British Telecom Industry News

How to Compete in a Fast-Moving Technology World

Technical challenges, the unexpected collapse of some markets and the emergence of an aggressive privatized British Telecom have hit Britain’s top electronics companies hard. Further drastic restructuring may now be necessary to meet the challenges of competing in a fast-moving and cutthroat world market. Graham Seargent reports.

computer-game-design

Today’s expected profits announced from Thorn EMI is likely to put the lid on a disastrous week for the image of Britain’s big electronics companies in the City. On Monday, Mr. Peter Laister was summarily removed as chairman and chief executive of Thorn, suggesting that few of the group’s troubles will be swept under the carpet today. On Tuesday, Lord Weinstock’s GEC reported another lack-luster year by its own high standards. Although GEC’s Marconi business did well as a whole, along with the group’s cash mountain, there were losses on computers, setbacks on telecommunications and other more traditional electrical businesses, all contributing to the feeling that the City’s long love affair with the nation’s great electrical combine was cooling rapidly.

Twenty-four hours later STC, transformed into an information technology group since Sir Kenneth Corfield led it away from the close embrace to the American multinational ITT, rushed out a short statement confirming the worst rumors about technical and management problems and warning of an overall loss after retrenchment provisions in the first half of the year.

At the best of times, that package would have knocked hundreds of millions off the share prices of our top electronics companies. The background, however, was already far from buoyant. In the high street, the great boom in home computers came to an end last autumn as the market reached saturation point – at least for the moment.

Founder-managed companies such as Acorn and Sinclair, which had converted British homes to the magic keyboard more enthusiastically than those of any other country, found themselves carrying huge unsold stocks instead of riding on cash-flow to develop the next generation of machines, which now face an uncertain market.

Both had to be rescued, largely on the long-term hope of plugging Eastern Europe into the era of electronic education. The personal computer market as a whole is locked in a tide of competition at a time when the sales curve is not looking so healthy. And that does not help the component manufacturers, particularly the chip-makers, who are being forced beyond the limits of reliable production by the twin forces of competition and rapid technical advance.

500004275-03-01

At the opposite, professional end of the business, there has already been bad news recently from Plessey, which is making the costly transition to producing digital electronic telephone exchanges (after-tax profits down 18 percent) and from Racal, where the chairman, Sir Ernest Harrison, warned of an impending setback after many years of spectacular profits growth.

The City has its own reasons for receiving these announcements of what may prove temporary problems with an hysterical lack of sympathy. Thorn EMI raised pounds 140 million of new share capital last summer, mainly to finance the purchase of a controlling stake in Inmos.

STC raised pounds 170 million through a rights issue only in February. The stockbrokers who persuaded their clients to stump up this money at prices far higher than today’s values have extremely red faces. The investment managers who bought shares for insurance companies, pension funds and unit trusts have large red items to ruin their portfolio performance. Both have a lot of explaining to do.

Much the same applies to racal which issued so many shares in its takeover bid for Chubb, the security firm in the perceived anticipation of ‘good improvement’ in profit.

To make matters worse, specialist City analysts, who are used to speaking with authority to clients and colleagues in the arcane parlance of electronics, sometimes made spectacularly mistaken and over-optimistic forecasts.

With honorable exceptions, much of the bad news has come as an unexpected shock rather than a confirmation of informed analysis.
Back in the real world, there are a number of common factors linking the problems of outwardly disparate companies.

In particular, groups striving to establish strong positions in exciting new markets, with all the short-term risks attending the development of products at the edge of manufacturing technology, have found that established businesses they might have relied on in the meantime have struck problems of their own – some, but not all, as a result of top management neglect.

computer-rooms-490

Thorn EMI appears to have misread the television market and the US music business as well as encountering problems with Inmos. The Middle East boom in military electronics dried up as well as the oil price tumbled and Opec budgets were tightened.

That has made life harder for GEC and for Racal, which is necessarily making start-up losses on its Provillus portable telephone project, although that appears to be meeting initial sales targets and could be highly profitable in a few year.

International oversupply of microprocessors and other electronic components has been exacerbated by market demands for ever higher technical performance. That hit STC at a moment when it is in the middle of an extraordinary transformation most notably via its takeover of ICL, from a telephone exchange cable and consumer electricals group into one that spans and exemplifies the convergence of telecommunication, video and data)processing businesses. That combination is widely thought essential to achieve a long-term world position in information technology.

STC has effectively given up continuing interest in the public telephone exchange business. Those who remain, such as Plessey and GEC, are finding that the costs of finally switching production to the new System X digital electronic exchange have been compounded by the new more competitive domestic market environment brought by the together, commercial and privatized British Telecom as buyer and competitor in lucrative ancillary businesses such as private exchange systems.

Plessey and GEC were unsurprisingly alarmed at BT’s proposed entry into private exchange manufacturing by taking over the ailing Mitel, based in Canada, but with some British production.

Attempts to diversify from constricted domestic markets by buying into the United States have also come up against a variety of technical, managerial and marketing problems.

Such problems inevitably raise a question over the structure of the heights of the British electronics industry. The ambitious strategies of STC and Racal (more questionably Thorn) clearly reflect a well thought out view of what is necessary to become a big player in international markets that offer tremendous growth potential for those who can stay the course.

Only the GEC, which has counted its coins and eschewed such visions, presently has the muscle to count on the world stage. The second division, with profits (until recently) between pounds 100 million and pounds 200 millions, are giants in domestic terms, but world midgets. They may face a choice between concentrating on smaller, specialized niches, such as Ferranti has developed of late, or merging into much larger units.

The Clark family at Plessey has for years hovered cannily between these two extremes.

British companies suffer a severe disadvantage compared with their American and Japanese rival because of their small and relatively open domestic market. For them, the EEC, which was intended to redress that imbalance, is no Common Market in most crucial product areas.

Lord Lucas of Chilworth, a junior trade and industry minister, caused some amazement in the House of Lords last month when he suggested that GEC and Plessy should consider merging to compete more effectively in world markets for telecommunications equipment. Yet the second league of British electronics companies now presents a remarkably similar picture to that successfully transformed when Lord Weinstock merged GEC, AEI and English Electric – with Whitehall encouragement.

kalet1962

Again today, British companies sometimes compete more fiercely with each other in world-scale markets than with their foreign rivals. At present, only GEC and British Telecom clearly have the financial strength to orchestrate a fresh re-organization, although the Clarks may still nurture the ambitions thwarted first time round. And BT has at least temporarily been warned off by the reference of its Mitel deal to the Monopolies Commission.

Dominating personalities militate against successful mergers, although Thorn and possibly STC stand out as likely junior partners, Lord Weinstock probably lacks the will or ambition to repeat his earlier role, which was so essential to the success of the three-way GEC merger. It seems unlikely, nonetheless, that the British electronics industry will look the same in 1990. It remains to be seen if it will build a new strength for Britain in some of the world’s most exciting and challenging world markets or the stock market’s recent fears will be fulfilled.