by Real Business - Thursday, 30th August 2007

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Not making things.

Five years ago, Technetix was one of the UK’s fastest-growing businesses* – a fact made doubly amazing because it was a manufacturer. Today all its kit is made in China and MD Paul Broadhurst (left) concentrates on logistics management. But this isn’t yet another article about the decline of British industrial life. It’s the way smart firms do business these days.

Meet Paul Broadhurst, boss of a proud British manufacturer, Technetix. If you have cable TV, you probably have one of his little black boxes in your house. He does all kinds of little black boxes – and not just for cable. When Channel 5 figured out that its signal would interfere with your video recorder, Technetix, came up with a ceramic resonator filter that solved the problem.

Ceramic resonator filters may be a small part of your world but they’re a big part of Paul Broadhurst’s. Even before Technetix got the Channel 5 order, he was running one of Europe’s biggest manufacturers in the field. “We were a small company competing for that order against Racal and a sizeable Finnish company. But what gave us the lead was that neither of them could beat our manufacturing know-how.”

Back in 1996, the Channel 5 order quadrupled the turnover of Technetix to £10m. Its workforce swelled to nearly 200, most of them in manufacturing. Nearly as many again worked on Technetix products in a network of UK sub-contractors. “Our products are not high-tech,” says Broadhurst. “They’re medium-tech. Only half of our expertise is in the product design. The real USP is in manufacturing in volume for a price.” He means for a low price. And he means that you really have to be involved in the nitty-gritty of the manufacturing process to achieve that low price.

Or rather, that’s what he meant. Meet Paul Broadhurst, boss of a proud British service company, which is the leading UK supplier of cable television installation kits. All the key components in these kits are Technetix’s own designs. But few of them are made in the UK and none by Technetix itself. Eighteen months ago, Technetix closed its UK factory and completed the migration of its vaunted local manufacturing capability to China.

“Back in 1999, I was as keen as anybody to maintain our manufacturing in the UK,” says Broadhurst. “We were competitive against anybody, anywhere. Sure, our labour costs were higher than Eastern Europe’s and Asia’s. But we had invested heavily in automated assembly so we didn’t need as much labour. Maybe our costs were ten per cent higher than low-cost competitors. But against that, the flexibility we had by having our own facilities, close to the customer, was very valuable.

“We had structured the company along the lines of the latest manufacturing thinking. We were a model of the just-in-time process. We just had a week’s stock of components. We had ‘on demand’ agreements with all our suppliers. We got our stock turn up to nearly 40 times a year. We were making to order. It was an excellent system.” The pride is evident.

So what changed? Three things. First, the growing realisation that Technetix was passing up opportunities in high labour content components, the production of which could not be automated. Next, in 2000, Technetix bought its main competitor, Tele-Installs, which had always sourced its products from the Far East. All of a sudden, all the expertise and contacts to initiate Far Eastern manufacturing were in-house. And finally, Technetix was experiencing profound difficulty growing manufacturing capability to meet demand. “In 2000, we landed an order which required 200,000 units a month. We managed to push our production up to 100,000, but we couldn’t get beyond that level. The local labour market simply dried up. Well, not quite, but you simply couldn’t get people with the right attitude. In the UK, it’s very difficult to get people to do repetitive assembly tasks.”

It may not have helped that Technetix was based in Royston, just south of Cambridge, a veritable sunspot of economic activity and not a natural home of repetitive assembly tasks. But it was. What to do? Ricky Nye, Paul Broadhurst’s new right-hand man from Tele-Installs, didn’t waste time suggesting that his partner in China would be pleased to quote for the missing 100,000 units a month. Five months later, Technetix’s first container-full of Chinese-manufactured black boxes arrived at Southampton. The quality was excellent.

Over the next year, the Chinese partner, one Michael Wang – a Taiwanese with a factory in China (in which Technetix has an equity interest) – picked up several more manufacturing contracts from Technetix.

Broadhurst: “For me, there were two big upfront issues: one, quality; two, our designs leaking out. The first was resolved almost immediately. Ten years ago, I guess there might have been reason to be dubious about Chinese quality. But now, it’s second to none. The factory has ISO 9000 certification. The quality is excellent. Quality procedures are, if anything, easier to enforce than in the UK. China does not have any shortage of people with the right attitude.

“And on the intellectual property – well I’m sure this issue is often problematic in China, but in our case, we have become absolutely sure that our designs go no further than our manufacturing partner. About 80 per cent of his business is with us. He has built his capacity up with us. He now employs 1,000 people. He’s with us, it’s a real partnership.”

So, by 2001, Technetix had discontinued the struggle to expand its UK capacity. Then came the great telecoms slowdown. The issue of moving all manufacturing to China had already been mooted, and tested. Says Broadhurst: “At that stage I was still committed to retaining a UK manufacturing presence, but nevertheless, in early 2002, we sent a couple of our most complex products off to China. It was a sort of final stage of verification. We had ticked off quality. We had reassured ourselves about intellectual property. So what about complexity?”

If you guessed that Mr Wang’s workforce passed the complexity test with flying colours, you guessed right. Which was just in time for the telecoms squeeze. As the cable giants manoeuvred to survive – you remember all those headlines about multi-billion pound debt for equity swaps? – Technetix suddenly found that instead of having more orders than capacity, the boot was on the other foot. In 2002, its sales fell by 20 per cent.

