Thursday, 30 October 2014
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Startups need ambition to help British manufacturing grow

Britain is bursting with exciting new technologies. Forty of them, from liquid air-powered engines to fuel made from CO2, were on display at the IMechE this week at the Cleantech Innovate showcase. And all the companies involved were making valiant efforts to overcome that great British problem of turning good ideas into profitable ventures.

The idea that Britain needs to rebalance its economy by growing its manufacturing export sector in order to create wealth and good jobs, has been drummed into us on a daily basis for over four years now. We need more entrepreneurs, we’re told, more investment in startup firms and more government help for new businesses.

All sensible ideas for tackling a genuine problem. However, if this week’s showcase is anything to go by, many technology startups are still struggling to attract the investment they need.

Everyone at the event had their own ideas as to why this is the case: investors and banks are too risk-averse, both since the financial crisis and in British culture in general; there’s a lack of technical expertise among investors and a lack of financial expertise among engineers; there’s too much bureaucracy in government schemes and too few tax incentives to invest in small businesses. One delegate even blamed a lack of ambition on the part of some startup firms to ask for the money they really needed to substantially build their businesses.

But even if the firms at Cleantech Innovate can access the money they need, this wouldn’t necessarily equal the new boom in British manufacturing output and jobs we’re hoping for. Many of the companies’ business plans involved licensing their technology, outsourcing manufacturing to foreign firms, or seeking a corporate buyout rather than building themselves into a big manufacturer.

You can’t necessarily blame companies for taking the non-UK manufacturing route. The nature of their technology and intended markets will help define the best way for them to commercialise and for some products it just wouldn’t make sense to build them here. Talk to ARM, whose chips are in mobile devices all over the world but doesn’t make any itself, or Dyson, a great British engineering success story that shipped its production abroad over ten years ago, and I’m sure they’d give you multiple reasons why these were the right decisions for them.

But there was something rather inspiring about the determination of one company at Cleantech Innovate, Libralato Engines, whose CEO made an explicit point of his desire to bring green manufacturing jobs to deprived parts of the country, and is presumably hoping some investors will respond to this emotional pull.

Other firms told me they would like to manufacture in the UK and plan to start by doing so but that it probably wouldn’t be sustainable in the long term. For many technology firms, Britain has the expertise and the supply chain to develop and build complex products in their early stages but high-volume costs, access to raw materials and the hassle of exporting can make it less attractive as the company expands.

But it often comes back to the issue of funding. Turning a small company into a big one can require huge amounts of capital, which banks just aren’t willing to offer at the moment. We’ve heard time and again that the government is leaning on the banks to get them lending but where’s the proof that it’s working?

I’m also increasingly inclined to believe that Britain is disadvantaged by its lack of a major multinational consumer/industrial technology player to compete with the likes of Siemens, Samsung and GE. If the banks won’t give you the money to expand then why not go to a company who can give you instant access to global reach? Unfortunately this will almost always mean ending up in foreign ownership.

If we want to see Britain increase manufacturing output and jobs on a large scale, and hold onto the wealth created by maintaining domestic ownership, we need to do more than just encourage startups. We need to make sure companies have the ambition and the ability to stay British and that our financial services sector is there to support them, not just make money for itself.


Readers' comments (20)

  • Seems a lot of people are missing the point. If you design you don't have to be the manufacturer you can subcontract it, and there are plenty of subcontractors in the UK willing to do so. The innovators need to go looking for these people to get their designs kicked off and into Production. These guys in particular specialise in low volume, perfect for start up. And I am sure they are more than willing to go to volume. After all they grow, and then the innovator could bring it back in house if they want. The attitude needs to change from the bandwagon mindset of "everything's cheaper in Asia!"

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  • Absolutely agree with the above, if that were the case then zero manufacturing would be done here. Increasingly with labour/transport costs rising the opposite is true. In addition many people who offshore never see the apparent benefits because of the lack of control and defects etc. The subcontractor point is also highly valid. If prototyping can be done here then we have the ability to innovate our way to full blown production! I would urge any of the companies mentioned in this article to redouble your efforts to maintain control and production here in the UK, collabarate amongst yourselves and with subcontractors. We can do this.

