How the UK lost its faith in National Champions

John CubbinCity University, London;UK Competition Commission

Any views expressed are personal to John Cubbin and do not represent the official policy of any public body

2

Introduction

The evolution of policy may be determined more by experience than ideology.

Ideology may itself be influenced by experience.

The UK seems more open to foreign ownership of companies than certain other countries

What role did experience play in the development of openness ?

3

Overview

• Examples• Current situation in regulated sectors• National champions policy in its heyday• Examples: motor vehicles, computers,

machine tools• An interpretation

4

“Spanish construction company Ferrovial has made a £10.1bn offer for airport operator BAA, which controls Heathrow, Gatwick and Stansted.” (ThisIsMoney.co.uk)

“Thames Water is to be sold to a consortium led by Australian investment fund Macquarie in an £8 billion deal. RWE, the German energy group that owns Thames, struck the deal late last night with the Kemble Water consortium.” (Scotsman.com)

Examples

5

“EDF Energy is one of the largest energy companies in the UK... In the last five years we've transformed into a major, national energy player with the acquisition of the supply businesses of SWEB Energy and Seeboard Energy; the Sutton Bridge, West Burton and Cottam power stations, and the TXU and Seeboard networks businesses.” (EDF Energy)

Examples continued

6

Summary of current position

• Widespread privatisation of formerly State-owned assets

• “Golden Shares” expired long ago.• Many “leading companies” owned by, or in

process of being bid for by, foreign-owned companies.

• Some of these owners are themselves in public sector or are only just going through privatisation process

7

Company at privatisation Sector Current ownership

National Power generation

Powergen generation

Eastern Electricity Distribution/supply

London Electricity

Current situation: Electricity

RWE (Germany)RWE npower (retail and distribution)

E.On (Germany)

EDF (France)

EDF (France)

8

Gas

Company at privatisation Sector

Current ownership Comments

British Gas: => All gas Split up National Grid Co

Gas + electricity transmission UK (plus large US holdings)

CentricaGas distribution plus more UK

Rumours of potential Gazprom takeover

9

Water examples of foreign ownership

Company Ownership

Essex and Suffolk, Northumbrian

Suez Lyonnaise des Eaux (Franco Belgian)

Three valleys , Folkstone and Dover, Tendring Hundred, 3 million customers

Veolia (Formerly Vivendi, formerly Generale des Eaux) France

Mid-Kent AustralianThames Water RWE

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Company at privatisation Sector

Current ownership Comments

British Telecom BT Telecommunications UK Retail regulation dropped

Thames WaterWater and sewerage services RWE

Sale to Macquarie recommended by RWE's board

BAA 6 UK Airports UK

Offer from Ferrovial agreed; market under investigation by OFT

Royal Mail Postal servicesPublic sector

Open to full competition from 1/1/2006

A selection of other sectors

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This is strange, because…The UK previously had a strong tradition of:• Public ownership (especially in

1920s,1930s, 1940s)• Government sponsorship of National

champions (1964 – 70)

What happened?

12

National champions Policy 1964-70

• British Leyland (1968)

A new Britain was to be forged in the “white heat of Technology” Leading examples:

• International Computers Limited (ICL)

• Alfred Herbert (Machine tools)

13

Austin Morris Motors

British Motor Corporation (1952) Leyland Motors (Trucks, buses)

Takes over Rover cars (1967)

Leyland Motor Corporation

Takes over Standard-Triumph (1961)

BMC buys Jaguar (1966)

British Motor Holdings

British Leyland is formed!

A national champion!

Formation of a National Champion (simple version)

1968

1968

14

International Computers and Tabulators (1959)

Ferranti Business computer division (1963)

International Computers Limited

British Tabulating Machine Company

Powers-Samas

Elliot Automation

ICL (1968)

A national champion!

GEC computer interests (1961)

Some Computer Mergers

15

What happened to British Leyland?

1. Failed to integrate businesses

2. Management too busy dealing with industrial relations and problems of integration to focus on:

• Good new designs

• Matching quality and reliability to growing German and (increasingly) Japanese imports

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What happened to British Leyland (2)?

