Managing in a downturn
Now we are officially in a global recession, the big question is what are we going to do about it? Are engineering companies adapting and implementing new strategies to cope with the downturn?
Last November the recession began to hurt. The Bank of England quibbled over the exact moment that it had actually started (stating it was mid-2008), but the point is: how much worse can it get, how long will it take before recovery is in sight, and how can companies adapt to face a situation much worse than previous downturns and survive?
November was the turning point. People stopped blaming London newspapers and radio and television stations for exaggerating the impact of the credit crunch, of which there had been fewer signs in the regions so far. But the pace began to build up, with daily news of house repossessions and redundancies, an estimated 50,000 financial service workers likely to be out of work within months, a massive cut in bank rates, and retail prices hitting rock bottom.
Plummeting car sales forced Ford to go on a four-day week until Christmas, Toyota stopped nights shifts at Derby, Nissan gave up manufacturing two of its models in Sunderland, while Honda planned to close its Swindon factory in the first quarter of 2009. Rolls-Royce Motors decided to cut production and temporary staff - a sign that the crisis in global car making began to spread to the highest level of the luxury market. Rolls-Royce's top of the range Phantom coupe that sells for £300,000 had been relatively insulated so far from the global economic downturn. Those who bought cars like that weren't the sort of people to be affected by credit crunches.
Gloomy indicators for UK car industry
In the next few months the car industry could face a wave of lengthy closures and job losses unless the UK government is prepared to help. A substantial shutdown would also cause severe problems for the component supply chain.
Figures published by the Society of Motor Manufacturers and Traders (SMMT) show car production fell 25 per cent in October, the lowest October level since 1991, reflecting, said the SMMT, the rapid reduction in global demand for motor vehicles. American carmakers raised cash by selling subsidiaries that no longer fitted the main car business. GM and Ford sold shares in Suzuki and Mazda respectively.
The Confederation of British Industry's (CBI) deputy director, John Cridland, thinks the recession could be deeper and longer-lasting than predicted. "We are in a difficult and unprecedented time," says the Governor of the Bank of England, "but we will come out of recession and get back to a period of low and steady inflation and economic growth."
But how soon? The Bank believes recession will be with us until well into 2009. Some economists, and even the Chancellor, think it's likely to be nearer 2010. Markets expect interest rates to go below 2 per cent within a year, the lowest since 1964, but unemployment, expected to reach two million by the end of this year, may well rise to near three million in 2010.
Companies in London and the South East are likely to bear the brunt of the recession with as many as two in five jobs at risk. The renaissance of northern cities such as Manchester and Liverpool - and the relative boom in public sector jobs - could mean they are best placed to weather the oncoming storms. Construction and manufacturing are two sectors likely to be hardest hit with up to three-quarters of a million jobs at risk. Even with tax breaks and more help from banks, SMEs will continue to be hard-hit.
A report by Capital Economics warns that 665,000 service sector jobs will go, plus 90,000 in the financial sector, 485,000 in construction, 22,000 in manufac-turing and 100,000 in the public sector. The hardest hit areas this time will be the once affluent suburbs and towns where service sector jobs will go, says John Philpott, chief economist at the Chartered Institute of Personnel and Development. The south and east of England will bear the brunt.
A poll of over 1,000 senior executives by the Chartered Management Institute indicates that UK managers are calling for calm in the face of continued economic gloom, arguing that the temptation to make knee-jerk responses must be held in check.
A significant proportion of UK managers are still keen to take risks (33 per cent) or accept extra work (57 per cent). But many are not prepared to 'sit tight', with 60 per cent admitting they would be "tempted to move if the right offer came along". Even so, 55 per cent are optimistic about business prospects in the next 12 months.
Other significant findings include nearly one in three respondents reporting that their organisation has already frozen recruitment; nearly one in five are developing skills of core internal staff and eight out of ten argue that focusing on management and leadership skills will help them survive the recession. Nearly 70 per cent of managers say that organisations should focus on product innovation and service to stay afloat. Just over one in three favour investment, but the same proportion agrees that the best response is to cut costs.
Riding the rapids
Praesta, the executive coaching specialist, in topical report 'Riding the Rapids: How to navigate through turbulent times' recommends that when faced with day-to-day decisions and issues during extreme turbulence, the most effective leaders resist being subsumed by any specific situation or crisis by focusing on four things. These are: keeping a sense of perspective, setting priorities, having the right people around them, and leading from the front. Praesta says leaders stress the need to stay focused on four fundamental ways of informing decisions:
- get the best data and information you can;
- listen to others' views;
- have personal sounding boards;
- create personal space to think clearly on your own.
