Economic recovery is proving decidely elusive, particularly in London and the South East. Yet there are still signs of life in the UK economy, particularly in the regions. Scotland and Wales have both suffered proportionately less in this recession compared to the 1980-81 downturn. The painful restructuring that followed the collapse of indigenous industry in the early '80s has paid handsome dividends in the '90s. Scotland, for example, is now the biggest producer of computers while in Wales, companies have eagerly relocated along the M4 motorway. In both areas there's been an explosion of small businesses. In the first of our regional reports, Steward McIntosh looks at three Scottish companies that were helped by local development funding.
Lined up at the annual Sun Microsystems awards ceremony in California last year were the usual crowd of American high-tech giants and Sony, the £12.5 billion Japanese group. The only European company represented was Atlas Datacom, a £2-million minnow among the multinationals.
Though this tiny Scottish company, employing just 40 staff, has only been in business for four years, it won the award for providing the computer trunking for Sun's new Scottish plant in Linlithgow. If pockets of heavy unemployment in areas once dominated by Scotland's old smokestack industries (coal, shipbuilding and steel) are to be mopped up, it will be companies such as Atlas Datacom, Stoddard Carpets or Health Care International who will play a vital role.
Inward investment, job creation and training north of the Border is now largely handled by Scottish Enterprise and Highlands and Islands Enterprise, respectively the successors of the old Scottish Development Agency and the Highlands and Islands Development Board.
Around a third of Scottish Enterprise's first year budget of £446 million went on training, helping some 18,000 people to new jobs or training places and a further 11,200 to obtain qualifications. This reflects an important part of its remit, namely to bring "the development of the economy and the development of skills together".
But it is with its inward investment role that Scottish Enterprise captures the headlines. In 1991-92, it managed to attract some 59 new investments, worth £380 million all told. These should create around 4,800 new jobs and safeguard 1,100 existing ones.
Other agencies are also busy in the job creation field. British Coal Enterprise, the job-creation arm of the nationalised industry was an early backer of Atlas Datacom. With its aim to encourage new jobs in declining mining areas (Scotland has just one deep mine left in operation), it loaned £3,000 to Atlas Datacom to help it off the ground. Other grants followed as Atlas grew rapidly from its Glasgow base, fitting the computer trunking which is the lifeline of modern high-tech businesses, whether they are manufacturing or service concerns. Last year Atlas received a Department of Trade and Industry Regional Development Grant of £15,000 in return for employing five new members of staff. Later that year as turnover was leaping ahead, cash-flow problems persuaded British Coal to provide a further loan of £20,000 - and Strathclyde Regional Council threw in a further £25,000.
"The input was essential," says managing director Alistair Walker, a long-time computer cabling professional who prior to joining Atlas, had worked for Anixter, the world's largest supplier of the cabling. "Within a couple of years we grew from nothing to a turnover that was heading for £3 million and a staff or more than 30. The loans helped us to get over cash-flow problems - without them we would not have been able to recruit the staff or buy the equipment we needed for such rapid expansion. We would have stood still."
Aside from Sun, Atlas has built up an impressive client list. It provides trunking for Compaq computers being built at its Scottish plant and BP retains Atlas to maintain its in-house trunking. But the company sees its biggest area of expansion in Scotland's home-based financial services sector where clients include the Bank of Scotland and Standard Life.
The computer industry has been through a phase when the emphasis by the big manufacturers was on shifting boxes. The strategy was a success but the price is being paid by the customers who are waking up to the fact that they have purchased incompatible systems. Meanwhile a nightmarish spaghetti of cabling spills out from the walls and dangles from the ceilings. Computer trunking provides the answer to these problems. Previously exclusive systems can be harnessed together and the quantity of cabling reduced. The field is being revolutionised by the use of fibre optic cables which allow for the secure transfer of massive amounts of information. With most of the competition coming from south of the Border, Walker says that Datacom's Glasgow base provides the firm with a key competitive edge. "Once you have designed a good system for a client it all comes down to the expertise of your installation staff. We have an advantage there; we find that we can attract the 'bright sparks' of the business - electricians who get a kick out of operating with leading edge technology like fibre optics and stage-of-art trunking systems. We compete reasonably on price, but as a small firm we can't offer all of the economies of scale of larger rivals. So we score on local service." The company has committed itself to growth, setting itself a target of £8 to £10 million turnover within the next few years. To ensure that Atlas Datacom is fully wired for further expansion, there is an agreement with the DTI for a Regional Selective Assistance grant for the plant and buildings required for relocation.
