Why are the British Bad at Manufacturing?

Karel Williams, John Williams, Dennis Thomas

• Publisher: Routledge
• Year: 2018
• ISBN:
  9781351244770
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This book, first published in 1983, offers a new explanation for the poor performance of British manufacturing since 1950. Rather than invoke orthodox economic theory or general social factors, the book analyses four national conditions – enterprise control over the labour process; market structure and the composition of demand; the relation of manufacturing enterprise to financial institutions like banks and stock exchanges; and the relation of manufacturing enterprise to government.

CASE STUDIES

1 GEC: An Outstanding
Success?

John Williams

There is widespread agreement that the GEC has been one of the most, perhaps the most, consistently successful major British manufacturing company over the last two decades. It would be generally accepted, too, that great significance attaches to the fact that these were the years during which Arnold Weinstock (now Lord Weinstock) has effectively controlled the company.

Headlines like ‘GEC Keeps on Sparking’ or ‘GEC steam-rollers through recession’ (Investors’ Chronicle, 14 December 1973, 12 December 1979) are common enough in the financial press. The tendency for the company’s profits to do even better than forecast usually ensures a suitably rapturous reception for its annual reports. All this reflects, as we shall see, the real achievements of GEC and, indeed, the initial expectation of the present essay was that it would be mostly concerned with explaining the company’s success. So general an acceptance of GEC’s attainments does, however, create an atmosphere in which it is more difficult to examine that experience in rather more depth. Most of this is understandable enough: successful companies escape scrutiny. It is the failures, like BL, which are subjected to probing, sick-bed examination and forced to answer deeply embarrassing questions about their structures and habits. Even so, in GEC’s case, the situation is compounded because the company’s style is unforthcoming. It has released little information for the present study. Much reliance has, therefore, had to be placed on the public reports and accounts and on bringing together a good deal of scattered material. As a result, the argument is often indirect and the essay is an unavoidably speculative attempt to understand a major enterprise.

1 A flying start

The present GEC was formed by the merging together in the late 1960s of the three leading British electrical engineering firms, Associated Electrical Industries, English Electric, and General Electric Company (hereafter AEI, EE and GEC). In one sense these major rapid-fire mergers were events which were as startling as they were significant: yet in another sense they represented a logical, almost a natural development of the industry. To appreciate these dual aspects we need to make a brief historical survey of electrical engineering in Britain. (The following account draws heavily on the excellent work of Robert Jones and Oliver Marriott, Anatomy of a Merger, 1970.)

From the view-point of neo-classical economics, the electrical engineering industry was deformed at birth since it was strongly monopolistic from its earliest days. The reasons for this need not detain us, but one of its results was that on a world-wide scale the industry before 1914 was dominated by two American firms (General Electric and Westinghouse) and two German (Siemens and AEG). In this period electrical manufacturing in Britain largely took the form of offshoots from these companies.

It was the First World War which provided the opportunities which led to the emergence by the 1920s of more specifically British firms, and especially EE, AEI and GEC. Despite this all three were (or soon became) dominated by American capital: EE fell into serious financial difficulties in the late 1920s and was surreptitiously reconstructed and financially underpinned by the American Westinghouse company; the merger (of British Thompson Houston and Metropolitan Vickers) which created AEI was clandestinely arranged by GE of America; and although attempts to swallow GEC were beaten off by Hugo (later Lord) Hirst, GE of America owned the largest (though non-voting) block of its shares.

It was thus easy to fit the British companies into the international cartel arrangements which were a normal part of the industry’s inter-war structure. Even so, none of these British-based firms was very profitable especially in heavy electrical engineering. This led Gerard Swope, as president of General Electric of America, towards still tighter control by attempting to secure a merger of AEI, EE and GEC in the 1930s. The attempt was abortive, but it was a pre-run of what happened in the late 1960s. In the inter-war years some of the advantages of merger were instead obtained through the close co-operation of the major British firms over prices and tendering in the home and Commonwealth markets which were their tacit territory under the international cartel arrangements.

The Second World War led to substantial expansion and improved profitability. Partly as a result, the post-war situation was significantly changed, although there were many other influences besides the increased strength of the main British firms. The war had also disrupted the cartel arrangements especially so far as European (and particularly German) producers were concerned. The loosening was further encouraged by anti-trust pressure on the US firms in the late 1940s, a factor which also induced the US companies to sell out their financial interests in the British firms. (In 1946, for example, GE of America still held 40 per cent of AEI shares.)

The potential competitive effects of these developments were, however, not felt for some time. The European manufacturers did not re-establish themselves for a decade or so; the British firms continued to run co-operative arrangements in the British markets; and they continued to have a more or less free hand in the Commonwealth. The big shift came in the late 1950s and forms an essential preliminary to the mergers of the 1960s, which in an important sense represented a means of ending this brief period of unwonted (and unwanted) home competition.

The 1957 report of the Monopolies Commission on Electrical and Allied Machinery and Plant directly condemned the common price system as being against the public interest. The industry – especially the heavy engineering end – strongly opposed the findings and feared the instability they thought it was bound to produce. The feelings of instability were compounded when, at much the same time, competition from Germany and Japan re-emerged. Indeed, such competition now took a more serious form since the ending of the cartels meant that the home market itself was exposed. ‘What have previously been regarded primarily as British markets are now scenes of international competition’ (Lord Nelson, Chairman of EE, 1961).

