It’s said that the debate over our place in Europe has exposed a great demographic schism at the heart of the nation. The vote was split across age and socio-economic perspectives, the north/south divide and even across racial lines. But it might also have exposed a lack of national self-confidence, or at least among that half of the electorate in the grip of what might uncharitably be described as a collective Stockholm syndrome. But contrary to what the naysayers would have us believe, whatever the shape of our eventual trading arrangements with our erstwhile partners in the European Union (EU), the UK will continue innovating, financing, fabricating and exporting – with all the attendant opportunities for investors. We’ve decided to highlight some highly competitive markets in which the UK has established a significant presence through the employment of advanced technologies. And one key area in which we could restore a previously held technological advantage.
At the start of the 1960s, Harold Wilson made his famous “white heat of technology” speech; one of the most recognisable of Labour rallying cries, but less remembered for the thrust of its content, which warned of the disruptive challenge of automation and computerisation. The paper on which the speech was based – ‘Labour’s Plan for Science’ – foresaw that the period from 1960 to the mid-1970s would entail greater change than the previous 250 years of industrialisation: ergo the UK’s economic health would depend “to a unique extent on the speed with which we come to terms with the world of change”. You could make the case that it took the UK much longer to transition its economy than Wilson might have originally anticipated, but there’s no doubt that he would recognise that politicians, entrepreneurs, financiers and the general public have certainly bought into the “white heat” narrative by 2016. And the latest statistics back this up.
Patent applications on the rise
Patent applications from the UK at the European Patent Office (EPO) grew by 5.7 per cent last year, the biggest increase in five years and the second highest in the past 10 years.
With 540 applications, Rolls-Royce (RR.) was the UK's most prolific patent applicant. By upping the number of applications from 182 in the previous year, Rolls-Royce became the UK frontrunner, followed by last year's leader Unilever (ULVR) and BAE Systems (BA.), which increased its number of patent applications by 152 per cent. BT Group (BT.A) holds next place in the pecking order, followed by GlaxoSmithKline (GSK) and Vodafone (VOD). Within the leading technology fields, the growth in applications grew most strongly in computer technology (+37 per cent), transport (+35 per cent), including a surge in patent applications from the automotive sector, and engines, pumps and turbines (+22 per cent), with a growing number of patent applications in clean energies filed.
Meanwhile, latest figures from the World Intellectual Property Organisation show that patent applications by UK companies have not only started to rise above the global average, particularly in the filing of international patent applications, but that UK innovators are increasingly looking to market inventions and technology globally. Overall, the UK ranked seventh in the 2015 league of countries that submitted applications under the Patent Cooperation Treaty (PCT), which is one of two routes to secure international legal protection for a new idea. It seems a reasonable position in the global pecking order, although we still only file about a tenth of the number of applications submitted by the US and roughly a third of those filed by South Korea. Obviously, that needs to improve.
Intellectual property and business registrations
That said, the concentration of PCT applications within a relatively limited number of top filers disproportionately skews the figures for some countries, but the UK - with no representative companies in the leading 50 PCT filers - appears to have a more diffuse research base, including two of the leading university filers, in Imperial College and the University of Oxford. The former institution's intellectual property has been commercialised through Aim-traded Imperial Innovations (IVO) for some time, but there are other options for investors looking to tap into the growth of UK innovation: PureTech Health (PRTC), a science-driven healthcare specialist targeting disruptive clinical approaches to disease management; Allied Minds (ALM), an innovation company that funds and develops start-ups based on early-stage technology; and IP Group (IPO), a venture capitalist for UK technology companies.
The new Conservative administration under Theresa May recently addressed one of the main areas of concern for universities and the wider scientific complex when it confirmed that it would maintain existing EU research subsidies subsequent to the eventual UK withdrawal. Indeed, last June’s vote looks as though it has already precipitated a rethink about state-funded incentives and investment programmes to support research and development through favourable tax incentives, together with grants and subsidies. Even if we were left with the so-called ‘hard Brexit’ option outside the single market, it would remove many (but not all) of the existing European restrictions against state aid, so there could be more leeway to provide state assistance to British businesses.
