Does it matter that a Spanish company owns and runs our main airports? If
French companies own our power and water companies? What are we to make of
General Electric snapping up the aerospace division of Smiths Group last
month? The openness of the UK corporate sector to foreign ownership often
amazes commentators abroad. After all the Americans will not let foreigners
buy airlines, television networks or any business remotely connected with
security. France protect eleven sectors from foreign contractors, including
casinos and food giant Danone. Spain is fighting a last-ditch battle to stop
Eon of Germany buying Endesa, Spain's national energy champion. British
businesses and political leaders are generally comfortable about this state
of affairs. Even when the state-run Russian energy company Gazprom expressed
an interest in buying Centrica last year, Tony Blair ruled out any
possibility that the government would block the bid.
Rescued by the Japanese
The bottom line is that it is costly to be xenophobic in matters of
economics. Take the UK car industry as an example. Under British ownership
the industry failed to meet the challenges of international competition. We
didn't do ourselves any favours by merging all our small weak competitors
into a large weak competitor British Leyland, which at one time was the
third largest car company in the world, in the hope that one national
champion would enjoy "critical mass", "global reach" or any other industrial
policy cliché you care to mention. In 1972 1.9 million passenger cars were
produced in the UK. Ten years on this output had collapsed to below 0.9
million cars as feeble management and militant workers conspired to destroy
the industry. Then came the renaissance. First Nissan came to Sunderland to
build a plant that is still the most efficient in Europe, then Toyota set up
in Derbyshire and Honda in Swindon. Today, the largest viable car firms in
the UK have Japanese ownership, management and design. In 2005 Nissan
produced 315,000 cars, the UK's largest producer, Toyota, Britain's second
largest producer made 264,000 and Honda, the fifth largest, rolled out
187,000 units. In total, 1.6 million cars were produced in the UK in 2005.
"The Wimbledon Effect" a net positive in The City
This is an example of a successful foreign investment story. A nation's
economic objective is to enhance the added value created in Britain. We can
only add value by having skills and capabilities which are better than those
of our international competitors. Accordingly we should welcome foreign
ownership when it adds to skills and capabilities. It follows that we should
not be disturbed by the fact that much of what is done in the City of London
is done by firms with foreign parents.
Ownership may have been transferred in the last 20 years, but London is
still where the value is added.
The UK has benefited enormously from its open economic borders, free markets
and its welcoming of foreign capital and talent. Free movement of capital
and talent has given Britain a unique selling point and a real competitive
advantage. Indeed London's success as a financial centre can be described as
the "Wimbledon effect". Every year Britain stages the world's most
prestigious tennis tournament, yet in the last 25 years British players,
particularly ladies, have not featured prominently. So it is no surprise
that Richard Lambert, director general of the CBI, pronounced himself as
untroubled by the possibility of the London Stock Exchange falling into
foreign hands.
There are valid concerns, however...
But not all foreign takeovers meet our value added criteria. Take an
acquisition involving Britain losing head office functions when company
control moves abroad and where research and development, technology and
design functions move overseas. A second objection is that foreign companies
often structure their UK operations to minimise their British tax
liabilities.
This means that Gordon Brown has to plunder the personal sector here to make
up for the shortfall.
Meanwhile opponents of the Great British sell-off worry that foreign owners
may be tempted to close down British subsidiaries first, when times become
hard, since there is less employment protection in the UK than elsewhere in
Europe. Moreover it is disconcerting that our trading partners do not
embrace the spirit of openness that the UK does, as foreign takeovers by
British companies are potentially blocked by economic chauvinism. The
accusation that the playing field is tilted against the UK is particularly
notable regarding acquisitions by Spanish companies, who have been able to
write-off goodwill against tax. In effect this is a Spanish state subsidy
that would give a Spanish company an advantage in a bidding war. But it may
also involve a transfer of wealth from the Spanish tax payer to UK
shareholders.
There is some substance to these objections, but there are also counter
arguments. Most foreign companies buy UK businesses to build on them, not
demolish them. What sense is there in paying a premium price to treat it
like a second class asset? Companies such as Boeing are substantial net
importers from the UK because of the strength of their supply chains in this
country. Boeing spends between $1-3bn a year on the supply chain in UK
supporting 30,000 jobs. Moreover research by McKinsey shows that
subsidiaries of global companies to be more productive and innovative,
having greater pools of expertise to draw on. Indeed after GE acquired
Amersham International for £5.7bn in 2003 it moved its global healthcare
headquarters to the UK from Milwaukee.
But by far the worst form of foreign investment is that which is driven by
government subsidies and regional aid. The sort of foreign direct
investments we should be wary of are those associated with enthusiastic
ministerial announcements creating thousands of jobs in the depressed region
of the country. These companies have not come to the UK to make British
skills available to the wider market. They have been attracted by the top
bidder in a subsidy competition funded by you the tax payer.
A lesson from the DeLorean scandal
The most infamous example is the DeLorean car fiasco.
Former General Motors high-flyer John DeLorean had a plan to build a stylish
gull-wing European sports car at a price that would make it attractive to
the American market. A state-of-the-art factory was built on a muddy field
on the outskirts of Belfast, a city best known for sectarian violence and
high unemployment. In 1978 the plant opened, and the first car came off the
production line in 1981. But early optimism soon turned sour. Although the
cars had a futuristic design, the windows leaked and the engines seized.
