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Playing the long game

Scott Mcculloch is editor of Families in Business magazine.

How do you grow a tiny family business into a €1.5bn manufacturing multinational? Keep things simple, says JCB's chairman. Scott McCulloch talks to Sir Anthony Bamford in this exclusive report

Spend an hour with Sir Anthony Bamford and it becomes blindingly obvious why his company is a model of efficiency: the man cherishes simplicity.
For all the hand wringing over the euro Sir Anthony's position on the single currency is refreshingly patent. "I don't see the benefit," he says with audible candour. "We are a major economy on our own. We are the fourth largest economy in the world. I just don't see the need for it. Mexico, America and Canada are bound under (Nafta) trade agreements, but they each keep their own currency, so I don't see why we shouldn't."

Sir Anthony says it's a view he's held for years when the single currency was first mooted. "One of the reasons given in England for having the euro is that it will take out the fluctuations in the currency… well, we have fluctuations in the currency anyhow." Businesses, he rightly says, must always deal in currencies. Which is why the manufacturing group has numerous bank accounts and deposits in euros and, where necessary, it tenders in euros. It's a practical decision that addresses the realities of European commerce. But then Sir Anthony is a practical man.

Despite the fact that JCB exports about 40% its products to Europe – a market in which the group leads – the 58-year old chairman is unlikely to ever throw his weight behind a currency whose only appeal he sees as minor. "The only benefit I can see is on a very low-level basis and that is going on holiday so you only have to take euros when you visit France, Italy and Spain. That I can see as a benefit, but in trading I don't see a great benefit at all."

Opposition to UK membership of the euro is hardening among Britain's business leaders, with two-thirds against joining the single currency, according to the Institute of Directors.  The IOD, which has 53,000 members and is one of the country's most powerful business lobbies, says it would not hold an official poll on euro membership until the government declared its 'five economic tests' on membership had been met and had agreed to hold a referendum. Dr Richard Wilson, the IOD's business policy executive, estimates only one in three of the group's members would currently support UK entry. He says the main reason members give is the strength of the UK economy compared with Europe and the fear that handing over responsibility for monetary policy to the European Central Bank in Frankfurt could damage UK jobs and growth.

With or without Frankfurt calling the shots, Britain's embattled manufacturing sector has long been sensitive to interest rate rises. So why has JCB grown as a private manufacturing company when so many others have disappeared? The group has focused ruthlessly on its core business, growing organically in its niche construction, industrial and agricultural equipment markets. "Something which is time-tested in our case is to stick to what we know," Sir Anthony says. "[We] don't diversify and buy businesses which have nothing to do with our business."

Started in the Midlands in 1945, JCB is now the UK's biggest privately owned manufacturer and the world's fifth largest maker of construction equipment, exporting 75% of its products to 140 countries. JC Bamford Excavators, commonly known as JCB, is such a popular brand in the UK that its residents use 'JCB' as a substitute for digger the same way Americans use 'Kleenex' for tissue. The group – which in 2002 had turnover of about €1bn – produces more than 160 different machines. It attributes much of its growth to new products. One promising venture is the launch of the company's £80m project to build a diesel engine in Britain – the first for a decade. The 4.4-litre engine will be manufactured at a new 160,000-sq ft facility with low-volume production beginning later this year. USA's Perkins Engines currently supplies JCB with about 30,000 units per year. JCB's engine will also see the group enter a fiercely competitive market dominated by Cummins of the US. JCB says the engine will give customers higher performance than existing engines while complying with future worldwide emission requirements.

No surprises there. JCB is completely focused on customer satisfaction. Why hasn't JCB gone offshore like so many other British manufacturers in their bids to slash costs? Because it can be done at home. The company was an early adopter of just-in-time manufacturing processes where orders are placed, machines are built and then shipped. Stroll the group's bucolic headquarters in Staffordshire and there's a conspicuous absence of inventory – a one-time necessary evil in automotive and related mass-production industries but now dismissed as a colossal expense and logistical headache. The few dozen diggers in the car park? "They're all sold and on their way," says a company spokes­man. Flexible production systems, management-speak for "order it and we'll build it", means JCB can deliver a machine within a week. Meanwhile, spare components can be shipped almost immediately.

It's all been thought through with one thing in mind: simplicity. The group's whisper-quiet assembly lines and high levels of automation are the product of a massive investment programme that has enabled JCB to generate an average return on assets of around 30% over the past decade. The company is a model of efficiency in terms of its worker-to-machine labour cost ratio. The figure, says Sir Anthony, is 4-5%. "Labour content is not such an enormous component in our price build-up. It is partly because of investment [in automation] and productivity."

JCB exports more than 70% of UK production. It has 13 plants, ten of which are in the UK. Compared with the US behemoth Caterpillar, by far the biggest organisation in construction machinery, JCB is small. No matter, because operating his business sensibly and profitably is what Sir Anthony is really after. "Bigness is not that important to me. What is important is that we have a successful well-run business, that we carve out a niche for ourselves round the world and compete and win round the world."

His sense of pride is tangible and with it comes a natural smile. There's an audible tone of sincerity in Sir Anthony's voice. But behind the confident demeanour lies a hard-nosed businessman who wants to do more. "Am I happy with what the company has achieved? No, we could do better."