The rise in the number of intellectual property patents provides a pointer to the renewal of what might be described as entrepreneurial spirit in the country; a dynamic that some believe was given impetus by the global financial crisis. There’s certainly enough anecdotal evidence to suggest that’s the case, and the latest figures released by campaign group StartUp Britain show the UK continuing to thrive as an entrepreneurial hub, with new business registrations up in the first half of 2016. Around 350,000 companies were set up in the UK during the period, representing a 14.3 per cent increase on 2015 on an annualised basis.
Britain and the inexorable rise of fin tech
Of course, the UK, in common with other post-industrial economies, has lost much of its heavy industry, a point borne out by the recent travails of the Port Talbot steelworks. So when we’re talking about start-ups, it’s unlikely that many breaker’s yards or smelting works are being registered at Companies House. Instead, a growing proportion of start-ups in the UK now form part of what’s often labelled as the ‘knowledge economy’. You couldn’t find a better example of this trend than the rise of the ‘fin tech’ industry; an inherently disruptive form of business based on the use of innovative software and digital technology as an alternative to incumbent financial systems. The term was originally applied to computer technology used in the back office of banks and trading houses, but now describes a wide variety of technological applications used in personal and commercial finance.
It’s not difficult to appreciate why the UK is at the forefront of this rapidly growing industry. Combine a stringent and transparent regulatory backdrop with easy access to business capital, throw in first-rate financial services infrastructure and a large and technologically savvy customer base and you’ve got all the necessary ingredients to drive the industry forward. And that’s saying nothing of London’s unique position as a global trading hub. The upshot is that deal volumes in the fin tech space have been growing at 74 per cent a year in the UK since the global financial crisis, according to research published by EY; all the more impressive when set against a global average of 27 per cent and 13 per cent for Silicon Valley. The UK and Ireland now account for around 40 per cent of all fin tech investment in Europe, according to Accenture. Annual revenues generated across digital payments, software, data and analytics in the UK is now in excess of £20bn – and, if anything, the rate of growth appears to be accelerating.
As with many industries that have expanded rapidly, there is one noticeable drawback: the difficulty in formulating an effective regulatory framework. Thus far the UK appears to have avoided regulatory strictures that inhibit innovation or act as a disincentive to investment. And the UK regulator is actively promoting its approach to regulation as a model for other countries to follow – with some success, it might be added. Admittedly, some fin tech companies have expressed concerns that they could be cut off from the EU market once Britain leaves the trading bloc, but we’ve yet to see much evidence of a wholesale migration of financial companies to Frankfurt, Luxembourg or Paris.
Mounting a robust defence
Although a source of discomfiture for some, the UK remains at the forefront of technological development within the wider aerospace/defence sector. In 2015, the UK aerospace, defence, security and space sectors’ contribution to the UK was: £65bn in turnover; £35bn in exports; 340,000 direct jobs; and £26bn in value added. The UK’s aerospace sector is the largest in Europe and second globally to the US, generating well-paid jobs, high-tech exports and growth across the country.
The UK is also the second-largest defence exporter in the world, again behind the US. That’s in addition to its key strategic objective of supplying the equipment and services needed to safeguard national security. The UK value chain in the sector is underpinned by a growing network of innovative businesses, with more than 5,000 SMEs directly supplying the Ministry of Defence (MoD). The defence procurement model in the UK is probably the nearest commercial set-up we have to Germany’s much-vaunted Mittelstand system, characterised by long-term focus, nimbleness and by a common set of values and management practices.
Whitehall policymakers are in no doubt as to the wider sector’s importance to the UK’s balance of trade, but also in strategic terms. That’s why a new UK government funding programme has just been put in place, which will see £800m allocated to the development of new and disruptive defence technologies, via the MoD’s innovation and research insights unit fund.
You couldn't find a better example of a potentially 'disruptive technology' than an initiative under way involving the MoD and private industry, most notably BAE Systems (BA.) - the world's third-largest defence contractor. The Taranis stealth drone, wisely held to be the most advanced British aircraft ever built, is currently undergoing an exhaustive testing programme, in a bid to discover what is technically feasible in this kind of aircraft. A number of other British contractors are contributing to the development of Taranis, including Rolls-Royce, Qinetiq (QQ.) and Cobham (COB).
