UK: BRITAIN'S COMPUTER INDUSTRY BATTLES BACK.

UK: BRITAIN'S COMPUTER INDUSTRY BATTLES BACK. - Rising from seemingly barren soil, the new generation of PC companies in the UK is wooing the City and developing global strategies to compete with the US giants.

by Jane Bird.
Last Updated: 31 Aug 2010

Rising from seemingly barren soil, the new generation of PC companies in the UK is wooing the City and developing global strategies to compete with the US giants.

Elonex has come a long way since its founder, Israel Wetrin, began selling mail-order personal computers from his sitting-room in Finchley, north London, in April 1986, and placed his first half page of advertising in Personal Computer World magazine. The company, which plans to ship 200,000 PCs this year, forecasts profits of £10 million on sales of £150 million. With a gleaming new £5.5 million factory in Cumbernauld, an existing London plant, and 600 staff worldwide, Elonex is now the biggest computer manufacturing company owned in the UK.

Despite the impressive growth, however, Elonex accounted for only 3% of the UK PC market last year, according to International Data Corporation (IDC), the market research company. US players dominated the sector, led by Compaq with 12%, and IBM with 11%. Next came Dell with 8%, followed by Apple with 7%. Elonex, in eighth place, was the leading UK company, along with ICL and Digital.

It is a far cry from the early 1980s, when UK companies such as Apricot, Acorn and Sinclair topped the personal computer charts. During the past decade, Apricot's computer manufacturing business has been sold to Mitsubishi, Olivetti has taken over Acorn, and Sinclair has been swallowed up by Amstrad. Even ICL, the home-grown manufacturer of large computer systems, is now part of Fujitsu of Japan. Many other smaller UK PC companies have simply collapsed.

Elonex is one of a new generation of UK-based PC companies that has risen up in their place. The vast majority of these 300 companies are better termed assemblers than manufacturers. All PCs are made from standard components: even US giants such as IBM, Compaq and Dell use these building blocks to create their machines. In that sense, everyone is an 'assembler'. Unlike most UK-based PC assemblers, however, Elonex designs and manufactures its own electronic sub-systems. These are printed circuit boards at the heart of the PC and the various boards that control functions such as networking and screen display.

Whether assemblers or manufacturers, the question is can UK PC companies survive in the cut-throat PC market against the huge volumes and ultra-slim margins of the US giants? Elonex financial director Michael Spiro admits it is a tough challenge. 'Compaq sells more machines in a month than we do in a year,' he says.

Nevertheless, he is convinced that Elonex's expansion can continue.

In the past, one of the biggest problems for UK-based computer manufacturers was the relatively high cost of labour. Thanks to factory automation, this is no longer an issue. Labour accounts for just 5% of production costs. 'This may vary by up to 25% but, even so, labour only comprises 4% to 6% of the total production cost,' says Spiro. Partly for this reason, (proximity to lucrative European markets being the other main reason) the UK now has a host of factories owned by overseas players such as IBM, Compaq and Digital Equipment. Industry experts estimate that 70% of PCs bought in the UK are manufactured here.

The real problem for the smaller, UK-based vendors is one of product differentiation. Most of today's PCs are based on industry-standard components - processor chips, disk drives, monitors, printed circuit boards, casing and software, all of which come from the same handful of manufacturers in the US and the Far East. 'Suppliers have to differentiate themselves by marketing, brand image or quality,' says Simon Pearce, senior director at IDC. By rigorous testing, for example, they can build up a reputation for producing more reliable machines.

Small computer companies have the advantage of being able to move more nimbly than lumbering industry giants. Big is not necessarily beautiful in a field with such a fast pace of technological change, as last year's £5.4 billion loss at IBM demonstrated. 'In theory, global vendors can offer lower prices,' says Pearce. 'But in fact they are often unable to do so because their international infrastructure costs are so high. Companies such as Elonex can compete by keeping their overheads very lean.' Indigenous suppliers can also win by having a better understanding of local markets. They are not constrained by global strategies, says Pearce. 'National markets tend to be sufficiently weird and wonderful for the native suppliers to have the edge.' Moreover, there is often a tacit desire to buy from a native manufacturer, especially among government clients - an approach to procurement which has undoubtedly contributed to Elonex's success. 'In the early days, our market was mainly eccentrics, individualists, adventurists,' says Spiro. But now some 50% of sales are to government accounts such as the Bank of England, the Ministry of Defence, and the London Metropolitan Police.

UK-based suppliers may also be better placed to capitalise on the consumer market for PCs, which is by far the strongest growth sector. Brentwood-based Amstrad is the UK's pioneer in consumer computing. It recently strengthened its position with the £60 million acquisition of Viglin, another north-London PC maker. Amstrad's skill is in consumer packaging and marketing, but its sales channels have previously been confined to high-street retail outlets. The combination with Viglin's mail-order business could prove very successful.

But in the longer term, the PC market is going to get much tougher. As margins are squeezed, so manufacturers need ever higher volumes to stay profitable. The vicious price wars of two years ago have already taken their toll. The number of companies actively marketing PCs under their own brand name in the UK has tumbled from 500 to 300 during the past 18 months. With a maximum of around 20% difference between the cheapest and most expensive machines, it is becoming more difficult for larger corporations to justify choosing a small-scale supplier with no brand equity. 'Viglin and Elonex do have some brand equity,' says Pearce. 'But it will be increasingly difficult for small players to enter the market with whizz-bang new products.' UK companies that want to survive must expand abroad - larger volumes boost profits and increase buying power when purchasing components. This is essential when dealing with companies such as Intel, which supplies the microprocessors on which most of today's PCs are based, and Microsoft, which owns the industry-standard software. These companies can be persuaded to cut prices, or release details of new products in advance, in exchange for access to new markets. 'We've got to have something to offer them in return,' says Spiro.

