta in 1996, the British team received just one gold medal – its lowest score ever.

What a difference smart planning makes

What has made the difference over these 20 years? The short answer seems money from The National Lottery, with each ticket sale generating proceeds that were dedicated to funding Team UK at the Olympic games.

But that is not the whole story. Once Britain was awarded the 2012 Olympic games, the country’s then-government under Messrs. Blair and Brown decided to change things around a bit.

A long-term strategy was developed and priorities were set to focus on certain sports where the chance of medals were greatest.

To that end, specialized facilities like the Manchester Velodrome created (yielding a record haul from indoor cycling events for Team UK this time around).

In addition, the best coaches were hired and they and the athletes were highly motivated through incentive schemes based on performance.

Just apply the Olympics strategy to the UK economy

As far as I can tell, the new British Prime Minister, Theresa May, is determined to take a leaf out of her nation’s Olympics book and apply it to the entire British economy.

Mrs. May certainly doesn’t want to copy the English football team’s example, which reached its own “Atlanta moment” this year, with a defeat against Iceland in the European Championship.

Britain has got plenty of sports talent but, as the Olympics strategy has proven, that talent must be properly nurtured.

England’s national football team failed because of systemic problems. That football is considered the national game in England makes these failures especially stinging.

The BPL cover-up

However, for most of the year, they are carefully covered up. With the relentless focus on the global commercialisation of the Barclays Premier League, club football seems a glorious enterprise.

But even here, as is seen in the late stages of international club competitions every season, English clubs fall short of expectations.

A key part of the explanation is short-term pressure on results, paired with too many foreign owners and managers with no interest in the national game.

They look for spectacular foreign signings rather than developing home-grown talent over the long term. The contrast to Spanish and German clubs is palpable. They do hire foreign talent, but develop plenty of home-grown talent.

Sir Alex Ferguson was the last manager who raised English youngsters to become world-class football payers – and that is now too many years ago.

As goes football, so does the economy?

Unfortunately, England’s football saga bears an uncanny resemblance to the overall British business approach, with a similar result.

The Anglo-Saxon “shareholder value” governance system, with its inherent pressure on quarterly results, drives short-term decision-making by boards.

M&A activity yields quicker results to make a corporation larger than organic growth would. For the latter approach, you need patient product improvement and development, investment in the latest technologies, focus on opening up new markets and, above all, on skills development in house (at all levels, from shop floor to top floor).

Balance sheet maneuvers, instead of focusing on productivity

All that costs money and reduces profits in the short term. The approach chosen instead is to massage the balance sheet – often through share buy-back schemes – to make the company’s results “look” better, even if this is just a financial engineering exercise achieving no real enhancement in value.

It is part of the shareholder value model where the incentives for directors are in line with those of the shareholders – unfortunately both thrive on short-term results.

Bizarre “business” practices

Even more importantly, they mostly just pay mere lip service to the stakeholders – employees and their families, the towns and cities where operations are based, as well as society as a whole.

To give a concrete example how far this disregard for employees and society can be taken, consider Sir Philip Green’s purchase of British Home Stores some years ago.

His special dividend payment of £400 million to his tax-exiled wife, followed by his sale of the company (which carried a £572million pension deficit) to a three times bankrupt associate for one Pound and the subsequent collapse of the company led to the loss of 11,000 jobs.

This bizarre, but carefully crafted chain of events has rightfully been described as “the unacceptable face of capitalism”. It clearly highlights major shortcomings in the UK’s corporate governance.

To make a long story short, under the British business-as-usual rules, the deck is amply stacked against long-term thinking and value creation.

Selling the family silver until there is no more?

Britain has lived for decades on the proceeds of selling assets to shore up the country’s current account deficit and the exchange rate.

Ports, airports, the energy sector, huge numbers of industrial businesses have been sold to foreign investors. The London Stock Exchange and high-tech ARM Holdings PLC are the latest in a long line.

For a long time, all this selling off the family silver was falsely heralded as underlining the attractiveness of Britain as an investment location and considered a virtue.