The IC contacted a BAE spokesperson only to be told that the group is bound by The Official Secrets Act, so detail on the Taranis (named after the Celtic god of thunder) project is rather thin on the ground. However, it’s generally thought that the prototype, which feeds into the Anglo-French Future Combat Air Systems (FCAS) agreement, is capable of supersonic flight, is virtually invisible to radar and can fly and select targets autonomously. Many defence analysts believe that the latest generation of piloted fighters such as the F-35 joint Strike Fighter and the Eurofighter Typhoon might represent the last chapter for manned assault aircraft due to the inherent operational limitations in having a pilot on board, coupled with the prohibitive cost of modern fighter jet programmes. If so, BAE and its UK partners will be particularly well placed to exploit the strategic shift towards unmanned combat aircraft.
Britain's nuclear option
Britain has remained a leading light in aircraft design and avionics ever since the second world war, but we haven’t always managed to stay ahead of the field in every area of endeavour. Five years prior to Harold Wilson’s ‘White Heat’ speech the world’s first commercial nuclear power station, Calder Hall at Windscale, Cumbria, had gone into service. At that time, we were vying with the Americans and the French for mastery of civilian fissile applications, but we have let our relative standing slip in the intervening period, although that may be about to change.
The UK is entering a new stage in its nuclear history. The construction of new nuclear power plants, an expanding decommissioning obligation and delivery of the Successor submarine class to sustain our nuclear deterrent will create enormous investment in the sector over the next decade. In years to come, the nuclear industry will have to compete with far more sources of renewable energy, and within an energy market that some believe will be saturated with abundant and inexpensive shale gas.
However, the current impasse over the proposed Hinkley Point C nuclear power station development shows that there are conflicts at the top level in relation to where Britain’s nuclear industry should be headed. Critics of the project maintain that the European Pressurised Reactor (EPR) that is proposed for Hinkley was not even state-of-the-art when the project was originally proposed. And that’s saying nothing of concerns that have recently been aired about the extent of China’s involvement from a security angle. After pre-initiation delays and cost overruns, there’s now genuine political pressure to either pull the plug on the original proposals, or to substantively alter the project. The bottom line is that Britain’s nuclear industry faces an uncertain future as foreign companies position themselves to rebuild the UK’s nuclear capability – do we want to be simply a host nation at the expense of our indigenous industry?
Rolls-Royce and a modular future
However, there are alternatives in the offing that could help to reinvigorate an industry that has seemingly lost its confidence and, more worryingly, its innovative spark. Many energy analysts now take the view that small modular reactors (rated at less than 300MW) could provide a viable alternative to EDF’s two EPRs at Hinkley Point C (2 x 1,600MW) or Hitachi-owned Horizon Energy’s proposed advanced boiling water reactors at Oldbury and Wylfa (with a combined rating of 1300MW).
It was widely reported that Rolls-Royce, which already makes nuclear reactors for submarines, has been shortlisted to build a fleet of mini nuclear reactors as part the government’s £250m nuclear research programme unveiled in last year’s autumn statement, along with a competition to identify the best value small modular reactor design for the UK. Separately, it was announced that unlisted Sheffield Forgemasters International (SFIL) and Oregan-based NuScale Power will work together to develop the manufacturing techniques required for the future deployment of small modular reactors in the UK, as part of a programme supported by government agency Innovate UK to develop innovative forging and fabrication solutions for the nuclear industry. The partnership underlines the importance of a collegiate approach in projects of this scale.
SFIL will forge a large civil nuclear reactor vessel head by the end of 2017, but this segment of the nuclear industry faces its own challenges, not least of which is the licensing process to ensure that the new technology is safe. This would cost millions and take five years or so to complete, although central government has probably warmed to the idea of a homegrown solution given the extent of the debacle at Hinkley Point C. The prospect of modular reactors is apparently attracting support in government circles because they are quicker to build and could be manufactured largely in the UK and exported. They offer flexibility in terms of our future energy mix and would only entail a fraction of the costs associated with the projects currently planned.
