The collapse of the UK's biggest family-owned machine tool builder should become a classic case history of this recession, a tale of energy, error, cupidity - and waste.
Here's a story of our time. A Christmas Carol, almost, updated 149 years. By a lesser hand than the original, certainly, and shorn of all the uplifting optimism that characterised so much Victorian writing. It's not actually a Christmas story either. Yet it has its version of Scrooge, and it could well assist in the process of sobering up after the excesses of the plum pudding and the Queen's speech. It might encourage earnest reflection about where one is likely to be in Christmases to come.
On 14 July this year, Beaver Engineering Group of Norwich, the biggest family-owned machine tool builder in Britain, went into receivership. Some 80 jobs disappeared at a stroke, with all the knock-on effects which that implies for families and communities. The remaining 50 or so employees were kept on until early October when the company was sold to the Swiss machine tool manufacturer Mikron. Then most of them, too, lost their jobs. For chairman and founder Victor Balding, 77, and particularly for Anthony Balding, his son and successor as managing director, it was a tragedy of a deeper kind: a personal humiliation which threatened to sweep away the savings of more than one working lifetime.
The company's collapse was a grievous blow for Norwich as well. The city's manufacturing base is fairly small and of comparatively recent date. Beaver, which at its height employed fewer than 300, was never the biggest industrial undertaking in the vicinity. Yet over a period of 40 years it had acquired an importance that belied its size. It made sophisticated tools with a reputation for quality, it was a worldwide exporter, and a reservoir of high level engineering skills. It thus helped to balance a regional economy, heavily dependent on agriculture.
Now Beaver's manufacturing has gone overseas. All that's left in Norwich is a small outpost of a continental producer, consisting of a mere 15 technical and service personnel. At a national level Beaver's failure was one more nail in the coffin of the British machine tool industry. Perhaps, indeed, in the coffin of British manufacturing industry. The 1980s argument about whether the UK really needs a manufacturing sector - or whether services will suffice to fill the gap by mopping up unemployment - has naturally faded in the '90s, since services have taken a beating as well, but it has never been satisfactorily resolved. Certainly, manufacturers detect no greater sympathy in government for their own view, that manufacturing should be recognised as occupying a central place in the economy. "A lot more people live on the back of manufacturing than on the back of service industries," growls Tony Balding.
Balding is biased, of course. But plenty of his fellow manufacturers, including customers and even competitors, have been deeply saddened by his company's demise, and would fully support his arguments. Balding believes that "the Beaver situation" is a mirror image of the national situation. "The company should not have gone down," he insists with a thump on the arm of his chair. "It is the sort of company that's needed if we are going to have a successful economy." The fact that it went down, he says, "calls into question the viability of British manufacturing - full stop." Now that sounds like special pleading on a grand scale, but perhaps Balding has a point. The question is, could "the Beaver situation" have been avoided? Also whose actions might have prevented it?
The simple truth of the matter was that the bank pulled the plug. As usually happens in these cases the company was operating at a loss and the bank, being unable to see the prospect of an immediate return to profits, called in the overdraft. The directors then had no alternative but to invite the bank, the NatWest, to appoint receivers.
The figures suggest that Beaver had been on the slippery slope ever since 1987. In the 12 months to end-April that year the company (then called Balding Engineering) had reached a peak: turnover climbed to nigh on £11 million, and operating profit edged past the £1 million-mark, which translated into well over £700,000 before tax. The following year's turnover was more than £1 million lower and profit before tax crashed to £65,000. But 1987-88 might have been no more than a slight hiccup while management was preoccupied with a scheme for rejigging the capital structure of the company. It was this, incidentally, which brought about the change of name to Beaver.
At the time expansion was still very much in the air. In 1987-88 the overdraft doubled. In addition the company took out a bank loan to finance construction of a new branch factory in Peterborough. The next year it elected to sell its main factory in Sweet Briar Road, Norwich, and build anew on a greenfield site at Bowthorpe, on the edge of the city. Although turnover recovered slightly, 1988-89 proved to be the first of several years of mounting losses at the trading level. Inflated by interest charges, a £100,000 operating loss became a pre-tax loss of nearly £640,000. And the recession was not yet under way.
For Beaver that came immediately after the year-end. "We saw a significant decline in May '89," recalls Tony Balding, "which fell to 50% of normal by September, and never ever got back above that level." In 1990 losses were more than made good by the profit on the sale of the old Norwich factory. But the following year the loss on trading had reached £1 million. After exceptional write-offs and reorganisation costs relating to the move into its new home, Beaver's bottom line was £2.8 million to the bad. A little under 15 months later NatWest blew the whistle.
So what else is new? Beaver was clearly unwise or unlucky enough to get its timing badly wrong. It was spending money when it should have been consolidating and retrenching, and it paid the price. It was not the first business to have misjudged the cycle, and it surely won't be the last. C'est la vie.
But it wasn't as simple as that, Balding maintains. He accepts that errors were made. "There are things I would have done earlier or differently with 20:20 hindsight. Where we went wrong was to build assets. It would have been more beneficial to have gone for leasehold land, which would have freed up capital to go back into the business." But the decision to relocate within Norwich was not a mistake, he insists. A scheme to develop a retail park in the city created a unique opportunity to sell the relatively inefficient Sweet Briar Road works at a fat price, and roll the money over into a superb, purpose-built facility with ample cranage, wide gangways and a logical workflow. The new factory was omitted from the sale to Mikron, incidentally, and remains with the receivers.
Too late in the day Beaver "started to have a philosophy of being less self-reliant", of putting work out to subcontractors. Management also began to think about making something in addition to machine tools. However, "We didn't take any positive step down that road." Yet the 15 months preceding the receivership saw a lot of retrenchment. The Peterborough works (which built lathes, to set alongside the machining centres manufactured in Norwich) and a small sub-assembly plant at Halesworth, Suffolk, both closed down and their operations were absorbed into the main factory. There were redundancies in Norwich, too, and sales of surplus plant in addition to the write-offs which helped swell the losses of 1990-91.
