Tony

Where did the money to pay for the Pilkington research come from? To build the new factory, to publicise and distribute the new product, to build up stocks prior to the first sales...? I am guessing it did not all come from retained profits but mostly from either banks or shareholders. Read the stories of most of the innovative companies on AIM, the drug developers, the medical device developers, the fuel cell, tidal power, solar power etcetera developers. Most of these companies are continually seeking either loans, venture capital or to sell more shares. Sometimes they sell the entire company to a bigger, better funded competitor. Better funded means having better access to finance.

Suppose you want to build cape size supertankers. Do you get a job in a shipyard to save the money to buy the materials for building a rowing boat, keep doing that until you have saved enough to hire someone else and make two rowing boats at a time? Then save enough to start building dinghies, kayaks, cabin cruisers? Make enough from that business to hire a naval architect and a marine engineer? Build a few tug boats or rich people's yachts and save the money from that to build a coastal tanker or two... ? Are we talking three generations of the family business or ten here?

Love it or loathe it: finance is necessary.

Jeremy's point about finance is well made. All companies need access to finance to grow. Even Trevithick needed risk capital/money to build his first steam engine and the makers of all those early industrial machines had financial backers. The industrial revolution in this country could not have begun without financial support from very wealthy individuals. But then there was almost no competition from other nations which is why we succeeded so well. The structure of industry was different too - Brunel made ships and bridges but this was all based on large scale ironwork and civil engineering/design. He did not operate outside this discipline.

Our problem now is that in every sphere imaginable there is intense competition. Much of this arises from huge companies operating globally in multiple disciplines - take the Korean Chaebol such as Daewoo, Lucky Goldstar, Sunkyong, Ssangyong, and Samsung. Their investment in technology (as well as copying good Western ideas) is so large that it is unlikely that any new UK advance in the non-military environment can succeed for long without meeting Asian competition. Dyson's product is now plagiarised by Far Eastern manufacturers for example. And now we have a new global threat - the Internet - which is killing off the high street.

International business models are revealing: The Chaebol were family-owned companies that were funded by the Korean Government with almost unlimited amounts of cash during the 1960's but suffered badly during the Asian financial crisis in 1997 because they were too dependent on export-oriented manufacturing. They bounced back, however, and we see their products in stores every day.

The 9 major Japanese Keiretsu were formed after WWII following the partially successful attempt by MacArthur to dissolve the family-owened Zaibatsu. Each one centred around one bank which had great control over all the companies in the keiretsu and prevented external takeovers. They too provided almost unlimited amounts of capital for expansion. These Keirestu now have interests ranging from food to electronics and are managed by professional managers. Sony, Mitsubishi, Sumitomo, Toyota - names we are all familiar with. The Japanese banking crisis 20 years ago, however, led to a significant loosening of the ties between these central banks and the operating companies and some in the business community felt the old keiretsu model was no longer effective.

But both these industrial models have been globally successful in manufacturing, design and innovation.

Today we heard that Bombardier is to lose 1500 jobs in Derby because it lost a rolling stock contract to Siemens whilst Hitachi - part of the Sanwa or Toyo Trust Bank keiretsu - is still preparing to open a new rolling stock plant in the UK within the next 3 years. Hitachi still has access to huge financial resources and its keiretsu operates in multiple sectors - try these names on for size: Suntory, Kobe Steel, Sharp, Kyocera, Daihatsu. It even owns its own private railway.

Siemens is a multi-disciplinary company with the financial muscle to compete globally and it too operates in multiple sectors, though not as broad as a Japanese keiretsu. Bombardier is a more narrowly focussed company operating in 23 countries in civil aerospace and transportation. Neither are part of a major bank.

The traditional keiretsu model has not appeared outside Japan but some large business have been described as keiretsu such as Virgin Group(UK), Tata Group(India) and Cisco Systems (USA) and some banks have been cited as central to keiretsu-like systems such as Deutche Bank. The chaebol systems are more like western conglomerates such as General Electric.