While Atlas is a successful case of a small high-tech start-up, Stoddard Carpets has proved to be one of the most successful rescues ever mounted by the then Scottish Development Agency. Based in the small Renfrewshire town of Johnston - since 1862 - Stoddard began to run into trouble in the early '80s, notching up losses of over £4 million in two years. "We were a very, very badly managed company at that time - a family firm that was reluctant to change personnel if they didn't have the right name. It was heading for a 'clogs to clog' situation," says managing director Ralph Ellis.
A rescue bid was started involving an injection of fresh capital by the Scottish Development Agency. The SDA's capital - some £781,000 - was used to stabilise the company but as part of the deal the investors insisted on a major re-organisation. A new chairman was appointed, the SDA nominated a new non-executive director and Ellis was eventually promoted from a subsidiary to the managing director's post. "We then concentrated on three little tenets, which were to the effect that we would get back to the top of the tree by good design, good quality and good service," says Ellis - common business parlance maybe but, in Stoddard's case it happened to work very well.
By 1988 the company was making a profit of £4.6 million on a turnover of £58 million, boosted in part by two UK acquisitions: Mercia Weavers and Sekers International. By 1991, the company was back on the acquisition trail and purchased Louis de Poortere UK, the British branch of a major Belgian firm. As part of the deal, the Belgian company will use its sales force to market Stoddard's Axminster carpets on an exclusive basis throughout the European Community.
Earlier this year the company acquired BMK, one of Britain most famous carpet names. BMK's turnover last year was £18 million, which should contribute considerably to Stoddard's results next year. Over the last four years Stoddard Carpets has increased market share in the carpet sector from 5% to 6.2%. Ellis reckons to have spent £764,000 on research and development last year, a higher proportion of his turnover than most others in the sector.
Another plus for Stoddard is its location north of the Border. "We like to stress the Scottishness of the company," says Ellis (who is English). "We don't wave the haggis around, but Scotland has a name for quality in North America and we gain from that. In parts of Europe there is an image of the Scots as being a little bit Presbyterian - and hence giving value for money. This is the world HQ right here in Renfrewshire. That's very important to us."
The company's major market is now the EC where virtually all exports consist of contract work. "We're not selling a living room carpet to Frau Schmidt - we're selling a contract to Herr Schmidt who is the designer for a new international hotel, or some such," says Ellis. At home, the glitterati who grace the suites and lounges of hotels like Edinburgh's Balmoral and Calendonian, the Gleneagles in Perthshire or the Grand in Brighton, sip their drinks and strut their stuff on Stoddard carpets.
Recession did not hit Stoddard until 1991 when turnover dipped to £43 million and profits fell to £2.51 million. But Ellis takes it in his stride: "We're good at handling our money nowadays. Gearing is down to under 2% and our management consists mainly of the people who led the fight back from the brink in the early '80s." The experience of dealing with recession then helped management to cope much better this time around. Redundancies have been avoided and the workforce of 630 in Johnston remains unchanged (with 1,100 in the group as a whole). Looking back over the last decade, Ellis rates the SDA's role in insisting on changes as important as the initial cash injection. "They made us professionalise ourselves. They gave us the cash to get through the dark days - and they encouraged us to set up the organisation that would get us through the current recession." The SDA even got its £781,713 back, and more - they made a profit of some £206,000 on the investment.
But in the long term the Scottish economy simply cannot do without substantial inward investment, which has consistently proved to be a major job creator. Scotland has more than its fair share of electronics companies and is now branching out into new areas. Perhaps the most spectacular new investment decision in recent years has been Health Care International's (HCI) £180-million private hospital in Clydebank.
