UK: That demerger (1) - what it says about the British economy - ICI.

UK: That demerger (1) - what it says about the British economy - ICI. - Being a big, research-based company in Britain is a thankless task.

by Roger Eglin is managing editor of The Sunday Times.
Last Updated: 31 Aug 2010

Being a big, research-based company in Britain is a thankless task.

When it seemed likely that Lord Hanson would bid for ICI and apply his own version of the demerger treatment to the cornerstone of Britain's manufacturing industry, there were cries of foul from politicians, union leaders and other critics. Now that ICl's managers are enthusiastically promoting their own radical demerger plan, the critics have on the whole remained silent.

Presumably Lord Hanson now feels a prophet without honour in his own land. But we should all be grateful to him. What ICI might not have summoned up the courage to do on its own, it has done with his prodding. As the Financial Times's Lex column put it: "ICI's demerger plan is a splendid example of how a supposedly hidebound management can be rendered nimble by a sense of threat."

ICI is long overdue for radical treatment. The recent story has been one of steady job losses and a company seeking a strategy. The more traditional part of the company, the ICI of paints, explosives and heavy chemicals, employed just over 88,000 people to make profits of £313 million on sales of £8,701 million in 1991. ICI Bio (City wags will no doubt dub it Baby Bio after the plant fertiliser) had 35,500 people making more than twice as much profit on sales more than half those of the traditional ICI. No wonder there is enthusiasm for the split. Bio should achieve the stock market rating its performance and pharmaceutical and agrichemical products deserve, enabling it to raise finance more cheaply.

While Bio forges ahead, it is hard to work up the same enthusiasm for the heavy rump. Nevertheless ICI's future managing director, Ronnie Hampel, robustly defends what can be achieved through restructuring a business that was a powerful cash cow as recently as 1989. Despite the feeling that ICI will find the going tougher than the liberated Bio, the case for the demerger remains powerful. It should help cut through some of the bureaucracy that envelopes ICI. However, the demerger does not alter the basic problems that each business faces, says chairman Sir Denys Henderson, but "they can be addressed in sharper focus". Why then is Dr Razeen Sally, a 35e research associate at Insead, the European business school, so critical?

In a letter to the Financial Times, Sally says Henderson's argument that the companies will benefit from having separate technologies catering for discrete product lines is "spurious". Hoescht, Bayer and BASF, ICI's German rivals, says Sally, reap economies of scale by diffusing generic technologies, management expertise and vocational skills across broad product ranges and production processes. They also seek scale to leverage competitive advantage, he adds. In short when it comes to a German chemical company, big is definitely better.

He concedes that ICI may have no real alternative. Demerging, he says, may be "the least-worst option" longer term. The issue as he sees it is not so much ICI's size as the environment in which it operates. ICI, he says, has to exist on a home base "that leaves much to be desired for technology-driven large industrial firms". ICI finds itself squeezed by narrow shareholder financial pressure. In contrast, he argues, Germany's big three are "embedded as science-based, manufacturing firms in the conducive environment of Germany's social market economy."

Germany sustains its industry with close ties between companies, customers, suppliers, universities and research institutions allowing the rapid diffusion of technology and upgrading of human capital. His criticisms throw an altogether different light on the ICI demerger. What he's really saying is that running a big research based company is a tough enough job. Trying to do it in the British context, where neither the environment nor management capability is conducive, is a thankless task. Better to opt out of the big league by running something smaller and more manageable.

It's a pessimistic conclusion but it helps explain the contradiction between the conviction that Britain needs heavyweight industrial champions who can compete on the world stage and the general lack of enthusiasm for the way this country's big companies perform. The issue is not one of corporate size but the effectiveness of the British economy as a whole. Big or little, one suspects that the German way will produce greater corporate success irrespective of size.

Find this article useful?

Get more great articles like this in your inbox every lunchtime

When spying on your staff backfires

As Barclays' recently-scrapped tracking software shows, snooping on your colleagues is never a good idea....

A CEO’s guide to smart decision-making

You spend enough time doing it, but have you ever thought about how you do...

What Tinder can teach you about recruitment

How to make sure top talent swipes right on your business.

An Orwellian nightmare for mice: Pest control in the digital age

Case study: Rentokil’s smart mouse traps use real-time surveillance, transforming the company’s service offer.

Public failure can be the best thing that happens to you

But too often businesses stigmatise it.

Andrew Strauss: Leadership lessons from an international cricket captain

"It's more important to make the decision right than make the right decision."