UK: Low-profile Smiths has an exemplary way with recession and the City.

UK: Low-profile Smiths has an exemplary way with recession and the City. - London's leafy suburbia is hardly the first place you'd look for the forging of Britain's industrial revival. But set amidst the dentists' and doctors' surgeries, the solidly resp

by Helen Kay.
Last Updated: 31 Aug 2010

London's leafy suburbia is hardly the first place you'd look for the forging of Britain's industrial revival. But set amidst the dentists' and doctors' surgeries, the solidly respectable 1920s housing and local Sainsbury's, is the headquarters of Smiths Industries, unsung hero of the recession and surprise inhabitant of the Finchley Road. With a portfolio of products that spans airborne electronics, flexible hosing, plastic tracheal tubes and catheters, Smiths has achieved what many a more glamorous and high profile company has found impossible. It has defied the recession and kept profits intact.

The 1990-91 profits, at £120.3 million, repeated the record of the previous year, but Smiths did more than maintain its margins. Against a background of difficulty in all its major markets, the company held on to its customers. Last year saw group turnover reduced from £673 million to £655 million, a drop of just 2.67%. Even more impressively, property disposals, which had boosted the 1990 profits by over £5 million, accounted for less than £1 million in 1991. Strip out this income and the real measure of Smiths' achievement is apparent: in the capable hands of chairman and chief executive Roger Hurn, it produced a 4% increase on its earlier profit performance.

The well deserved accolades of the City have earned the company its current market capitalisation of nearly £800 million, but they have so far done little to bring it more public acclaim. Yet that too may change. Very shortly the corporate logo will appear in public loos all round the land.

The warm-air hand dryer which is destined to bring the SI trademark to the man on the Clapham lavatory is something of a departure from its backstage presence, but completely consistent with Smiths' knack for lateral thinking. Founded in 1851 by Samuel Smith, a clock and watchmaker who set up shop in Newington Causeway, it prospered by dint of translating existing technology into other contexts. Though Smith and his son were sound horologists - indeed, Scott sang the praises of the traveller's watch which he took to the Antarctic - what distinguished them was the ability to turn their inventive spirit to other applications. Allan Gordon Smith, Samuel's grandson, was responsible for designing a mileometer and, at Edward VII's request, invented the first British speedometer, which was duly installed in the monarch's Mercedes.

In 1904, Allan Smith branched out into the motor accessory market and then into altimeters, when aviation took off. The company later pulled out of clocks and car parts. but to this day it remains a significant player in the aerospace business. With turnover of £431 million in 1991, avionics supplies two-thirds of Smith's revenue and half of its profits.

Expansion through associated activities accounts for the company's other core markets. A small research business acquired as part of a package deal in 1958 took Smiths into healthcare, where Portland Plastics, renamed Portex in 1967, has since become its flagship. The medical systems group (SIMS) now generates nearly 20% of Smiths' total turnover and a fast growing chunk of its profits.

The industrials group began in like fashion, as a spin-off from Smiths' aerospace contracts. Together with a hotchpotch of unrelated engineering products - fans, hydraulics and so forth - the manufacture of high integrity hoses and cable protection systems for advanced technology industries now contributes some £16 million to profits.

This motley structure might be something of a nightmare to manage, were it not for the hands-off philosophy which Hurn espouses. It's 'a devolved, decent style which generally means that the people running the business are responsible for it', he argues. In practice, Hurn delegates responsibility for the specific sectors of business to three group chairmen who, in turn, devolve the day-to-day operations upon the managing directors of the various subsidiaries. Jack Crone, MD of home security company Environmental Controls, explains: 'Each year each of us puts a budget before the board and, provided it's acceptable, we're left to get on with it.' Crone gives a weekly report, 'maybe four sentences', to Ron Williams, chairman of the industrials group, but 'If I-do fail, Smiths will give me what they call "assistance"', he chuckles.

The 'high degree of freedom vested in its local leaders' is a crucial strength, aerospace chairman Norman Barber believes. A burly figure whose six-foot-plus frame seems at odds with his slow, almost hesitant manner, he adds, 'In parallel with that is a very strong flow of financial information from the businesses into the centre. It means we have a finger on the pulse of cash, sales, orders and profits.'

