Sector Insight:Heavy Industry

The traditional heavy industry sector has been forced to move with the times in order to keep up with the e-commerce boom. Claire Smith and Tamzin Hindmarch report on what the sector now expects from its legal advisers

These are hard times for manufacturers in the UK. The traditional heavy industry sector is faced with the knock-on effects of utility restructuring, privatisation and the nation's obsession with new technology.

As well as increased competition, a change in customers and their needs, and pressure from rivals in the global market, the dotcom craze is drawing investors away from traditional markets and towards e-commerce and the new supply and demand chain it creates.

As a result, engineering companies and manufacturers are being pressed to do everything at a lower price. And in a bid to cut costs, many companies are demanding legal services at a cheaper rate too.

When it comes to selecting firms, long term loyalty, word of mouth reputation and close proximity are also important factors.

Tony Ventrella, group solicitor at electrical engineering giant FKI, says: “What we are looking for is a combination of factors – people we know or have been recommended to us, the level of experience, getting results and delivering on cost. We are very conscious of costs.”

Ventrella believes that the engineering sector has become cost aware because of external pressures.

He says: “In our experience within the engineering sector, because we are working in an environment where you are quoting fixed price contracts, you don't get into a situation where paying hundreds of pounds an hour for lawyers really adds value.

“If you can get the expertise equivalent in Birmingham or Leeds that is cheaper, there is no point in going to London. Most engineering companies have been reluctant to get involved with outside lawyers because of the expense. We don't necessarily have the high profit contracts that they may have in the financing sectors.”

Instead of using a formal legal panel, FKI turns initially to Hammond Suddards for UK work. Local lawyers are used abroad, sometimes on the recommendation of Hammonds.

Ventrella says: “They have been our lawyers for a long time, and that's just the way the relationship has built up. If I had a problem that I felt we needed to use external lawyers for, it would be one of my first points of call.”

A clear sign of industrial decay in the UK has been Rio Tinto's decision to withdraw most of its business from the UK. The mining and minerals giant's assets, which last year created an estimated turnover of $1bn (£632.7m), are now based almost entirely overseas. Just a decade ago, its UK business accounted for 30 per cent of its activities – today the figure is less than 1 per cent.

But Rio Tinto's head office remains in London and because of this, a large portion of the international legal team is still based in the UK.

Head of legal Charles Lawton says: “The reason for this is that we have focused on mining of all types and in this country there are not many mines and mineral deposits left. We have to go where the deposits are so we shed our manufacturing businesses and bought mining businesses elsewhere.”

Though the number of in-house counsel has depleted in recent years, there is still a team of five in the UK, as is the case in Australia and the US.

Lawton says: “There would be no point if the headquarters weren't here. But this is where all the directors sit and many of the senior executives and heads of product groups, so there is a need for a legal team in London to make sure that if, for example, they want to buy or sell assets or merge or establish joint ventures, we are already here.

“There are always proposals coming up from the strategic end of the business and we are constantly looking at potential acquisitions and targets – there is a legal dimension to all these types of activities.”

Yet in contrast to many in the manufacturing and industrial sectors, as a supplier of raw materials for new technology, Rio Tinto is actually profiting from the arrival of e-commerce.

Lawton says: “Whether the hardware is your computer on your desk or a box on top of the television, every single one of these devices uses the products which we supply – they all contain metal of one sort or another so there is a constant demand as a result of the expansion of the IT industry.”

He compares today's technology scare to the days when fibre optics were introduced as the communications medium of the future.

“Ten years ago people worried about optic fibres being used for telephones and those sort of things rather than copper, but it never took our business in the way we thought it would. In fact copper consumption has actually been increasing year on year,” says Lawton.

According to Lawton, e-commerce has also made it easier for the company to tender for suppliers. He says that rather than the time-consuming process of approaching firms individually, businesses can simply put out an appeal on the internet and wait for replies.

Rio Tinto uses external lawyers in countries where the company does not have an in-house presence and in the UK for specific work.

Linklaters & Alliance is the company's main firm. It is also used by the the pensions and tax departments, which are separate operations.

