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23 April 2018updated 09 Jun 2021 9:43am

Melrose’s purchase of GKN demonstrates capitalism’s fundamental failing

As Mariana Mazzucuto’s new book, published today, explains, our economy has been financialised and no longer rewards real value creation.

By Chi Onwurah

So it is done. Teenager Melrose’s £8bn has bought it 260 years of British engineering excellence once they convinced GKN shareholders their short term ‘buy, improve, sell’ approach would add more value to their investment than the existing management. The perfectly rational and well informed market players have chosen the most economically optimal option which will grow their wealth and therefore that of the nation.  Move along, nothing to see here says Greg Clark. This is the way a free market works.

He is wrong. What we are actually witnessing is the death and burial of this Government’s short lived, callously neglected and brutally beaten  Industrial Strategy, at the tender age of 18 months.

In 2016 Theresa May stood on the doorsteps of Number 10 and announced that she would give the British people more control over our lives. “When we take the big calls, we’ll think not of the powerful, but you.”  In true Yes Minster form she put the difficult part in the title of a newly formed Department for Business, Energy and Industrial Strategy. May had listened, she had learnt the lessons of Brexit. Our country needed proper jobs, and a vision of its place in the world, making and building things.

There followed a consultation and a beautiful, glossy publication with lots of pictures of Very Important Infrastructure and Scientists Doing Science.

But she and Greg Clark ignored the most fundamental point – for the economy to change government needs to change it.

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As leading economist Mariana Mazzucato argues in her new book published today The Value of Everything, at the heart of capitalism’s fundamental failure are ‘two faces of financialisation’. The first is the way in which the financial sector has stopped resourcing the real economy – instead of investing in companies which produce ‘stuff’, finance is financing finance.  Why lend money for a manufacturing plant which may take years to yield a return and can’t easily be sold on when you can make a bet on some options hedged with other options and virtually guarantee a return in a few weeks? With so much financial engineering demanding investment, real engineering doesn’t stand a chance.

The second is the financialisation of the real economy with industry driven by short-term returns. This results in less reinvestment of profits and rising burdens of debt which, in a vicious cycle, makes industry even more driven by short-term considerations. So this kind of finance is not neutral but changes the nature of what it finances. Ten years after the financial crash, finance is again at the heart of an existential threat to our economy.

From its focus on short-termism it is clear that Melrose a financialised business and the finance it is using to buy GKN will  change its nature. Short-termism leads businesses to neglect the difficult, costly business of maintaining sunk assets like factories or the decade long investment that new aerospace technologies require. It is for this reason that the CEO of Airbus said he did not see how they could be a customer of a Melrose-owned GKN.

20 per cent of the shares in GKN were in the hands of hedge funds – and the bid was won by 52per cent to 48 per cent. So GKN had been financialised by the very fact of being the pray of a financialised company.

Historically this is how Melrose works – they are a ‘turnaround’ company which purchases firms, sweats them to boost the share price, and sells them. This ‘Melrose magic’ can be successful for shareholders – with companies it purchases doubling or tripling in value before being sold off – but the effect on jobs and people can be devastating.

Brush Generators has had five different managing directors since it was taken over by Melrose in 2008 and only last month it announced it would cut up to 270 jobs in Loughborough and shift production overseas.

The Melrose CEO talked of the ‘catharsis of change’ This sounds very much like  Schumpeterian ‘creative destruction’ but with little regard for what is destroyed.

As a proportion of its sales GKN spends five times more  on R&D than Melrose, employing nearly 650 people in R&D roles across the country. Since 2000 it has invested £561 million in R&D in the UK alone. As shadow minister for industrial strategy and a chartered engineer I believe that makes the company an important part of our future innovation economy. And its not only  Labour that is saying this, Greg Clarke said GKN R&D is critical to his industrial strategy.

Innovation is a long term bet. As Mazzucato argued in her previous best-seller an ‘Entrepreneurial State’ can enable that bet. But still Greg Clark refuses to intervene instead retreating to the traditional Tory ‘market forces’ argument. Having spent twenty years in industry, working across four continents in businesses large and small I can say categorically I have never seen a wholly free market or came across a pure market force. They are all defined by the regulatory environment and the vested interests which shape the landscape. A Labour Government would urgently review the takeover rules, for example we have called for a six month minimum holding to vote in takeovers and we will look at including significant R&D as one of the public interest tests.  We will also establish a National Investment Bank and introduce a financial transaction tax which would add some friction to the forces of financialisation.

As Mazzucato says, government should be co-shaping and co-creating markets, not just fixing them when there are ‘failures’. That requires not levelling the playing field—the usual policy talk—but rather tilting the field in the favour of innovators and true value creators. But this Government is embalmed in Brexit and hidebound by ideology they no longer have the intellectual capacity to question. GKN and our real economy will suffer as a result.

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