The decision to close the Royston plant, converging all UK activity into what had been the Tele-Installs warehouse and distribution operation in rural Sussex, was “personally very painful”. By the time it arrived, natural wastage had already run the workforce at Royston down. The final toll in P45s was 60. Broadhurst: “I had built it up over many years. But it was the right decision for the company. However, although it was sad, there was a silver lining in the fact that we had a high-quality workforce. They all had the right attitude. Only five people spent any time out of work. All the rest started new jobs immediately upon leaving us.”

As the squeeze persisted, another virtue of Chinese production became self-evident, one enhanced by the fact that Paul Broadhurst had not personally built up the Chinese plant: “As well as being able to turn volume up by a phone call, you can do the same in reverse. If we had not closed our UK facility, it would have been a severe burden over the last 18 months. In the UK, manufacturing is an overhead. In China, it’s a variable cost.”

Extremely variable, in fact. The Dong Guang factory that changed Broadhurst’s view of Chinese manufacturing is currently being closed. Chasing government grants, and escaping the higher costs of trading via Hong Kong, Michael Wang is replacing it with a purpose-built factory in Shanghai, which has just opened its doors.

But relocating within China, we shall leave to the Chinese. Relocating to China is the issue at hand. And it is on hand for every serious manufacturing company. Does that include you? Chinese wage rates – £550 a year compared with £15,000 in the UK (World Bank figures) – represent an irresistible force that has long gripped the top tier of the global business community. It is said that almost three quarters of the world’s photocopiers emerges from the Shenzen economic zone. Now the same force is now moving down through the ranks. In February, Doc Martens stopped making its famous boots in the UK and shifted production to China. In June it was Wedgwood’s turn. No, it’s not moving its top brand there – yet – the heritage problem is too tricky. But in what will probably turn into a pathfinder mission, its number two brand, Johnson Brothers, is moving to China.

To trade union officials, economic planners and many working people, this is a giant and unwelcome glugging sound. Many entrepreneurs will hear the same thing, but they are more used to unwelcome glugging sounds. Relocating to China is a challenge that sits alongside the hot new rival, the step change in technology and the consolidation of suppliers or customers. The world moves on and as it does, entrepreneurs need to reinvent themselves. Relocating to China is simply the next mortal challenge. It won’t be the last.

Sure enough, as Technetix reinvented its manufacturing method, it found the game changing rapidly on its customer side, too.

And just as the game has changed on the supply side, so it has on the demand side. Forced to attack its cost bases, Technetix’s big customers, such as NTL and UPC, launched “vendor reduction programmes” (see Vendor reduction programmes below). They decided that their business was running a communications network and that installation and the logistical tasks that go with it were a distraction. Their big central warehouses, feeding components out to regional installation operations, were closed. Instead of dealing with dozens of separate suppliers of individual components, mandated to supply by the pallet-load to those central warehouses, they looked for suppliers willing to aggregate components from multiple sources and deliver them direct to installation teams. This is called “turnkey outsourcing” or the “vendor-managed inventory service”.

Broadhurst: “Our customers no longer wanted to discuss just kilohertz and efficient signal processing. The key skill became supply chain management. Either we were going to have to get into this business, or it was going to fall to a logistics specialist such as United Parcel Services or Securicor to whom we would have been just another component supplier.”

Technetix went into this business. It now supplies the entire 150-item kit to connect a new cable subscriber to the network. And instead of supplying just a few customer warehouses, it despatches the kit to hundreds of individual engineers. For simple upgrades, it even supplies plug-in units direct to the subscriber. Says Broadhurst: “We had to add a new area of competence – despatch management – to pull this off.”

Broadhurst: “These days, you have to juggle big things. A few years ago, we were all about manufacturing and most of the big issues were within that arena. Today, our core skill is knowing about manufacturing – understanding the production engineering issues. Putting that knowledge into designs gives us a special lead. But that whole manufacturing issue has simply become the kernel. The equally important outer shell is the supply interface. That’s the new big issue. I wish I knew what the next one will be.

“We used to be a pretty special manufacturer. Now, we’re even more special. Our competitors are either manufacturers or delivery companies. But none of them is both.”

So should Broadhurst have caught a plane to China years ago? “I don’t think so. You have to be of a certain scale to do this. Five or six years ago, we would be putting into production a design that was only 80 per cent final. The other 20 per cent we would get right via an iterative process between the factory floor and R&D. You can do that when they’re only yards apart. But if you’re sending your design off 8,000 miles and it’s coming back to you by the container-load, you need a certain maturity to do that.”

Alistair Blair is an award-winning business journalist.

“Vendor reduction programmes”

NTL – an important customer of Technetix – used to have a purchasing department. Now it has a supply chain department.

Senior manager, Jane Owen: “We used to have 77 stock locations. I can’t tell you how many suppliers we had. Stock items ran into thousands. The value of stock was £150m. When the squeeze was on [NTL - a US company although most of its operations are in the UK - actually went through the US Chapter 11 bankruptcy process, emerging in January 2003], that figure got a lot of attention, and so did the administration it involved. Now we have two stock locations.

“How did we get there? We picked out suppliers we saw as either key or capable or both and invited them to take some of this burden away from us. We got a wide range of responses. Some refused. Some tried but failed. Some knew what we needed to do better than we did ourselves.

“Technetix proposed internet ordering. We took some convincing. Fine in theory but making it work in practice looked like a potential distraction. They made it work.”

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