Why was all this misleading thinking pushed on the British public? Because plenty of people in “the City” got filthy rich in the process of acting as advisors to, if not instigators of, these transactions.

Just ask all the lawyers, investment bankers, accountants and management consultants.

England and the “kindness of others”

Now, at long last, doubts are being voiced over the long term effect of all this so-called inward investment. Mark Carney, the governor of the Bank of England warned before the Brexit vote that the reliance on “the kindness of strangers” might backfire.

There undoubtedly is a short-term gain for the national accounts when the proceeds of a sale support the British balance of payment. However, the dividend flow leaves the country forever.

Unsurprisingly, the UK’s once considerable earnings flow from overseas investment has reversed. While the country’s trade balance has for decades been negative, it is a new and worrying development of the last few years that the service sector is in deficit, too.

In some areas, the open door policy has of course worked with remarkable results. The car industry, once the perpetual laggard, is now thriving as it is almost completely under foreign ownership and management.

That is a great success story — and so are hundreds of foreign owned businesses in the UK. The profits from these operations, however, are only partly re-invested in the UK.

The largest part flows abroad. It is thus like English league club football – a great success story, but sadly not so much for the national team.

May’s mind in the right place: Can she do it?

The UK Prime Minister Theresa May appears to understand that there is a problem. Rather atypically for a former Home Secretary, she has been referring to:

  • rethinking the role of workers on boards of publicly listed companies
  • refocussing on industrial strategy and board room remuneration in connection with the ease with which British companies and assets can fall into foreign hands.

It will be interesting to see what she can actually do about it. The prime minister’s mind certainly is in the right place, but she will encounter plenty of resistance from her country’s financial establishment that has gotten very rich on selling off assets.

A true challenge given global competition

Britain’s businesses are up against world-wide competition, quite a few of them like the Germans, Japanese, Chinese and others who are determined to play the long game.

These nations engage in the long game for very different reasons. For example, most German companies, even in the export sector, are not listed on the stock market.

They are family-owned enterprises, whose main aim is to grow to survive and look after its stakeholders – their employees, customers, suppliers and the community.

But even those companies that are listed on the stock market have supervisory boards with worker and management representation.

This structure, reflecting in actual voting rights for workers at the supervisory board level, prevent a company’s top managers from purely self-interested behaviour that underlies most prettifying balance sheet manoeuvres.

I know because I was there: As a top manager of German companies, I was always paid bonuses on market share and profit – never on profit only.

What can be done?

It is impossible, and even counter-productive, to try to copy the German governance system and corporate culture for many reasons. Theresa May is obviously avoiding any reference to the German model – the Social Market Economy also called Rhineland Capitalism.

It would be ironic, to say the least, if Britain would turn in the direction of the continental economic model after leaving the EU. Probably for that reason, Mrs. May has been called May Guevara already!

The search is on for a workable construction that combines the best of both worlds and allows British managers to act in a long-term oriented fashion to the benefit of their shareholders, employees and the national performance.

There can be no doubt that there is enough talent in the United Kingdom to compete with the best – but the system has to be right.

Brexit or no Brexit, the UK has a choice to make. It can follow an Olympic strategy or stay with the calamitous football set-up, which has all the glitz and none of the glory.

Is English Glory Foreign-Made?

Exploring parallels between English football and the economic and political landscape of the country.

This article was published in The Globalist on 5 July 2016

England has without doubt the most expensive and internationally most followed football league in the world. Many Premiership clubs are owned by Americans, Russians, Saudis, Iranians, Thais and Chinese.

The global element shaping the sport in England doesn’t end there: Out of the top 12 clubs in the 2015/16 season, 11 were trained by Italians, Spanish, French, Dutch, a Chilean, a Croat and a German.

In the pool of players signed by all Premiership teams, 59 foreign nationalities are represented, accounting for 67% of all players in the league. Of the remaining 33% — the English players — not even half get to play every weekend.

The English press regularly proudly reports the Barclays Premier League as the richest, best and most successful league in the world.

It also elevates the English team before every international tournament like the World Cup in Brazil in 2014 and the current European championship to semi-favourite status.

