UK: GEC ALSTHOM - A MARRIAGE A LA JACK SPRAT.

UK: GEC ALSTHOM - A MARRIAGE A LA JACK SPRAT. - The merger of power giants has created a cross-Channel duo with global muscle.

by Simon Caulkin.
Last Updated: 31 Aug 2010

The merger of power giants has created a cross-Channel duo with global muscle.

It may not suit the Sun or some politicians, but in one area of national life the Europeanisation of Britain proceeds apace. Quietly and without fuss, British companies are being integrated into Europe. Over the last decade, France and Germany have emerged as Britain's fastest-growing markets for manufacturing exports. Now investment is following trade. Just as John Major is immersing himself in the notion of British manufacturing, a fresh dimension is emerging to blur past distinctions - a European manufacturing base. As companies struggle to find ways of matching their insular inheritance to the wider reality of the single market, new entities are emerging which owe little to traditional notions of national culture or company organisation. The consequences for industrial structures - and in the long term for the economy as a whole - are profound.

For example, you could hardly find a more quintessentially English engineering town than Rugby. Yet in four years its largest employer has metamorphosed from a stolidly British business into a world-scale company with 80,000 employees which is registered in Amsterdam, has administrative headquarters in Paris, presents its accounts in ecus, and as for nationality - well, what nationality is it? English? French? Anglo-French?

None of these things, says Pierre Bilger, chief executive of GEC Alsthom. The eponymous 50-50 shareholders in the £5-billion engineering joint venture, headquartered in Paris, are British GEC and French Alcatel-Alsthom, but GEC Alsthom itself is both and neither. Rather it is one of a new breed of Eurocompanies which regards the Continent as its home market and the world as its oyster. In the week-long seminars through which the company is running its senior managers, says Bilger, the automatic questions used to be about whether it was possible for French and British to live together in the same firm. No longer. 'After four years we have established our own identity. The questions we get now are about the future of this company and its world prospects.'

Four years ago there were two national power engineering champions, both respectably muscular at home but weaklings in world markets. Put them together, and, says analyst Peter Roe at Nikko Securities, one and one makes more than two. Voila an ambitious, fast-growing global challenger both in power generation and distribution, in which it is second only to ABB in size, and rail transportation, where the race is neck and neck between GEC Alsthom, Siemens and ABB. GEC Alsthom is the most visible in rail, however, as it builds the TGV, the undisputed leader in the high-speed sector. GEC Alsthom also possesses a shipyard, Chantiers de L'Atlantique, at St Nazaire, a market leader in cruise liners and liquid natural gas carriers. And it has an industrial business which includes factory automation.

While power engineering and rail equipment hardly set British pulses racing, in the global context they are huge industries, growing fast. Estimates are that world orders for power-generating capacity will total 700,000 MW during this decade, with Asia and the newly industrialising countries (provided they can organise financing) making the running. Like the other major power generation companies, GEC Alsthom booked record orders in 1992, with particular success in combined-cycle gas-turbine plant, the preferred technology of the moment. Its jewel in the crown is the recent 2,400 MW order for Black Point, Hong Kong, the largest combined-cycle power station outside Japan, worth an estimated $1 billion to the group. In switch-gear, too, GEC Alsthom has the right technologies for an electricity transmission market which is steadily growing alongside the new generating capacity.

The firm also has the essential technologies for an expanding transport market. British Rail may be a by-word for non-investment, but at European and international level the picture is one of burgeoning growth. Powered by the sleek TGV, of which 525 sets have been sold in 12 years, GEC Alsthom Transport notched up an estimated 30% increase in turnover last year. In France the company is about to deliver a new double-decker version of the high-speed train to boost capacity on existing routes. But GEC Alsthom has also sold the TGV to five other European countries, including Britain: with satisfying symbolism it is the maker of the complex Eurostar trainsets which will run through the Channel Tunnel - 'the hyphen between France and Britain', as Bilger elegantly puts it. Outside Europe, the TGV could also win orders from Texas, where a decision on a $6-billion project linking Dallas, Fort Worth and Austin is expected by the end of the year, and South Korea. All this adds up to a group-wide order book which now stands at 16 billion ecus (compared with 11 billion in 1989), three to five years' work in factory terms. 'The order book is very strong, and penetration into new territories offers good prospects for order intake and factory loading,' says Lord Weinstock, chairman of the supervisory board, although he admits that margins have been more difficult to raise. But last year's pre-tax profits of 430 million ecus on sales of 7.5 billion ecus were 'ahead of plan', according to Bilger, as the benefits of production and commercial integration start to be felt.

