Whessoe's dedication to quality when building pressure vessels gave it kudos but left the firm vulnerable to competition. A new leadership forced it to rethink its strategy entirely and concentrate on a new core business of instrumentation.
When George Duncan was appointed a non-executive director at Whessoe in May 1986 there were two things that disturbed him. First, at the age of 53, he found that he was the youngest man in the boardroom. Second, much more serious, the company had no finance director. Duncan is a veteran in business circles. After running first Truman and then the Watney Mann breweries in the '70s he turned pluralist. Today, as well as being chairman of Whessoe, he is also at the helm of the Household Mortgage Corporation and another engineering group, ASW. He has a string of other non-executive roles in leading organisations, including Lloyds Bank and the group which publishes the Independent newspaper. 'Whessoe had never had anyone quite like Duncan on the board,' says company secretary and legal adviser Ken Mullen.'The firm had built its reputation on achieving an engineering result to the highest possible standard and by believing that everything else would look after itself.' Before Duncan arrived - he succeeded former Tory politician Lord Erroll as chairman in 1987 - relations between the company and the City financial institutions were strained. It had an up-and-down profits record and a reputation for producing unpleasant surprises. All that has now changed.
Over the past four years a radical reconstruction of the business has taken place 38e under a new, young management team led by Chris Fleetwood. Chairman Duncan lost no time in head-hunting Fleetwood from Courtaulds and appointing him Whessoe's first finance director for more than a decade.
Fleetwood, now 41, says: 'I brought the average age of the board down by about 15 years.' He emerged at the beginning of 1989 as chief executive, charged with leading the company out of impending financial crisis. Within nine months he had recruited his own new executive team: Jon Samuel as finance director, Ken Mullen as company secretary and legal adviser, and Clive Dennis to run what was then the core but troubled heavy engineering operation. All three were in their late thirties or early forties.
Whessoe has radically changed its business profile by dint of savage surgery and a string of overseas acquisitions. A 36-acre site at its headquarters in Darlington in the north of England is now a flattened wasteland; this was where the heart of the business - its heavy engineering fabrication plant - once stood. Fleetwood has also taken the group out of building modules for offshore oil rigs.
Meanwhile, Clive Dennis has recently been given the task of preparing the project engineering operation - covering large contracts with petrochemical plants, irrigation schemes and suchlike in some of the far flung corners of the world - for an outright sale.
'Such contracts can carry enormous risks for a company our size if something goes wrong,' Fleetwood explains. 'The projects business would fit much better within a much larger group.' The retrenchment cut Whessoe's yearly turnover by half, to under £50 million by the end of 1990. But at the beginning of that year the company had made its first important overseas acquisition. Its £1-million purchase of Coggins, an American instruments company, signalled Whessoe's intention of instigating a radical change in direction. It was the first of four overseas acquisitions in the field of instrumentation and controls.
Later this year the Norwegian government is expected to give its blessing for a fifth takeover, another instruments company called Autronica, based in Trondheim. Once that is completed, Whessoe's instruments business will have an annual turnover of about £70 million out of a group total of £110 million.
The balance of sales will come from its other core business, building piping systems for power stations and petrochemical projects around the world. This business, based in Derby, was originally acquired by Whessoe back in 1967, and now has operations in Australia and in the US.
Now the company, which once employed as many as 5,000 people on its heavy engineering site in Darlington alone, has just 450 employees throughout the UK and only 1,100 worldwide.
As far as the financial community is concerned, the remarkable feature of Whessoe's renaissance has been the way profits have continued to grow in each of the past five years despite the severity of the recession. The returns, £8.3 million for 1992, are more than double those of 1988. The stock-market value of the whole business, as low as £20 million two years ago, has lately been over the £100-million mark.
Restored relations with the City have enabled Duncan to tap the market for £22 million, via rights issues, to finance the acquisitions programme. 'Closure of the heavy engineering operation and a run down of 40e the offshore projects business freed up working capital and stopped the cash drain,' Fleetwood says. 'When I joined the firm there were £11 million of borrowings. When the rationalisation was complete we had £20 million in the bank. Now the businesses is cash positive.' In some respects it is not surprising that Whessoe has adapted so well to the changing industrial climate. After all, that is what it has been doing throughout its 200-year history.
Its origins go back to the start of Britain's Industrial Revolution. Founder William Kitchin owned a streetcorner ironmongery shop in Darlington, on the road leading to the tiny village of Whessoe. When Robert Stephenson built the first railway in the town it was only natural that Kitchin should become involved.
After building railway engines throughout the steam age, the company gravitated towards the gas-from-coal industry which began at the turn of the century. From there it moved into the petrochemical industry, and then to nuclear power stations.
Throughout these changes there was one common denominator running through the business: Whessoe's unflagging expertise in building pressure vessels - boilers for steam-driven trains, storage tanks for the oil and gas industry and ultimately the containers for the reactors in nuclear power stations.
'The heart of any chemical process is a pressure vessel,' Chris Fleetwood explains, 'and our skills in that area led us heavily into the nuclear industry.' Clive Dennis points out: 'Whessoe built the first ever nuclear reactor for a power station at Windscale. In fact we have built two-thirds of all the nuclear reactors in the UK. These are nothing more than very thick pressure vessels welded together on site.' Whessoe's dependence on nuclear programmes continually enhanced the group's culture of engineering excellence and helped promote its worldwide reputation among professional engineers.
