Takeovers and Britain’s poor industrial performance

Materials World magazine
,
1 Mar 2006

In the December 2005 issue of Materials World, I wrote about Britain’s failure to invest in industrial R&D. The most recent international R&D scoreboard, published annually by the Department of Trade and Industry (DTI), confirms and quantifies these failures.

In seven of the top 10 R&D sectors, Britain’s contribution is negligible, indeed vanishingly small in some cases. Only in pharmaceuticals and aerospace does our R&D spending rise above two per cent of the global figure. The drugs companies alone spend almost half of Britain’s total R&D expenditure, with aerospace not a very close second.

To what can we contribute this relative success? It is not irrelevant that both sectors are strongly supported by government – pharmaceuticals by an enlightened National Health Service (yes I do mean ‘enlightened’) and aerospace by defence contracts and government-led collaborative projects such as Airbus. Could there be a lesson here? In contradiction to the conventional right-wing mantra adopted by both our major political parties, could there be a case for more government intervention in our industrial affairs?

 

R&D in the UK and Europe

What is more surprising and equally worrying is that R&D is apparently more expensive in Britain than in the US, Japan and the rest of Europe. John Chapman who, as a civil servant in 1991 introduced the first DTI R&D scoreboard, has teamed up with the Guardian’s financial editor, Larry Elliott, and examined in detail 10 industrial sectors. He shows that in each sector Britain’s R&D costs are either equal to, or exceed, the corresponding sectors in Europe and America.

In the meantime, actual or rumoured takeovers of important British industries by foreign companies continues apace. In his letter published in the January 2006 issue of Materials World, Matthew Gemmill had particular concern that Britain’s energy industries should remain in UK control, so he will not have been cheered by the strong rumour that the Russian company Gazprom, the largest gas company in the world, may make a £11 billion bid for Centrica, the largest utility in Britain.

Centrica has 17 million customers, supplies gas to every second home in Britain and controls about a quarter of the electricity market. Gazprom’s action in cutting off gas supplies to Ukraine increases nervousness in government circles and the DTI has announced that any proposal to take over Centrica would face ‘robust scrutiny’.

 

Takeover bids in the steel industry

There has also been much activity in the steel industry with Mittal Steel’s £12.8 billion hostile offer for its nearest rival in size, the Luxembourg based company Arcelor. The offer has been swiftly rejected, but Mittal Steel’s owner Lakshmi Mittal (Britain’s richest man) does not give up lightly. Should his bid succeed, the combined company will be three times the size of its nearest rival, Nippon Steel, and four or five times the size of Corus (whose shares price rose at the news anticipating further activity in this particular market).

To end, as I started, on a gloomy note, recently published comparisons reveal that Britain is failing to close the gap in productivity between it and rival countries. In 2004, output per hour worked was 19% higher in France, 15% higher in America and five per cent higher in Germany. Lack of investment in plant is one explanation, but equally worrying is that a recent OECD study highlights failings in skills, innovation and transport. Deficiencies in education have resulted in a British workforce with a much higher share of low-skilled people than in most other developed countries.


Further information

DTI Benchmarking Tools for R&D and Innovation