At the start, says Jim Cronin, one of the firm's two Paris-based deputy managing directors, seasoned industry watchers smugly predicted that GEC Alsthom would last a matter of months before dissolving in comic cross-channel misunderstanding. The company's senior managers knew it had arrived when rivals such as GE chairman Jack Welch, ABB's Percy Barnevik and Siemens chairman Karlheinz Kaske started turning up to give the new competitor a respectful once-over.

So far, GEC Alsthom looks like an advertisement for the benefits of the new Europe. The City likes the long-term prospects. Weinstock says: 'It has achieved the objects for which it was conceived in both technology and access to markets. We're very happy with it.' That hardly seemed the likely outcome in 1988, when the two separate companies were beset by the uncomfortable feeling that the world was changing faster than they were. In a way, it was a replay at international level of the forces that led to the amalgamation of English Electric and AEI into GEC in the 1960s.

On GEC's side, top managers Bob Davidson and Jim Cronin were aware that while the UK power-engineering group was profitable, it did no business in Europe and at world level was hardly a terrifying rival to the likes of GE, the newly combined ABB, Siemens in Germany and the Japanese. For a broad-line supplier, GEC's small size was a real disadvantage, as it was obliged to carry otherwise uneconomic capacity to cater for every type of order. Costs were therefore high, and offered little scope for reduction. The firm needed volume.

As GEC managers pondered their options, their attention finally turned to Alsthom, a French-oriented company which had emerged from electricity privatisation in the mid-1980s and had only recently started to develop an export business. It turned out that, unbeknown to each other, Alsthom and GEC had been courting the same partners for the same reasons. The two companies never met in competition because Alsthom, although bigger, was GEC's exact Francophone counterpart, strong at home and in French-speaking markets, but aware that it had no world role on its own. As soon as the first exploratory meeting took place in 1988, it was clear that the two were as complementary in both product and geographical terms as Jack Sprat and his wife. There was the added bonus that the approach of 1993 would make transnational mergers easier as well as more logical.

For a year, talks between the two sides were a well-kept secret. The companies' decision to merge was made public in early 1989 after an intense burst of activity when the negotiators hammered out a financial basis for the joint venture. 'Pierre (Bilger) and I began sitting opposite each other arguing about how much the businesses were worth and how we could bring them together,' recalls Cronin. 'We quickly realised it was such a good deal that we were actually sitting on the same side of the table working out how to convince the shareholders.'

Joint ventures have a chequered history. Failure to integrate the constituent parts, differing goals and levels of commitment by the partners, and failure to let the new company develop its own identity are the most common pitfalls. In other cases the supposed equal venture turns out to be a covert takeover as one partner tries to assert superiority over the other. The dangers of non-consummation and misunderstanding are, of course, all the greater for ventures which span national boundaries.

In GEC Alsthom's case, says Weinstock, the decision was soundly based. 'Both sides are fully committed to it; and the personalities involved are reasonable, intelligent and compatible.' In addition, some ground rules were usefully set by Brussels. A merger of this size needed not only permission from national governments, but also from the European Commission. To get the latter meant convincing the authorities that the new company really was an arm's-length venture, managerially independent from its shareholders. This was achieved by a set-up both simple and symmetrical. The holding company, incorporated for tax reasons in Amsterdam, has two equal shareholders who, having defined its scope as far as possible, pooled all their relevant businesses in the joint venture.

One quarter of GEC was swallowed up in the new company. GEC and Alcatel-Alsthom sit on the firm's top-tier supervisory board, appoint auditors and the three senior managers, and declare dividends. They get operating budgets and GEC-style monthly management accounts, but past that point have little direct say.

GEC Alsthom is master of its own strategy and resources and 'has no need to go to its parents for pocket money,' says Cronin. Nor does the group have to worry about stock markets, an important advantage in a long-cycle business such as power engineering. Cronin notes that there has been much less interference from shareholders than past experience might have suggested: phone calls from Lord Weinstock come at a rate of one a month instead of one a week, as in the past.

From this starting point, Bilger and his colleagues have welded together an organisation which, they claim, is no longer a joint venture but an international company in its own right. Indeed, Bilger says that after an initial period of accommodation - sorting out a common language (English, much to the relief of some British managers) and learning about the different identities - the company is now 'getting fantastic benefit from the regrouping of European skills'. Initially, top jobs were shared between English and French managers on a careful 50-50 basis. Now, Bilger claims, the only consideration is who is right for the job: future appointments at the top are as likely to be Spanish or German as French or English.