'In the nuclear industry the quality demands were exceptionally high: we were taking welding technology to its limits,' Fleetwood explains. 'With hindsight we put too many eggs into the nuclear basket and so lost the very strong position we once had in conventional pressure vessels.' When the Government switched the nuclear programme from Advanced Gas Cooled Reactors (AGR) to Pressurised Water Reactors (PWR) Whessoe's vulnerability began to be exposed. The Sizewell power station contract for a reactor lining went elsewhere, while the Chernobyl disaster in April 1986 in the former Soviet Union put a blight on the whole nuclear programme.
'In nuclear, the quality demands are understandably very high and in the design and fabrication process they are almost overwhelming,' Westwood explains. 'We developed a psychology of quality which was fine for the nuclear business but was simply overkill for everything else.' When it came to attempting to replace the declining nuclear work with other business the company found it difficult to compete on price because of the very high cost base that had been created for nuclear applications. 'We had sold on reputation but we were in a recession. Price was the key issue and we found we could not compete,' Fleetwood says.
The crunch came in the summer of 1989 when the directors decided to close the site entirely because 42e of continued and increasing losses. 'It was a large fixed facility with a continual requirement to feed it with work and that became very difficult to do in a recession,' says Dennis. 'It was losing a large amount of money and really there was no alternative but to close it.' One part of the business was conserved, however, and transferred to a brand new plant at Newton Aycliffe near Darlington: this was the systems and controls business which the company had gradually developed over a period of 30 years.
The board had ripped the heart out of the old business, and had now identified the Newton Aycliffe venture as the new core business in instrumentation - the linchpin for creating a new Whessoe, supported by the piping systems division which is run by Dennis.
'It grew up out of the oil industry's need to have gauges on the top of the storage tanks we built for them,' explains Colin Turner who is in charge of the Newton Aycliffe plant. 'It was a sort of hobby business at the back of the old Darlington site. As the environmental and cost pressures on the oil industry increased, so gauging what is going on inside these tanks has increased in importance. The equipment we make is increasingly sophisticated and computer controlled.' Turner recalls how, on the old site, his business had five unions representing only 60 workers on the shopfloor. 'Because it was just a subset of a much larger plant we had tremendous problems getting anything done.' At the new site, Turner made a new beginning: offering the same terms and conditions for shopfloor workers as for the rest of his staff in return for agreement to end to all demarcation disputes. 'I have not lost an hour in an industrial relations dispute since we moved here two-and-a-half years ago,' he says.
A family of these instruments businesses is now being assembled by Whessoe in overseas markets: one in Italy, two in the US and now a further business in Norway. There is no reason to suppose that Fleetwood will stop there. The company has long had an international culture, with projects in places as remote as the Ascension Islands. It is now attempting to exploit that culture in a new way: it is planning to supply control equipment across a wide range of industrial processes. Many applications are concerned with safety and environmental protection.
Malcolm Burke, marketing director for the instruments division, says: 'When one of these companies joins Whessoe we clearly bring a lot to the party in terms of creating opportunities globally that they might not see independently. They are beginning to co-operate on product development and selling each other's products in their own markets. What we are seeing is the alliance of similar businesses enabling them to compete more effectively in international markets.' The Whessoe brand name helps that process. 'When we talk about the rationalisation we have had to make it sounds like a catalogue of woe,' says Fleetwood, 'but the company's reputation for engineering excellence remains intact and we intend to build on that.' The main board of the group is now a balanced blend of accountants - Fleetwood, Samuel and Duncan himself; and engineers - Dennis and Donald Wood - who have more experience in the old company culture.
Dennis is a local Darlington lad who did his apprenticeship with the company before going off to work elsewhere. Fleetwood enticed him back in 1989. Wood, 56, has been with the business 25 years and is chairman of the piping systems operation - though his main role at present is to travel the world looking for contracts and possible acquisitions. According to Fleetwood, Wood has played an integral part in the process of 'trying to re-model Whessoe'. He says, 'One of the dangers in that process is that you can lose a lot of the knowledge acquired by the business over many years,' he says. 'Donald's long association with the company has prevented us from doing that.' Wood can become quite lyrical about the pipework in a power station: 'To a layman it can seem like just an advanced form of plumbing. But these safety related systems can, as in the case of Sizewell, involve up to 50 kilometres of piping. You are dealing with enormous pressures and temperatures of up to 500oC which have to be contained in pipework which moves, expands and contracts like the veins and arteries in your body. It can move several inches as it gets from cold to hot and you have to make sure it lasts 30 years.' Aiton, the Derby-based pipes operation, was the one bit of the established Whessoe business which adapted well to change. It has won orders for gas-fired power stations to offset the loss of nuclear business and secured a number of contracts overseas as well. By acquiring Connex, a similar American company which has some of the best welding technology in the world, Aiton has extended its opportunities to bid for other power generation business.
'There are only about seven or eight companies worldwide who do what we do,' Wood stresses. 'In this business you only need five or six real opportunities every 10 years, each worth between £20 million and £30 million, to achieve success.' The Whessoe experience provides a case study of how a traditional engineering company can change its culture rapidly if the pressures to do so are strong enough and the leadership is there. Fleetwood himself stresses that, though his rapport with George Duncan was important when he first joined the group, it was in fact his predecessor, Bill Smart, who encouraged the rest of the directors to accept him as their new leader.
'We are now an engineering group driven by profit and performance,' Fleetwood says. 'It is no longer engineering for engineering's sake. We can still become a dominant player in our chosen markets, despite our relatively modest size. Management in industry tend to underestimate what is possible. We tend to look for incremental improvements of 5% or 10%. But in instrumentation it is possible to make those quantum leaps of 200% and that I feel is where our future should be.'