Manufacturing proves that we can be “all in this together”

Another cracking set of manufacturing output numbers yesterday from the CBI, a report on which can be read HERE on the Guardian’s website.

The CBI has reported that the orders balance has jumped to 5% in March from -8% in February, well above expectations of a reading of -6%. Manufacturing firms are expecting to increase output in coming months, with that measure rising to 27% from 23%, the highest level since February 2007.

All of which begs the question, how is manufacturing doing it when another one of my clients more aligned to the current vagaries of the consumer sector says he is feeling a definite slackening in demand?

Previously, I have put this down to a more favourable exchange rate environment which is making UK manufactured goods more competitive than we historically have been, but the CBI figures are beginning to show that there may be more to this than meets the eye. Apparently, the export orders balance fell back 11% to 5% during the period. This is still high by historical standards but does point that there more to this than just exchange rates.

A conversation with a manufacturing client a few weeks ago may offer a clue. He believes that manufacturing’s response to the downturn has been far more flexible than other sectors. Instead of laying people off, short time working, pay freezes and cuts, were used to drive cost out of businesses without, crucially, losing the skills necessary to take advantage of any upturn.

All of this demonstrates a rare maturity from both management and workforce and is truly a case of “we are all in this together”. It is certainly a far cry from the days of Red Robbo when a previous client told me he wasn’t sure if he was in the business of manufacturing or just providing jobs.

If you want to speed up homebuying, reform conveyancing!

The news that the UK Coalition Government is to abandon sinking HIPs (that’s Home Information Packs for the uninitiated) will be welcomed by all those wanting to sell their homes and the property industry in general.

Originally conceived as a way of speeding up the homebuying process (homeowners had to have all manner of documentation ready in advance of getting an offer, including energy performance ratings and local searches) ultimately HIPs achieved little of what it set out to do. In fact, a persuasive argument could be made that HIPs actually discouraged people from moving home at exactly the time when we should have been trying to refloat the housing market.

To be fair, the previous Government correctly identified the problem, even if it ultimately came up with the wrong answer. Moving home can be an interminably slow business, but I would argue this is more often down to conveyancing lawyers rather than homeowners not having their ducks in a row. The Law Society many years ago, in a review of conveyancing practices, found that the adversarial nature of English law was responsible many of the delays. In other words lawyers could not get it out of their minds that the other side were trying to pull a fast one when actually, all both vendor and buyer wanted to do was move and get on with their lives.

My own experience is a classic illustration. We were selling a Victorian terrace in Bedfordshire many years ago and got a buyer on the first morning it was up for sale (oh the heady days of the property boom!). Of course what should have been wrapped up in a matter of weeks dragged on as the buyer’s solicitor asked all many of extraordinary questions.

It reached its nadir when my solicitor received a letter one morning expressing some concern that the roof of the property had been rebuilt at some point. Could we provide details of the contractor who had completed the job and give guarantees about the quality of the materials used? Bearing in mind that the roof had been replaced in the mid-1950s the answer was ‘no’ and ‘no’.

The French have an entirely different conveyancing system which avoids much of this unnecessary angst. Under French law one solicitor acts for both parties, acting as an impartial referee during negotiations, suggesting compromises and solutions rather than just throwing up problems.

Of course such a system would halve total conveyancing fees overnight, which is precisely why it won’t happen over here.

Last train to Waterloo

The late Geordie comedian Bobby Thompson had a wonderful gift for story-telling. One of his funniest routines involved the story of his trip to London and hailing a black cab.

“I got in and said: “Take me to Waterloo.”

“The station sir?”

“Well I think I’m a bit late for the battle” replied Thompson.

I bring this up because the Board of bus and train operator National Express must be hoping that the train has not left the station for its own preferred option of a rights issue, which must be completed by December 31st to avoid a breach of its own banking covenants on £1.3 billion of debt. Having declined Stagecoach’s offer for the company last week, the timescales are perilously tight.

I was talking with a friend and former colleague a few weeks ago and he brought me up to speed with current conditions for fundraising in the City. He has just completed a rights issue for a former client of mine which had got caught in the ‘perfect storm’ of the credit meltdown. The company’s business plan involved relatively high gearing (debt) levels to finance working capital which is then hired out on a three-year replacement cycle.

Prior to the credit crunch the company was a FTSE 250 with a stable and well-respected management team. However, trading conditions and bank aversion to debt brought it within an ace of a breach of its own covenants and only a cash call to institutional investors, in the form of rights issue, could save it. In an unconscious echo of the Duke of Wellington’s description of his greatest battle, my friend described the eleventh hour success of the fundraising as a “damn close-run thing.”