Europe-wide integration has been crucial to the new company to gain economies of scale. As Bilger acknowledges, this massive task has been eased by the fact that 'managers in both countries knew perfectly well that to go on a French or British manufacturing basis was hopeless'. It has also helped that in most of the company's seven divisions the lack of overlap in products, geographical markets and skills made the advantages of the merger exceptionally plain.

Thus, there was no conflict of interest in gas turbines, where Alsthom had been developing heavy machines for energy applications in partnership with GE, while GEC was a world leader in machinery for oil and gas pumping and for hostile environments generally. Alsthom had a boiler maker, GEC did not. In switch-gear, between them the partners had the two main technologies that the world is buying.

Alsthom was a leader in hydroelectric turbines, while GEC had none. 'So here again there was an area where we could sell with export guarantees from the British Government, using technology from France, bringing new work to the UK manufacturing base,' says Cronin. In transport, although both GEC and Alsthom are involved in metros and trainsets, there was no geographical conflict, and while GEC also had locomotives, Alsthom's flagship was the peerless TGV. Between them they had almost every aspect covered.

The one area where there was a serious problem was in steam turbines and generators, where the new company found itself with parallel products competing in the same markets. Moreover, it is a business where there is substantial world overcapacity. Mike Barrett, deputy managing director of the division explains: 'We had to find a way of bringing everything together into a single design base, at the same time taking out surplus capacity.'

Once existing orders had been met, the group had to begin selling products stamped neither GEC nor Alsthom, but GEC Alsthom. Even though the two companies' technologies came from the same family, this was, he admits, a pretty daunting task, and the single most substantial piece of restructuring which the company faced as a result of the merger.

It was made even more daunting when, the merger having just been completed, the British Government cancelled its entire nuclear and coal power-station building programme following electricity privatisation. At a stroke, this removed all projected workload for the plant at Larne, Northern Ireland, and most at Trafford Park, Manchester. After keeping Larne going for two years, the group finally closed it in 1991.

In total 3,500 jobs were lost, divided equally between France and the UK, as manufacturing has been concentrated at Belfort, eastern France, and Rugby. Both of these have benefited from considerable new investment - which would probably not have been an option under the previous ownership. Although costly in job terms, integration has allowed a large amount of surplus capacity to be taken out in both countries, and the division's cost base to be lowered. The division continues to drive down lead times: a measure of the improvement is the 1992 Manufacturing Effectiveness Award which GEC Alsthom Large Machines received last year.

All this has been hard and a high-pressure learning experience whose lessons have not been lost on the group as a whole. Many European mergers have failed, notes Bilger, because decisions have been taken which could not be justified on grounds of industrial logic. At GEC Alsthom, on the other hand, he says, 'We have had to be 100% more cautious, more careful to explain openly to everyone the reasons why certain decisions are being made - and be able to show that they are being made only because of industrial logic. The need to communicate in such a way is a tremendous discipline.'

These qualities will almost certainly be needed in the future. For all the company's new scale and muscle, the energy and transportation industries are still consolidating at world level. And GEC Alsthom has a lengthy shopping list. 'If the Italian government is privatising Nuovo Pignone, we'd like to buy it,' says Cronin, referring to the Italian power engineering company. In rail transportation, one of GEC Alsthom's first actions was to take over the struggling Spanish rail engineering concern and rationalise it as a quid pro quo for Spain's purchase of the TGV. The group's rail factories are now pretty well integrated: Spain makes part of BR's Networker trains, while controls for TGVs are manufactured in Preston.

In addition, GEC Alsthom tried to buy the railway equipment interests of Fiat of Italy, Fiat Ferroviaria, with which it has R and D and technical agreements. Although the talks stalled, it still has hopes in this direction. It is also bidding for the huge East German rail company Deutsche Waggonbau. If negotiations with the Treuhand privatisation agency are successful, GEC Alsthom will gain a significant foothold in the German railway equipment market and double the size of its $1.7 billion, 17,000 strong transport division. If the first two prospects look unlikely in the short term, such acquisitions, says Weinstock, 'are well within our financial resources'. They are also within its ambition - an unthinkable proposition four years ago.

The success of the GEC Alsthom marriage is a powerful example of what can be achieved through European courtship. Moreover, cultivating overseas relations is no longer an option for many British firms, it is a necessity if they are not to be left on the single market shelf.

Find this article useful?

Get more great articles like this in your inbox every lunchtime