Soccer, just like the economy

The English are without doubt the champions in self-promotion. The meeting with reality is quite harsh, though. Consider that Spanish club teams made a clean sweep of trophies in European club competitions this season, with the English clubs all knocked out early.

The early exit of the national team in Brazil in 2014 and now in 2016 against Iceland shows up the fundamental weaknesses of the overall approach.

The sport is played for profit only, with little regard for the development of home grown talent on or off the field. That money-based approach has an obvious impact on the national team, which has underperformed badly yet again.

This soccer saga has all the hallmarks of the overall British economic and political malaise. In politics, the bragging about the greatest league translates into “We are the fifth-largest economy in the world” and “We are the fastest growing country in the G8.”

This self-boosting rhetoric has been peddled by Cameron and Osborne over the last few years and featured hugely in the British press. However, once the pair decided to campaign for remaining in the EU, it came to haunt them.

Harsh economic reality

The two slogans were effectively used by the Leave campaign by simply claiming, “we can stand alone, we don’t need Europe.” Neither Cameron nor Osborne could admit that both claims were untrue for fear of being accused of “talking the country down.

As David Smith, the Economics Editor of the Sunday Times, pointed out, economic reality is not as kind. The UK, by Purchasing Power Parity (PPP), is the tenth largest economy.

And in the first quarter of 2016, Britain’s economy grew at less than half the pace of the Eurozone – 0.3% versus 0.7%. Moreover, it was forecast to lag behind for the full year without the Brexit disaster.

But not only that – the country’s fiscal deficit is also going up. The current account deficit is at record high with 7% of GDP, this under a presumably strict Conservative government.

Private household debt hit a new record way above the pre-crisis level of 2008, with credit card debt rising at double-digit rates. The much talked about National Health Service is under water, to the tune of £2.5b billion.

The underfunded company pension schemes – like those of Tata Steel and BHS – amount to £92 billion, much of that shortfall will have to be covered through the government guarantee scheme.

Public pension deficits look even worse.

Sterling under pressure

All of it is totally unsustainable, even without the shock of Brexit. Theresa May, the leading contender for the prime ministership, announced simultaneously with Chancellor Osborne the abandonment of the fiscal target for this parliament. It makes sense, but doesn’t solve the problem.

Britain’s current account deficit is of particular concern. The trade balance has always been negative, but services made up for the gap in the past.

No longer so. Britain has lived for decades on the proceeds of selling assets to shore up the current account deficit and the exchange rate. Ports, airports, the energy sector, huge numbers of industrial businesses have been sold to foreign investors.

Unsurprisingly, the UK’s once considerable earnings flow from overseas investment has reversed. It means that Sterling would have come under pressure before any Brexit-related effects.

Overseas investment

The car industry, once the perpetual laggard, is now thriving. It is almost completely under foreign ownership and management. These firms have trained their workforce well, for example, by re-introducing German-style apprenticeship systems and taking a long view.

The Brits treat this as a great success story. But working for so many foreign employers has another side to it. There is a deep psychological problem here, too.

Having foreign bosses and even being paid well by them is one thing. Liking that situation is quite another matter altogether.

Accordingly, there is a growing feeling of alienation in the country because of these developments. The migration crisis, which made the timing of the referendum so awful, has of course magnified this feeling.

We want our country back” seems also a cry of despair about what has happened – and blaming others like Brussels was just so easy to exploit by the populists on the right and left.

Need for home-grown talent

What gets lost amidst all this is that what still makes Britain great these days is that it attracts so many skilled professionals in all sorts of fields, not just soccer; however, more home reliance is clearly necessary.

German and many other clubs on the European continent are owned by their members. Of course, German clubs also import players, but they are serious about developing their own young players – always with an eye on the national game, too.

Unless Britain develops more home-grown talent in all walks of life, changes the overall approach from short to long-term thinking and stops kidding, if not deluding itself, it will not succeed — on or off the field.

Why Brexit is So Likely

As a German I would definitely like Britain to remain in the EU – with my English hat on it is, however a bit less clear cut.