A closer look under the bonnet
When most people think about modern cars, they are unlikely to think about Britain. Iconic brands such as Mini, Rolls-Royce, Jaguar, Land Rover and Bentley have been sold off to overseas owners, while motorways, roads and country lanes, both at home and abroad, are now clogged with the latest German, Japanese and North American models.
Yet even though the best-selling Volkswagens, BMWs, Toyotas and Fords are associated with distant lands, a closer look under the bonnet suggests that a portion of their success should be credited to British engineering. From vital engine parts to decorative interior features, plenty of the components that make these cars special are in fact crafted on these shores.
Most of the companies at the heart of this lucrative industry are not household names. But that shouldn’t undermine their importance and reputation for engineering excellence that, in many cases, dates back to the early 20th century.
GKN (GKN) traces its origins back to the industrial revolution and the world-famous Dowlais ironworks. In automotive circles, the company is now best known for its innovative systems designed to transmit power from the engine to the wheel in the most efficient, reliable and economical way possible. Its lightweight driveline technology features on the latest range of cutting-edge hybrid and electric vehicles, including the Ford Focus RS, Porsche 918 and BMW i8.
Johnson Matthey (JMAT), which started out in 1817 as a gold assayer, has also been busy developing solutions to match today’s automotive needs. In recent years, one of its smartest moves was building a niche product capable of converting dirty fumes from exhausts into less toxic gases. High returns from this heavily regulated market have enabled the speciality chemicals maker to invest in new technologies. That includes lithium-ion batteries, which are used to power everything from cordless lawnmowers to the McLaren P1 plug-in hybrid supercar.
Johnson Matthey has Ricardo (RCDO) to thank for making its eco-friendly catalytic converters roadworthy. The multi-service engineering consultancy has carved out a deserved reputation for improving vehicle efficiency – its founder, Sir Henry Ralph Ricardo, helped to design the internal combustion engine and revolutionised how tanks are powered.
Sir Henry passed away in 1974, although his legacy still lives on through his company’s expertise and manufacturing of engines, transmissions, electric motors, battery packs and fuel cell systems. In fact, Ricardo often plays a leading role in bringing the latest breakthroughs to fruition, whether it’s for run-of-the-mill family cars or those whizzing around racing circuits.
David Coulthard, who spent the bulk of his successful Formula-One career driving for Ricardo’s strategic partner, McLaren, once proclaimed that Britain is “the centre of the universe of motorsport”. He may have a point, too. British drivers and race teams have secured far more F1 championships than their international peers. And some could argue that trophy numbers would be even more lopsided if it wasn’t for the design work and engineering excellence of John Barnard and Ross Brawn at Ferrari.
Looking further back, some of you may recall Sir Stirling Moss driving the first rear-engine car to victory at the 1958 Argentine Grand Prix. Rob Walker’s odd-looking creation went on to revolutionise the sport and fortify Britain’s reputation for mechanical innovation. Of the 11 teams in this year’s competition, seven are based in the UK and more than half across the Midland counties – an area otherwise known as Motorsport Valley.
Egham, Rickmansworth, Macclesfield and Thornton-Cleveleys are also hotbeds of automotive activity. These towns are home to some of the country’s sharpest engineering brains dedicated to taking cars to the next level.
For example, Spectris' (SXS) precision instruments offer carmakers the means to rigorously test products more quickly, while Senior's (SNR) flexonics arm designs a variety of fuel-efficient components for a customer base spanning Ford, General Motors, Peugeot and Renault.
Elsewhere, thermal processing specialist Bodycote (BOY) uses its world-renowned heat treatment processes to ensure that brake systems, pistons and other car parts go the distance. And polymer maker Victrex (VCT) utilises its lightweight, ultra-resistant PEEK plastic to develop better antiskid braking systems, transmission applications and clutches.
Then there’s AB Dynamics' (ABDP) vehicle safety prowess, Trifast's (TRI) fasteners, Carclo's (CAR) LED lighting, TT Electronics' (TTG) sensors, plus the infotainment capabilities of tech wizards Laird (LRD) and Imagination Technologies (IMG). With such a vast array of niche credentials on offer, the Society of Motor Manufacturers and Traders' claim that British manufacturers can produce 80 per cent of an average car’s components suddenly doesn’t seem so far-fetched.
