British Business is under pressure as the pound continues to strengthen. But those companies learning to adapt now will be well placed to compete in the global economy of the future
It was clear at the 1997 General Election that the strength of sterling was going to prove a headache for any incoming government. In the three years since, the situation has intensified as the pound continues its seemingly unstoppable rise against the main European currencies, now combined in the euro. Indeed, since its launch 18 months ago, the euro has fallen by as much as 20 per cent against sterling.
Few need reminding how badly the high pound is affecting British industry. A strong currency puts pressure on exports, and that hits profits and also jobs. It has been estimated that some 40 per cent of extra costs have been imposed on UK players in many of the most competitive manufacturing markets. Some contend that unless action is taken soon, the strength of sterling will result in the elimination of whole areas of viable business which would otherwise be flourishing.
Baptism of fire
But there is an emerging school of thought that takes a decidedly more pragmatic approach. It insists the currency crisis should be seen as a useful wake-up call to UK industry – a baptism of fire, perhaps, in preparation for the even more rigorous conditions they will have to face in the emerging global economy. Thus, those companies which have been forced to find innovative and efficient ways of countering the natural disadvantages inherent in the high pound are well poised for the future.
One company which has taken this to heart is the Glynwed Engineering Group, producer of the famous Aga cooker that is still made in Telford, close to the fulcrum of the Industrial Revolution. “I think for many years the UK was quite a protective environment,” says CEO Tony Wilson. “That strip of water worked wonders at keeping imports at bay.”
But the strength of sterling has forced many companies to quicken the pace of change. “We may have been lax and lazy because of our protective markets but I think the businesses which have survived have learnt very quickly how to adapt to that new environment.”
The company’s new £2m state-of-the-art foundry belies the traditional image of its Aga product and has also dramatically cut costs. “We’ll actually use half as many men as the old plant, and it will double the output,” Wilson says. “Obviously we expect our suppliers to carry some of the burden with us and our employees have also had to become much more flexible. We have things like flexible working hours now, and flexible money arrangements – and flexibility was not something the UK was noted for.”
But efficiency alone is not enough to ensure continuing survival and prosperity – the welter of imitative companies coming out of Asia and eastern Europe has seen to that. “They can easily replicate our products,” Wilson says. “What they can’t do very easily is design new products and bring new innovations to market.”
The challenge, therefore, is to create things which customers are prepared to pay a premium for. According to another successful UK exporter, Bede Scientific Instruments, this means thinking through every product much more thoroughly – especially in the high-tech environment in which it operates.
Bede Scientific currently enjoys a competitive advantage in its market – it has developed one of smallest yet most powerful X-ray generators in the world. “Instead of weighing 1,000lb, it weighs 30lb. And instead of using 5 kilowatts to power, we will do it in 80 watts,” says chairman Norman Price.
One of the first applications of its technology is the possibility of X-ray analysis on board the International Space Station. “Nasa is considering examining the structures of crystals grown in low-gravity conditions. They couldn’t have done it actually in space with the old-fashioned X-ray machines because of the weight and power. But they could with our new machine,” says Price.
But he insists this competitive headstart can only be maintained “by running very fast… we have to keep developing and we will do that”. The critical ingredient to sustained success, he adds, lies less in all this, is less in the excellence of an individual product per se, and more in the know-how that goes into it.
“You really make money if you can embed your knowledge and sell it again and again. You can keep on adding value for the business and for the nation. The true knowledge economy is actually embedding the knowledge and selling it as a product and service – and the package that goes with it.
“There is a perception that the manufacturing industry is old-fashioned and passé, but the question is can you produce something with more inherent knowledge than the competition? There’s a limit to what you can do in terms of driving down costs but there’s almost no limit to what you can do in terms of enhancing the value to the customer,” he says.
It might be argued that such market niftiness is all very well in the high-tech arena where products are small-scale. But what of hard core, large scale traditional industries? How have they countered the pound’s strength in Europe? The answer lies mainly in bringing ever-increasing efficiency and automation to their production lines.
According to Graham Mackenzie, chief executive of Cardiff-based steel producer ASW Holdings, the UK steel industry is a good example of what can be achieved, albeit at great cost in terms of jobs. “Twenty years ago the steel industry in Britain employed 250,000 people. Now only a fifth of that number work in the industry, which still produces more steel now than it did then.”
These changes have been reflected at ASW’s own plant, where one operative effectively controls a manufacturing process stretching half a mile. “A billet that starts its life 15 metres long, moving at around 10 feet a minute, is seven miles long at the end of the process and moving at 100 metres per second,” claims Mackenzie. “The man in the control cabin runs the entire mill from start to finish.”
The track record of productivity improvement in steel has been very good – increasing threefold in the past 20 years. “We take it rather ill when Gordon Brown makes criticisms about productivity, because you certainly can’t point the finger at steel,” Mackenzie says.