This is based on the transcript for a speech given at the Kapitalmarkt Forum of Commerzbank AG in Hamburg, October 2015. Lesen Sie diese auf Deutsch

There are a number of reasons why the British people may prefer an exit in the forthcoming in/out referendum. These are quite apart from any economic arguments that have been put forward and which may point to staying in.

Firstly this island paradise is already overpopulated and has too much foreign influence – in most British eyes. Immigration from Commonwealth countries in Asia, Africa and the Caribbean started decades ago, is still strong and the integration process in many peoples’ eyes has not gone well.

The new immigrants from Europe were welcomed to start with – Polish plumbers were much in demand during the big housing boom prior to the recession. Instead of using the permissible EU quota system, Labour decided to let all in who wanted to come. During the recession when unemployment was high and afterwards, when wages remained depressed, politicians like Farage and others took advantage to blame Britain’s membership in the EU. The fact that Europe went through a terrible time made their argument even stronger. The Merkel invitation to all refugees from Muslim populated countries into Europe is possibly the final straw in the debate about immigration.

Whilst Germany may be able to cope and eventually integrate these people and bolster its workforce, the rest of Europe is struggling with it. And so is Britain. One big reason is that Britain has never had and probably will never have an infrastructure to cope with large scale immigration. No identity cards, no border controls on exit are just two examples. Students come on a six months visa and stay for twenty years; nobody knows how many are living in Britain. This is one of the main reasons why Britain has become the preferred immigration country – apart from the fact that the whole world speaks some broken English and that seemingly unlimited numbers of unskilled jobs are available in the service sector.

Secondly, structures and regulations are quite alien to the British and they do not care for them.

It’s a cultural thing; it starts with the language: a grammar with more exceptions to rules than rules themselves. Easy to learn, but very difficult to perfect. One also prefers to express oneself vaguely rather than clearly, as the anthropologist Kate Fox describes beautifully in her book Watching the English.

Very interesting” usually means “boring” or “rubbish“. “You must come for dinner” means you never hear again. Speaking your mind is – particularly if it comes from a German – called blunt, or in your face, or worse. Proper English is not only a living and constantly evolving language, it is also an important domain for the true Brits.

My friend Prof Thomas Kielinger, correspondent for Die Welt, has showcased this splendidly in his book “Crossroads and Roundabouts” – everything is constantly in flux.  The Germans like regulation; they stand patiently at a road crossing and wait for green to cross the street – whether there are cars coming or not. But in the UK, self-reliance and self-regulation is more important than rule by the authorities.

Labour flexibility is the name of the game in the world of business in Britain, and employment laws don’t fit easily into an adversarial culture. For Germans with their more consensual model they are the norm.

Another huge difference – Britain sports “case law” whilst the Continent has written law – another non-fit and quite alien.

So it’s not surprising that that there is so much opposition to the huge amount of regulation coming out of Brussels, lots of it of course unnecessary.

Thirdly, the press in the UK is mostly Eurosceptic, and their owners are probably frightened of all the possible rules and regulations that might come their way one day. For them the debate has started in earnest and their influence on the referendum should not be underestimated.

And finally, the Exit Supporters have simpler messages:

  • We want our country back from those unelected and overpaid bureaucrats in Brussels
  • Being outside the Eurozone, Britain will have little influence and will be a second grade player forever
  • In language, history and politics, the UK is closer to the USA than to Europe – and when it matters, has to follow America.
  • The Europeans sell more to us than we to them – it’s all to their advantage
  • You can’t trust the Europeans – least of all the French and the Germans, who are suspect, as they want to rule Europe again
  • The City contributes more to GDP than manufacturing and Brussels wants to break or undermine its supremacy in Europe.

As a German I would definitely like Britain to remain in the EU – with my English hat on it is, however a bit less clear cut.

The more EU or German politicians try to help the UK to remain in the EU, the more it appears to the Eurosceptics that the Europeans are doing it for their own advantage. A real conundrum. It will require very finely tuned political handling to find the right tone here. Sentimentality is neither suitable nor wanted. The Anglos always were from Mars and the Europeans more often from Venus (even the Germans nowadays – to everyone’s confusion).