During the next year the company struggled hard to get on terms, and not without success. With the virtual disappearance of the home market, exports were the only hope of salvation. In the late '80s these had fallen to around 20% of sales. In 1991-92 they climbed to 60%, Balding claims. And at the year-end - according to management's draft accounts - the company broke-even on trading. It remained heavily indebted to the bank, of course, to the tune of just under £2 million. But the greater part of this sum consisted of a building loan, and the overdraft had never been fully utilised.
Tony Balding doesn't blame the bank, he says, which has its own job to do. The shock was not exactly unexpected. He had lived under threat of receivership for quite a while: 12 months earlier NatWest had suggested that Beaver might like to find different bankers. Balding approached several other English clearers plus alternative sources of finance. Surprisingly, no one wanted to take on a loss-making, debt-laden manufacturer of machine tools. ("The sector has a very, very bad name," he admits.) So he had to put up with bank-appointed supervising accountants, Coopers and Lybrand, looking over his shoulder.
Yet it's transparent that Balding does blame the bank. "We should have been given longer," he complains. The company had two brand new CNC machining centres that had just been put on show - at Dusseldorf and Birmingham - and had attracted a lot of interest. "We'd taken £400,000 of orders." There were plans for "condensing" further, for selling plant and sub-contracting certain operations to eastern Europe, or maybe China, but that would have required a further £3-400,000 which the bank was not prepared to advance. Shortly before the axe fell Mikron (which used to sell Beaver machines under its own name in the German-speaking lands of central Europe), offered to put up £300,000 secured against the stock. Coopers rejected the suggestion.
There is, however, a more oppressive fiend in Balding's demonology and that's the Government. Beaver didn't want crutches, its former managers protest, almost in unison. "No way was the company a lame duck," cries one-time technical director Tony Jackson, now employed by Mikron as head of the surviving design team. The ex-Beaver executives all blame the Government for creating conditions that made survival impossible.
In times past, certainly, Balding/Beaver had shown itself fully capable of standing on its own feet. Much of its early development was driven by exports. The business was founded in Norwich back in 1951, as a jobbing engineering shop. Three or four years later, in order to even-out the work load - and although he had no experience of the machine tool industry - Victor Balding built a turret milling machine which found a ready market in the US. Through the 1960s and '70s the company joined in the industry's long march towards sophistication, via NC and CNC controls, automatic tool changing, etc. But in the late '70s, when it was a small but established producer of state-of-the-art tools, there came a crunch.
In 1978 the Baldings, father and son, visited the machine tool fair in Chicago to discover, as Tony Balding recalls, a "plethora" of Japanese bed-type machining centres on offer at the same price as the half-dozen inferior British knee-type products. "We were obsolete overnight." The company had a choice, either to compete or get out of the business. It chose the former, which meant new designs with more electronics, new cranes to lift components weighing 1.5 tons rather than 6 cwt, and higher quality. The challenge was met, so successfully that the business sailed through the 1979-82 period of recession. Indeed, 1980's profit of £600,000 before tax implied a return on capital employed in excess of 30%. Not until 1987 did ROCE struggle back to double figures.
A dozen and more years ago, of course, there was plenty of government money available to help fund "the technology of change". When that dried up, product development became much more burdensome to a small family business. Nevertheless Beaver continued to finance constant improvements in product and quality out of cash flow. It also managed to grow at better than 20% per annum through the mid-'80s, with only a modest overdraft. The first Peterborough factory was opened in 1984 and the Suffolk plant two years later - because, said Victor Balding, of the skills shortage in Norwich.
Having forced businesses to rely on their own resources, the Government then lost its grip on the economy. Unfortunately the only way to re-establish control was to crank up interest rates. "What the Government sees is the effect on margins, it doesn't see the effect on liquidity," Balding complains. "Interest at 15% and more just sucks working capital out of a company." But for that, he considers, Beaver might still be trading.
As it is, at the age of 46, Balding is having to start again - as a consultant. Inevitably there are money worries. True, he doesn't have to sweat about the mortgage on his Edwardian house which is roomy but not at all grand, but he feels a certain responsibility. Aside from the bank, the company's biggest creditor is the family. Its equity has already been lost. Balding reckons that, when the factory is sold, it might recover half the value of loans made to the company either directly or via the shareholder-directors' pension fund.
Balding senior has voiced concern about skills being thrown away. His son also feels "angry at the effect (of the company's failure) on a lot of people over many years". Some weeks ago he met two former workers in the street: they were going to try something else. "There's no future in engineering," they thought. Ex-sales director David Carter, who at the time of going to press was himself looking for a job, tells of one man who is now a security guard after 30 years in engineering.
Governments can't legislate against company failure. They can't hand out subsidies these days, and nor should they. But nor need they destroy by neglect. It used to be axiomatic that a primary function of (Tory) governments was to create the conditions in which British industry could thrive. In a perverse way the recession of 1979-82 furthered that end by making industry more efficient, even though it cut severely into the critical mass that many industrial sectors need for healthy operation. But what is happening today is simply a waste. If Beaver's former managers are only half correct, it might have saved the nation money, in the long run if not in the short, had the social security benefits incurred by its collapse been earlier diverted to pay the company's bank charges.
But whether this particular company could have been saved is not really the point. The point is that the right conditions for creating wealth cannot be met by policies aimed at pursuing zero inflation or tracking the Deutschmark, or defending any given exchange rate. If the same effort had been devoted to promoting wealth creation at source, the balance of payments - and hence the exchange rate - would have fallen into place.