The Lessons of Longbridge

In 2000 on Regional TV I was asked what the prospects for MG Rover would be with the Phoenix Four. I said that British Aerospace, one of the world’s largest engineering businesses, could not make it work and BMW, one of the world’s best carmakers could not make it work. I saw little hope that four blokes from Birmingham with an overdraft could make it work.

As you might expect I was both right and wrong. Right about their chances of building a successful car maker but wrong about their need for an overdraft. BMW’s largesse meant they made a great success of the business for themselves taking, according to the recently published report, over £42 million out of the business without taking any risks whatsoever.

It is incredible that these men burned their way through some two and half billion pounds! To take an inheritance from BMW of around £1.2 billion in assets and cash and turn it into a loss of £1.3 billion really takes some doing. As a result around £5billion has left the Regional economy leaving it reeling. Add to this the closure of Peugeot near Coventry, the collapse of LDV in Washwood Heath and now the threat to one of Jaguar Land Rovers plants in the region and is it any wonder that the West Midlands is the national unemployment black spot.

It now seems unless there is a dramatic change in Government policy the West Midlands has little future in automotive manufacturing. This is the result of a whole series of calamitous decisions handing MG Rover on a plate to the Phoenix 4 being just one. The death sentence on Longbridge was announced in 1998 when the Rover Group was sold by the Thatcher Government to British Aerospace. BAe had no real interest in volume car manufacture but did have an interest in Land Rover. At least given Rovers engineering weaknesses it had the sense to form a partnership with Honda.

In 1994 they sold the business to BMW for £800 million in theory making a profit having bought Rover for just £150 million from HM Government but one suspects they were happy to be rid. BMW’s purchase was at the time a defensive action. With BMW threatened with takeover needing a strategic acquisition to be bigger.

The rest as they say is history. BMW could not make any money out of Longbridge. Despite investment in new models, the Mini at Cowley and the Range Rover at Solihull, at Longbridge the wrong product in the form of the Rover 75 came too late to save the plant. This too was partly due to Government policy. For many years cars of this type were bought as a perk for their employees by companies thanks to the structure of company car taxation. Older readers will remember our motorways being full of Vauxhall Cavaliers, Ford Cortina’s and big Rovers all looking much the same with reps jackets flapping on hangers in the back. When the tax benefits disappeared and individuals started making their own car choices the trickle of hot hatchbacks from mainland Europe became a flood. Leaving Dagenham, Luton and Longbridge tooled up to build cars no one wanted. Unlike Rover, Ford and GM could bring into the UK models from their plants elsewhere in Europe sentencing their UK plants to death.

So what are the lessons of this sorry tale?

1. There is no substitute for a Government with an active long term industrial strategy. Most economies of our size try to maintain a mixed economy, in terms of services, manufacturing, energy and agriculture. This requires more than supply side initiatives or high spending on science. It requires a fiscal policy that favours investment over short term speculation and ensuring access to markets that are large enough to support large scale enterprises.

It is not just since Gordon Brown gave the Bank of England its independence that the economy has been run in favour of the money lenders but the way the monetary policy committee operates does not help. They do not have to take into account the effect on investment or on the value of the pound of their decisons. High interest rates have made it harder for businesses to invest in the UK and an uncompetitive exchange rate has made it hard for firms to export. The strong pound has a double effect it is harder to export but easier for those based in euroland to sell us their products. I am not arguing for joining the euro (although it would help) but if we stay outside we need at the very least a more competitive currency.

2. Ownership matters. The government should never have dumped Rover onto BAe. The lasses faire approach to the ownership of major businesses in Britain will come back to haunt us. Compare for example the French Governments approach to Renault. Here was a company that made a successful small (car its mini being the Renault 5) and like Austin Rover it could not make money out of manufacturing it. When it got into financial difficulties the French Government stepped in nationalising it in 1984. After making a huge investment in Renault and in its suppliers, completely restructured it was returned it to private sector in 1996. But here is the telling point. The French Government still maintains a fifteen per cent stake in Renault and even more tellingly from the point of view of the Rouge Roberto’s who work on the tracks (members no doubt of the CGT) three members of the main board are elected by employees and another is elected by employee shareholders. Such a board structure means four directors could not have run off with the workers redundancy money and pensions. Of course the proof of the pudding is in the eating and so at year end 2008 Renault had produced 2,382,230 cars and employed 129,068 people whilst weeds were growing through the rubble of Longbridge.

3. Manufacturing can only survive as part of a more general technological economy. The UK prides itself on its excellence in science. Science of itself however does not make money. Scientific breakthroughs are easy to copy because they are published; so that even Iran can split an atom or put a satellite into orbit. No. Money is made from technology. There is little new science in mobile phones, computers or modern cars. The science is pretty much old hat. There have been developments in new materials and miniaturisation but much of the science in modern products is half a century old. What we need for a vibrant manufacturing economy is an undergrowth of small and medium sized technology businesses. These are the firms that exploit new materials and new technologies first. Government spends a lot of money on science but needs to support the development of small technology businesses.

4. We do not need any more engineers or more children doing more engineering or science in school. We do need more demand for engineers. A manufacturing economy is driven by investment, new investment drives the development of new products, and new product development drives R&D and the acquisition of new skills. Too many businesses have learned half the lesson of the Japanese lean manufacturing philosophy. The constant pressure on costs. Obviously if you have a successful product and want to maximise profits you must keep pressure on costs. But any long term successful business also needs a constant stream of new products. Too many UK engineering and manufacturing businesses are just too lean they have little or no new product development and as soon as their product base gets stale they then get taken over or close all together.

5. There is real need for changes in company law. Firstly on board structures. Although why the trade unions who had made such an effort to get MG Rover for the Phoenix Four did not demand at least a seat on the board is beyond me. There are also issues about insolvency law and the law about pensions. We need to take these issues seriously. In retrospect it would have been better to have closed Longbridge and used BMW’s dowry to pay off the suppliers and the workers. It can never be right for Directors to be able to walk away as millionaires at the expense of their suppliers and workers.

6. It is never too late. Korea and the other Asian tigers developed as manufacturing economies from next to nothing. We can be better at manufacturing which would do wonders for our trade balance and the economy generally. It would also be good for our society. The collapse of manufacturing has huge social consequences changing our society into a less equal more divided one.

So let us hope this is not just another chapter in the history of decline of British industry. Manufacturing does matter and an active government can make a real difference.