The Death of British Business

The City of London, 1999

Jean Gaumy/Magnum Photos

The City of London, 1999

It is hard to exaggerate the scale of the disaster the British people have inflicted upon themselves with their decision to leave the European Union, taken in the referendum last June. More than three and a half months since the vote, some of this damage is difficult to quantify, including loss of influence with the US, Europe, and the wider world, the flourishing of insular nationalism, especially in England, and growing hostility toward immigrants—a tendency that had been already visible during the referendum campaign and was disgracefully exploited by the Leave campaigners. But in recent weeks, there have also been stark indications of a kind of damage that is readily quantifiable and severe: the damage that Brexit has and will continue to inflict on the UK economy—an economy that, after decades of mismanagement, is overwhelmingly dependent on foreign enterprise and foreign capital.   

At the beginning of September the Japanese Government sent a blunt “message to the United Kingdom and the European Union” warning that, without Britain’s present trading relationship with the EU and the full access to European markets it guarantees, Japanese financial institutions “might have to…relocate their operations from the UK to existing establishments in the EU.” The UK’s other leading trading partners have been issuing similar warnings. On September 6, Eric Schweitzer, head of the German Chambers of Commerce and Industry, warned that amid the current Brexit “deadlock”—the uncertainty about how Britain’s arrangements with Europe will play out—many investments in the UK are now “held up and will not be carried out.” At the G20 summit in Hangzhou in early September, Barack Obama himself acknowledged the risk that Brexit could “unravel” American business investment in the UK. 

Especially ominous for Britain are the warnings coming from the US and European investment banks which now dominate the City of London, which in turn dominates the UK service economy. On September 21, Daniel Pinto, chief executive of JPMorgan Chase’s corporate and investment bank, told the Financial Times, “It’s hard to see how we can serve all of our European clients, and the European economy, without access to the single market.” And other “senior executives and advisers” in the City of London cited by the FT now estimate that 20 percent of all investment banking and capital markets revenue generated in London—worth some £9 billion ($10.9 billion)—could be “disrupted” if these companies lose their free access to the EU single market in financial services. In a September report, the London consultants Oliver Wyman have estimated that the kind of “hard” exit from the EU toward which the UK Government is now moving could cost the UK service economy up to 75,000 jobs, £38 billion ($48.34 billion) in lost annual revenues, and £10 billion ($12.2 billion) in lost taxes.

The supporters of Brexit should have seen this coming. A large-scale flight of foreign capital from Britain in both manufacturing and services would be a mortal blow to UK economy. In 2015, for example, roughly half of all Japanese investment in the EU was in the UK, with a thousand Japanese groups using the UK “as an effective springboard into Europe,” in the words of the Financial Times, and with Nissan, Toyota, and Honda’s UK assembly plants making up the core of the UK-based auto industry. Now, Kenichi Ohmae, who as head of McKinsey’s Tokyo office in the early 1980s advised Nissan to set up its main European plant in the UK, is already advising his Japanese clients to keep clear of the country: “If you have to make an investment beforehand, then you have to invest in continental Europe. This is no longer a country-by-country decision, it is one country versus the whole EU.” 

The UK has long depended on heavy flows of investment from abroad to make up for the weaknesses in its own corporate and financial institutions. In 2015 the UK ran a deficit in its external trade in goods and services of 96 billion pounds ($146 billion in 2015), or 5.2 percent of GDP, the largest percentage deficit in postwar British history and by far the largest of any of the G-7 group of industrialized economies. By comparison, the US ran a deficit of 2.6 percent of GDP, while Germany earned a surplus of 8.3 percent, Japan a surplus of 3.6 percent, and France broke even. In the memorable words of Mark Carney, the Canadian-born Governor of the Bank of England, the UK must depend on “the kindness of strangers” to remedy its trade gap.

The reason for this unusual dependency is that for decades the UK has been unable to produce enough goods that the rest of the world wants to buy. According to WTO statistics, between 1980 and 2011 the UK’s share of global manufacturing exports was halved, from 5.41 percent to 2.59 percent, so that by 2011, according to UN statistics, the dollar value of UK merchandise exports at $511 billion was not far off the level of Belgium’s at $472 billion, an economy with one six the UK’s population, (and not included in the Belgian figures, the value of German exports routed through Belgium ports).


Looking at export industries such as IT products, automobiles, machine tools, and precision instruments, all strongly dependent on advanced R&D and employee skills at all levels, the UK’s performance looks even worse. The period of 2005-2011 is especially revealing because it includes both the years of the Great Recession and the collapse of trade between the advanced industrial economies, but also years in which their trade with China and other BRIC economies such as India and Brazil grew rapidly. Since one of the chief claims of the Brexit campaigners has been that there are now these exciting new markets in BRIC countries waiting for British exporters to conquer, it is worth looking at how British companies actually performed during those years.