Only 8,500 cars were made, and production ceased in early 1983. As
DeLorean's financial problems mounted he was arrested for cocaine
trafficking. Over £80m of tax payers money went into the scheme with little
to show for it. This is the one type of foreign direct investment that we
should be most sceptical of.
To sum up, although it is galling for British companies to be targets for
corporations from countries that close their borders to foreign ownership,
it is important not to lose sight of the bigger picture.
Historically Britain's economic success has always rested on its openness to
trade, capital and talent from abroad. This characteristic has been the
source of a notable competitive advantage in an era of globalisation. The
bottom line is that in most cases foreign purchasers in effect transfer
wealth from their own country to UK shareholders. Indeed foreign bidders
have to pay premium prices for certain UK assets because they are not for
sale elsewhere in the world.
Brian Durrant is Investment Director of The Fleet Street Letter.
P.S: Remember the 1970s...just before the good old days of Austin Allegros
and fondue parties were buried by oil-driven inflation and a plunging stock
market.
Bill Bonner in France but pondering America...
The great mill of life grinds away...exceedingly slowly sometimes, but
always exceedingly fine.
Now, it is grinding down the realtors and the sub-prime lenders. The poor
lenders are having to take back the mortgages they wrote. We were really
shocked. Shocked!
Imagine...you're nice enough to lend to people...you'd think they'd be nice
enough to pay you back.
But the borrowers don't have any money. Poor saps. They probably do want to
pay the money back. But how can they?
And now, their Neg. Am., I.O. Limited Doc, ARMs are being reset - upwards.
As much as $1 trillion worth of mortgages are set to be adjusted to higher
payments over the next 12 months. And where are those nice lenders now?
They're putting away their wallets and folding up their files. Or, where
they are still lending, they're asking customers for income tax returns!
What are the homeowners to do? If they can't pay? And they can't refinance?
We don't know...but the millwheel still has a few turns left. It will be
interested to see who finally gets crushed...and how.
Right now, the realtors seem to be getting pinched.
Sale prices have not fallen very much - at least, not in most areas. But the
volume of transactions has dropped so much that the realtors are having a
hard time making ends meet. Many are said to thinking about waiting on
tables, parking cars, or starting a hedge fund.
By the way, last week we ran into an old friend.
Actually, he is a young man who saw where the money was and decided to go
after it. He started up his own investment business- with practically no
resources, no contacts, no investors, no training, no nothing.
"How's it going," we wanted to know.
"Well...little by little, it's coming along. The key thing is just to keep
your expenses very low and get good returns. Last year, my little fund
showed a 40% return. So when I go to people to ask them to invest some
money, they are interested now. Besides, I don't charge a percentage of
capital. Just a percentage of performance. If they don't make anything, I
don't make anything."
"How did you get a 40% gain last year?"
"Simple, I invested in gold stocks."
Surely, the realtors must be looking at the money business. And maybe even
gold. The yellow metal rose almost $10 last Friday...to $672. Oil is near
$60 again. All of which suggests to us that whatever is bugging the economy
isn't going away anytime soon.
And more views:
*** We're rushing off to Ireland this morning. We have only enough time to
recount an incident that happened on the subway last week.
Coming back from a meeting, we were sitting in a metro car when we heard a
man yelling. A tall, black man was coming towards the open door, which was
already closing...he then got trapped in the door and had to wrestle his way
into the car. Thereupon, he began harassing, menacing, terrorising everyone
in the car...preparing to punch someone...then yelling in someone's face...
Parisians are accustomed to a bit of inconvenience in their lives; they tend
to be very tolerant of lawbreakers, bums, and mental defectives.
The poor man was both drunk and crazy. Everyone tried to ignore him.
Thus he went from one end of the car to the other and finally sat down next
to your editor. First, he began to annoy a middle-aged man on his left, who
looked a bit like a schoolteacher. Then, he turned to his right...where we
were seated.
He began a long harangue... We couldn't tell what he was saying, partly
because his accent was strange...and partly because he seemed to be speaking
a gutter patois that we just don't know. But we got the gist of it.
Finally, he put his hand on our shoulder and gave us a nudge. At this point,
the synapses in our brain all fired at once. Without thinking, our elbow
came up and clipped the man on the chin. His head went back.
"Keep your hands to yourself," we told him.
At this point, the man on his left rose to his feet.
"Off the train!" he yelled to the man. "You're getting off."
"Yeah...? Go f*** yourself!" was the reply.
"You have to go... You can't just go on menacing everyone like this. It's
time for you to get off,"
continued the school-teacher.
The train had stopped. The doors were open.
Again, without thinking, we rose, grabbed the man's jacket and, with the
schoolteacher on the other side, tossed him out of the car.
A round of applause went up. "Thank you," said one woman. "It's about time,"
said an old man.
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The Daily Reckoning PRESENTS: The UK has the one of the most open markets in
the world and foreign investors have taken full advantage by buying up large
chunks of UK business. Should we be worried? Not according to Brian Durrant,
editor of the Fleet Street Letter...
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