MARCONI’s failure to win any order in BT’s £10 billion programme to upgrade its core telephone lines is a greater industrial setback for Britain than the demise of MG Rover. It signals the end of a mainstream UK telephone equipment industry. Work for BT was the core of Marconi’s business. It accounts for more than a quarter of turnover, much of which is now likely to be lost. It is also the centre that carries the research overheads and on which the rest of the business therefore hangs.
For Marconi, as for Rover, long-term survival depended on finding larger partners, whether for a joint venture or a merger. In both cases, the deal has not come in time. More jobs are being lost directly through the closure of the Longbridge car plant. The plight of Marconi, though less dramatic in the short run, is more frustrating because it was perhaps more avoidable.
The contract was decided on blind sealed bids. Marconi lost to a variety of European and Far East rivals on price rather than through any deficiency of technology or performance. Mike Parton, the chief executive who has nursed Marconi back from the brink of insolvency, insists that there was no question of assuming Marconi would win some business and pricing accordingly. Budgeted margins for this crucial work were thin, veering towards non-existent. But the price had to include technical overheads.
Rival bids did not need to include overheads, because industrial policy is very different elsewhere. A government will often support a national telecoms utility on the understanding that it will support a local equipment maker. If the product is inadequate, ministers will support research or bully would-be foreign partners into supplying it. Taxpayers, but more often consumers, may pay a little more to keep this system going, but if the equipment maker can leverage foreign business on its domestic contracts, the benefits may dwarf the costs. The danger is that it will breed duds.
Britain’s industrial policy is competition. Incumbent suppliers such as BT, far from being supported, are the chief butt of government and regulators. To compete with the cheapest newcomers with their hands tied behind their backs, the BTs must squeeze every penny off costs. Local suppliers must look after themselves. BT’s revamp aims to cut costs by £1 billion a year but will be taken into account by regulators, so every little extra is critical to returns.
Marconi’s problems date way back and are intertwined into its symbiotic relationship with BT. System X, the first generation of automated exchange, was a good design specified for BT which did not sell well elsewhere. When the old GEC was broken up, however, Lord Simpson of Dunkeld made the fateful decision to focus on telecoms and buy up US businesses at high prices to achieve the scale that Marconi lacked.
Instead, the global market collapsed, sinking Lord Simpson’s Marconi under its own debt. Mr Parton’s new Marconi, owned by banks after a £4.7 billion reconstruction, has slowly returned to profit. It has done well in data compression technology but lacks a significant stake in either broadband or mobile telephony, the markets that count at the moment. It knew that it had to merge but no serious company was eager to start the consolidation process while all were in difficulty. Marconi has suddenly become the weak player with no high cards in its hand. It even carries a £140 million pension fund deficit, though this may be too modest to deter.
Mr Parton has forged two joint ventures but they came too late to affect the BT contracts. He must now try to sell the whole or profitable parts, most of them abroad, to save as much business, as many jobs and as much value for shareholders as he can. This will be harder, more thankless, than nursing Marconi back to profit.
Even an industrial policy that relies solely on competition can carry a heavy cost to taxpayers and consumers too.
Who’s next for Spitzer sin bin?
A LETTER from Eliot Spitzer has become a bringer of such foreboding in American business that most directors would gladly accept a tonne of junk mail a day in order to be protected against the dreaded missive. Mr Spitzer clearly sees his job as New York’s attorney-general as a stepping stone to much higher things, from the gubernatorial mansion upwards.
On Wall Street he outflanked the bureaucratic Securities and Exchange Commission to provide American investors and pension savers with plausible villains as well as scapegoats for the bursting of the bubble that cost so many people so much money. He moved on to expose horrendous malpractices behind the smooth ethical facade of America’s top insurance broking and underwriting companies. He has despatched AIG’s Hank Greenberg, one of America’s most admired and most durable chief executives, shamefacedly into the corporate sin bin.
Mr Spitzer has now written to HSBC, along with Citigroup and other banking leaders, to ask politely about the interest they charge to homebuyers of modest means. Mortgage rates can be more than 10 per cent even when the Fed funds rate is only 2.75 per cent.
HSBC is in the firing line because it bought Household, America’s leading independent secondary lender, which built an immensely profitable business by skilfully aligning higher risks of default with higher interest charges. The purchase looked good for HSBC’s bottom line, in part because Household could then borrow at fine rates. But it also came with a guarantee of controversy and an inevitable risk to HSBC’s ethical reputation.
Complaints can be more potentially damaging because of their subtlety. Lenders are not accused of being loans sharks. Plainly they are not, at least since predatory practices were cleaned up after previous regulatory attention. It is damaging enough to show that black borrowers from secondary lenders pay substantially higher interest than white borrowers from more usual sources. The implications are hard to refute, though possibly meaningless if not patronising and malicious.
If Mr Spitzer sinks his teeth in, he could keep a hold for some time. The best HSBC and the others can hope is that the attorney-general will follow his usual pattern. He shows good judgment on financial malpractice but little grasp when he ventures into other areas, such as prescription drugs. Discrimination may be in that category.
Unfair bet
DIRE predictions have been made about the reflotation of IG Index, the spread-betting company. Private equity houses selling shares were accused of greed, not a unique sin in this part of the forest. The City addicts’ favourite exploiter was being valued at nearly three times the price at which its listing was bought out 20 months ago. A boycott by institutional investors was foreseen. The price would have to be cut or the share sale slashed. In the event, none of these happened.
The price was set at the lower end of the indicated range, the offer was adequately subscribed and the shares ended 0.25 of a penny lower at first-day close.
Doubtless there was some envy of smaller issuing houses getting the business, but rather more amour-propre among the institutional investors that had sold out at what now seems a silly price. Since then, IG Index has become more of an internet gambling concern, no doubt adding to its rating.
The fault lies with fund managers so anxious to make a fast buck that they simply do not look at long-term values. Sadly, this lesson is no more likely to be learnt than are gamblers to realise they are losers.
- John Towers, Nick Stephenson, Peter Beale and John Edwards saved Longbridge five years ago but saved more for themselves afterwards. As Rover slid to bankruptcy, the four slipped from hero to zero. But they still seem to have admirers in high places. The Labour Party’s manifesto for enterprise, skills and science, unveiled yesterday, promises to “introduce a new award for Phoenix Entrepreneurs to encourage positive public recognition for individuals whose first business did not succeed but who have come back, worked hard and built successful enterprises”.
