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[FONT="]2.[/FONT]Another one bites the dust
Cadbury goes American. Is this healthy for British manufacturing?
WHY can’t Britain hang on to ownership of iconic brands such as Jaguar, Land Rover, the Mini, Rowntree, the Times and now Cadbury, purveyor of chocolate to children of the British empire? On January 19th, after a four-month battle, Roger Carr, chairman of Cadbury, said his board was recommending to shareholders a £11.9 billion ($19.5 billion) takeover bid by Kraft Foods, of Northfield, Illinois. Somehow, despite the blustering of politicians and the protests of organised labour, great companies like this one have been slipping out of British control.
In business terms, Kraft’s acquisition (which will go through unless rivals top the bid by January 23rd) may be a good deal for both companies. They have complementary markets across the globe in which to cross-sell their products: Cadbury is strong in India and various Commonwealth countries; Kraft is solid in continental Europe, Russia and China. Greater scale may help the two develop in the emerging markets that probably hold the key to future fortune. That will be good news for Cadbury’s workers, wherever they are based.
Less rosily, the fact that so much of the deal ($7 billion) is financed by debt is a negative: borrowing that looks cheap today could double in price tomorrow. That would eat up the cost savings on marketing and administration already factored into the purchase price, and perhaps force undesirable cuts to operations. Cadbury is no sluggish layabout: under its current management it has slimmed, offshored and become lean and mean, so swingeing cuts will take out bone, not fat.
Received wisdom has it that three-quarters of mergers fail to create shareholder value and half actually destroy it. In such a sensitive consumer sector, the risks of a culture clash and brand destruction are high. That is what happened to Terry’s, a smaller York-based chocolate company bought by Kraft in 1993. Terry’s has lost visibility in Britain since production was relocated to central Europe in 2005. Something of the same could await Cadbury.
The emotions roused by the fight for the chocolate-maker go far beyond the business specifics, however. Two sensitive themes are intertwined. The first is that foreigners are buying up Britain’s most famous firms, and weak sterling may exacerbate the trend. The second is the long, slow erosion of Britain’s manufacturing base.
Take foreigners first. The phenomenon has been described as the Wimbledon effect: Britain provides the beautiful arena where foreign champions come and beat the hell out of British players. The annual Oxford-Cambridge Boat Race is much the same: a slugfest between predominantly non-British mercenaries. For centuries, British investors have bought up more foreign assets than foreign investors did British ones, and lived handsomely off the rents. That net outward flow of investment continues, although in 2005 and 2006 the trend temporarily reversed. Yet the public perception is that Britain is selling the family silver. Does it matter that ultimate control of decision-making, brands and intellectual property in many big companies is shifting away?
There are understandable fears that foreign owners will be more likely than domestic ones to axe British jobs or use British profits to pay off their global debts. And perhaps the British taxman focuses less hawkishly on the precise source of a foreign-owned firm’s earnings than he might. But all successful big firms, British and foreign alike, respond to the demands and opportunities of the global marketplace these days, and, as Cadbury’s current managers have shown, their behaviour is rarely determined by their nationality.
So the outflow of control and know-how is no bad thing—as long as the outgoing old firms are constantly replenished by new and equally good or better ones, with universities, science parks and business incubators constantly launching tomorrow’s stars that will hire today’s workers. The problem is that this may not be happening, or not in sufficient quantity, thanks in large part to over-regulation of business and indifferent education of the masses.
If fear of foreigners is one reason why Cadbury has touched a national nerve, so too is nostalgia for Britain’s vanished 19th-century glory as the world’s workshop. Although manufacturing output has increased marginally over the past decade and a bit, its share of GDP has shrunk, from 21% in 1994 to 12% in 2008. As productivity has risen, employment has fallen, by over a third since 1998. So the significance of manufacturing to the economy, measured in corporate returns, has been reduced, while that of service companies, particularly financial services, has ballooned (see chart). Given that an increasing share of many manufacturers’ earnings is derived, in fact, from servicing their products, the economy’s shift away from making things is greater still.
This change is hardly confined to Britain; most developed countries are seeing the same transformation. Relocating production abroad is the near-inevitable option for low-value products. Mechetronics, a small company in Durham which has been making solenoids—coil components for electric motors—for over 60 years, bought a factory in China two years ago and moved its low-value-added production there. “You pay £1,800 for a machine in China which would cost £16,000 in Britain,” says James Ingall, its sales manager. Mechetronics lost its independence last year when it was bought by an American firm, Curtiss-Wright.
There are, of course, a fair number of world-beating high-tech, British-owned manufacturers, including engine-maker Rolls-Royce, GSK, a pharmaceutical company, BAe Systems in defence equipment and others. But a surprising proportion of manufacturing firms in Britain are nothing like that. Some two-fifths are foreign-owned, according to a survey by BDO Stoy Hayward, an accounting firm, and EEF, a manufacturers’ association. As for the rest, studies show a wide spectrum running from family firms, many of them poorly managed, to well-run high-performers, some of them kept to the mark by private-equity funds.
In the aggregate, however—thanks to a long tail of dozy firms—manufacturers in Britain score badly against their American, Japanese, German and Swedish counterparts. Measured for accepted management best practice, such as performance-tracking, target-setting and manager appraisal, they lag behind the others, according to studies since 2006 by McKinsey, a consulting firm, and John Van Reenen, director of the Centre for Economic Performance at the London School of Economics.
One problem appears to be the lower qualifications, on average, of both senior managers and the workforce at British firms. In terms of management standards, “Britain looks like a mid-European country,” says Mr Van Reenen.
The silver lining, the study found, is that the management practices of multinational companies tend to be better than the average in any country they operate in. In theory, then, Kraft’s takeover of a British firm should bring better management to Britain. One problem: Cadbury is itself a multinational, and in no need of lessons from Kraft. A pity, perhaps, that its shareholders went for the short-term gain.