An unanticipated secondary, but important, effect of the UK leaving the EU may be the long-term consequences for British management.
Some of the best-performing parts of the UK economy are cars and specialised manufacturing, finance and tech and creative start-ups. All will be affected by the terms of Brexit.
The UK needs large inflows of foreign capital to compensate for its chronic trade gap, which in 2015 hit a record 5.2 per cent of gross domestic product, or £96bn. But inward investment is a double-edged sword that leaves the country, as Mark Carney, governor of the Bank of England, recently put it, precariously dependent on “the kindness of strangers” to fill the gap when confidence in the economy is weak and sterling is under pressure.
Less obviously, the UK has become equally dependent on foreign management. The success of the UK motor industry is only partly British-made. Indeed, “UK motor industry” is a misleading term, since there is no longer a volume carmaker in British ownership. Japanese, German, Indian and US companies supply not only capital but also the management skills that the British industry, once the second-largest in the world, has lacked. The startling revival of the underperforming British Jaguar and Land Rover brands under the enlightened governance of Tata Group could hardly be more telling.
Aside from their export exploits, these companies have acted as a vital academy for UK manufacturing management, both directly and indirectly through the standards they impose on suppliers. Even with this boost, since 1980 the UK has lost half its share of world manufacturing exports. In 2015, they stood at just 2.8 per cent, or $460bn.
The conspicuous lack of bounce after the sterling devaluation following the financial crisis hardly suggests a revival of animal spirits — how could there be one if the sector is barely alive? If BMW, Honda and Toyota uproot or downgrade their UK operations, the UK’s meagre reservoir of modern manufacturing knowhow, along with its depleted supply chain, would surely go with it, making the former chancellor George Osborne’s “march of the makers”, or a serious rebalancing of the economy, a mirage.
The UK’s vaunted leadership in financial services also dissolves under scrutiny. Much of the City is foreign-owned, with important management decisions taken elsewhere. After the Big Bang deregulation of 1986, far from conquering the world, the City’s famous old brokerage and investment houses quickly succumbed to the ambition and organisation of US and European competitors for which London’s position as a bridge between the two continents was a powerful attraction. It is these corporate “citizens of the world”, to use UK prime minister Theresa May’s term, that are now pondering where their loyalties belong. In the light of Brexit, the hollowing-out of industry and the City leaves the UK economy looking vulnerable. Many argue that by long maintaining sterling at levels that damaged the productive economy, London’s prowess in finance has operated as a kind of “resource curse”, so that manufacturing weakness is the flip side of finance’s strength. An unwelcome revelation of the financial crisis was that the financial sector in its current form is not a renewable resource. The potential mobility of its global protagonists only reinforces that conclusion.
Where does this leave us? Dutiful imitation of US governance and management models — shareholder primacy, a vigorous takeover market and deregulation — have bequeathed the UK a financialised economy. A few successful but largely foreign-owned and managed businesses conceal the reality of a long tail of companies stuck on the management low road of competition through low cost, low wages and low skills. Hence the growth of top-up benefit payments to those in low-paid, precarious work in retail, hospitality and social care; and hence inert productivity. The UK’s largest manufacturing sector is now food processing.
It is hard to see how loosening ties with high-road northern Europe will benefit manufacturing or finance, or the UK’s start-up sector, where London’s boasts of open, cosmopolitan entrepreneur-friendliness start to sound hollow. As does the Brexit promise of sovereignty. With management of such important components of the economy effectively outsourced, the principle that “decisions about the UK should be taken in the UK” is wishful thinking. In management especially, it pays to be careful what you wish for. Or as Warren Buffett once put it: “Only when the tide goes out do you discover who has been swimming naked.” As the European tides begin to turn, the nakedness of British industry is not a pretty sight.
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