Wednesday, 23 December 2009

The end of the Swedish Car Industry?

This blog has followed recent events in the car industry closely, with an eye to the long-run viability of car manufacturing in mature economies. The last week has seen massive changes affecting Saab and Volvo, Sweden's two biggest car manufacturers.

Last Friday the majority US government owned GM, the owners of Saab, which is trying to restructure itself as a precursor to an IPO, announced that it was unable to find a buyer for Saab and would wind the company down. Saab, which stands for Svenksa Aeroplane Aktie Bolag, which actually means Swedish Airplane Corporation was established in 1938 as an aircraft manufacturer to build planes for the Royal Swedish Air Force. After 1945 the company diversified into car production, focussing on affordable cars, eventually selling its car subsidiary to GM in 2000. GM had owned a 50% stake in Saab's car subsidiary since 1991; however this investment has turned out to be a very poor one as Saab cars have failed to make a profit since 2001. Now Sweden's government have rightly refused to bail out Saab, although attempts are continuing to sell the company to a performance car maker, Spyker of the Netherlands. Such a sale would however probably mean the end of Saab as a volume manufacturer.

Over at Volvo, established in 1927 as a spin-off company from the ball bearing manufacturer SKF the future of the company as a volume manufacturer in Sweden also looks dubious. Volvo was purchased from the rest of the Volvo group, which continues to make commercial vehicles and construction equipment, by the Ford Motor Company in 1999. Volvo had continued to be a strongly independent subsidiary within Ford, continuing to specialise in safety and engineering innovations in-house. However Volvo's continued reputation, particularly for making high end family cars has not been sufficient to sustain its position in the western market, with sales falling 18.3% in 2008. Ford, itself struggling with the downturn, has now decided to sell on Volvo to Geely, a Chinese manufacturer. While Geely may choose to keep Research and Development in Sweden, with production costs, particularly wages, being very high in Sweden it seems unlikely to keep Volvo manufacture in Sweden for long.

No doubt some manufacturing will continue in Sweden for the European market, but as Volvo production is increased at lower cost for the Chinese market for how long can this be expected to continue? Or could Volvo be a rare case in which the country where the product is made counts, given Sweden's general reputation as a country which manufactures quality products? Not if the case of furniture retailer IKEA, a company which for many consumers embodies Swedish design and quality, is taken into account; it has successfully sold 'Swedish' furniture made in China, among others, for many years now.

Tuesday, 15 December 2009

Cadbury - end of ethics?

This week the UK chocolate and confectionery manufacturer Cadbury, manufacturer of the iconic Dairy Milk brand among others advised its shareholders to accept a hostile take-over bid from US food conglomerate Kraft Foods. With Kraft's US rivals Hershey also entering the fray it would appear that Cadbury's existence as an independent is likely to come to an end after 185 years. British chocolate eaters will fear that the distinctive taste of Cadbury's products may be under threat; however the ethical stance of Cadbury's, something relatively rare in the food market, may also be under threat.

Quaker Chocolate maker John Cadbury first opened a shop in Birmingham in 1824 to sell drinking chocolate. By 1831 he had started manufacturing; the company remained a family concern and by 1879 Cadbury's sons established a new factory on a green field site at Bourneville, on the outskirts of the city, where it continues to manufacture today. At Bourneville the company established one of the 'model villages' of the nineteenth century for its workers, building detached houses with gardens (unusual in what was otherwise a crowded industrial city), as well as providing pension schemes, education, training and health schemes for employees.

It seems likely that such benefits were not extended to the firm's suppliers in the then British colony of Ghana in West Africa; but under ethical pressure in early 2009 the firm announced that it was moving to Fairtrade certification of its Dairy Milk brand. The Fairtrade Foundation aims to guarantee that farmers working for Cadbury in Ghana receive a fair living wage. Cadbury are rare among mid market chocolate makers in adopting Fairtrade, which is usually reserved for the high end manufacturers. It will be interesting to see whether or not Kraft or Herschey will value the Dairy Milk brand enough to retain its Fairtrade status; if they are wise they will continue with this as part of a premium international image for Dairy Milk, as well as continuing its manufacture at Bourneville, a crucial part of its 'Made in Britain' image.

Monday, 30 November 2009

Can Scotland really be economically self sufficient?

On November 30th, the Scottish First Minsiter, Alex Salmond, marked St. Andrew's Day by unveiling his Government's plans for a referendum on Scottish Independence. Scotland has been part of the United Kingdom since 1707, when the Scottish Parliament voted to join the English parliament. The Scottish Parliament was subsequently reformed, within the Union, and with limited powers in 1999. While political historians continue to keenly debate the reasons for the Union, there is no doubt that it was gainful in the long run, and its hard to imagine the Industrial Revolution, so dependent on inputs from both sides of the border, being so successful without Scottish participation. The Union also gave Scotland, a country typical of Braudel's thesis of mountain nations less able to support their population, the access to the 'British' Empire that it had long craved.

One of the reasons for Union was that Scotland's own imperial adventure of the 1690s, the Darien scheme, had ended in an abject failure. This was a scheme that saw the formation of the Company of Scotland, which raised at least £400,000 in Scotland, as well as some funds in England, totalling roughly a fifth of Scotland's wealth at the time. The company sent colonists to claim territory in Panama, despite its being territory claimed, though not occupied by, Spain. The attempt to establish a colony called New Edinburgh failed abysmally, with only 300 of the original 1,200 colonists surviving the attempt, with tropical fever claiming the lives of most of the Scots. Tragically a second ship was despatched from Scotland because, in an era before electronic communication, it was not known that the first had failed, with similar results. The loss of savings through the scheme was not surprisingly catastrophic and union with England allowed Scots access to the Empire without incurring future risk. As I demonstrated in my PhD thesis, Scots went on to become very successful foreign investors, in agriculture in Australia and New Zealand, and in mining and cattle ranching the US, among ventures in many other industries and countries (note - the link is to a shorter seminar paper). It seems unlikely that these ventures would have occurred without the long run economic recovery made possible from Union through the agricultural and then industrial exports of the 18th and 19th centuries, many of them to a growing London economy.

Salmond has long claimed that Scotland would be better able to allocate its own resources if it were independent. To do this he has previously pointed towards smaller independent countries in Europe such as Luxembourg, Ireland and Iceland. Both of the latter have suffered disproportionately from the credit crunch, with top-heavy property based economies collapsing while creditor nations, themselves under pressure, sought recompense. The collapse of Iceland's banking system forced it to seek a £6bn emergency loan from the International Monetary Fund; unfortunately much of this will end up being spent recompensing savers abroad. Had Scotland been independent during the present crisis, then with RBS alone loosing around £24bn in 2008 the country would also have been driven to seek aid from the IMF; the whole of Scotland's GDP was £86bn in 2006 (although this excludes oil and gas revenue). To cover this loss alone Scotland would have been forced to spend a more than a quarter of its GDP. Oil and gas revenue might provide some temporary boost but are unlikely to remain substantial in the long term; a smaller economy would also provide more limited opportunities for the profitable reinvestment of these revenues. While the UK is struggling with national debt created by the recession, with the bailout of the banks not even shown on the national balance sheet, the chances of the UK economy growing significantly seem much greater than that of Scotland's alone. Nicholas Crafts writing in 2005 showed that Scotland had a market potential only around 35% of that of London in 1985, because the country continues to find itself on the European periphery. An independent Scotland would undoubtedly be pushed further to the periphery as European business activity centralises further into the London-Brussels-Ruhr-Zurich corridor; surely better for the country to continue to take advantage of its continuing connection to the wider UK so that it can have a more active stake in this centralisation.

Further Reading:

Crafts, N.F.R., 'Market Potential in British Regions, 1871-1931', Regional Studies issue 39, pp. 1159-1166.
Prebble, J., The Darien Disaster (London, 1968).
Tennent, K.D., Owned, monitored, but not always controlled: understanding the success and failure of Scottish free-standing companies, 1862-1910, unpublished PhD thesis, LSE, 2009.

