How British business can compete with the global elite

What British entrepreneurs can learn from a better understanding of the global context

Ian Wallis

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For me, the highlight of the inaugural reception of The London Entrepreneurial Exchange was a speech by Philippa Malmgren of Principalis Asset Management.

While whimsical anecdotes from Sir Angus Grossart, founder of merchant bank Noble Grossart, and Russ Malkin, the TV production company owner behind Charley Boorman and Ewan McGregor’s journeys across the world, had flashes of amusement and insight, it was Malmgren who opened eyes to how the global context is playing out in your businesses.

We live in troubled economic times where the social fabric of nations around the world has been ripped asunder. The uprisings in the Middle East are not a result of the people getting up one morning and thinking ‘today is the day for democracy’, said Malmgren. The catalyst was the West opting to buy from elsewhere. “We’ve had a 25-year run of inflation falling – or dis-inflation. Everyone believed they’d get rich. There’s now more chance ‘I might get old before I get rich’. So if the pie isn’t growing, how can I get a share of the pie that does exist?”

Why UK manufacturing’s competitive again

Paradoxically, the global economic turmoil has been something of a godsend for manufacturing in the UK, where better access to the pie has returned. In December 2010 the Purchasing Managers Index (PMI), data compiled by the Chartered Institute of Purchasing & Supply and financial information services company Markit, showed its highest reading since 1992.

It’s worth noting there has been a slight drop-off following the Royal Wedding, bank holidays, and domestic fears. But if you look at the general trend, the outlook is more positive. So what’s the cause specifically? In Asia there’s a demand for higher prices to be set for the West’s purchasing nations. In Bangladesh, textile workers were on strike for three days, said Malmgren, with those living in an urban area demanding a doubling of the minimum wage. It took three days to shut the riots down.

In China too, the people have become more attuned to their value in the supply chain, with riots in June over unpaid wages in the country’s southern manufacturing heartlands. With that and a weak pound, the UK (and the US for that matter) has returned as a competitive force. “Manufacturing is returning from China to the Midlands – and the Mid-West of the US. It’s shifting the location of production and growth,” said Malmgren.

However, for businesses still sourcing from Asia and the Far East, this testing of the social fabric has had the undesirable effect of increasing unit prices. In addition, climatic changes have pushed up the cost of raw materials. Malmgren pointed to Lord Wolfson, chairman of Next, who recently said that because of the record high price of cotton and textile workers’ costs, the price of goods at Next will jump by 8% this year. This is a leap the debt-crushed consumer could do without at a time when most of us are facing up to retiring later.

Food prices too are only going in one direction, squeezing the margins of the catering industry, for one. And Cadbury, following its sale to Kraft, has removed two squares from its chocolate bars, but is charging the same price. Paying attention to currency exchange rates has never been so necessary. Even companies that have sold high levels may be shocked to see they’ve made an exchange rate loss, Malmgren said.

The changing face of consumption

The shift we are witnessing, said Malmgren, is an understanding that we must buy less and yet spend a little more on the things we do buy: “Fewer items, less cars. Buy higher quality. We want things to work. It’s part of the reason for the shift to local manufacturers. We will also spend more on things like experiences. The nature of consumption has changed.”

She pointed to Westfield – an Australian shopping centre business – which has found that people are spending more in shopping malls on experiences, such as the cinema and restaurants. Entrepreneurs should be feeding on this glut of information. The path of innovation rarely looked so enticing. “You need to pursue management of your business that is conscious of the global landscape,” added Malmgren.

And what of capital? Something Malmgren welcomes is an environment where we gain “a better sense of the price of capital”, even if it comes amid a frightening debt burden backdrop. “I’m not afraid of the word ‘default’,” she said with Churchillian undertones.

If the price of capital is more realistic on one hand, it’s also less available to smaller, entrepreneurial businesses on the other. While interest rates are historically low, it’s the larger companies that are capitalising and seizing the opportunity to buy their shares back in readiness for the good times, suggested Malmgren. We arguably know this through the steady stream of stories about bank lending to small companies and the apparent failures of Project Merlin.

Philippa Malmgren spoke to an audience of around 400 entrepreneurs as an asset manager, but one who had run her own food business. “Conviction and vision have to be strong,” she said. By paying heed to what’s going on in the world beyond our shores and by pushing at the edge of what’s possible through innovation, British entrepreneurs will give themselves a far greater chance of success.