So to answer the the question at the top of this forum one could say that if UK Ltd is to survive we need to develop much closer and more effective means of supporting horizontally and vertically integrated business groupings through links with the banking sector. Manufacturing needs integrated systems to work effectively - whether its a food plant or a railway plant. Our politicians are too wedded to the notion that the marketplace will provide the answers. It will not. Classical economics is a fanciful religion. The UK Government must find ways to encourage the financial services sector to support UK Ltd - not just pay itself international salaries because that is what the market does.

PWC has said the Government must not just sell its bank shares for a profit but use the investment for socio-economic purposes. I say that now the taxpayer has a big slice of Lloyds and RBS we should use the opportunity to do what the Koreans did in the 1960's before porting the model to move into a 21st Century keiretsu. Why not buy Bombardier and re-let the contract for a start?

How Manufacturing Can Lead to Future Economic Prosperity
http://www.brookings.edu...29_recession_baily.aspx

- an American view. This is not a peculiarly British debate.

Responding to Manufacturing Job Loss: What Can Economic Development Policy Do?
http://www.brookings.edu...facturing_job_loss.aspx

Meanwhile in the UK, Nanoco, a leading edge developer of quantum dots, complains that neither government nor commercial funding is available in the UK to build a high tech manufacturing facility that would keep the business here. Blaming the problem on the abolition of Regional Development Agencies, it threatens to move to Japan or Singapore. It currently researches in Manchester and has a pilot plant in Runcorn.
http://www.ft.com/cms/s/...bdc0.html#axzz1RB92xy95

This is what happens when you elect a bunch of mad axe men.

Dr Jimbo

I agree that money has been wasted on supporting lame ducks to buy short term votes and put off the inevitable. Nanoco is a growing company with a saleable product and a lot of scientific and engineering talent that is being starved of funding here and so will be forced to move to more hospitable climes. If I was rich enough to be a venture capitalist I would certainly back it with a reasonable portion of my funds.

======

There is an interesting article in today's MF:
http://www.fool.co.uk/ne...-drives-the-economy.aspx

Dr Jimbo,

I was involved with a company in Liverpool in the early 90's at the time of the last big recession. The bank supported our business plan offering us lots of money and then arbaterily cut our overdraft by £100,000, this made managing cash flow very difficult. We went out for venture capital and had three offers. We could only afford to run with one of them. The day before we were to get our investment from the venture capitalist, a grant from the council and a long term loan from the bank, the venture capitalist withdrew their offer. We later learnt their parent bank had put a stop on all investment due to the large number of risky management buyouts they had invested in. Our bank then said due to the lack of confidence of the venture capitalist they wanted their overdraft back. As we could not pay they put us into administration expecting our £1,000,000 order book to attract lots of buyers. It didn't, all the companies interested wanted to steal our order book as they had no money either. The bank then persecuted my fellow directors and myself relentlessly to try and get their money back. One went bankrupt, one had a heart attack and died and two of us managed to reach an agreement with them after much difficulty as they would not talk to us except through their solicitor and he would not talk to us unless we could offer the whole amount.

So 27 people lost their jobs and a good software product with international potential disappeared.

A few years later I was on a course with a number of bankers from various banks and told them this story. They all said that while they hoped that their banks would not have behaved like this they could not say they would have acted any differently. They all said that local banking was a myth and diktats came from the centre each day, week, month telling them to give more loans, reduce existing loans, sell this product, don’t sell this product, make more charges on customers etc.

So while we may want banks to loan more to business unless the loan is of a size where the bank cannot afford the business to go under they will be an unreliable partner and may cause many more viable businesses to go under. During this process a colleague whose well known company had been ruined by venture capitalists (another story) told us to put our wives on the street, sell our children and do anything rather than get involved with VCs.

So I would recommend anyone wanting a loan from a bank to tread very carefully and be very aware of the fact they will be swimming with sharks.

I totally agree with keeping quangos of various types out of investment decisions, they are even worse than bankers except they are wasting our money. I do not have an answer to the way forward.