Marconi crisis a disaster for UK plc

THE crisis at Marconi, Britain's leading-edge telecoms manufacturer, shows how difficult it will be for Labour to fulfil its ambitions to refocus the economy on hi-tech and research industries. It will be among the first challenges for Alan Johnson, who heads the new Department of Productivity, Energy and Industry, the trendy successor to the DTI.

In many ways, the difficulties at the company are likely to have much more serious long-term consequences for British manufacturing in the years and decades ahead than the collapse of MG Rover. It underlines a failing of successive Governments to develop national champions that can compete in an increasingly globalised market.

Britain's ambitions to become a research powerhouse were outlined in a joint paper by the Treasury and the old Department of Trade ahead of this year's March Budget. But even before Marconi's troubles, the UK was lagging behind other rich countries in adding value to business through research and development.

The present Marconi is the rump of the old GEC industrial empire built up by the late Lord Weinstock in the post-Second World War era. The great industrialist's company was often criticised in the City for sitting on a mountain of cash and being too dependent on Government contracts.

But during his period at the group, the one thing which was never stinted on was R&D. Indeed, the old GEC labs could claim credit for growing the first silicon chips, the basis of all the semiconductor and computer development that followed, in its laboratories.

Respected research

The company's defence arm was also responsible for creating the first field telecommunications systems for the military - a technology which was to become the basis for mobile phones.

Despite the dismemberment of the old GEC by Weinstock's successor, Lord Simpson, who focused the company narrowly on telecoms equipment, it never abandoned its research origins. It managed to keep together a respected R&D team in the Midlands last year, spending some £185m on pure research. This was lower than the £300m spent in 2003 and the billion-plus spent by the old GEC, but still demonstrated a commitment to maintaining the nation's technological edge.

If Marconi made a critical mistake it was in believing that British Telecom, which had its own financial troubles in the early part of this decade, would remain a loyal customer. In the Weinstock age, the company would have pulled out all the stops to ensure that it had support within BT for what it was doing and to make sure the Government was on side too.

This is the way that Alcatel, one of Marconi's big rivals in the telecoms equipment market, has behaved in remaining the main supplier to France Telecom. So when BT decided that the biggest industrial contract ever awarded in Britain was to go to eight companies overseas, from France to China, it was a body blow to Marconi's future as an independent enterprise.

Despite working flat out on BT contracts, which make up 25% of Marconi's total sales, it did not receive one penny of the £10bn contract awarded by BT to create its 21st Century Network. The investment by BT is designed to provide ever-faster and more efficient broadband, data transmission and telephony services to a global market.

Price competition

To the credit of Marconi's management team, headed by the well-rewarded Mike Parton, it has worked hard at updating the products that the telecoms group makes and sells. It has been responsible for technologies such as SoftSwitch, which routes calls over the internet. It has also been behind the development of an Access Hub technology, which delivers broadband services, including TV, on demand.

But despite the investment it made, it was unable to compete on price and BT chose to go in a different direction. Its chosen suppliers include a Chinese upstart, Huawei, which was better able to deliver on price. Marconi had the technical capacity but not the scale of manufacturing to supply BT in an economical way.

Much has been made by the Government of the need to improve the nation's skill base and move Britain up the manufacturing tree, away from traditional industries such as textiles and metal bashing to producing hi-tech goods. In some areas, including aerospace through Rolls-Royce, which is well supported by Government, and pharmaceuticals, the strategy has worked brilliantly and the nation now has world-class companies.

But despite having some of the world's best fibre optics and telecoms research, insufficient resources and attention have been focused on telecommunications. Now Marconi has revealed that the first 800 staff, many of them engaged in the most sophisticated research and development, are to be axed.

The Marconi implosion is not just a tragedy for the firm's workers and the investors who maintained faith in the enterprise, it is also a disaster for Great Britain plc.