Elonex already has operations abroad, with associate manufacturing companies in France and Belgium. Together with Switzerland and the Czech and Irish Republics, these territories will account for 25% of sales this year. But the really big overseas push is planned during the next 12 months - a new US plant capable of producing up to one million PCs annually. Elonex is currently considering a public flotation as a means to raise the $20 million to $30 million that such a venture would cost.

Crucial to the company's global strategy is the fact that in each country it will have the look and feel of a local player, especially in the US. 'We don't want to have the stigma of being a north-west-London company,' says Spiro. 'You're tarred with the same brush as all the UK companies that have come unstuck over there.' Products will be tailored for the national market, employees will be drawn from the local population, and manufacturing will take place on the spot. This also helps to respond rapidly to consumer demand.

'It's no good having supplies tied up on a ship that might take three weeks to arrive,' Spiro says. 'PC buyers want instant gratification, they don't want to wait.'

Raising funds has long been a problem for UK-based PC companies due to the traditionally hostile attitude to high technology among banks and venture capitalists. When Sir Clive Sinclair was looking for backing for a pioneering microprocessor company in the early 1990s, he began by trawling the UK institutions. 'We needed several million pounds and we couldn't get anyone interested in the UK,' he says.

In the end, the new venture, MTI, was backed by US institutions and is based in Seattle.

One solution to the financial problem is to be taken over by a large, rich multinational. The big brother gains by increased access to the innovative technology employed by its younger, smaller, more agile sibling. The small brother has lots more pocket money to play with.

This has worked well for ICL, says Alastair Kelly, managing director of the company's manufacturing business, Design 2 Distribution (D2D). 'It means our potential creditors know that we're very unlikely to go bust next week.' Another advantage is the free flow of staff between the two companies as they share expertise and learn from each other's manufacturing skills. D2D, which last year had sales of $400 million, employs some 2,000 people in its five factories near Manchester and at Kidsgrove in Staffordshire. Some 25% of its output was under contract to other computer manufacturers - a business that the company entered in 1990. Fujitsu has been so impressed with the speed of growth in this area, that it is about to begin contract manufacturing itself.

But there are few other such positive examples of the advantages of takeover - more often, the benefits of synergy are never fully realised. Even ICL got it wrong first time when it merged with STC. The merger was disbanded in the mid-1980s when the companies realised that their computer and telecoms businesses were not ready for convergence. Nor has Olivetti made much of Acorn, the Cambridge-based computer company that it acquired in 1985 for £15 million. On the plus side, the presence of Olivetti has enhanced the company's credibility with customers and suppliers and it has provided effective non-executive management, says Sam Wauchope, Acorn's managing director.

But he is disappointed at not having reaped the benefits of being part of a large international group. Olivetti has not actively promoted Acorn's products; until recently there was no joint effort on procurement of components; and there has been no synergy on product development. A similar story comes from EO, a Cambridge company with an innovative hand-held computer, which has languished in the hands of Olivetti and AT and T.

Takeover is not necessarily the best solution to gaining a global presence, says Wauchope. 'It is essential to get the right critical mass. But it doesn't have to be done through ownership.' Partnerships and joint ventures may be far more effective. Acorn has proved how well this can work with the company it set up with Apple and VLSI to develop and exploit its advanced RISC (reduced-instruction-set computer) processor technology. The company, Advanced RISC Machines, contributed £200,000 to Acorn's profits last year. 'We're exploiting technology invented in Cambridge on a world scale,' says Wauchope.

The good news for would-be, high-tech entrepreneurs is that the City seems to be warming to them. During the past year, for example, there have been three UK stock exchange flotations of companies specialising in the futuristic science of virtual reality.

Bob Booth, financial director of Tadpole Technology which designs and manufactures world-leading portable computers in Cambridge, says there has been a change of attitude in the past three years from the financial community. 'Previously it was relatively easy for the health-care sector to raise funds, but a lot more difficult in electronics. Now there is more willingness in the City to take a long-term view.' Tadpole, which obtained its first full listing in December 1992, was able to raise a further £6.8 million this June on the back of a half year loss of £1.3 million. The company has pioneered the market by swimming faster than the multinational corporations, and by keeping close to component suppliers such as NEC, Samsung and Hitachi. Originally founded under the Business Expansion Scheme in 1984, it is determined not to fall into the trap of so many other British companies and remain small. 'We're still a young company and we're putting substantial resources into development,' says Booth. 'We've got a lot to spend on marketing infrastructure and on putting the sales channels in place. You won't see your return immediately but we're going for the big one.' Analysts expect Tadpole's profits to soar to £2.5 million this year and £10 million in 1995 on the back of major contracts to build machines for IBM and Digital.

Investors at least seem convinced that entrepreneurial UK companies can carve out lucrative niches by keeping at the forefront of emerging technologies - the entrance fee is too high in established sectors. Even Elonex is investing heavily in R and D and has filed applications for more than 100 patents in the past three years. But the flipside of being at the leading edge, is that it is very risky. New high-tech companies are cash hungry and for every success there may be several failures. These companies are currently darlings of the City but no one knows how long that closeness will last.

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