Will Britain exit? The Scots were very close to leaving and to creating a social democratic country. They have promised that if the UK overall votes “out” and the Scots vote “in” then there will be another referendum in Scotland, and the Scots may well leave the UK. There could be some tactical voting here!

Much depends on how Europe portrays itself until voting day. If the Eurozone develops on a positive trend economically, as it appears to be doing at the moment, that will take some of the wind out of the sails of the no campaigners; if not – and if the immigration problem gets worse, which is more likely, then I feel that many Brits will want to shut off the tunnel for good.

BB/January 2016

Sterling at €1.34 is a threat: Britain, the EU and the price of independence

At the heart of the British argument against closer ties with Europe has always been many UK citizens’ fear of losing control over the country’s affairs in general and in economics in particular.

This article originally appeared on OMFIF’s website here

At the heart of the British argument against closer ties with Europe has always been many UK citizens’ fear of losing control over the country’s affairs in general and in economics in particular. For many in Britain, the euro project is not a basket of former independent currencies, rather a basket case. Doubts about the wisdom of so-called ‘German-backed austerity policies’ or about the ability of Greece and others to stay in the single currency have strengthened this belief in many British minds.

The ‘in-out’ referendum on Britain’s membership of the European Union which could take place in 2017, depending on the outcome of the May general election, will further focus attention on this point. Latest opinion polls indicate a majority in favour of departing.

The big question for a relatively small country like Britain is what ‘independence’ means in a globalised world. Being on your own, in monetary affairs as well as politically, can be damaging. Against its €1.04 low point in 2009, sterling has appreciated by 30% to around €1.34. This may be good news for Britons holidaying abroad, but the pound’s rise will hammer British manufacturing exports.

Switzerland, which has just abandoned its currency peg against the euro, has a current account surplus and high-value manufacturing goods, helping the Swiss absorb the shock of the latest 20% Swiss franc revaluation. Britain, on the other hand, has a large and growing current account deficit. It desperately needs to rebalance its economy away from services to manufacturing.

Although the UK’s coalition government has declared it wishes to further the ‘march of the manufacturers’, it has made little progress. Britain’s external performance will get worse. All this spells future trouble for sterling, especially if an inconclusive May election result brings political uncertainty.

Against this sobering background, Britain’s power over monetary and fiscal policy – setting interest rates, deciding quantitative easing and calibrating fiscal expansion or contraction – is well short of being an unmitigated benefit.

Germany has been doing well within the euro area because it benefits from the weak euro for its non-European exports, and even more from the stability, or lack of volatility, that emanates from membership of a large club. Germany still runs a substantial trade surplus with the rest of the euro area, but it has fallen sharply in recent years, making up less than 25% of Germany’s overall external surplus, against 40% in 2011.

If Britain wants to be serious about rebalancing the economy, it has to give its manufacturers a solid base, particularly in foreign trade. Currency hedging is expensive, the more so when volatility is high. The euro bloc encompasses most of the UK’s largest trade partners. Every transaction to another currency – whether one is buying or selling – costs money.

With so much of British industry in foreign ownership, there is an additional danger. When the foreign owners see developments they don’t like, they will first stop investing and then look elsewhere. At the German-British Chamber of Commerce and Industry we hear many worried comments from the over 1200 German-owned companies in the UK. The grumbling is getting louder.

And it’s not confined to the Germans. British business is overwhelmingly in favour of the UK staying in the EU, as a recent poll by the EEF manufacturers association showed. Britain can hardly be expected to join the euro in the foreseeable future. But as the election approaches, the issue of UK EU membership will start increasingly to occupy business people’s minds. Some might even support Labour as a potential party of government that will not brook a referendum on the matter – and could bring a weaker currency as well.

OMFIF

The Official Monetary and Financial Institutions Forum is an independent research and advisory group and a platform for confidential exchanges of views between official institutions and private sector counterparties.

The overriding aim is to enable the private and public sector to learn from each other in different ways, promoting better understanding of the world economy and higher across-the-board standards.