The five aerospace centres in the US and five in the UK which comprise Barber's particular empire have between them a healthy share of the military and civil avionics market. They serve 30 types of commercial aircraft and virtually every US military plane. Barber concedes that the current downturn in military budgets will make things more difficult, but his many years at British Aerospace make him no stranger to trouble. He is positively bullish about Smiths' prospects. 'The one thing the Gulf War showed was that technology in planes was essential,' he reasons, and points to the significant number of retro-fit contracts which the company has secured.

Mid-life updates of existing aircraft like the C141 are one source of revenue. Smiths has also pursued joint European projects such as the European Fighter Aircraft. 'Though it's going to be the subject of much controversy and international debate', Barber remarks, 'it will actually give us a technological boost.

In the civil aviation sphere, which offers the most immediate opportunities for business, he is keen to 'get a reasonable route into Airbus'. So far Smiths has been unable to break the Franco-German hold on cockpit systems for reasons that have more to do with politics than the quality of its products.

Such obstacles have not impeded its successful tender for work on the Boeing 777. A comparatively small but profitable involvement on the 737 fostered good relations with the US aircraft manufacturer, and Smiths has now been entrusted with a major contract to supply three electronic systems. The company has committed some $60 million of its own money to R and D over the next three years and is clearly excited by the project. The Boeing 777 is on everyone's lips.

Though the short term may be sticky for the avionics business, the long-term prognostications look good. But precisely because Smiths has such a diversity of interests, it is better placed than most of its competitors to shift its emphasis. Hurn anticipates that 'In 10 years' time there will be a substantial change in the weightings. I don't know what that will be and I don't terribly mind which of the groups gets the next major opportunity for expansion,' he adds. It's clear from his comments a few minutes later that he has his sights set on the medical systems group; 'we could easily be led out of the recession by healthcare,' he notes.

Certainly, with a growing and greying world population, SIMS looks set to flourish. It is already well established in the US, where Concord Laboratories, acquired in 1979, significantly added to its product range. Under the Concord/Portex label Smiths has coordinated its manufacturing and marketing functions to service the US, UK and its overseas markets. Japan has also proved a lucrative customer for Portex goods and in 1991 Smiths took a 24.5% stake in Japan Medico, its main local distributor.

However, group chairman George Kennedy, a soft-spoken Scot whose shirtsleeves and swirling multi-coloured tie suggest a man more flamboyant than his fellow chairmen, also has his eye on eastern Europe. It's a 'fantastic opportunity', he thinks. Kennedy has already been cultivating contacts in Russia, where SIMS installed a plant in 1976 to manufacture the Portex range of products. 'We eventually got an invitation to see it,' he laughs, clearly amused by the dilapidated state in which he found it when he finally got access.

Smiths is strategically placed to reach new overseas markets, but it has also benefited from changes in the markets it currently serves. The risks of cross infection have been highlighted in recent years, with a corresponding increase in demand for disposable products.

Moreover, the trend towards higher technology means greater opportunities for adding value. The 'smart' catheter, for example, has electronic sensors which provide information only surgery could earlier have supplied. The Hythe-based Portex UK, with its ranks of women in lab coats and caps- all part of the controlled environment - has just introduced one such smart catheter to its range.

Tubes of a rather different kind preoccupy Williams in his capacity as head of the industrials group. In reality the two sectors are not as unrelated as their product lines suggest; engineering, as Kennedy points out, is common to the development of medical devices and the design of the flexible ducting which comprises the primary business of Williams' group.

If there's a semiotics of neckwear at Smiths, his tasteful floral number places Williams midway between Kennedy and the more conventional Barber, who sports a discreetly patterned red silk. A Welshman whose origins are obvious from the lilt of his voice. Williams joins Smiths in 1959 as chief accountant of the Anglo Celtic Watch Company. He has subsequently risen through the ranks to his present appointment. He is responsible for supervising 14 manufacturing operations and six additional distribution points.

Like Barber, Williams faces a decline in defence demand, though civil applications in aircraft and the rail traction industry have helped to offset the fall. Last year's purchase of the US-based Flexible Technologies, a manufacturer of ducting for both commercial and consumer use, has further boosted Smiths' interconnect business. With three product-related firms in the UK, US and Germany, half the industrial group's turnover is now generated outside Britain.

