Friday, 1 February 2008

Industry Structure – United Kingdom – Auto IPR: Increased Profitability Returns

Since the fracturing and effective collapse of British Leyland – selling on Jaguar and Land Rover to private and BAE interests – the UK’s auto-industry has been heavily reliant upon inward investment. At the VM level, that pattern was inaugurated by Nissan at Sunderland in the early 80s, followed latterly by Honda’s self sufficiency drive have been an Austin-Rover bed-fellow and more recently BMW’s nurturing of Mini and Rolls-Royce. Today we wait upon SAIC and the promise of Longbridge’s re-opening for a reborn (if Chinese) MG.

Such investments and operational know-how by world-class Japanese and German companies have undoubtedly re-energised what was once a rapidly faltering domestic industry to produce in recent years record production levels. Reports from the SMMT and other commentators highlight that the UK auto-industry is in rude health and in turn provides economic stimulation for parts and services suppliers for the ‘New Domestic’, employees and of course local economies. That cannot be denied, and given that the halcyon days of indigenous volume British car-making are long-gone, it is a strong economic industrial base that must be appreciated.

Whilst investment-auto-motives is purely focused on investment interests wherever they may be, and as such is politically impartial, we seek to ascertain how the UK (and it’s privately and publicly held companies) can best play a role in the future of an ever more global and eastward-shifting industry.

[Many of course think that the sale of Jaguar – Land Rover to TATA leaves nothing left of British volume manufacturing, but of course Ford is American even if its long-held association often felt otherwise. Of course UK industry observers have long recognised that the JLR sale is the last remnant of a desired post-industrial shift that’s been evident for 30 years].

Moving upstream UK Auto is, and has long been, centred on service and consulting sectors, specifically recognised for engineering R&D, design & development and projects talents – a function of diversified and improved labour-force education and the power of information technology. But when such skills are being rapidly organically emulated, or even more quickly bought-in and directly replicated (eg SAIC-Ricardo), what core competencies and differential services are left to offer?

Of course the likes of Ricardo, Lotus Engineering (and other similarly positioned Europeans like Pininfarina) have sought to exploit and try to control the shifting sands by working with the emerging eastern VMs, opening commercial and project offices to take advantage of the demand for western expertise. Unlike much of UK car-manufacture which sees an essential outflow of national revenue transformed into Yen or Euro company profits, the R&D and Engineering acumen still manages to provide an inward income stream converting Remnembi or Rupee into Sterling.

For nigh on a decade engineering consultancies have recognised that foreign VMs and new engineering services providers would soon be able to provide for themselves the fundamentals of basic development engineering resource – or “bums on seats engineering” as it’s known in the trade. For UK and western companies, this of course puts the onus more and more onto higher-value, increasingly technically complex and intellectually rigorous R&D services. This has been ‘conveniently’ matched by the call by advanced nations to seek technical solutions for the much debated topic of climate change and the focus subject of CO2 abatement.

The economic ramifications and opportunities are self evident, from the creation of new carbon trading bourses, governmental revenue earning taxation hindering those companies that do not partake in the sea-change and of course technical exploration, development, application and scalability – whether that be new solutions for naturally sourced clean energy (solar/wind/wave/bio-fuels etc) or man-made integrated powerplants (eg EVs, hybrids and fuel-cells utilising emerging L-ion or super-capacitor electrical storage forms)

From an investment perspective value creation is value creation wherever it may be, but within the UK and relative to C02 and new-energy requirements where exactly is that? Whilst we hear of US, European and even claimed Chinese advances the UK seems to hide its light under a bushel. Yes we’ve seen the commercialisation of university R&D spin-offs and even the privatisation of military research units for broader ‘real-world’ industrial and consumer application, but in truth little is heard about the conversion and commercial results of such IPR.

Of course commercial sensitivity plays an enormous role in what is released, but we think that the role of government has much to do to encourage investor publicity and subsequent commercialisation of such IPR. This has finally started with the transformation on 28.06.07 of what was the old DTI into 2 separate but conjoined departments individually focused upon:

1. Traditional Business – Dept for Business, Enterprise & Reg. Reform
2. IPR & Application – Dept for Innovation, Universities & Skills

Of course many will say it is still early days for the affects of such governmental change to take real economic effect. But in reality all stakeholders – from University Professors to Research Heads to Investment Banks and Venture Funds to Government Policy-makers and enablers need to work closely, intensely and quickly to ensure that a sound IPR commercialisation ‘delivery channel’ is formed and is then proven to work.

Names like Porton Capital’s (Tech Fund) and Circus Capital’s (Science & Innov Fund) and others are seen as leaders in this field and so, although understandably sensitive, could be used as case study examples of how to improve the efficacy and return margins of the IPR to Reality process.

The heart of the true UK auto-industry in effect has 2 chambers - that of the renowned niche vehicle makers (Lotus, Westfield, Bristol etc) - and that of an ever more important chamber of Innovation Transference. And in terms of ultimate commercialised global value the latter will have far more investment potential in terms of ROI and ROC than much of the labour intensive former that with typified by TVR we see relocate overseas.