All developments regarding OMFIF can be followed at www.omfif.org and www.twitter.com/OMFIF.

Bob Bischof is a member of the OMFIF Advisory Board.

Foreign Takeovers and Nationalism – BBC World Service

With takeovers like the AstraZeneca – Pfizer bid much in the news, Bob Bischof joins a panel of industry experts for the BBC World Service programme ‘In the Balance’ to discuss foreign takeovers and the national interest.

Bob Bischof on 'In the Balance'With takeovers like the AstraZeneca – Pfizer bid much in the news, Bob Bischof joins a panel of other business experts for the BBC World Service programme  ‘In the Balance‘ to discuss foreign takeovers and the national interest.

You can listen to the half-hour programme here: http://www.bbc.co.uk/programmes/p01y0sb9

 

Interview: European Trade Protectionism

Bob Bischof, vice president of the German British Chamber of Industry & Commerce, talks with Charles Powell, member of the U.K. House of Lords, about European trade protectionism, U.K. inward investment and growth, in an interview with Francine Lacqua and Guy Johnson on Bloomberg Television’s “The Pulse.” (Source: Bloomberg)

Watch the interview here

Bob Bischof discusses European protectionism on Bloomberg TV
Bob Bischof discusses European protectionism on Bloomberg TV

Invensys Sale: UK Manufacturing On the Fast Track to Oblivion?

This article was published in the Daily Mail on 7 August 2013

The sale of Invensys, one of the last remaining substantial engineering companies in the UK, to the French industrial giant Schneider Electric simply beggars belief.

The declared aim of this Government is to rebalance the economy towards manufacturing. In reality short-term shareholder value rules and the Brits will sell anything and everything to please the City.

As a German living in this country, I am aghast at this. Germany’s manufacturing prowess is founded on a much more long-termist approach. But Invensys is, sadly, a typical British industrial story.

The company was created out of the merger of two engineering companies Siebe and BTR in 1999. The new company was debt-laden and poorly managed, going through a £2.7billion debt restructuring exercise in 2004. In 2005 the board appointed Ulf Henriksson as chief executive, who restored the company to financial health. Enter Sir Nigel Rudd as new chairman.

Opinion in Daily Mail: Sale of InvensysIn March 2011 he fired Henriksson, an engineer, because ‘he could not see the big picture’ and replaced him with the chief financial officer Wayne Edmunds. The share price subsequently halved in 2012 because of technical problems. It only bounced back when the break-up of the company was announced and set in motion with the sale of the signalling business to Siemens.

The rest is now on its way to being swallowed by a French company for £3.4billion – well done, Sir Nigel. Does anybody get the message that these deals are a sure way to manufacturing oblivion in the UK?

My own experience bears this out. I arrived in the UK 40 years ago to set up a UK subsidiary of a German lift truck maker. Our main European rival was the British company Lansing Bagnall, based in Basingstoke. Their market share in the UK was around 45 per cent and they exported 60 per cent of their production worldwide. They were the envy of the industry.

Some 20 years later a large German industrial conglomerate bought them. A few years later they were sold on with the rest of the lift truck division to private equity, who closed the Basingstoke factory and moved the production to Germany and France.

In 1994 my company bought the last remaining British lift truck manufacturer Lancer Boss, invested huge sums for a while, but then had to give up, close the plant in Leighton Buzzard and moved the production to Germany.

One of the reasons was that they could no longer get cold-rolled steel sections for the lift masts of their trucks in the UK, as the Corus plant in the North East was ‘restructured’ – the other was that there was a cyclical downturn in the sector.

There are dozens of industries and companies where the same or similar happened. Mergers, acquisitions, de-mergers and break-ups of companies are a favourite game in the UK to enhance so-called shareholder value. It promises faster returns for shareholders and bonuses for the board members rather than following the slower path of growing their companies organically. They would rather ‘return cash to the shareholders’ by share buy-back programmes and high dividends than invest in the future of their businesses and the prosperity of UK Plc.

What is the Government doing to change this pattern? The slogan needs to change from ‘It’s the economy, stupid’ to ‘It’s the real economy, stupid.’