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  • When British manufacturing led the world, capitalism used to mean real investment in industry.
    Now it means speculation in resources and existing assets.
    There will be no 'rebalancing' towards manufacturing until manufacturing is rewarded better than speculation.
    We need a tax on high-frequency stock and commodity trading - a tax which our Prime Minister opposed when some in Europe wanted to introduce it.
    Also, perhaps a new (optional) type of limited company which imposes restrictions on share trading, for example insisting on a minimum term of ownership, or requiring each new owner to contribute a fee towards the firm's R&D budget.
    This would help to mitigate the downside of a floatation, which is normally to drive a firm towards 'quick-buckism'

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  • Went to the RAMM Museum in Exeter on Saturday. Our grandson was being awarded with a prize for Literature.
    GREAT!
    However, the museum we were sat in had recently been awarded £10 million, YES, £10,000,000 for "whatever".
    Could go along way in supporting start up ventures.

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  • A good example of what you are saying is a recent £1 million regional growth fund investment with ebac. This together with £6 million of private investment will create up to 200 jobs in a new factory making washing machines in the UK again, something that we had previously lost! I'd say that was a great investment and if the same sort of funding can go to ensure these startups remain British owned and manufacture here we would all benefit.

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  • This discussion is well worth having and you raise a key issue:

    "Many of the companies’ business plans involved licensing their technology, outsourcing manufacturing to foreign firms, or seeking a corporate buyout rather than building themselves into a big manufacturer."

    The real reason for this rarely emerges because very few people involved in a startup, and looking for funds, will hazard that process by voicing it.

    The mindset within investment organisations (banks, VC firms, angel funds etc) is that manufacture should be farmed out to cheap far east facilities. Modern manufacture is extremely efficient and this view is severely outdated, however, the various investment bodies do not employ any staff with relevant engineering experience and therefore have no relevant, up to date experience.

    If an engineering startup is looking for funding it is very likely that they will be well aware of the benefits of in-house manufacture, however, breathing a word of this to an investor will send them packing in short order hence the silence regarding this "unfortunate truth". We have witnessed the panic attacks that this induces even when discussing prototype manufacture.

    Far east manufacture is fading rapidly as a low cost option as the countries concerned now have rapidly expanding economies, living standards are rising and cheap labour will, before too long, be a thing of the past.

    What in-house manufacture actually means is:

    You get what you want

    You know what it is made from

    You remove a layer of goods inwards checking

    Design-manufacture interface issues are resolved instantly

    Concessions are resolved instantly

    Design changes are effortless

    Transport costs and delays are eliminated

    There is no queuing behind someone else's contract

    Key know-how is kept in-house

    The fix is for investment houses to employ non-executive directors with real experience of development from within the engineering industries.

    However.... this is not the whole problem. The common desire for a corporate buyout is due to the structure of VC and other investment funds. These generally have a closing (or maturation) date and conventional funds expect a significant return to accrue by this date. This is simply not possible if the intent is to develop a significant manufacturing entity and the only route is therefore a buyout. Proposing this as a business model can be the only way to get an investment source to engage.

    History gives us an alternative. Many historic engineering businesses from the 18th and 19th centuries were funded by wealthy individuals who had a passion for science and technology and were in for the long-haul. This model can still work as these people still exist. The VC industry is relatively recent and their business model is not viable if engineering growth is sought. A typical VC deal is that the company is handed over, a couple of years downstream, if everything is rosy, will result in the return of a very small part to the founders and the rest passed on via a corporate buyout. This is not appealing and the acceptance of terms like this smacks of desperation. As we once observed to a well known VC, is a business model based on investing only in the desperate actually a good idea?

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  • There are some great comments posted, but not Mr Fields. Does he really believe that in the present circumstances in the UK than anyone other that a school leaver living with Mum and Dad could afford to take a wage of such pittance.
    Perhaps he should try living on such a wage. Living in hovel and not being able to pay his bills.

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  • It's a great disappointment, and a worry, to hear so many negative experiences. As a high growth coach, I am working everyday with ambitious business owners who are moving their ideas forward. Times are tough, it's true, and the banks are very difficult to work with, but there is often a way for those that are not prepared to take no for an answer.

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  • Manufacturing is often a solution lead innovation or platform information. There are plenty of optimum (material efficient) designs that are awaiting manufacture technology. If small (manufacturing) companies can be encouraged to do R&D on their manufacturing then they can be the winners (rather than the currently backed govt. favourites/large companies). We have seen it happen; there are many good but neglected technologies that are ripe for the plucking.

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  • There seems to be an end to the interest in this.
    There did seem to be an idea that small manufacturing companies are required. But there seems to be a lack of govt support for them or a realisation that for disruptive innovation research support for them is required -- rather for large companies and the barriers of supply chains. Or perhaps (as of old) bringing back, or supporting, societies that support idea generation and innovation (mechanics, modelling or philosophical societies....).
    Hope some still reading this.
    Cheers

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