Now contrast this with National Express. The company is going to attempt to raise funds from current investors without a CEO (Richard Bowker’s departure for a lucrative new job in the Middle East in June looks increasingly like a case of “every man for himself”), with the Government threatening to confiscate two of its rail franchises for poor performance and its biggest shareholder (Spain’s Cosmen family) accusing it of a “lack of strategy”.

This is high risk indeed and one must hope that National Express is not about to meet its own Waterloo. And I don’t mean the station.

Too big to do anything about?

The Governor of the Bank of England’s use of Churchillian rhetoric a few nights ago in a speech on banking reform (“never in the field of financial endeavour has so much money been owed by so few to so many”) opened a new front in the on-going Battle of the Bonuses, on this side of the Atlantic at least.

We now have two of the biggest names in banking and regulation effectively wanting to break up the banks by splitting off commercial banking activities (clearing, loans, mortgages etc) from investment banking activities (trading, arbitrage etc) where the big profits and bonuses are being made. The other? Paul Volcker, former Chairman of the US Federal Reserve who advocates the re-enactment of the Glass-Steagall Act, first passed by the Roosevelt administration in the midst of the Great Depression.

How likely is this? Well, for a current Governor of the Bank of England to be talking this way is certainly a surprise and is probably the start of a Bank of England ‘land-grab’ which will be enacted if we get a Conservative Government, which has pledged to get rid of the FSA and return banking regulation the Bank.

However, our current Chancellor of the Exchequer has publicly said that a modern Glass Steagall is not on the cards and Volcker’s views are finding little traction in Washington (according to the New York Times).

My own view is that there is a lack of political will to do anything about this, beyond words. I’m not sure that these banks are now ‘too big to fail’. It’s more like they are so well connected, politically and economically that they are now ‘too big to do anything about.”

A very quick PR point. Banker confidence was on full display when the official spokesperson for the British Bankers Association was asked to comment on the bonuses. Apparently, we all need to “move on”.

End of the PLC?

Excellent article today in The Times by Charlie Mayfield, Chairman of the John Lewis Partnership, which asks some serious questions about the future of the PLC as the best model for business in the UK. It can be found HERE.

Mayfield characterises the PLC model as being prone to short-termism, elitist, in that it usually excludes the means of production, namely the actual workers, from the ownership structure and only interested in management teams that can deliver double digit growth year on year, or else.

In all honesty, there’s not a lot I can disagree with here. My own time in the City was characterised by deepening disillusionment with the obsession for capital growth over income stocks, the need for “excitement”, which usually meant M&A activity, and an almost total disregard for the retail investor, otherwise known as you and me. All of this led very sound companies offering a good dividend year on year to be downgraded or just plain ignored by analysts with the result that management teams often resorted to desperate M&A activity to engender some interest in their stock. The JD Sports acquisition of First Sport would be a classic case in point, which nearly brought down the entire company.

While I don’t think it’s the end of the PLC, I do think the UK economy could benefit from some diversity. Again, Germany could be a good model, where major companies like BMW, Vaillant, Schaeffler etal remain private, family owned concerns existing alongside the likes of Siemens which is listed in Frankfurt and New York.

Worth a read.

In Retrospect

It’s not fashionable at the moment to publicly defend financiers, but the news that the Serious Fraud Office is investigating the Phoenix 4 who so memorably ‘saved’ Rover, is a reminder that financiers do, on occasion, get things right.

Those of us with long enough memories can remember how John Moulton of Alchemy Partners, the venture capitalist, was treated, by Sir Ken Jackson of the AEEU engineering union in particular, when he came up with the plan to turn Rover into a niche sports car manufacturer, based on the MGF design. I remember words like parasite and asset stripper were freely used.

The story of Moulton’s involvement with Rover is worth repeating, if for no other reason than to remember the dire straits the company was in. Moulton was attending a board meeting at Hayden McLennan as non-executive director when he learned by chance that the firm had run out of its main product, namely camouflage netting. He enquired why, and was told that they simply couldn't meet the demand from their primary customer, Rover, to disguise acres and acres of its unsold new cars in fields up and down the country (honestly, you can’t write comedy like this).

Moulton’s plan was brilliant but unorthodox. He convinced BMW to sell him Rover at a knock down price and cover its losses by selling Land Rover to Ford with the sweetener, for BMW, of keeping the prized Mini Cooper brand made at Cowley.

Moulton made no secret of the fact that there would be job losses, but the trade unions went on the search for a White Knight and duly found one in the shape of the Phoenix 4 who promised to retain all jobs at Longbridge and continue manufacturing in the volume car market, up against Ford, Vauxhall etal. The end was inevitable, although it took five years.

As Moulton said at the time: “The reality is, there are two choices, no jobs or some jobs.” How right he was and what a pity he was unable to put his plan into action.