The group says it brings a "sense of excitement to the industry" that people more readily associate with the car industry. If the mood at its UK headquarters is a benchmark then yes. Concentrating production in Britain can have its drawbacks. For one, JCB doesn't increase the prices of its products to offset currency fluctuations – instead, it takes a hit. But absorbing the effects of a strong pound concentrates the mind, which is why the company keeps a sharp eye on ways to drive up productivity. And this is where the family comes in. Sir Anthony's father was a stickler for efficiency gains, which is why JCB's investment philosophy is to reinvest half of the company's free cashflow. Some years all of it is pumped in. Ever mindful of driving up productivity, JCB built its first ever US plant with its own cash: a cool €100m.

Although the majority of JCB's output emerges from its domestic plants the group has made production inroads into Brazil in a bid to sidestep punitive import taxes and establish itself as a sales leader in the South American market. Meanwhile, domestic production of components is flourishing. JCB makes its own axles, gearboxes and will soon produce its own engines. The decision to do so on its home turf was never in doubt. "It's reality," says Sir Anthony. "And the reality is that I'm English and our business is essentially a British multinational."

But demographic trends and the younger end of Britain's labour force, seemingly smitten with IT courses and media studies, have conspired against companies like JCB. Skilled engineers are gold dust. Even welders, says Sir Anthony, are hard to come by. JCB's new diesel engine plant in Derbyshire will create at least 100 skilled jobs. "But we do have a problem in Britain. We have a problem in finding engineers – there aren't enough. We have a particular problem finding  welders. They don't exist! The average age of our welders is going up because young people are choosing other occupations." To address this JCB is buying welded components from Hungary and Poland.

As a family-run manufacturing multinational, JCB is a bit of an anomaly: compared with its opposite numbers on the continent, privately held British multinationals are less numerous. Sir Anthony, who is one of fewer than ten shareholders controlling JCB, believes tax figured prominently in the demise of the British privately owned manufacturer. The decay emerged in the 1960s as a result of Britain's personal tax system – a regime so confiscatory (tax on unearned income was a high as 98%) that owners preferred to take less punitive capital gains taxes and sold out to larger groups. At the time, says Sir Anthony, IPOs made a lot of sense. "Certainly in the 1960s and early 1970s a lot of family-owned businesses in Britain were floated for the people to get the money out of the business. The only way they could get any money at all, because they were taxed at over 90%, was by selling their business or by floating their business. So I think all family businesses did look at that at the time."

Times have changed. So is an IPO on the cards for JCB – even for a strategic acquisition? "I don't see the benefit, I really don't," says Sir Anthony with the sobriety of high court judge. "I don't see one in the future. If we want to buy a business, we could buy one. If it was more than our cash reserves, we'd borrow the money. This is something quite different to 30  – even 20 – years ago. Being able to borrow money against a business you plan to buy. You couldn't do that years ago."

Rarely does a family survive more than three generations at the helm. JCB has two under its belt. Yet it's unclear who will succeed Sir Anthony. The business is closely held by his family. How do the next generation fit in? Sir Anthony reads the rule of law. "I've three children and if they wanted to come into the business, they could but they've got to be able and capable." Joseph, his 26-year old, enters the fray in September. Fresh from a degree at the University of Edinburgh, a 2-year stint in the City of London, a year-long spell training with JCB in America and a tour of JCB's global operations, the graduate will head up JCB's Groundcare unit with two others. For Sir Anthony, it's a delight. "He's joining in an area where he is not affecting other people and an area where he really has carte-blanche to build up the business."

Meanwhile his 23-year old son, George, recently graduated from Parsons School of Design in New York with a degree in photography, while his daughter Alice, 27, runs her own marketing business in London. His wife, Carole, is also actively involved in many aspects of the business.

Family is important to Sir Anthony. He attributes bloodlines to part of his company's success and believes Britain would be better with more family firms. "I'm sure it would be but you can't turn the clock back," he says with a flourish. "We used to buy our components in Britain, from companies that were frequently family owned. [They were] engineering companies run by father and son or two brothers – people we'd done business with for many years." Over the years conglomerates have absorbed many of these JCB suppliers.

Families are for life and although Sir Anthony's father, Joseph Cyril, died in 2001, he instilled the 'work hard' philosophy in his sons. Today that work ethic pervades the manufacturing group. Another thing he learned from his father when he took over in 1975 was the value of delegation. At the time JCB's sales were £43.7m and its profits £6.3m. Sir Anthony couldn't sustain the success alone. "One of the things one has to learn is you can't do everything yourself," he  says. "You have to delegate and this is something I learnt from my father. He was able to run every aspect of the business for many years because it was much smaller then and he was involved in all decision making."

Delegation means having faith in people, an aspect not uncommon to many families. Then there's JCB's long-term vision in all matters financial, a line that Sir Anthony believes separates privately held concerns from public organisations. "I am very conscious of public companies declaring their quarterly figures all the time and that there is big pressure for them to be better than the previous quarter. As a private company we don't have to do this. Obviously we're looking at annual year figures but not to the same degree," he says. "I'm thinking of five years and ten years ahead. I'm not doing things just for the short term [so] our company will look better or I'll be able to bump my share price up to buy another business or the analysts will think of us in a favourable light. We don't think like that at all." No, family businesses never need do.

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