Like the Chartered Management Institute, management consultants McKinsey urge looking at cost cutting - and beyond. "Economies around the world are slowing down and companies are looking for ways to trim spending and improve the bottom line. Although information technology often represents a small fraction of the corporate cost base," a spokesman for McKinsey says, "senior executives inevitably turn their attention to IT budgets for substantial contributions. IT capabilities have fostered new sales channels, defined new customer segments, and even helped to create new sales models. Thus simplistic cuts, applied across the board, may endanger critical business priorities, from sales support to customer service - a message that should resonate even among corporate officers anxious to find quick savings.
"Discipline," Mckinsey warns, "tends to slip during a lengthy upturn in spending. Reducing pockets of unproductive expenditure will bring savings that help meet corporate cost targets."
Support for local companies
How effective are the Regional Development Agencies (RDAs) in supporting local companies? How effective can they be in the downturn? How do they see the Chancellor's Pre-Budget Report?
Speaking on behalf of the RDA network, Bryan Jackson, chairman of the East Midlands Development Agency, says: "We are refocusing our business support activity to help businesses across the nation at this time. Our activities include providing financial health checks, help with business resourcing efficiency and in finding new markets for export."
Terry Hodgkinson, chairman of Yorkshire Forward, says: "We welcome the move to bring forward £100m funding for regeneration schemes. As private sector-led public bodies, the RDAs not only have strong links into businesses through their day to day activities, they also have strong relationships with business organisations such as the Chambers of Commerce and the CBI."
Business Secretary Lord Mandelson says: "Access to finance is crucial for businesses to survive. Businesses across the country will now be able to obtain essential funding through their RDA to help them weather the economic storm. Working with the RDAs, we are doing all we can to support viable companies in our regions, which are struggling to access finance to get through these difficult times.
"This is just one part of a wider programme of measures to help small- and medium-sized enterprises facing credit constraints, including a new Small Business Finance Scheme to support up to £1bn of bank lending; a separate £1bn guarantee facility to support bank lending to small exporters, and a £50m fund to convert businesses debt into equity."
Whether starting up, already running, or aiming to grow and develop, local business links can help manage your finances, employ people, find customers, pay correct taxes, comply with legislation, and trade overseas. Many companies, large and small, will welcome the measures, but wait to see how effective they will be in practice.
Engineering sector playing it safe
Few engineering companies are prepared to reveal what, if any, strategies or new initiatives are planned or in operation to deal with the global economic downturn. "It is too early," says ABB in Zurich. "The big question is, how the crisis will affect the confidence of our customers and their financing ability. We note that some of our customers delay large investment decisions (both infrastructure and industry) due to market uncertainty, and our overdues have increased slightly. We have not had any order cancellations, but we do see some delays of projects in the tender phase.
"We of course benefit from our strong balance sheet and solid investment grade credit rating. So far, we have had minimal exposure to the financial institutions that went bankrupt. We keep watching our financial counterparts closely, and are prudent and conservative in investing our cash."
QinetiQ, the defence research company spun-off from the Ministry of Defence, plans to sell several non-core businesses, a tactic which if not directly connected, looks related to the global economic downturn.
"It's about releasing cash for future investment and is not about downsizing the business," says Graham Love, QinetiQ's chief executive.
During the recession, Logica, the IT and consulting group, plans to increasingly position itself as an IT outsourcing company to meet new demands. In past recessions outsourcing firms grew by proving they could save companies money.
The engineering company A E Harris, founded in Birmingham in 1880 by the great-grandfather of the current chairman, Russell Luckock, reckons to have survived ten recessions. "It's important to realise," says Luckock, "that you get a recession about every ten years and each and every one you go through will be different.
"I think we have enough irons in the fire with our customers to make sure we keep all our people in employment," he continues. "I don't believe it will be a deep recession, but I think there is a danger of talking ourselves into a deeper recession. Some of my customers are very busy at the moment, but you need to go out and get business.
"My advice to companies that are struggling at the moment is to draw in your horns. You have to cut salaries, remuneration and costs. However ruthless it may seem, you have to stay in business. The good times will come again."
Michael Foster, chief executive of Charter International, the group that owns ESAB welding and Howden gas handling equipment, hit record monthly revenue figures for June and July but in November issued a profit warning. Its share price - £10 last year, £5 last month and since closer to £2 - hardly does justice to a company still in good shape.
"We are seeing growth in South America, Russia and parts of south-east Asia. I've seen difficult times before," says Michael Foster, "and you learn that so long as you do the right things and watch your cash all things will pass.
"The problem is that people are sitting on their hands in the expectation that things will get cheaper, and that is stalling economic activity."