The row with the US over the UK’s commitment to continue to use Huawei systems for its 5G roll out has filled the column inches not already consumed with the CoronaVirus. It’s not as if the US is using national security as a justification to favour US companies (something not unheard of in the past), since the only real alternatives are the European firms Nokia and Ericsson. Rather, as we have noted on numerous occasions, Huawei is the symbol for the new cold War between the US and China and there is no doubt that behind much of the US ‘concern’ for the UK is a desire to curtail Chinese industrial pre-eminence in this area. There were hints however that the UK government want to develop their own expertise rather than being stuck with the legacy of relying on foreign, often semi state owned, monopolies such as Huawei. In the new and merging multi polar world, allowing such dependence to develop is rightly being questioned and even though purists of Ricardian Equivalence suggest it is more efficient to specialise and trade, politicians are definitely moving in the other direction. As such we should be wary of all monopoly or semi monopoly positions. Warren Buffet is right to look for Moats, but populist governments are increasingly going to be draining them.
State aid is something that is specifically restricted under EU rules, although there are many examples that seem to bypass it, in continental Europe at least, so it will be interesting to see if, post this weekend, the UK starts to support ‘National Champions’ in the way that many other countries already do – either overtly or covertly. People in UK industry will often tell of the way that all UK procurement goes to open EU tender and is often won by German or French firms (think the situation with the new UK passports being printed in France), while French and German tenders always seem to be ‘won’ by local firms. Telecoms is thus a topical as well as an obvious area, not least because of the UK’s history of pre-eminence in the industry, sadly mostly destroyed in the late 1990s when finance directors became deal making rock stars instead of remaining book-keepers.
When I was first involved in broking in the late 1980s, one of the biggest stocks in the UK market was GEC, run by Lord Weinstock, selling power plants to China, locomotives to America and advanced radar systems to the Gulf. In addition, in Plessey it had a very profitable telecoms business. In short, it had all the things that the UK ‘needs’ thirty years later. Cautiously run and highly profitable it made over a billion pounds a year in profit and had a huge cash pile. Big institutions loved it for its rock solid balance sheet and its strong dividend. However, by the late 1990s the operations of the company had passed into the hands of Lord (George) Simpson and John Mayo, the latter a merchant banker fresh from breaking up another industrial giant ICI and they chose instead to focus on its profitable Telecoms arm, and sell off the rest. GEC-Alstom was floated on the French stock market, the defence business was sold to rival British Aerospace and the telecoms business rebranded as GEC- Marconi.
It was, sadly, another case of management hubris. Armed with three billion of balance sheet cash plus another eight billion realised from selling off large parts of the business, Mayo and Simpson went shopping in the US and elsewhere at the top of the dot com boom, buying a series of unproven companies at top dollar and borrowing a further three billion in the process. The rest, as they say, is history; busy with their new options plans and brushing off concerns about falling customers, they produced a shock profit warning and saw the share price collapse from 1250 to under 100. Too late the management were removed – in a manner reminiscent of the bankers themselves a decade later – such that the bursting of the financial dot com bubble ended up collapsing what was left of GEC, taking the jobs and expertise with it.
It will be interesting to see therefore if the new UK government choose to push broadband infrastructure spending at least in part towards some new UK champions. Preferably those with proper book-keepers as finance director.