HCI is the brainchild of two Boston doctors, Ray Leavey and Angelo Eraklis, surgeons at the city's Children's Hospital Medical Centre. Their aim is to serve patients with complex and severe illnesses that can't be properly treated in their own countries. Unveiling the plans exactly a year ago, Eraklis said: "Many countries in Africa, Asia and Southern Europe lack the facilities for organ transplants, complex cardiac diseases and (cancer) problems. Even in western and northern Europe, where advanced medical care exists, demand far outstrips supply." Patients from these countries will be whisked to the new hospital from nearby Glasgow airport where the facilities are also being upgraded.
The Government - in the shape of the Treasury, Scottish Enterprise and the Scottish Office - will not reveal how much public money has been poured into the project. Incentives include enterprise zone status (the deal was signed at the 11th hour before zone status expired), and at least £8 million for de-contamination of the site, formerly an old asbestos works.
Then there is the panoply of regional grants and loans, training and business development services available. Estimates for total public funding have ranged up to £25 million. But this seems a fair price for a project that will create some 4,000 jobs, of which 1,800 will be directly employed at the hospital. "It is the largest inward investment we have ever had through Locate in Scotland," says John Laydon, Scottish Enterprise's head of service industries.
In return, HCI will, by 1994, provide 260 high-tech surgical beds and 16 operating theatres for the international medical market, £25 million in equipment, 450,000 sq ft of highly serviced hospital accommodation and a 125,000 sq ft hotel for patients and visitors. The facilities would make an NHS consultant blanch with envy: three radiographic rooms, two nuclear medicine rooms, clinical laboratories, two ultrasound rooms, blood banking, and facilities for bone marrow, liver and kidney transplants.
The opportunities for suppliers are enormous - everything from catering to computers, pharmaceuticals to foreign exchange services, cleaning materials to coronary care equipment. Work is well advanced on the new hospital, located on the north bank of the Clyde. Soon after the scheme was unveiled, the John Laing construction group won the £80 million contract to build the 56,500 square metre complex on the 147-acre site. No wonder the Government worked hard to win HCI for Scotland: the knock-on effects and potential for "critical mass" are enormous.
Dunbartonshire Enterprise (a local enterprise company which is part of the Scottish Enterprise network) has set up a liaison office to encourage the sourcing of supplies from the immediate area, and from the UK as a whole. "The door is wide open - but nobody is knocking on it. I thought I was going to be swamped, but I could count on one hand the number of credible firms that have come forward with serious offers of supplies," says project manager David MacAulay at Dunbartonshire Enterprise.
"We get more serious inquiries from the US than from the UK. There's no point in simply sending in a bundle of product brochures and hoping that one of them will attract the attention of an HCI procurement executive. Scottish and UK firms have got to sit down and talk to HCI, find out what their needs are and tailor their goods and services accordingly. I guess that the reluctance is all part of the British disease - an apparent inability by business to get off its backside and seize new opportunities."
HCI has indicated that there will be a bias towards local sourcing - but only if it can meet their exacting standards. Where potential suppliers fall below the HCI criteria, Dunbartonshire Enterprise will help with improving standards. The tool-kit of possible assistance includes help with marketing, management development, advice on achieving the BS5750 quality standard, regional grants and loans, and help with identifying and filling training needs. "Local enterprise companies have the advantage of offering a holistic and integrated approach to business problems which simply wasn't available south of the border," says MacAulay. A training needs analysis is identifying skill gaps in the local labour pool which will have to be plugged to ensure that as many staff as possible can be sourced locally. MacAulay is in no doubt that the public will get its money's worth from the investment: "Most service sector start-ups are merely churning. But an operation like this, which is internationally tradable, is as useful as selling cars to Germany. Firstly, you get a substantial number of high-quality jobs. Secondly, additional money comes into the area. Thirdly, it earns foreign currency. It all adds up to a big impact on Scotland plc - that's the reason this project was kept alive."
All it needs now is for a few of Scotland's plcs, and their competitors from south of the Border, to overcome their lethargy and win a share of the action.