“We try very hard not to employ very expensive skills if we can possibly do it ourselves. For less significant work we tend to use smaller or niche firms, which has so far worked very well,” says Lawton.

UK firms other than Linklaters used for outsourced work vary and are a mixture of City, niche and smaller firms. They are not selected from a panel, but are chosen on an ad hoc basis.

Other UK work, including litigation and employment, is dealt with by Lewis Silkin or Davies Arnold Cooper. Herbert Smith may also handle litigation, and international arbitration is occasionally outsourced to Allen & Overy.

“We have good relationships with these firms and I would choose from them according to which one seems the most appropriate to deal with the matter in hand,” says Lawton.

FKI's Ventrella says that throughout the sector panel arrangements vary according to the size of the company. “Some of the other engineering companies have much more formal panel arrangements than us. It seems that the bigger ones have formal panels, the smaller ones have favourite firms and the smallest have ad hoc arrangements,” he says.

For example, Cheshire-based Bodycote International, which treats and tests metals, outsources all its legal work as it keeps a team of just six senior staff and no in-house legal team at its head office in Macclesfield.

For more than 20 years, it has relied almost entirely on Alexander Tatham in Manchester. When Eversheds merged with the firm five years ago the company maintained the relationship.

The decision to use a local instead of a City firm was a deliberate one. Company secretary John Grime explains: “It is a very historic connection which has been maintained well by both sides over the years.

“If you are happy with the firm you are working with, I cannot see any reason for change.

“Using a local firm makes communication much easier. The senior partner only lives two miles down the road which means he can make early morning meetings before going into work.”

While Eversheds deals with the majority of the company's legal work, largely relating to acquisitions and disposals and corporate work, other firms are used and selected on an ad hoc basis. But no panel or beauty parade is used. Instead firms are picked at random depending upon the specialism required.

Throughout the sector there is often much more loyalty to individuals than firms.

Ventrella says: “I have always felt more comfortable with individuals than firms because going to a particular firm does not guarantee any particular quality.

“It guarantees that you are not going to get a lemon, but not a lot else. I would only if I could not think of any individual.

“If we need a lawyer to advise on position X the first thing we ask is, 'Do we know anyone?' Then we talk to other lawyers to see whether they can recommend anyone, and then we may look them up in one of the directories. Though generally we have managed to do it by our own knowledge.”

Earlier this year engineering giant Invensys decided to scrap its panel of firms in favour of individuals. Senior vice-president Jim Bays has co-ordinated a list of individual lawyers into a database which can be accessed by his colleagues around the world.

He said: “We need different skills for different matters. What we are looking for is certainly expertise, and an ability to take a commercial view.”

Invensys also claims to be moving into the technology realm and is turning its back on traditional manufacturing.

As companies continue to follow that path, the future promises plenty of work for outside lawyers. In the meantime, struggling engineering companies must either move with the times or continue cutting the cost of outside advisers.

FTSE 100 COMPANIES

Billiton

One of the world's largest aluminium producers and the largest exporter of thermal coal, it has a controlling interest in the world's leading integrated producer of ferrochrome and ferromanganese and a 50 per cent interest in Richard Bay Minerals, the world's largest producer of titanium oxide slag.

FTSE ranking: 5Market capitalisation: £5.1bn

Rio Tinto

One of the world's leading mining and minerals companies. The group underwent a major restructure during the 1990s, centred on the creation in 1994 of two separately listed companies, the London-listed Rio Tinto Plc and the Australia-listed Rio Tinto Ltd.

FTSE ranking: 3Market capitalisation: £9.8bn

Rolls-Royce

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FTSE ranking: 86

Market capitalisation: £3.4bn

Blue Circle Industries

Parent company of the international group whose business is manufacturing and sale of heavy building materials. It is the UK's largest producer of cement and a leading producer overseas of cement, concrete and aggregates.

FTSE ranking: 8Market capitalisation: £3.4bn

Imperial Chemical Industries (ICI)

A commodity chemicals business which last year announced it would undergo restructuring and sell off businesses to concentrate on becoming a specialist chemicals entity.

FTSE ranking: 7Market capitalisation: £4bn

GKN

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FTSE ranking: 50

Market capitalisation: £6.35bn