Though trading conditions have been tough of late, the seven engineering companies have also maintained acceptable profits. Reduced overheads and increased exports have enabled the fan, hydraulics and ceramics manufacturers to weather the storm, while a move into passive infra-red lighting some four years ago has proved a godsend to Environmental Controls, the only consumer company in the Smiths portfolio. Crone bemoans the stagnating sales of the last two years but cheerfully notes the first signs of an upturn.

In fact the industrials group has suffered less than aerospace, where job cuts of 1,100 have reduced manning levels to 7,300 and the total Smiths complement to 11,800 from a 1989 high of nearly 14,000. Hurn expects that there will be further redundancies before the recession ends, though it is obviously not a prospect he relishes.

An intensely patriotic man, for whom Smiths' British roots are a source of profound satisfaction, Hurn spent two years as an engineering apprentice at Rolls-Royce, before joining the motor accessories division in 1958. 'I was mad keen on cars,' he recalls, but no motor mechanic it transpired. When Smiths gave him the chance to be an export manager, he jumped at something that 'sounded a lot more exotic than living in Crewe'.

Twenty-three years later Hurn was appointed chief executive, a position he has held for the last 10 years. It's a length of service which seems common at Smiths; you're still a new boy if all you can claim is a decade or two. In November 1991 Hurn took the unusual step of assuming the chairmanship as well, in a reversal of the present trend to split the two functions. He has thus become the sole public face of the company, a position in which he may find it hard to safeguard the privacy he values.

'The board asked me to assume the role,' he hastens to explain, lest accusations of a soaring ego should follow. However, being 'of the school that believes 60 is a good age to leave', Hurn anticipates that the functions will eventually be split once more 'as part of the succession planning for the top'. 'A company combining the two roles must rely very heavily on its non-executives to monitor it,' he adds. 'We have an evenly split board and the non-executive directors are all industrial heavyweights. That is the greatest safeguard against premature senile dementia on my part going undetected for long.'

Far from being prematurely senile, Hurn evinces a quick and confident intelligence, but he is conscious of cutting the ladder behind him. These days Smiths is 'taking in fewer apprentices with tool room skills', he confesses. Future chief executives won't be culled from the Rolls-Royce assembly line; they'll need a degree in electronic engineering at the very least.

Higher entry qualifications, specialised training and retraining programmes have all been introduced to satisfy the progressive rise in the level of scientific and technical capabilities. As Hurn wryly remarks, 'Everybody actually needs a mid-life update'; it's not just appropriate for planes. At Smiths, however, training, like everything else, is entirely decentralised and therefore the responsibility of the individual MDs.

Bill Talley, president of the Florham Park avionics facility in New Jersey, takes such duties very seriously. The training of staff is the key issue of the decade, he declares. Talley has arranged for every employee to receive 12 hours of training in relevant skills and last year implemented a similar programme, called 'Pump up for Productivity' with characteristic American exuberance.

At Environmental Controls the enterprising Crone goes so far as to track the careers of promising graduates after they've left the company. Later, when they've reaped experience with another employer, he tries to woo them back. It's a 'sound return on investment', he argues, 'especially on an investment that's not entirely Smiths'. Nevertheless, not all MDs are necessarily so committed to the development of staff, and in this respect at any rate Smiths' decentralised training policy carries some risk. 'The difficult thing is to blend the people with the profits,' as Hurn readily admits. Having improved margins right across the group in the current economic climate, he has certainly got the profits right and can afford to feel pleased.

Hurn is also in the enviable position of sitting on a £79-million cash pile - no Everest maybe, but a healthy little peak to which many a debt-laden company might aspire. He clearly has plans for spending some of this money, should the recession produce 'the right opportunity at a sensible price'. No specific prospects are mentioned, but medical and industrial firms in Europe can expect to feel the weight of his gate.

As for Hurn's ambitions nearer home, 'It would be nice to be in the FT100. But whenever it looks likely, there's another privatisation,' he adds wistfully, 'and we get knocked down the list'. It should be some consolation to think that dispensing with paper towels in public loos may yet secure a role in the pink paper for the backstage boys at Smiths.

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