All the leading industrial economies increased their exports of advanced goods between 2005 and 2011, some spectacularly. South Korea, with its proximity to China, was the big winner with a 93 percent increase in the value of advanced goods exports, followed by Germany with a 46 percent increase, Italy with a 35 percent increase, Japan with 31 percent, France with 24 percent, and the US with 22 percent. The UK could manage just a 7 percent increase, even though it benefited from an 18 percent devaluation of the pound. What has saved Britain from relegation to the European lower echelons—to the level of Italy, Spain, or worse—has been the pursuit over several decades of an economic strategy that has encouraged global corporations in both manufacturing and financial services to come to the UK and fill the British business vacuum. 

The UK’s favorable financial and legal environment helped draw foreign capital. But it was access to the EU that allowed this to happen on a large scale. Since the early 1980s, leading global corporations have located plants and offices in Britain, sometimes taking over British businesses in the process, using British soil as a terrestrial aircraft carrier to assault the single European market. Trade figures for the past three decades show with brutal clarity how dependent the UK is on this aircraft carrier status, and how much it stands to lose if a full Brexit is carried out. Even with the benefit of major inflows of foreign capital the UK’s trade performance has been the weakest of all the G-7 industrial economies. What will it look like without them?

How the UK got into this situation is told in detail by two books: Nicholas Comfort’s Surrender: How British Industry Gave Up The Ghost 1952-2012, which deals especially with the collapse of British manufacturing in the late twentieth century, and David Kynaston’s The City of London: Club No More: 1945-2000, which chronicles the corresponding failure of British financial institutions and their displacement by international competitors. (Club No More is the final volume of Kynaston’s four-volume history of the City of London, one of the outstanding achievements of contemporary British scholarship.) Kynaston and Comfort are best read in tandem, and the cumulative impact of their histories is devastating. 

The most telling chapters of Surrender are those dealing with the 1980s, 1990s, and early 2000s, because they give the lie to the claim that Margaret Thatcher as prime minister arrested and reversed Britain’s industrial decline. Some of the most damaging cases of British industrial collapse took place during and following her period of office, and are well described by Comfort. Among them was the implosion in 2004 of GEC, a sprawling engineering conglomerate and a rough British counterpart to GE as the UK’s market leader in power generation, industrial control systems, and defense electronics.

In the early 1980s, GEC employed 250,000 workers in Britain, but it was brought to its knees in the early 2000s by its last CEO, George Simpson, who made a series of disastrous acquisitions of American IT companies just as the dot-com bubble was collapsing. Much the same fate has befallen the British car industry, part of an industry that following World War II ranked second in the world to its US counterpart. From the 1960s onward the leading British car manufacturer was downsized in a series of poorly-executed corporate restructurings, first as the British Motor Corporation, then merged as British Leyland, and finally as Rover Group.

Between 1988 and 2005 Rover was propped up successively by Honda, British Aerospace, and BMW, but none of them could turn it around. In 2005 the company met a sad and humiliating end at the hands of a quartet of British asset strippers calling themselves the Phoenix Four. Once they had control of Rover, and despite its extreme frailty, the four looted the company with pay and pensions awards to themselves worth £42 million. (They managed to escape prosecution when Rover finally collapsed, but were barred from being directors of any public companies for between three and five years.) Twenty-six thousand workers at Rover’s main Birmingham plant and the plants of its suppliers lost their jobs when the company went into receivership in 2005.


In his account, Comfort includes similar obituaries of British corporations in such disparate areas as machine tools, mechanical engineering, shipbuilding, steel, consumer electronics, and textiles. In 2007, Imperial Chemical Industries, a corporate giant of the first half of the twentieth century, vanished after a series of ill-judged acquisitions and the sale of its surviving rump to AkzoNobel. And in 2009, ICL, the leading UK computer maker, was taken over by Fujitsu following a series of bad product decisions in the 1980s and 1990s.

As we have seen, the steady erosion of British corporate enterprises was partially offset by an increased flow of overseas investment to Britain, which had become a low-cost and low-wage producer in comparison with its nearest continental European neighbors. Also attractive to foreign investors was the efficiency, transparency, and—for American investors—familiarity of the British legal system, especially when set alongside those of its counterparts in continental Europe. But none of this was enough to raise deprived regions of the country to the level of even moderately prosperous local economies in Germany, France, the Netherlands, and the south of England.

I had first-hand experience of this while researching my book The New Ruthless Economy: Work and Power in the Digital Age (2005). I visited Japanese-, American-, and German-owned plants all over Britain, including Toyota, Honda, and Nissan’s assembly plants in the northeast of England; the plant managers showing me around would invariably explain that they were supplying the whole European market. Of course, these sales opportunities had opened up thanks to Britain’s membership of the EU and the free access to the European single market it guaranteed. This was also the chief rationale for locating the plants in the UK in the first place. With the completion of Brexit, this rationale will disappear.

