The foreign takeover of British manufacturing expertise
- A quarter of UK aerospace suppliers have fallen under foreign ownership since 1990, case study suggests
- Cherry picking of most valuable companies has weakened scope for remaining British firms to reduce the trade gap
- New safeguards needed to protect local control of UK technology and know-how
The extent to which high-value British manufacturing firms have fallen prey to foreign takeover is laid bare in an in-depth case study of the aerospace supply chain published by Civitas today.
Based on detailed analysis of a substantial section of the aerospace supply chain, it provides a unique insight into the enormous scale of mergers and acquisitions activity in recent decades.
The study provides a striking picture of the degree to which the most attractive UK companies have been cherry picked over the past quarter of a century.
As a result, those that remain in British hands tend to be smaller firms with less promise of growing into significant players in the global market.
The report’s authors, Norman Smith and Joseph Wright, call for measures to bring Britain more into line with its international counterparts in protecting domestic ownership.
They write: “It is important for the UK aerospace supply chain to remain innovative. To entrust this to mainly foreign-owned companies is a risk, since their optimum strategies are unlikely to give much weight to British concerns. Something needs to be done, therefore, to safeguard the British ownership of the remaining locally owned firms.”
Findings
Based on a close examination of the experiences of 207 firms between 1990 and 2014, the study indicates:
- A steep rise in the proportion of foreign controlled companies, from 14 per cent in 1990 (29 out of 207) to 41 per cent (64 out of 155) in 2014.
- Almost half (101) of the companies experienced changes of ownership during the period, some experiencing multiple takeover activities.
- Of those, more than half (53) ended up in foreign ownership, with 48 remaining British-owned.
- Less than a quarter (47) managed to survive until 2014 while also avoiding takeover or related activity. A greater number of companies (52) left the supply chain altogether.
- In total there were 174 takeover deals associated with just 101 companies during the period studied.
Importantly, those companies that were targeted most for takeovers tended to be those with those with the highest turnovers.
Within our sample, a small group of companies – Cobham, Thales, GE, GKN and Siemens – were responsible for 16 takeovers of firms with a median turnover of £150 million. By contrast, the median turnover of those companies unaffected by takeovers during the period was just £4 million.
“This strongly suggests that large companies have cherry-picked the most attractive targets in the supply chain,” say Smith and Wright.
“Unfortunately one of the results of the shrinkage in the supply chain and rise of foreign ownership has been to leave the surviving British owned companies heavily skewed towards small and medium-sized enterprises (SMEs).
“As a generalisation it is probably true to say that few of these will ever reach the minimum economic scale to grow into significant members of the international aerospace industry.
“However, unlike most science based industries there remains a significant number of large British controlled companies capable of competing in the global market place.”
Proposals
In order to better safeguard British ownership in future, the authors suggest that foreign takeovers should be subject to additional tax.
“One way to achieve this, particularly for small companies, would be to make the process more expensive for the foreign buyer by following the Israeli example of levying a large tax charge on the buyer when domestic technology/know-how falls under foreign control, at least for businesses which have had public funding for R&D or product development,” they write.
“For larger companies a turnover related requirement to obtain government consent would be more appropriate.”
Only three companies – BAE Systems, NATS and Rolls-Royce – are protected from foreign takeover by the presence of a government ‘golden share’ on their share register. By contrast, virtually all other developed countries retain more power to block foreign takeovers not deemed to be in the national interest over large sections of their economies.
The trend towards foreign ownership has a series of adverse effects on the British economy, diverting employment opportunities, skills acquisition and tax revenues abroad. By frequently reducing UK operations to assembly operations it also reinforces the UK’s trade gap.
“Foreign owners can bring benefits to the UK, above all if they undertake greenfield developments. But these are increasingly uncommon and usually associated with public subsidy. There are many disadvantages as well as advantages in the foreign acquisition of existing domestic businesses and whether or not a gain will be felt by the UK economy will vary from case to case,” says Smith and Wright.
“Gains usually occur when the new parent sees its UK subsidiary as an important part of its global operation and continues to invest, carry out R&D and upgrade the skills of the work force after the acquisition. At the other extreme, a business may be closed and its activities transferred abroad, which certainly happened in some cases in this study.”
Notes
Norman Smith is a former director general of the Department of Energy’s Offshore Supplies Office (OSO), the government agency which supported British suppliers to the North Sea oil and gas industry. He subsequently co-founded and managed an energy consulting company and served as director of eight private companies in the oil and gas industry, becoming chairman of three. Since taking retirement he has conducted extensive research into the British supply chain supporting exploration and production activities in the North Sea.
Joseph Wright is research fellow on Civitas’s Wealth of Nations project.
A full description of the source material and the methodology used by the report’s authors can be found in the Appendix from page 36.
Losing Control: A study of mergers and acquisitions in the British aerospace supply chain