But the commodity nature of the product means that the effort has to be ongoing. “If we are going to stay competitive, we’re going to have to do the same thing in the next 20 years.” He believes that, with the appropriate investment, such leaps are possible. “What you’re talking about is gradually reducing the employment and changing the profile from unskilled and semi-skilled to highly-skilled people.”
This quest for continuous improvement is also much in evidence at Farnborough-based Weston Aerospace, which produces sophisticated, high-value widgets for the international aerospace industry.
But for Harry Tee, chief executive of the Roxburgh Group owner, the current strength of sterling is just another challenge driving the company’s quest for lean manufacturing. “We’ve had to accelerate some of those programmes and put more resources behind them. We have initiatives in place across a wide range of sites and product lines to drive as much as 30 or 40 per cent out of the cost of production,” he says.
Weston achieves this feat by relentless attention to detail. It has abandoned the old production line in favour of smaller units of workers – so-called cellular manufacturing. Tee maintains that the essence of the process is the elimination of waste.
“Basically, we create a value stream map of every product and we measure how long every process takes in seconds. If you pick up the product and put it back down, it gets registered.
“So it’s incredibly detailed – but we’ve managed to reduce the production cycle time by half in the last six months by doing this work. It’s very necessary to drive out the wastage that goes in materials flow, on movement of product, and in material and labour costs.”
He admits Weston has had to make compromises for this hasty investment in efficiency and these have mainly come from the R&D effort. “We’ve had to allow slippage in one or two product development areas in order to concentrate on driving costs out. R&D is still a very important part of our business. But there has been a trade-off – clearly over the past year we’ve had to put a bit more attention into new manufacturing as a result of the exchange rate movements.”
If the high pound is obviously hurting so many businesses, why isn’t something done about it? To some extent the Government absolved itself of responsibility nearly three years ago when Chancellor Gordon Brown handed over the day-to-day control of interest rates to the Bank of England.
“I think we must beware of expecting too much of economic policy and economic policy-makers,” says Roger Bootle, economic adviser to Deloitte & Touche. “They have very few, and crude, tools at their disposal. But they have to deploy them to the best possible advantage.”
Instead he believes the Government has been operating a policy of “benign or malign neglect”. If there was a clear political advantage in altering the situation, something could be done. It might be an old-fashioned move but the Bank of England could intervene in the foreign exchanges. If it sold its sterling reserves, the international value of the currency would be reduced.
Representatives of the Bank of England monetary committee, which sets interest rates, admit that the high pound has caused irreparable damage to some otherwise viable businesses, and possible long-term damage to the economy. Yet they claim there is little they can do to alter the situation because their remit from government is to set interest rates only in relation to future price stability.
As one member of the nine-member committee, economist Shushil Wadwhani, points out, the strong pound would only become a matter of concern “if a significant fall in industrial capacity then has implications for price stability further out. It’s only through that channel that we incorporate such considerations into our interest rate-setting decision.” To do otherwise “would be contrary to our remit – indeed illegal.”
This apparent helplessness will, no doubt, be of little comfort to those who consider their very survival to be threatened by the high pound. But many of those businesses which have already been forced to take action to counter the inherent disadvantage brought by the strong pound claim there is a silver lining to the situation. Without the impetus of the currency crisis, they might not have upped the productivity and efficiency of their organisations – moves that will stand them in good stead for the future.
Indeed, some industry leaders, such as steel executive Graham Mackenzie, maintain that the high pound in itself is only one of a series of external pressures that any business has to address continually. “To be honest I don’t expect relief from the pressure. I mean, why should we?”
Tony Wilson at Glynwed agrees: “It’s a very small world now. Trade is international. So I don’t think we can relax – and we don’t intend to relax.”
This is precisely the kind of long-term attitude that industry observers such as Brian Woods-Scawen at PricewaterhouseCoopers are seeking to encourage. “I don’t think the pound coming down will be quite the salvation that many manufacturers think,” he says. “We won’t be back in the old world – it won’t be that we’ve been through a period of dark nights and suddenly we’re in the sunshine.
“The world will have changed. [Companies] won’t necessarily be able to succeed in the new world without making all the other changes necessary, simply because of a cheaper pound.”
But the outlook is bright for those who have seen the writing on the wall and have acted on it. “There is a great opportunity for manufacturers in Britain which take advantage of these circumstances and make the necessary changes. They can then move into markets that are more favourable and have a fantastic chance to create world-leading positions as a result of their products and processes.”
To some extent, therefore, the high pound must be seen as merely a symbol of the sort of pressures industry will continue to face throughout the 21st century. By learning new ways of coping with what seems like an unfair exchange rate, British business may be learning how to survive in a cruel new world.
This article is an extract from BBC Radio 4’s In Business programme