Tuesday, 24 November 2009

UK Borders to close? The declining value of creative goods

More ructions in retail; this time one of the darlings of the out-of-town shopping sector, fast growing bookstore chain Borders, are suffering. Today its former UK subsidiary, which still trades under the name Borders froze new sales via its website while it supposedly finds a buyer; the company is losing money and does not have enough cash to survive until Christmas. Borders were one of the few US based retail chains to come into the UK at the same level of the market as its US based stores, the obvious other examples being WalMart which purchased ASDA in 1999, Safeway, which entered as long ago as 1962 but later sold its UK arm, and Woolworths, which entered the UK in 1909. The US part of Borders has also been finding life tough, having sold its UK operation in 2007, before the worst of the credit crunch hit, to concentrate on reviving its flagging fortunes in the US.

This decline is surely further evidence that diminishing returns in the once high value creative goods sector, that made up of products such as books, music, DVDs and computer games sales remains a serious problem, having already contributed to the decline of the store formerly known as Virgin Megastore, Zavvi and Woolworths in the UK. Competition from internet distributors of physical media such as Amazon has been one problem, and internet distribution via download another. Media can also store more nowadays and that has further driven the real prices consumers are willing to pay down. Physical shops that consumers actually have to visit are at a real disadvantage in this industry as browsing is not always necessary and items can easily be posted or sent digitally. As an example of the falling value of production in the industry, a long-playing album in 1968 cost around £2, which equates to around £25.99 in 2008 pounds using the Retail Price Index. Today its possible to download an album from Apple's iTunes, which probably has more tracks, for £7.99. iTunes' overheads are far lower as they don't have a distribution system or shop infrastructure to maintain, nor do customers have to spent time and money travelling there. It seems likely that the creative sector has a lot more pain ahead of it and pain which is not just a result of the present recession.

Thanks are due to

Wednesday, 18 November 2009

Boardroom Switches

Two UK companies previously featured on this blog have confirmed interesting management changes.

Marks and Spencer, the retailers, who two weeks ago announced the end of their own label only policy have appointed Mark Bolland, Chief Executive of competing retailer Morrisons. It will be interesting to see how Bolland copes as a newcomer to Marks and Spencer, a traditionally fairly insular organisation. Bolland has been very successful at Morrisons, managing to grow sales by 8% over the last year, and increasing market share from 10.8% to 11.8% over the last 15 months. It will be interesting to see how Bolland, a Dutchman, does at M&S; its last executive from overseas, Belgian retail expert Luc Vandevelde, had limited success during his tenure as Chairman and Chief Executive between 2000 and 2003.

Meanwhile struggling commercial broadcaster ITV have announced the appointment of former ASDA Chief Executive Archie Norman. Archie Norman has had a varied career, which also included stints as the Finance Director of Kingfisher, which owned Woolworths for many years, as well as being a Tory MP in William Hague's shadow cabinet. Norman's contribution at ASDA has probably been his biggest achievement so far. Norman remodelled ASDA, which which had pioneered the Hypermarket concept in Britain, on the US giant Wal-Mart, expanding the company's discount non-food lines and avoiding the move upmarket taken by other food retailers. Employment policies were also changed, with the introduction of new bonus structures and employee empowerment schemes inspired by those used by the fast growing Hi-Fi specialist store Richer Sounds. This strategy was so successful that when Wal-Mart was seeking to enter the UK market in 1999, but unable to do so on its own due to planning constraints, it simply purchased ASDA, which has continued to perform well under Wal-Mart ownership. Mr Norman now hopes to turn around ITV, claiming that he had even considered purchasing the company directly through his private equity company Aurigo Investment Partners. Its unclear if perhaps he will go outside of the UK to find inspiration this time, perhaps from the way that US TV broadcasting operates. It seems unlikely that with its core competency in television, which is essentially a declining technology, that ITV will be able to sustain itself alone in the long run. Perhaps Mr Norman can prepare the company so that one day it might become CBS or NBC UK? ABC's owners Disney have been mooted as possible purchasers for ITV in the past, after all.

Tuesday, 17 November 2009

Station Refurbishments - but the UK's worst ignored?

Today advisors to the UK's Department of Transport published a report naming the UK's ten worst railway stations, claimed to fall short of 'proposed minimum standards'. The report recommends that the stations be specifically targeted for refurbishment. The ten stations named were:

Five of these stations are on the West Coast Main Line, or branches of it, which was recently upgraded in a £9bn project with central government funding, although cash was clearly not found to do anything about the state of the stations. Three of the stations, Barking, Clapham Junction, and Luton are busy south-eastern commuter stations which have been unloved by their franchisees for years, although keeping these stations in a good condition must be difficult due to the sheer numbers of people passing through them. Additionally with stations owned by Network Rail, the infrastructure provider and run by the franchisees, the division of responsibility for their long term condition is difficult to determine. A company which may only operate a site for a further five years does not have a great incentive to invest in it, particularly if the station is on a commuter route that locals will use regardless of its condition.

However, this may not be the full picture. The forgotten parts of the UK railway network are the large network of regional lines in the midlands, north and west of England. Such regional lines do not go anywhere near London and effectively exist to provide basic public transport. They are also not funded as well as their Scottish and Welsh counterparts. One such station on this network is Wakefield Kirkgate. Kirkgate is the second station in Wakefield, a town of 76,886 people, but in the 2006-7 financial year only 769 people bought tickets to or from it, though 61,000 changed trains there. While East Coast services to London serve the town's Westgate station, Kirkgate, is the neglected hub for four different regional rail routes, serving places like Leeds, Sheffield and Nottingham, and there are also plans for an 'open-access' service to London. The simple reasons that so few people travel to or from Wakefield via the station are its lack of staff, and the state of abandonment of many of its buildings, built in 1854, which make it a dangerous place to enter or exit at night. Kirkgate is typical of many Victorian stations which have lost services over the years in that many surplus buildings have been left, with no use found for them, and is in such a bad condition that a wall collapsed in 2008 crushing a parked car. The franchisee Northern Rail, which relies on government subsidy, are unwilling or unable to improve the station while Network Rail and the local council have also failed to act. The Rail Minister, Lord Adonis even admitted the station is the UK's worst 'medium-large station' when he visited in July 2009; in the same week a man was attacked at the station with a baseball bat. Worse still, a young woman was raped there in October 2008. Why then, did Kirkgate fail to make today's list? It couldn't possibly be because it has no Inter-City level services or is outside the south-east, could it? A business opportunity is being missed here, as more people would surely use the station if it was a safer and more attractive place.

Wednesday, 11 November 2009

GM update: Germany gives up on GM

A further update in the battle for state intervention in General Motors (see here and here) - today the German Economy Minister, Ranier Bruederie told GM that they would have to fund the restructuring of their European arm, Opel, alone. It now seems unlikely that GM will get state aid in Germany, a move unlikely to be popular with the German carworkers unions. The Germans are upset that GM had called off its decision to sell Opel to the Canadian parts manufacturer Magna, which was backed by the Russian state owned Sberbank. Magna had guaranteed Opel jobs in Germany in return for state aid. GM is presently 61% owned by the US government, (and 12% by Canada, making it a rare joint State Owned Enterprise). At its most sinister the reversed decision to sell to Magna might represent intervention from a US government concerned about technology transfer in the car industry to Russia, a present growth market. At its least sinister, the US government is putting pressure on GM to hold onto their European division, with its access to the EU and the growing Russian market to make the IPO that it is desperate to hold next year more attractive to investors. In Germany, meanwhile we have been treated to the rare spectacle of a government deciding not to intervene in the car industry. Although Germany may loose jobs in the short run if GM does decide to move Opel east, in the long run it will benefit from cheaper car imports. It just depends if this is a silver lining that the German government are prepared to accept. Given their history of intervention, other EU governments still seem likely to support GM remaining in the countries as far as EU law allows. Perhaps the tax payers of Europe will loose out while US and Canadian tax payers profit.

Sunday, 8 November 2009

Marks and Spencer: just another supermarket?

This week the British retailer Marks and Spencer (M&S) made a seminal announcement. On Wednesday M&S Chief Executive Stuart Rose announced that the company will soon be selling 400 different branded products in its food departments. This might not sound like an unusual announcement, particularly to non-UK readers, but M&S have sold own brand food since at least 1941, and from about 1950 onwards sold only their own brand. Sixty years on the company has at last chosen to abandon this famous policy. Rose has claimed that this is what consumers want.