1. Lost market share, and lots of money!

2. Eventually effectively nationalised (1975)

3. Triumph assembly plant in Speke closed (1978)

4. MG and Triumph assembly plants in Abingdon and Canley closed (1980)

5. Rover-Triumph plant in Solihull closed (1981)

17

1984, Jaguar floated off, sold bought by Ford (1989)What happened to British Leyland (3)?

Leyland Trucks & Vans sold to DAF (1986).Leyland Bus floated off (1986); bought by Volvo (1988)

Rover Group sold to British Aerospace (1988)BMW buy Rover Group from BA(1994)BMW sells the Rover assets: Land Rover sold to Ford (2000)

Remainder of company became the independent MG Rover Group (2000)

MG Rover goes into “administration” with large debts (2005)

18

Passenger car production UK

0

0.5

1

1.5

2

1970 1980 1990 2000 2010Year

Num

ber (

mill

ion)

Does this mean this mean that the British Motor industry is dead?

Not quite:

Source: Office of National Statistics

19

Explanation: Japanese companies, growth through competition not merger

High productivity, quality

20

ICL (1968) A national champion

Fujitsu

Early 1980s

Co-operation deal with Fujitsu

ICL absorbed into Fujitsu

2002

Dependent on public-sector contracts

What happened to ICL?

1974 2900 range introduced

21ICL: One of the 2900 series. “Nice orange cabinets”

22

What happened to Alfred Herbert?

It became the subject of a book!

Alfred Herbert Ltd and the British Machine Tool Industry, 1887-1983by Lloyd-Jones, Roger , Lewis, M.J. (2006)

“…this study not only provides a valuable insight into British manufacturing, but contributes to the ongoing debates surrounding Britain's alleged decline as a manufacturing nation.”

Draw your own conclusions!

23

What happened to industrial policy?

“it was losers like Rolls Royce, British Leyland and Alfred Herbert who picked Ministers... What was described as ‘picking winners’ appeared in practice to amount to spending huge sums shoring up ailing companies...” (Morris and Stout, p.873 “Industrial Policy”, in D. J. Morris (ed.), The Economic System in the UK. Oxford: Oxford University, 1985.)

“...government contributions to civil aircraft and engine development from 1945 to 1974 totalled ￡ 1.5 billion at 1974 prices and produced receipts of ￡ 0.14 billion” (Crafts, quoting Gardner (1976))

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What happened to the economy when the policy of National Champions was abandoned in favour of competition?

“….a notable turn around in trends in TFP relative to other countries before and after 1979. Detailed empirical studies suggest that this was associated with a majorshakeout associated with stronger competitive pressures and a transformation in industrial relations which eliminated the hold-up problems and overstaffing of the 1970s.” (Crafts, HM Treasury)

Improvements in productivity and growth:

25

An interpretation

1. Top management is a global market

2. Overseas management may be able to make more of assets

3. Supporting national champions can be expensive

4. Competition policy is one of the more effective forms of industrial policy

26

“The Kremlin owns a 51 per cent stake in Gazprom, a company that has 25 per cent of the world’s gas reserves and is a growing presence in the oil markets.

It provides more than 25 per cent of the European Union’s gas requirements.”

Timesonline February 2006

“Gazprom, the Russian gas giant, today said it is considering a takeover of Centrica, Britain’s largest gas distributor and owner of British Gas, according to Russian news agency reports.”

Are there any limits to this? e.g.

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Ministerial intervention: only if there are ‘exceptional public interest issues’ at stake.

The Enterprise Act currently only defines one public interest issue: national security,

Secretary of State can intervene by serving an intervention notice where (s)he believes that a merger raises other public interest considerations. Ministers may also intervene if one of the parties involved is a “relevant government contractor”.

Ministerial intervention under the Enterprise Act 2002

28

The Triumph Mayflower in production

Nissan factory and cars

29

"Because Great Britain has become a very attractive business environment for us", Mestrallet replies, completely unfazed. "It is a country where the rules of the game are quite clear for economic players such as ourselves. It is a place where freedom of action is quite complete and where making profits is considered quite normal. I only wish that the same could be said for France. That is why we shall continue to invest heavily in the UK, and if profitable opportunities do occur, you are unlikely to see us sitting back."

http://www.jeremyjosephs.com/mestrallet.htm

Gérard Mestrallet , Suez Lyonnaise des Eaux: