Rebalancing the Economy: Trade and Investment

Written evidence from Clyde Blowers Ltd

We are a global engineering business with c.87 companies in 28 different countries.  We have a history of buying Western European based businesses with engineering products which are "mission critical" as part of a larger process, e.g. Pumps for Nuclear Power Plants or Sea-Water Injection Pumps for offshore oil wells.  Without these pumps the whole process comes to a halt.  Pumps are only one example of the engineered products which we have in our portfolio.  We employ circa 5,500 people worldwide.

Typically we acquire UK engineering companies with a proud heritage which have been shrinking in size over the past 20-30 years.  Two examples of this would be the Weir Pumps business based in Cathcart Glasgow and David Brown Engineering based in Huddersfield.  Both of these companies can trace their histories back to the 19th century and both were world leaders in their field in the early 20th century.  We have transformed both of these companies by successfully implementing a plan to globalise them, with a particular emphasis on the emerging markets of China, India and Brazil.

This is a strategy which we have been employing successfully since 1992 when I personally purchased a major shareholding in Clyde Blowers.

Our strategy focuses on moving these companies from an exporting only model to establishing bases in the major markets of the emerging economies where we wish to grow our business.  To use our pump business as an example: - we bought the Weir Pumps business in Glasgow in May 2007.  This business had been operating from one large manufacturing facility in Glasgow and exporting its products all over the world.  In order to remain profitable, the business, prior to our ownership, had been focusing on products which it could make profitably and cutting out those which it could not compete with on price.  This strategy was leading to fewer and fewer products being manufactured and as a result of this strategy the company was unable to bid for projects where the customer wanted to go to one supplier for all the pumps required on the project.  Post acquisition in 2007 our strategy was to establish a presence in China, India, Brazil and the USA.

In China, India and Brazil we focused on finding joint venture partners and in China and India we also set up wholly foreign owned enterprises.  In the US our strategy was to acquire an established US business.

I am absolutely convinced that this is the best strategy for UK manufacturing.  We have employed this strategy with great success for more than 20 years in a number of businesses.  Since 2007 we have grown our pump business, based in Glasgow, from 1 manufacturing plant in the UK to 8 manufacturing plants worldwide including China, India, Brazil and the US and 27 Service Centres worldwide.

We have grown the turnover of the business from £77 million pounds in 2007 to £369 million pounds this year.  The number of employees in the UK in the pump business alone has grown from 550 in 2007 to 965 today.

The Business Innovation and Skills Committee should in my view find a way to support S.M.E's in developing an appropriate global growth strategy.  For many S.M.E's, particularly manufacturing companies, exporting on its own is not the right model.  I am sure that a lot of time, effort and money is wasted pursuing a strategy which is inappropriate.  More effort should go into analysing the global market for each company and developing a tailored growth strategy.  A simple exporting model no longer works in the way it did when we had the British Empire.  Globalisation has changed the way we need to approach international trade.  The measure of success should be growth in turnover and profitability of the UK based business and growth in number of employees.

UKTI can be a good source of market intelligence particularly in emerging markets, helping with the identification of local J.V. partners, arranging appointments and providing translators.

The role of British Ambassadors should not be that of visiting dignitaries.  They should have a more hands-on role with individual companies as a mentor and guide, helping to establish the correct strategy for each company - a more "sleeves rolled up" approach.

The effective provision of trade credit is the one area where the government could have a huge impact on international trade.  This is the single biggest constraint on our growth at the present and is impacting many companies like us throughout the UK.  If this was the only thing the government did it would have a significant impact.

The Coalition Government clearly understand that the way to economic recovery is through growth in the private sector and that it also has to be focused on businesses other than Banking and The City.  The recent trips to India and China by high level government and business delegations show a high degree of commitment to helping UK companies win a bigger share of the business generated by these very important emerging markets.  To fully exploit the opportunities created by these visits, UK companies need to have access to a reliable source of trade credit.  Unfortunately UK companies are at a significant disadvantage to their foreign counterparts when it comes to the availability and cost of trade credit.  The UK banks are restricting the availability of trade credit and are charging a penal rate ranging from 60% to 150% higher than our European competitors.

The UK banks acting in a oligopolistic way treat trade credit (bonds) as core debt, which it is not, it is a contingent obligation with a low risk.  The UK banks charge 3.75% plus an arrangement fee for each bank guarantee (bond) which takes the cost up to over 4%.  We have a number of companies in our group which are based in other countries.  We have recently re-banked a Swiss and German based company from our UK banks to UBS and Credit Suisse.  Our trade credit (bank bonding) facility has dropped from a cost of 4% with the UK banks to a cost of 1% with the Swiss banks.  With another company in our group based in Germany, we have been able to get a bonding facility from Commerce Bank backed by an insurance policy from Zurich Insurance which is costing us 1.5% compared to UK banks 4%.  Zurich charge 0.9% for insuring the bond and Commerce Bank charge 0.6% for issuing the bond, i.e. a total cost of 1.5%.

Unfortunately our Clyde Union Pump business is based in the UK.  Our major European competitors are based in Switzerland and Germany and as a result have a significant advantage in terms of trade credit availability and cost.

We have subsidiaries of our pump business in France and Canada where the governments provide assisted bonding schemes.

The French scheme is managed by COFACE - a world leading credit insurance and credit management provider.  This scheme is only open to companies incorporated in France and the bonds must be issued by a bank in France.  The French government counter-guarantee up to 85% of the value of the bond.

We can move work from our UK companies in Glasgow and Penistone to our factory in Annecy, France and benefit from the trade credit facilities provided by the French government assisted bonding scheme.  HSBC in France have agreed to issue these bonds at a cost of 2.35% vs. 4% in the UK.  Capacity is not an issue.

Similarly in Canada where the government assisted bonding scheme is being run by Export Development Canada.  EDC under-write 100% of the bonds issued under the Canadian scheme.  We have an arrangement with HSBC in Canada to issue these bonds at a cost of 2.35%.  Again work would have to be moved to our factory in Toronto to qualify for the Canadian scheme.

If we are unable to access competitive trade credit facilities in the UK we will be forced to move more of our business from the UK factories to France and Canada.  This is not something we wish to do but may be forced to in the absence of supportive trade credit facilities in the UK.

18 January 2011