Marks and Spencer has always been a slightly eccentric company. It was founded in the late 19th Century by Micheal Marks, a Russian-Jewish immigrant turned Leeds market trader. In 1894 he entered a partnership with Thomas Spencer, who's background was in the Yorkshire woollen industry. The two established a network of 'Penny Bazaars', variety stores selling household products, at this time similar to Woolworths. Transactions costs were reduced by allowing consumers to browse and choose their own purchases; the standard price of one penny meant that consumers did not have to ask the price or barter, also helping to encourage repeat custom. Although it mainly concentrated on clothing after the First World War, the company began selling tinned food in the 1920s, gradually extending into other ranges. The company also gradually moved upmarket, stocking quality products at affordable prices. In 1928 M&S registered its St Micheal trademark named after Micheal Marks; this name was used by the company on everything it stocked from the 1950s onwards. The application of the brand to all ranges was so comprehensive that a running joke among the British public was that M&S's bananas had the St Micheal trademark running through the inside of them like a stick of seaside rock. There was a risk that the brand might be spread a little thinly, but the company was able to retain the loyalty of most shoppers in its middle class market segment.

Some specialist food retailers, particularly Sainsbury's, and Tesco after 1977, copied this tactic to some extent, introducing premium own range products for everything alongside branded products, while moving to out of town locations with car parks and often providing in-store services that M&S did not such as customer toilets and cafe/restaurants, as well as accepting credit cards. This has left Marks and Spencer as specialists in premium products that people buy as an occasional treat rather than somewhere that people do their weekly shopping. Under pressure as pre-tax profits fell from over £1bn in the 1997/8 financial year to only £145m in 2000/1, in 2000 the St Micheal brand was abandoned for the 'Marks and Spencer' brand on all products. This further underlined the company's retreat into occasional purchases such as party food and ready meals; last Wednesday Rose noted that the company was doing particularly badly in such low order product areas as laundry, personal care, pet foods and beer; all frequent purchases in which branding is important for the consumer. In the case of the first three, the consumer often values a brand as being effective for purpose, in the case of beer the consumer may want to buy Carlsberg or Stella Artois because he likes their taste; M&S beer may be more of an unknown quantity! This announcement is seminal because M&S have indicated that they do not want to retreat into speciality foods but to continue to compete as a supermarket; by doing so they have conceded that their brand alone is no longer effective to compete as a food retailer. It will be interesting to see if M&S will prosper with this approach, or if paradoxically the public reacts less enthusiastically, perhaps fearing that M&S's abandonment of its own brand policy may signal a reduction in product quality by the retailer. Will you now be persuaded to shop at M&S because you can buy Persil, Lynx, Whiskas or San Miguel?

Wednesday, 4 November 2009

GM execute an international U-turn

On September 24th this blog commented on the viability of the volume car industry in mature economies, using the UK as a case study to argue that the industry has generally only been sustained by government intervention of some sort. Today an international row has opened up between at least five countries over state intervention in the car industry. The US company General Motors (GM), featured in Alfred D. Chandler's 1962 book Strategy and Structure as an example of a successful multi-divisional corporation, was forced into bankruptcy earlier this year. The US government provided US$60bn of new financing for the firm; a new GM company was registered to purchase the operations and trademarks of the old. Presently the US government owns 61% of the new company, while Canada owns 12% of the equity. Effectively this makes the company a US State Owned Enterprise (SOE), although the US Government claims not to be involving itself in the day to day management of the company.

As mentioned on Sept 24th GM was close to selling its European subsidiary Opel, which also includes the UK brand name Vauxhall, to the Canadian car parts manufacturer Magna. Today GM announced that it had reversed the decision to sell Opel to Magna, and would instead be pressing ahead with 10,000 redundancies in Europe, from a workforce of 55,000. This decision was motivated by a wish to remain within the European market, which GM says is starting to improve. GM are also thought not to want to miss out on expansion in the growing Russian market, a motive perhaps driven by the US Government's wish to float GM on the stock exchange as soon as possible. It will be easier to do this if GM has strong growth prospects. Meanwhile the German government and car unions are unhappy with GM's decision as they had negotiated a guarantee from Magna not to close any German factories. The German government is now also demanding the return of a €1.5bn bridging loan made to Opel to keep it going while the sale was negotiating, while the IG Metall union has announced a series of walk-outs in protest. Meanwhile in the UK the government and trade unions welcomed the news as it meant that factory closures in the UK now seem less likely. Even the Russians are in the mix - their state owned Sberbank had provided capital for the Magna takeover, and Russian Prime Minister Vladimir Putin announced that the Sberbank-Magna consortium would 'carry out a deep legal analysis of the situation' with GM.

Why then are all these governments fighting for their share of influence over GM? The US, Canada, Germany, and the UK can all be considered to have mature economies, while Russia's economy perhaps presents the main growth opportunity for the car manufacturing industry. It appears that the western governments were again acting to try to halt the long term decline of car manufacturing in their particular jurisdictions. Yet it surely seems likely that while government intervention may prolong the decline of the industry, as previously argued emerging economies like Russia are likely to be in a position to maintain production most economically in future. To complicate matters we now have an SOE in the unusual position of operating across borders, although as with other SOEs that operate across borders such as √Člectricit√© de France or Deutsche Bahn, it is unclear why the firm should be an SOE if it is operated like a private firm. Once again, it is clear that governments should accept that if an industry is declining, the government should concentrate on encouraging replacement industries to develop, rather than trying to keep dead ducks alive.

A Public-Private Partnership not the right way ahead for Royal Mail

Chris Colvin today posted a very well argued article on the Guardian's Comment is Free site suggesting that part-privatizing the UK's beleaguered postal service, Royal Mail through some kind of Public-Private Partnership (PPP) would be a poor idea. The argument runs that part-privatization could be attractive to a government, either Labour or Conservative, because theoretically it would allow for some immediate reduction in national debt while improving productivity. Colvin mentions that PPP has a very poor record in the UK, with companies keen to take on contracts for government without bearing the risk related to them, resulting in moral hazard. This certainly seems to have been the issue with previous PPP projects; the London Underground (LU) was forced by central government to outsource maintenance and infrastructure upgrades to two private companies, Tube Lines and Metronet in 2003. Metronet entered administration in 2007, a failure blamed on poor corporate governance, and its activities have since been absorbed back into LU. The UK National Audit Office reported earlier this year that the failure may have cost the taxpayer as much as £410m. Such a failure in the postal system could end up being even more costly to the public, perhaps more so than managed decline in the public sector.

Monday, 2 November 2009

Banking update: RBS and Lloyds parts to be sold off to the cheapest bidder too?

Tonight the BBC are reporting that a major announcement will be made by the UK Government tomorrow, November 3, regarding the future of the Lloyds and RBS banks that it owns major stakes in following the bailouts of last year. It seems likely that tomorrow's proposal for Lloyds and RBS will be similar to the proposal for Northern Rock featured on this blog last week. At present speculation suggests that both banks will have to split off parts of their branch network to form new 'good banks' (without toxic assets) for sale within four years, while the taxpayer keeps all the bad bits. As with the Northern Rock, the good part of which seems likely to be sold off before the 2010 election, surely the worry must be that four years will not be sufficient for the taxpayer to gain a return on the banks as they return to profitability. However, the hope must be in the Lloyds case that this will undo last year's shotgun marriage between Lloyds TSB and HBOS, one of the largest mergers in UK corporate history, and which the Office of Fair Trading recommended against due to the combined market share of the two banks combined. Whatever happens is bound to be very interesting indeed - it will be interesting to see where this will leave the remains of Scotland's banking industry.

Wednesday, 28 October 2009

Northern Rock split a poor policy decision for the future

Today the EU approved the UK government plan to split nationalised bank Northern Rock into two. One half will become a so called 'good bank', to be flogged off to a private company while the other half will become a 'bad bank' and remain in the state sector. The bad bank will keep all of the Rock's 'toxic assets', such as the 100% plus mortgages which the bank was left holding after the US financial sector suddenly lost interest in 'repacking' them as AAA securities (which weren't) in 2007.

The government apparently intends to return the 'good bank' to the private sector by the 2010 General Election. Given that that will be in May or before, the privatisation will happen almost straight away in business terms - a very quick privatisation. Although no doubt there will be a competitive process to buy the good bank, bidders, who could include Tesco Bank, Virgin Money, or the National Australia Bank, will be buying a business which would almost need rebuilding from scratch as a credible savings and mortgage bank. Meanwhile taxpayers will be left holding the toxic assets in the bad bank, and could possibly be paying for them as generations. Surely it would be wiser to rebuild Northern Rock in the public sector, but with private sector style management for a ten or twenty year period to restore it to profit, before releasing it back on the market for a much larger sum? Its not as if there are not precedents. Even the privatisation hungry Conservative government of the 1980s knew this; British Steel was a basket case nationalised industry suffering serious losses when the Conservatives came to power in 1979. By 1988 it had been turned around by new management who closed unprofitable plans, improved the company's marketing strategy and made it a world productivity leader in the industry. In the car industry the basket case British Leyland, nationalised by Labour in 1975, was also returned to the market successfully by Mrs Thatcher's government in 1986, again with unprofitable parts of the company closed and the company's trade union problems resolved. If we must have government intervention in industry, why can't we turn it around and make it a good investment for the taxpayer?

Tuesday, 27 October 2009

Iceland to go

Much has been made of the US-based fast food chain McDonald's apparent decision to leave the Icelandic market. The media have seized on this as a cheap example of how the once proud Icelandic economy has deflated further due to the collapse of its banking system in 2008. What is often forgotten is that Iceland is a very small country in population terms, with a national population of just 300,000, roughly the size of one of the larger UK provincial cities. Just as the effects of economic growth per capita in such a small economy are very pronounced because the earnings per head are higher, then a crash will also be felt more acutely, and the country is presently attracting far more attention from the international media than it typically has done because of this.

In reality this situation will not affect the McDonald's Corporation or indeed Iceland to any great extent. For a start McDonald's only had three branches in Iceland, a number that might be considered sufficient to serve a population of 300,000. However, the company was not even exposed to much of the risk related to these three branches. As with most McDonald's restaurants, McDonald's did not own and operate them directly, instead franchising its format to a local operator, in this case a company called Lyst. The franchising system is an important part of the fast food business, often ignored by campaigners against it, who fail to realise the opportunities it allows for local entrepreneurs to establish a business creating local growth while supported by national or, in this case international marketing generated by the parent company. Companies such as McDonald's have used franchising to establish large brand name based business networks rapidly, requiring less start-up capital and sharing risk with local operators. The benefit of having a widely known business name is obvious for the franchisee; goodwill can be shared with the other members of the network, meaning that people not familiar with the locality will patronise the business expecting certain service standards. Additionally product innovation is often carried out by the franchisor.

Lyst has decided to discard the McDonald's franchise and to start trading under its own identity instead. Patronage has increased due to recession suffering Icelanders seeking cheap fast food but the cost of supplies from McDonald's approved suppliers in Germany has doubled due to the collapse of Iceland's currency. Lyst will no doubt be able to operate its three restaurants more cheaply while McDonald's are unlikely to notice the loss of franchise fees from the outlets. Indeed, they are now free to re-enter Iceland on more favourable terms at a later date. The beauty of franchising is that the deal can be flexible enough to be operated by both parties to be operated for as long as necessary, but discarded if no longer viable, often with fewer ill effects than if the franchisor had owned the franchisee directly.

Sunday, 25 October 2009

Rangers F.C. partly nationalised?

A quick Sunday post. The team manager of the Scottish football club Rangers, Walter Smith, has revealed that the club is unable to enter the transfer market because the club is now being run by its bank, the Lloyds Banking Group, which is 44.4% owned by the UK government via its vehicle UK Financial Investments Ltd. Rangers have, despite having a vast support, successive championships, and their own chain of sportswear shops in Scotland and Northern Ireland been overspending on players for years. While the bank has not taken a stake in the club, if the bank is forced to bail the club out (they could let, say Albion Rovers fail, but to let Rangers fail would be political suicide) it is possible the bank could end up with a stake in the club. Just as with the DSB Bank owner Dirk Scheringa and his club AZ Alkmaar, football has once again proved that it is incapable of being run as a business, now to the extent to which the state may have to intervene by proxy.

Wednesday, 21 October 2009

UK Postal strike - can the workers win?

More on the UK postal dispute, which I mentioned on October 8. Today the UK's Communication Workers Union (CWU) announced that planned national strikes by postal staff will go ahead on Thursday and Friday, with further strike dates to be announced on Thursday. The strike will be split over two days with mail centre staff and drivers striking on Thursday, while delivery and collection staff will strike on Friday. Postal workers in the UK have already been holding localised strikes for several months. The CWU's members are striking over the 2007 Pay and Modernisation Agreement, signed following a round of strikes, in which the union agreed that modernisation would be necessary, but that Royal Mail would consult with them over modernisation which would replace workers. The union claims that Royal Mail has failed to do this, leading to a bitter dispute by modern British standards.

The present dispute is probably the worst industrial dispute in the postal industry since that of 20 January - 8 March 1971. In 1971 200,000 postal workers spent seven weeks flat out on strike. The strike completely paralysed the system, with post offices, then part of Royal Mail, also mostly closed. Postal workers went without wages throughout the strike, many being supported by 'hardship payments' from the union. Like many industrial disputes of the 1970s the dispute centred around pay rather than allegedly poor management decisions and the threat of redundancy. While inflation in 1970 ran at 6.4%, rising to 9% in 1971, in January 1971 the Royal Mail offered workers an 8% rise. The union had asked in late 1970 for a somewhat inflatory £3 a week, or 15-20% rise, which not surprisingly, management refused as it would cost the firm an extra £50m a year. As the strike wore on the union reduced its demand to a still somewhat high 13%, while management increased their offer to 9%, but mostly stood their ground despite the lack of postal deliveries, and £25m's worth of lost revenue. By early March the union was running out of funds and encouraged workers to return to work, without even the 8% rise originally offered, making General Secretary Tom Jackson unpopular among the membership. Instead the union was forced by the Department of Employment to accept an independent enquiry into efficiency in the post office which would then set a pay award.

While today's postal workers are not striking for the entire week, it remains to be seen how long their resolve will hold as they still stand to lose one day a week's pay from the strike. With Royal Mail again looking unlikely to climb down, the CWU might do well to consider the humiliating climb-down forced upon their predecessors. Strikes in the modern era rarely do workers much good in the long run, with the employer affected often loosing business and being weakened financially. If people are forced to find alternatives to Royal Mail for the time being, they may just find they prefer them even when the service returns to normal.

Tuesday, 20 October 2009

DSB Bank allowed to fail

Yesterday something very unusual in banking politics happened - a bank was allowed to fail. The DSB Bank, a small savings bank was allowed to collapse by the Dutch government. The bank entered administration last week after savers co-ordinated a bank run to threaten the bank's solvency. The run was organised by DSB's mortgage customers who were disgruntled with the bank's policy of linking expensive, and often unnecessary insurance policies with its mortgages, which were forced onto customers, making a €1.6bn profit. A US company, Lone Star Funds, were interested in buying the remains of DSB but failed to reach agreement with the bank's Chief Executive Dirk Scheringa. Scheringa also approached the Dutch government for €100m's worth of aid, but finance minister Wouter Bos refused, arguing that DSB's proposed business model would lead to the loss of these funds in addition to the funds already lost. The main Dutch clearing banks are responsible for guaranteeing deposits up to €100,000 in the Netherlands, and will pay the remaining savers €3,000 each, but did not want to buy DSB as its loan losses and potential legal claims were considered too great.

Bos also noted that the collapse was not related to the credit crunch, and that an independent investigation into the collapse of DSB was set up. Little is clear about DSB and its practices, as it was privately owned by Dirk Scheringa. Scheringa established the bank in 1975, originally as a financial consultancy known as Buro Frisia. The company expanded aggressively through aquisitions, gradually building up a portfolio of financial businesses. Controversially, in 1999 a planned IPO was aborted by Scheringa just hours before the start of trading due to a disagreement with the banks over the proposed share price. Scheringa chose instead to keep the company private, raising finance via subordinated loans instead. In 2005 the company was granted a banking license by the Netherlandsche Bank, which operates as the Dutch central bank. Scheringa also owns the football club AZ Alkmaar, the reigning Dutch champions, and an art museum, the Scheringa Museum for Realism, in Spanbroek, North Holland. It seems likely that Scheringa's financing of these assets, among others, came from DSB Bank funds. No doubt the inquiry into the bank will shed some light on the business model used by Scheringa to run the bank, which appears to have been controlled too closely by him. This blog will return to this story when more is known - it will be interesting to see if any interesting conclusions regarding the ownership of banks and whether it should be dispersed will be reached by the inquiry.

Tuesday, 13 October 2009

Recent Business History on BBC Four/iplayer

BBC Four occasionally gives us some excellent documentaries that, while often concentrating on the products, also feature business history topics, often in an accessible (and entertaining) fashion for a wide audience. The channel has long ran excellent music documentaries which often talk about the business side to some extent too; also a few months ago the Crude Britannia series gave an excellent overview of the British oil industry.

The present 'Electric Revolution' season, focusing on how electrical devices have changed our lives, has also brought some excellent material to our screens. Last night I watched Podfather, a biographical documentary of the inventor of the silicon chip and Intel founder Robert Noyce. As well as telling us about the science behind Noyce's invention the programme also told us about Noyce's role in establishing Silicon Valley's corporate culture. Silicon Valley business historian and Noyce biographer Leslie Berlin was even drafted in as one of the programme's talking heads. The story of how Noyce and his colleagues broke away from their original employer, William Shockley, to gain the patronage of the Fairchild Coporation, and then broke away from Fairchild to form Intel was well told. Noyce's style of management was also noted; that he was uncomfortable with large hierarchical organisations, and formed Intel as a company without a hierachy where senior management would work on the same floor as their underlings. The family tree aspect of Silicon Valley was also noted; the existence of many firms that split away from Noyce, and also Noyce's role as mentor to Apple's founder Steve Jobs, and Jobs' own role as mentor to the founders of Google.

Also part of the 'Electric Revolution' season was Micro Men, a rare drama about a business topic, set in Cambridge's 'Silicon Fen' against the backdrop of the British home/micro computing boom of the early 1980s. Micro Men is a slightly tongue-in-cheek dramatization of the competition between the eccentric inventor Clive Sinclair and his former employee Chris Curry, who breaks out Silicon Valley style to start up his own firm after Sinclair fails to be persuaded about the potential market for computers. Sinclair is played by the British comedy actor Alexander Armstrong with great comedy value, but the programme is no mere comedy biopic. Serious business topics are dealt with; the drama shows Sinclair's annoyance with the interference of the late 1970s Labour government's National Enterprise Board, before going on to show how government intervention shaped Curry's new company Acorn. Acorn won a major contract with the BBC to create a new machine for a computer literacy TV programme, the BBC Micro, which the Thatcher government then funded the purchase of for schools, much to Sinclair's annoyance. Consequently the first computer used by many people that were at school in the UK in the 1980s or early 1990s was the BBC Micro. The programme then showed how Sinclair's company accidentally found success in the games market with its cheaper and smaller Spectrum model, while Sinclair ironically coveted the BBC Micro's more worthy market. Both firms directed investment into competing with each other rather than concentrating on their strengths, with Sinclair bringing out the QL, a failed business/educational machine, while Acorn developed the Electron, a games machine which launched only after the gaming boom was over. The programme even deals with Acorn's descent into financial difficulty as the bank happily gives the company bigger loans for expansion, and it carries out an ill-advised stock exchange flotation. The programme deals with these topics in an entertaining way, although naturally some of the events that are depicted are probably exaggerated. But its well worth watching to understand the fate of Britian's long forgotten domestically owned computer industry, and particularly to understand why entrepreneurs are often good at starting businesses but poor at running mature businesses.

Both programmes are still on iplayer until Monday 19th October.

Thursday, 8 October 2009

Royal Mail - managed decline?

Today postal workers in the UK voted to strike nationally, following a series of local disputes regarding a range of issues affecting the organisation, which mostly stem from the gradual decline of post on paper. Royal Mail, which remains a state owned enterprise whose role is to provide a letter and parcel delivery service to every UK address, says that letter and parcel traffic is falling by 10% per annum, meaning a reduction in income of around £170m per annum. Despite this the company did manage to make an operating profit of £321m in the year to March 31 due to efficiency savings. Naturally however such efficiency savings are unpopular with the unions.

The decline of the Royal Mail does have true historical significance - it is one of the world's oldest surviving businesses, and particularly unusual in this sense that it still fulfils the same function. Its roots can be traced back to the 16th century at least, when it was literally the 'Royal Mail', carrying mail for royalty and government business. In this sense its roots parallel the internet somewhat, which was originally established by the US government for internal purposes. Members of the public were able to use the system from 1635 onwards, when Charles I opened up the service. It was granted a monopoly as the 'office of postage' by the dictator Oliver Cromwell in 1654, a monopoly only removed by government in 2006. A network of horse drawn carriages conveyed mail on contract for the post office, although originally the recipient paid for postage. This system was changed in 1840 with the innovation of the postage stamp, which meant that the sender paid the postage, which was reduced to 1d., or old penny (about 30p today). This, and the introduction of rail transport for letters led to a real boom in post office business, and about half of Prime Minister Gladstone's civil servants were postmen. The mail remained a government department, the 'General Post Office' until 1969, a period in which it had control over all communications in the UK (such as telgraph, telephony, radio and tv). Since that time it has been administered as a separate business, but still remained in the state sector, and still employs over 120,000 people today. With postal volumes declining so rapidly it seems unlikely to be a viable candidate for privatisation anytime soon - but at the same time it seems likely that unions may have to concede that with postmen having less to deliver, it may eventually become economically inefficient for society to continue to pay them to walk round everybody's front door every day. But how long will this take?

Tuesday, 6 October 2009

Tesco - making a lot from little things

Today the UK retail multinational Tesco announced half year results which exceeded the expectations of the City. The company's Chief Executive, Sir Terry Leahy proclaimed that the British economy was over the worst of the recession, perhaps missing the point that people are likely to turn to a low cost retailer such as Tesco during a recession. Tesco made a profit of £1.41bn on a turnover of £30.4bn; sales in the UK grew by 2.8%. The company has also created 6,500 jobs this year so far. The company has also successfully expanded globally from its UK base, firstly in emerging economies in central and eastern Europe, then in Asian countries; attempts to enter more developed economies such as the US have as yet been less successful.

Tesco's present record may be very impressive, but it is easy to forget that in the 1970s the company was the sick man of the British high street. Tesco's founder Sir Jack Cohen had expanded the company from its origins as a market stall in 1919 (all good retail stories start with a market stall) into a bulk-buying chain of grocers, and then after post-war rationing was abolished in 1954 into supermarkets. At this point supermarkets were new and exciting to consumers; Cohen became famous for a 'pile it high, sell it cheap' philosophy, expanding the company rapidly via new store openings and frequent acquisitions. The low margins on basic goods could easily be recouped by selling them on a mass scale; a chain of 900 stores, all in the UK was established. By the late 1970s however the company was struggling; more sophisticated retailers such as Sainsbury's and Marks and Spencer were attracting increasingly affluent consumers who had begun to shop on quality rather than price. Tesco found that many of its stores, inherited from a mixed bag of owners, were too small and poorly designed, while the company was not even using its market power fully to institute central buying with the benefits in pushing supplier prices down.

The company bounced back under Managing Director Ian MacLaurin, whose initiative 'Operation Checkout' in 1977 saw Tesco institute central purchasing and introduce new price cuts, forcing Sainsburys to cut its prices in retaliation. This was followed by an aggressive modernisation campaign to reduce the company's downmarket image, with 500 stores being closed and others expanded, with lighting improved and isles widened. Own brand products were also introduced for the first time, gradually being adjusted into a range of their own to appeal to customers of all income levels. By the mid-1990s Tesco had become the UK's largest supermarket chain, successfully expanding into Scotland and Northern Ireland ahead of rivals Sainsbury's. Now the company is aiming to purchase one of the UK's nationalised banks, perhaps Northern Rock or the Royal Bank of Scotland (a once unthinkable possibility - Tesco Personal Finance was originally a joint venture with RBS), to add to its rapidly growing banking arm. As Tesco diversifies further, both geographically and in range of products offered, in order to satisfy stock market expectations of growth, will it again reach a stage where it over-expands based around a narrow business model and becomes unmanageable?

Thursday, 1 October 2009

The BAE Bribery case - a chance for the SFO to redeem itself?

Today the UK's Serious Fraud Office, which has powers to investigate and prosecute serious frauds involving over £1m announced that it would ask the SFO to prosecute BAE Systems, the UK's leading defence equipment manufacturer, which is accused of bribing government officials in Tanzania, the Czech Republic, Romania and South Africa to secure contracts. These allegations run over a long time period, and follow an earlier case dropped by the SFO into alleged bribery by BAE over a deal with Saudi Arabia.

The SFO has generally struggled to secure prosecutions since its creation as a specialist agency to deal with corporate fraud in 1988. The SFO was created following a string of high profile frauds that the Police and the Crown Prosecution Service were unable to successfully bring prosecutions over. It was thought that a specialist agency employing lawyers and forensic accountants would be better placed to deal with the complexity of fraud cases, which often involve a high degree of specialist financial knowledge. However, the agency has proved so unsuccessful in this aim that last year its role was openly challenged by lawyers representing a group of drug companies accused of fixing prices against the National Health Service. The case was thrown out of court after the SFO failed to prove its case despite carrying out an 8 year long investigation, costing taxpayers £25m. Such actions are never cheap, but one can only hope that in this instance the SFO is more successful than it has been in the past if the body is to prove its worth at dealing with corporate fraud.

Wednesday, 30 September 2009

RBS insist they've learned from their history

Today the Royal Bank of Scotland (RBS) submitted a document to the Scottish Parliament's inquiry into 2008's banking crash, insisting that the bank has accepted responsibility. Those executives believed to be responsible for the crash, of which RBS was at the epicentre in the UK, had left the business. Time will tell whether RBS truly have learned from their previous errors or whether similar mistakes will be repeated in future.

RBS would have done well to have heeded the past example of the City of Glasgow Bank, the ghost of which has stalked Scottish banking since its collapse and bankruptcy in 1878. Infact this collapse came just twenty one years after the collapse of the Western Bank of Scotland in 1857, from which the lessons had already supposedly been learned. In a time when Scotland's 'public' banks (those with Royal Charters), the Bank of Scotland and Royal Bank of Scotland had very conservative lending and deposit regulations, as well as very small branch networks, banks such as the City of Glasgow Bank attracted a great diversity of business and personal customers from the new middle classes. Many investors from the middle classes were also shareholders. What was unknown to most of these customers was that the bank's directors had fallen into the influence of a small group of Glasgow merchant houses which managed to borrow (a then) large sum of £5m between them with no likely repayment schedule. By comparison the deposit base was £8m; eventual net liabilities were shown to be £6m. Money had also been lost gambling on US railroad securities, and in gambling on mining stocks and in Australasian farming.

The bank was closed suddenly by the directors on the 2nd of October 1878; the doors of each branch were locked and there was no possibility of a Northern Rock style run. Rumours about the security of the bank had been circulating for some months on the London market, where confidence in the bank's bills had been falling. The closure of the bank rendered this paper useless, as well as making it impossible for depositors to reach their funds. At this time there were no government bailouts for banks, nor government deposit insurance. Depositors were eventually fully repaid from calls for payment made to the shareholders, who eventually faced calls of £2,675 against a £100 holding. At this time banks did not have limited liability as it was thought this would reduce public confidence in them; this meant the shareholders were liable for all of the bank's debts. Many of the shareholders themselves ended up being made bankrupt, although they were given shares in the Assets Company Ltd., which pooled many of the bank's remaining assets which were still of value, giving them some recompense in the longer run. And the directors? They didn't just lose their jobs - they were sent to prison.

Gordon Brown returns to old venture capital idea

Yesterday UK Prime Minister Gordon Brown gave his 'keynote' speech at the UK Labour Party Conference, setting out the party's policies for the 2010 General Election. There was precious little on business policy; the headlines were grabbed by the promise of new regulations to disqualify negligent bank directors if they are considered to be unfit to run banks. Quite how it is to be decided that they are unfit to run banks remains unclear, but the FSA as it stands may not be the best people to judge this. The other policy announced has been elaborated on even less - this is a promise to create a new £1bn 'national investment corporation' to provide finance for new and growing businesses.

This interested me because back in the days when bankers were to be trusted with the economy we did indeed have a similar body. The Bank of England created the Industrial and Commercial Finance Corporation (ICFC) in 1945 to plug the gap then extant in corporate finance for firms too small to obtain stock exchange or merchant bank capital. The Big 5 UK clearing banks also took stakes in ICFC, helping to provide capital to the infant firm. During this period ICFC was successful in providing finance for start-ups, although in a period of general industrial decline in the UK the benefits remained unclear. ICFC was renamed Finance for Industry in 1973, then became Investors in Industry, or 3i in 1983. The banks then floated on the stock exchange in 1987. Ironically 3i was later better known for its role in funding mature businesses such as National Car Parks and the German/Danish ferry operator Scandlines, than start-ups, particularly during the private equity boom of 2005-7.

It remains to be seen how Gordon Brown's proposed firm will work in the event that he wins the 2010 election, but it will be interesting to see where the capital for it comes from, how it will be constituted (hopefully he won't repeat the Alan Sugar mistake by putting the star's of TV's Dragon's Den in charge) and what schemes are considered worth investing in by the new body. And further, how long will it be before the new company, which if it invests well in rapidly growing firms, should become very valuable, ends up itself being floated off by a future government seeking a quick return? This would jeapardise the original purpose of the new company, just as the banks did with 3i.

Monday, 28 September 2009

Government not keen to scrap scheme

A brief follow-up from Thursday's post. Today Lord Mandelson announced the extension of the UK government's car scrappage scheme to include a further 100,000 vehicles above and beyond the scheme's original target of 300,000 vehicles. The scheme gives any motorist scrapping a car that is more than 10 years old £2,000 off a new car, half funded by government and half funded by the car manufacturer themselves. This move will extend the cost of the scheme to government to £400m, up from £227m. Mandelson argued that it was important to help the car industry through difficult times. While keeping businesses going and workers in jobs may be important in the short term, the long run benefits are unclear; arguably government subsidised the price of British Leyland cars through the 1970s, as well as buying its products for government use (such as post office vans) this did not help British Leyland sustain itself in the long term. And indeed at present the scrappage scheme is only increasing the proportion of UK production sold in the UK market rather than increasing total car sales, which in August this year were down 31.5% compared to August 2008. And this at a time when the pound is extremely weak which should help the competitiveness of UK exports. Like many other government interventions in industry, this one is just intended to make politicans look good rather than improve competitiveness and profitability in industry, which is what will keep the jobs in the UK in the long run.

Thursday, 24 September 2009

The car industry - still worthwhile in mature economies?

Today Jaguar Land Rover, the British sports and offroad car manufacturer (which is actually owned by the Indian company Tata) announced that it plans to close one of its three UK factories in the next ten years, to consolidate production onto one site. Meanwhile the UK's Business Secretary Lord Mandelson has claimed that the Canadian car parts firm Magna's plans for the Vauxhall and Opel divisions of General Motors, which it is purchasing, are not commercially viable. Mandelson's reasoning for this is unclear, except that it is claimed that 1,100 jobs will be lost in the long term.

Historically the car industry, as a second industrial revolution industry, has been at home in mature economies where it produced linkages with other parts of the second industrial revolution economy, backwards into the steel, tyre and electronics industries, and forwards into the distribution and retail sectors. Indeed David Landes suggested that these linkages made the car industry "the industry of industries", perhaps the most vital to a modern industrialised economy.

However, the position of the car industry in many western countries has been one of decline for many years; the decline of the US big 3, General Motors, Ford and Chrysler in recent years being one sign of this. In the UK the position has been similar, with the UK's motor industry gradually consolidating through the 1950s and 1960s, then being forced into the super-consortium British Leyland (BL) by the government in 1968. Government believed that the failing British Motor Holdings could be saved by merging it with the successful truck and bus manufacturer Leyland, thus preserving employment. BL was unable to carry out the necessary rationalisaton of ranges, and its competitive position faltered to the extent that the government nationalised it in 1975 to preserve employment in the industry, and that of related industries. The Thatcher government was able to slim down and privatise BL as Rover in 1986, but even this has passed through a number of (government supported) owners and gradually withered away.

Given this history of unsuccessful government intervention in the industry, and history of gradual decline, its all the more amazing that Mandelson still believes that the motor industry in the UK has a viable future. While its clear that there is still potential for the industry in the UK as cars are expensive to transport, they are becoming increasingly cheap to make as Asian manufacturers find new scale economies in car production, seeking to boost the mass market in their home countries. Jaguar Land Rover's owners Tata, for instance are already making a basic car with a price to the consumer of less than US$2,000. It seems unlikely that British manufacturers could match these sort of economies in the long term, which must eventually make importing worthwhile, for the volume market at least. Surely governments in developed countries would be better to allow car manufacturers to make the savings required to remain competitive rather than forcing them to produce cars that they won't be able to sell to consumers. Such a strategy will mean that the present state interventions won't be the last.

Wednesday, 23 September 2009

Regulation - escaping capture

Yesterday I talked about how regulation helped to shape the television industry in the UK. But what of industries that shape the regulator? Today two stories about regulation in the banking and finance industry caught my eye. Firstly the European Union unveiled its tentative plans for banking 'super-regulators', intended to form a supra-national banking authority capable of intervening in the regulatory affairs of member states. Its hoped that this structure, which would create a European Systemic Risk Board to monitor levels of future risk, as well as watchdogs specific to the banking, insurance and stock exchange sectors. It remains unclear what will be considered a bad risk or bad banking, insurance or stock exchange practice, but the proposal may well be a good one, especially as it appreciates the need for an international approach to what is today a very international industry.

Meanwhile back in the UK Lord Turner, Chairman of the UK regulator, the Financial Services Authority (FSA), argued last night that 'radical change' was required in the UK financial sector, in which banks must focus on their 'essential social and economic functions'. This is code for going back to the boring old days of the clearing banks which effectively operated as the cogs for the system, with merchant and private banks as well as building societies indulging in most of the risky stuff. Whether this should happen or not is another post, but first we should decide what we want our banks to do. Then to encourage them to do this we will have to remove people with banking or financial interests from the regulatory sector to prevent 'regulatory capture', in which poacher turns gamekeeper. Industries tend to be rather close knit, with management personnel frequently moving from firm to firm and knowing those at other firms well; they may even have attended the same universities or even schools. The potential, then for a banker who is hired as a regulator, no matter how well paid, to view his friends in a neutral way seems low, further they may even emphasize with practices considered fashionable in the banking industry but which are perhaps not in the public interest. If we are to create a European regulatory organization, the worst starting place would surely be to staff it with former bankers. Regulators need to be recruited from other areas - well informed, but with a different background and different interests to those they regulate.

By way of exemplifying the UK situation - the present CEO of the FSA, Hector Sants, has an impressive CV including having worked for Credit Suisse First Boston, as well has previously having been a director of the London Stock Exchange. Deputy Chair Hugh Stevenson is presently Chairman of Equitas Limited, an re-insurance company, and The Merchant's Trust Plc., an investment trust, and has numerous past positions in the finance industry. Sants and Stevenson would no doubt argue that their experience in the financial industry puts them in an excellent position to oversee good practice in the industry. But as Sants and Stevenson have both had senior positions at the FSA since 2004, well before the present crisis, does the reality of their tenure suggest that they have done this?

Tuesday, 22 September 2009

British Television - an industry shaped by technological and regulatory constraints

The decline of the mainstream commercial television industry in Britain continues apace as the industry struggles to compete with the internet and the entry of digital and satellite channels, as well as the general diversification of entertainment. Today saw two separate news stories regarding the continued troubles of ITV plc., the UK's largest terrestrial broadcaster. This morning a story appeared warning that ITV, (which runs the UK's 'Channel 3' in England and Wales) as well as Scottish and Northern Irish franchisees STV and UTV could sink into deficit on their license payments to government by 2012 by £38-£64m. This would come on top of already substantial losses which are unlikely to be stemmed fully by 2012; ITV made a deficit of £2.7bn in its 2008 operating year. Additionally ITV and STV are at loggerheads as STV has dropped many of ITV's programmes from its schedules to save money, and today ITV, stung by the loss of a major client for its output launched a claim for £38m it claims it is still due from STV. Scottish viewers meanwhile find themselves unable to watch ITV's core entertainment schedule.

Many of these problems arise because of a historical straitjacket that ITV, STV and UTV find themselves in. Back in the 1950s when central government decided to introduce commercial television into the UK to compete with the public service BBC the amount of bandwidth available was constrained by VHF transmission technology then in use. Additionally the General Post Office, the government ministry which at that time ultimately controlled communications, was unwilling to license more than one commercial channel. However the 1954 Television Act required that 'adequate competition' exist between programme suppliers. A system of 15 or so local monopolies was thus devised which would sell each other programmes, as well as provide regional news and programmes for their region. More populous regions, such as London, the Midlands and North were given two programme companies, one of which would broadcast during the week, the other at weekends. These larger companies were also to be responsible for supplying companies in more marginal regions, such as North East England or the West Country with programmes. This contrasts with the system of affiliates which evolved in the USA or Australia for example, where a central company supplies programmes to a network of affiliates which produce nothing but local news. In practice there was little competition between programme companies, with a fairly standard schedule evolving across all regions. But the system worked, and the companies made money.

Coming back towards the present, the main competition introduced by the 1990s was from the state owned but commercially funded Channel 4 and from the satellite company BSkyB. ITV remained the only fully commercial terrestrial network in the UK, a position it effectively still holds, Channel 5 having been introduced in 1997 when the industry was already in decline. A system of premium payments for ITV license holders was introduced in the 1990 Broadcasting Act, which was also accompanied by a de-regulation allowing companies to own more than one franchise. The result was that many of the smaller companies were gradually swallowed up by the larger companies until the eventual formation of ITV plc in 2004, a consolidation of about 12 companies in as many years. The result has been a gradual rationalisation of content production, with local news areas merged together and the channel relying on a smaller portfolio of hit shows. The remaining TV audiences have left ITV for the BBC and newer operators, while it seems likely that the company's news production, which has gradually lost gravitas, will be bailed out by the 'top slicing' of the TV license fee, at one time unthinkable.

Had the UK adopted a system similar to that of the US, of competing networks based around a single supplier, in the 1950s we might now have a more healthy broadcasting industry. Such a system would have achieved the centralisation that ITV's management wanted to attain in the 1990s while providing the competitive incentive to keep standards high. Affiliated stations also compete for local news audiences in the US and such a system could have kept standards up in the UK, maintaining audiences for local news on television. Additionally a dispute such as the present STV/ITV could be solved by ITV finding an alternative outlet for its programmes in Scotland. Its even likely that the challenge of Sky in areas such as sport broadcasting could have been headed off more effectively with a wider range of bidders for sport in the first instance. The quality of news on commercial television generally would also be higher as channels competed with each other, rather than playing second fiddle to the BBC as ITV has. Unfortunately none of this was foreseen in 1954, and the opportunities for reform were not taken later, for instance when the first UHF channel was given to the BBC. Which is why today the BBC continues to dominate UK broadcasting with the commercial sector, much stronger in most countries, left far behind.

Monday, 21 September 2009

Oil has always been a cyclical industry

Oil, always controversial but necessary for everyday life in the 21st century, hit the news in two separate ways today. First came the news that oil prices have fallen again due to signs that demand is not recovering due to the recession, and that it was unlikely that recovery in prices would come until we see a sustained economic recovery across the world. Secondly, the CEO of French oil company Total warned that when recovery comes we may see a shortage of oil as a result of cutbacks in exploration caused by the recession.

While M. de Margerie is quite correct, he is of course displaying the sort of foresight about the economic cycle that only seems to be displayed in recession, i.e. that good times are around the corner (the bad times that follow booms are rarely publicly predicted by CEOs for obvious reasons). However, its unclear that we should worry about this issue unduly because oil is of course a commodity industry (one where the product produced is homogeneous with little scope for differentiation). As the graphs on WTRG Economics' site indicate oil has a long history of fluctuation related to supply, and the effect of political events upon supply. Conversely periods of prosperity and relative political calm, such as the late 1950s and early 1960s have tended to see production gradually opened up with prices falling away. If we look in the long term we see that prices between the original establishment of the industry in the 1870s and the First Oil Crisis of 1973-4 had always bobbed up and down through supply and demand cycles, albeit by a far lesser degree than post 1973. If we predict however that the next spike is likely to be around $100 then we can predict that as we begin to climb to that spike then exploration will be opened up, with some fields ready to be brought on stream shortly after that spike. Needless to say, it seems likely that Total can gain a lot from the likely 'shortage' to come.

Sunday, 20 September 2009

Warren Buffet and the Midas touch

Some Sunday fun. Its amusing that the Chinese suit maker Dayang Trands has seen its shares boom after the famous US investor Warren Buffet praised the quality of their work. Amazingly Dayang Trands are mass producers of garments, employing 4,500 staff and making 6 million pieces a year - they are not one of the small scale speciality outfits that tend to be thought the best high value producers in today's textile markets. Better yet, Buffet has not actually bought any shares in the company himself. Its amazing how reliant the investment world remains on superstition and prescription, despite everything we know about what makes businesses successful. In a sense Buffet is the modern day successor to JP Morgan and the house he left behind; Morgan was a financier who arranged many important mergers in the 1890s and 1910s, while a holding by the house he left behind came to be seen as an important vote of confidence in a company.

Thursday, 17 September 2009

Edinburgh and Glasgow Airport Rail Links stay on the shelf

Today the Scottish Government announced the scrapping of the Glasgow Airport rail link, estimated to cost £120m as part of an efficiency package designed to help plug a £129m hole in the Scottish NHS budget. This comes on almost the second anniversary of the scrapping of the ambitious Edinburgh Airport Rail Link plan (EARL), which was estimated to cost an incredible £620m. This means that neither of the airports serving the Edinburgh-Glasgow corridor, essentially Britain's second city will be easily accessible by mainline rail (Edinburgh airport is planned to be linked to the city by tram).

Observant readers that clicked on the last link will have noticed that a railway line (the former North British Railway Edinburgh-Aberdeen line, opened in 1890) actually passes very close to Edinburgh Airport. A similar situation exists at Glasgow Airport, where the electrified Paisley-Greenock branch (opened 1841) passes the end of the runway. The airports did not arrive until after rail nationalisation and were also funded by the government, Scottish airports being absorbed by the then government owned British Airports Authority in 1971. Glasgow Airport was opened in 1966, while Edinburgh opened on its present site as recently as 1977. In a great example of joined up government, the opportunity to build railway stations on the existing lines for the airports was missed, or even to incorporate railway stations into the airport design, despite the declining rail traffic of the time. Its even possible that this was a defensive move by a British Rail fearful of making rail traffic too easy; famously the West Coast Main Line electrification to Glasgow was completed in 1974, the same year as British Airways (also government owned) started domestic flights to Heathrow.

Back in the present the Scottish Government has decided not to fund privately owned railways to run to privately owned airports. Yet in the 1990s, faced with a government unwilling to fund a rail link to Heathrow, BAA built their own link from the Great Western Main Line which they still own and operate. If the potential gains from rail links to Edinburgh and Glasgow airports are so great, why does Ferrovial/BAA not consider building such links itself? After all, the government did not plan either of the railways which were there in the first instance. Private capital built them, and could do the same for the airport rail links. With low interest rates the time is ripe for a bond issue, giving some much needed stimulation to financial markets along the way. Just because the state has withdrawn financial support, does not mean that the Glasgow and Edinburgh Airport Rail Links could not be built if they are genuinely feasible projects.

Wednesday, 16 September 2009

Unemployment - can we avoid this again?

The Office of National Statistics (ONS) has estimated that UK unemployment in July had risen to 2.47m, the highest level in 14 years. Measuring unemployment has always been a difficult business - infact the 'claimant count', the number of people actually claiming unemployment benefit has been put at only 1.61m, the rest simply being unaccounted for.

More interesting perhaps is the regional balance of the figures. Last year in Policy Exchange's Cities Unlimited report Tim Leunig and James Swaffield argued that people in high unemployment districts in the north, many of which had first been declared 'distressed areas' in the 1930s, should be given the opportunity to move south to seek work. Leunig and Swaffield argued that these areas had declined relatively (that is, not grown as quickly) since the 1930s because they were in the wrong places to attract modern business, usually being on the coast and distant from the motorway system and airports. However, today's statistics suggest that moving workers to the south may not necessarily be the great solution that Leunig and Swaffield suggested. According to the ONS, in the twelve months ending in December 2008 workers in Tower Hamlets, which directly borders the City of London, includes Canary Wharf and which is a short DLR ride from City Airport, as well as a single change on the tube to Heathrow, suffered the highest rate of unemployment in the UK at 11.7%. At the other end of Britain Shetland suffered the lowest unemployment rate at just 2%, while other coastal places well off the motorway such as Aberdeenshire, the Orkneys and Purbeck, as well as the better connected Eden Valley in Cumbria all suffered unemployment levels of 2.6% and under. Leicester and Birmingham, also well towards the south, and very well connected by motorway, were the second largest victims of unemployment at 11.4% and 10.9% respectively.

More globally the highest level of unemployment found in Scotland was half that of London's highest, and the highest levels in the North East and North West still below 10%. The well connected East and West Midlands both found their worst districts above 10%. These figures suggest that perhaps the simple logic of 'South good, north bad' is not as universal as Leunig and Swaffield imply, and that simply encouraging people to move to wealthy areas for employment, as many in Tower Hamlets have, does not guarantee them employment. Instead there is no substitute for an advantage, whether comparative, such as the Shetland's oil based wealth, or competitive, such as workers possessing suitable skills for their jobs, such as the agricultural workers of Cumbria. It is these skills which Britain must work on improving in the workers of tomorrow if we are to avoid cyclical recessions, which can throw large numbers of low skilled workers out of work, having a serious impact on us again.

Tuesday, 15 September 2009

Lehman Brothers and Glass Steagal - solving the problem of banking regulation

Today is the first anniversary of the filing for Chapter 11 Bankruptcy Protection of Lehman Brothers Holdings Inc. due to liabilities incurred from the trading of derivatives. Lehman was subsequently sold on to Barclays Capital, which arguably picked up a great bargain cheaply, while the rest of the investment banking industry, including competitors Merril Lynch and JP Morgan, found itself a similarly difficult situation. The US government found itself forced to bail out many of the remaining banks, while in other countries, including the UK, the banking system found itself at similar risk of implosion leading to similar state aid and a chain of amalgamations.

Lehman was among the largest of the US Investment Banks. While Lehman has a history stretching back to 1850, and before as a merchant house, Investment Banking as a distinct type of banking in the US had emerged following the Glass-Steagal Act, or Banking Act of 1933. This act was passed in the aftermath of the 1929 crash, when it was believed that banks had lent too rashly against securities during the Wall Street boom of the late 1920s. Glass-Steagal forced banks to delineate themselves as either commercial banks, which would carry out day to day banking activity, or investment banks which would specialize in security trading and other investment activities. Commercial banks were restricted to sourcing only 10% of their income from securities, though they could underwrite government bonds. Deposits in commercial banks were also now insured by government. Investment banks meanwhile were permitted to carry on underwriting and investing in securities. While Glass-Steagal was repealed by congress in 1999 it had the effect of dividing the US banking market into strict commercial and investment spheres until the crisis of Autumn 2008 as banks had by this stage built up specific competitive advantages in their home areas.

When last year's crisis hit some investment banks transferred themselves back to the commercial sector to gain state aid. The structure of the US banking industry for the previous seventy years had changed instantly due to a crisis, essentially the same reason as the structure had been adopted. Despite the claims that policymakers have done little to regulate the activities of bankers this time round, is it perhaps just possible that they are doing the right thing by letting the dust settle before taking any action?


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About Me

London, United Kingdom
I'm Lecturer in Management at The York Management School, at The University of York, UK. I teach strategic management to undergraduate and masters students, as well as running the masters dissertation module. My research focuses on business and management history.