The move towards merger in the 1960s was thus partly a natural attempt to limit competition between the major British firms. It was also an equally natural response to create a firm or firms large enough to compete internationally. At the time it must have seemed that the most likely victim would be GEC. It had borrowed heavily for expansion in the 1950s, much being spent on developing nuclear power which was not profitable. For much of the decade this was disguised because of the big boom in electrical goods, but it became increasingly clear that GEC was faring less well than AEI or EE, especially AEI. It was thus not surprising that the initial move was a suggestion from EE that it should merge with GEC. The former was mostly engaged in heavy engineering and in airplanes, both of which were suffering from lack of home orders and severe foreign competition; the latter was mostly concerned with lighter electrical goods where conditions were better but where the management was singularly unsuccessful. GEC turned down the proposal and, surprisingly, EE did not press through to a takeover.

During the course of the 1960s the relative fortunes of the various companies underwent substantial change. Almost at the time of the abortive 1960 merger, GEC took over Radio and Allied Industries and with it acquired Arnold Weinstock (or perhaps it was really the other way round). R and A was a television firm run by Michael Sobell and his son-in-law, Weinstock. It was enormously profitable through the TV boom of the 1950s and this success was widely attributed to Weinstock’s management skill. So when it was taken over by GEC it brought an exceptional management talent at just the time when this was GEC’s greatest need. By 1963 Weinstock was managing director of GEC as well as being a major shareholder. He soon accelerated the growing profitability of GEC, partly by concentrating increasingly on the lighter end of the business. GEC, the smallest and in some respects the least successful of the big three firms in the 1950s, became stronger and stronger in the 1960s.

AEI’s progress was almost the reverse. The switch was partly caused because in the mid-1950s AEI (under Lord Chandos) had embarked on a vast programme of expansion including a huge new works at Larne in Northern Ireland. The growth was concentrated on the heavy side and was aimed at a poorly specified but rosy future for electricity based on nuclear power, electric railway traction and automated equipment. The lighter side, which might have been more immediately profitable, was relatively neglected – indeed AEI shed much of its interest in valves, lamps and domestic appliances during the 1960s. AEI did, however, undertake a serious exercise to integrate the company into a series of product divisions instead of continuing, as it had for three decades, as a loose union of separate and often antagonistic companies (BTH, Metrovick and, later, Siemens). This often disruptive exercise was completed just in time to be inherited by GEC.

English Electric, the biggest of the three, was an in-between case. It was generally accepted that its management – unlike that of AEI – was capable. But in the crucial years of the mid-1960s its profitability was suffering from a period of general over-capacity in the heavy electrical engineering industry, and the need to service a substantial weight of debt. It was an essentially sound but temporarily vulnerable firm.

In the space of a couple of years in 1967 and 1968 the position was dramatically transformed. GEC first took over AEI, and then was clearly the dominant partner in a merger with EE. The smallest of the three leading British electrical engineering firms had become, in domestic terms, a giant, and the new enlarged GEC had become of some significance on an international scale. It was, indeed, a flying start. How was it attained?

2 The stock market

As we have argued in the introductory essay, mergers were attractive in Britain in the 1960s because they could be largely financed with company paper. The stock market mechanism facilitated this process which was also fostered by the propensity for the market’s valuation to give great weight to short-run profitability performance. In the late 1960s the market placed a high valuation on GEC: after a bad period it had become increasingly profitable; it had Arnold Weinstock who had produced this financial result; it was more concentrated at the lighter end of the industry which financial comment at the time regarded as less risky and more profitable. The market, however, placed a low valuation on AEI and EE: they had a poor recent profit record; they had expanded capacity too fast; they were more concentrated at the heavy end of the industry.

It was within this institutional context that GEC was able to emerge as the dominating concern¹ and it was certainly shrewd enough not to pay out large sums of cash. Moreover the company paper which was issued as part of the deals was carefully limited. As a result the financial terms, both for the takeover of AEI and the merger with EE, placed no great burden on profitability. All this represented two brilliant financial coups in quick succession, especially in face of the relative sizes of the companies. In 1967 GEC had a turnover of £180 million; AEI had a turnover of £260 million; and EE a turnover of more than £400 million. The GEC final bid for AEI valued its assets at £160 million, and the merger terms valued EE’s assets at £300 million. Yet less than £16 million in cash was spent on the acquisition of these two major firms.

The bulk of the financial cost was provided in paper, either in the form of loan stock or as equity in GEC. The loan stock, with inflation, was no great burden especially as the amount was not large. More significantly, the high market valuation given to GEC because of its success in the 1960s and the market’s faith that Arnold Weinstock could continue the trend, meant that the nominal increase in GEC’s equity was modest in relation to the assets acquired. It rose only from £57 million to £136 million. Thus the enlarged company would not have to be wildly successful before it could hope to achieve financial profitability.

The fusion of the GEC-AEI-EE trinity was not, however, solely achieved through the working of the stock exchange. We have already seen that the reduction of national and international cartel arrangements led many in the industry to look for other means of restraining competition. More importantly, the government of the day wanted, and so facilitated, the mergers. The Labour administrations of 1964 to 1970 put much stress on improving the international competitiveness of British industry in general; and in particular believed that Britain needed an electrical engineering enterprise which could look the American, European and Japanese giants in the eye.

In 1966 the government had set up the Industrial Reorganisation Corporation (IRC) to implement rationalisation in the private sector of industry. In 1967 the IRC positiv...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Preface
• Introduction: Why are the British bad at manufacturing?
• Case studies
• Index