This is the first of Britain’s self-inflicted wounds, phase I of Britain’s economic hara-kiri. The second phase brings in financial services. In A Club No More, David Kynaston demolishes Thatcher’s claim that she turned Britain into a leader in the dynamic and cutting-edge world of financial services. Kynaston shows in painful detail that in the fourteen years that elapsed between the deregulation of British financial companies in 1986 (the “Big Bang”) and the year 2000, the City of London experienced an accelerated version of what had already been happening in British manufacturing: a massacre of British brokerages and investment banks at the hands of their US and European competitors.

Among the first British companies to go were ancien régime brokerages with names like Fielding Newsom-Smith, Pember and Boyle, Pinchin Denny, Scrimgeour Kemp-Gee, Wood Mackenzie, and Kitcat and Aitken. Their demise was followed by the disappearance of most of the City’s British investment houses, some going back to the nineteenth century. Deutsche Bank took over Morgan Grenfell in 1990; Barings succumbed to the activities of a rogue trader in 1995; S G Warburg, the creation of the legendry Sir Siegmund Warburg in 1946 and once the City’s dominant investment bank, was taken over by Swiss Bank Corporation in 1995, and eventually by UBS; Kleinwort Benson was acquired by Dresdner Bank in 1995; Hambros by Societe Generale in 1998; Robert Flemming by Chase Manhattan in 2000; and the investment banking side of Shroders by Citigroup, also in 2000. N. M. Rothschild, founded in 1811, was one of the very few survivors.

One veteran observer of the City quoted by Kynaston denied that this British rout mattered, drawing a reassuring analogy with the Wimbledon tennis championships. In 1995, Stanislas Yassukovich noted: “Wimbledon is still the world’s greatest tennis event, yet when did we last have an English player in the top ten seeds?” (In 2013, Scottish tennis star Andy Murray finally ended the drought by winning the men’s singles title.) But by 2000, another longtime observer of the City, the financial journalist Andreas Whittam Smith, was less sanguine:

We have given the keys of the City of London to its global competitors. They could, if they chose, on grounds of national rivalry rather than pure commercial calculation, set about dismantling it. The threat is there, even if distant and, in many people’s opinions, improbable. It could be the stuff of nightmares.

With Brexit the nightmare is no longer distant and improbable. Even before the June vote, EU governments, backed by the European Commission in Brussels, were trying to change the rules of the EU single market in financial services in ways that would force banks dealing in Euro-denominated bonds and securities to do their business in financial centers where the euro was the local currency, thus  excluding London. In practice this would have meant that British banks and foreign banks with their European headquarters in London would lose much of their “passporting” rights, granted by the EU to do business within the EU.

As a member of the EU, Britain was able to prevent this, but outside the EU it will be highly vulnerable to further regulatory assaults from Brussels. According to data just released by the UK’s Financial Conduct Authority, nearly 5,500 UK- registered companies, the great majority in financial services, depended on these passporting rights  to do business in the EU and stand to lose them with Brexit.

The issue for Britain now is whether Prime Minister Theresa May has the fortitude to face down the Brexit radicals within her own party and save Britain from the economic havoc that ‘hard Brexit’ and  the exclusion from the European single market  will surely bring. But in her keynote speech to the Conservative Party conference in Birmingham on October 5, she gave few indications that she will. Instead, she played unashamedly to the Brexit gallery, affirming that Britain would trigger Article 50—the provision of the EU treaty setting out the process for formally withdrawing from the union—by the end of March 2017. May also made the reduction of immigration from the EU her chief priority, and aligned herself so closely with the anti-immigrant wing of her party that she drew praise from Marine Le Pen, the leader of France’s far-right National Front.

Unless May soon changes course, Britain and its economy could face a decade or more of debilitating uncertainty. This is the amount of time it could take to negotiate a new trading relationship with the EU, which absorbs approximately 44 percent of UK exports and is by far its largest market. The British government knows that in a little more than two years Britain will lose its access to the European single market, the price it must pay for its hostility to immigration from the EU. But it has no way of knowing what trading regime with the EU will take its place.

It must now embark on a series of marathon negotiations with its EU ex-partners, certain only in the knowledge that the trading regime that will emerge from them may be far less favorable to business located in Britain than the one that exists now. It is hard to imagine a set of circumstances more likely to convince foreign businesses in Britain that they should act on their warnings to leave the country or reduce their presence there, and instead take up residence within the secure  confines of the Single European Market. The British economy and the British people will suffer the consequences.

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