Engineering sector focus: Industrial revolution

The engineering sector is not quite back on its feet after a tough few years, but it’s certainly on its way. Jodi Bartle reports

The engineering companies are experiencing something of a renaissance after a few dismal years. The disparate markets within the sector – ranging from steel production, ceramics manufacturing, automotive, defence, aerospace, precious metals and electronics – have all suffered in varying degrees from challenging conditions in a downturned economy.

But things are changing. Recovery programmes and cost-cutting strategies along with a softer global market are resulting in engineering firms reporting tentative rises. For some the question is not survival, but where to go from here.

Many in the industry admit they are not quite there yet. Rufus Ogilvie Smals, head of legal at automotive and aerospace manufacturing company GKN, says his company’s answer to difficult market conditions has been to trim costs accordingly. “Market conditions have been challenging in aerospace, particularly after 9/11,” he says. “The civil aerospace market is not expected to bottom out until next year. Meanwhile, the automotive market is extremely competitive with continuous cost pressures in order to maintain acceptable profitability.” Ogilvie Smals says the acute issues are pressures on profit margins leading to the need for extreme care on internal costs.

Cutting costs is a strategy also employed by metals group Corus as part of its extensive recovery programme, which has seen the company get “out of the hospital, off the intensive care ward and on the road to recovery”, according to Corus lawyer Richard Shoylekov. The group, which announced 13,000 job cuts in five years and lost more than £2bn since it was formed in 1999, is now expecting UK operations to return to an interim profit, while an expected strong demand for steel in the US and Asia looks set to see profits progress.

Shoylekov, at the legal helm for a mere three months, says: “One of the initiatives we’re going to look at as part of our broad restoring programme is how to rationalise our external firm usage, making it more cost-effective. We’ll look at how we use and instruct firms, as we do spend a lot.”

International materials’ technology company Cookson has also recently boosted profits by cost-cutting, discarding loss-making businesses and by taking advantage of a general upturn in the electronic market.

Last year, Cookson boasted a £33m profit, which soared above the 2002 profit of just £4m. Legal head Simon O’Hara says that because Cookson’s legal work follows its commercial drive, there has been a strong focus on raising cash from capital. “We underwent the rights issue two years ago, and since then have been very focused on cash generation,” he says. “We’ve been ‘rationalising’ our business and squeezing cash from assets, which, for example, has involved getting rid of disused property. Strategic advice has included ensuring the legal issues have been considered as well.”

Mott MacDonald, an international engineering consultancy firm recently earmarked by The Sunday Times as being number 66 in its Top Track 100 private companies list, has had a less difficult time. Head of legal Philip Gregory says: “Most of our sectors have been very successful and overall the market has not been seen as unduly tough.”

So, what now? For those companies that have battled their way out of the downturn and are following some fundamental shifts in strategy, a presence in the international market seems to be a common focus. BAE Systems head of legal Michael Lester says that the company’s principal aim is to grow the defence and aerospace businesses in North America, as “there is a lot of expenditure and large successful M&A concentrated there”.

For Gregory, the focus is on extending Mott MacDonald’s international presence. “A few years ago we were seen as a UK company with international work, now we’re perceived as an international company with business in several locations. But our aim is to become a genuinely global network as opposed to being just a hub and spokes.”

He adds that he is cautiously optimistic about Mott MacDonald’s operations in the Far East, which have involved forming alliances, bidding for work and employing 900 people in India alone.

Shoylekov says that Corus will be seeing a lot more acquisitions and disposals in an attempt to refocus business. As for an international reach, he says: “We’re certainly going through exciting changes, but we have to walk before we can run.” His belief is that the group will begin to focus internationally in the medium term.

This international focus extends to the US market, which appears to be a separate consideration. O’Hara concedes that the US has a big cultural impact and notes that regulations tend to spring from there. Lester says that most defence spending is in the US, dwarfing UK and European spending generally. He says that in the UK the Government has spending constraints and therefore has more difficulty in meeting requirements. The lawyers generally agree that the US moves in a different rhythm to the UK and elsewhere, Gregory owing it to the fair amount of publicly funded work there.

The ever-present threat of class actions and knock-on effects stemming from the US is a continuing concern, while compliance and regulatory issues also receive a name-check. Ogilvie Smals points to product safety litigation issues and the related Tread (Transportation Recall Enhanced Accountability and Document) Act as an example. “The effect of the act is to export US regulatory requirements so that if a product on sale in the US fails anywhere in the world, there is an obligation to make disclosure to the US authorities. The result is creeping internationalism and increased risk of involvement in US class actions,” he says.

The lawyers agree that compliance issues and regulatory control have increased tremendously across the UK and globally. “Regulators seem to be getting into everything. The increasing degree of compliance and the cost of widening governance issues fuelled by occasional corporate scandals have become increasingly burdensome,” says Ogilvie Smals. Lester adds: “They are an in-house lawyers’ bane – it is so difficult to keep abreast and keep everyone informed of changes.”

Revenue £5bn
Annual legal spend N/A
Employees 40,000
Head of legal Rufus Ogilvie Smals
Legal capability 14
Main law firms Clifford Chance, Linklaters, Simmons & Simmons and Wragge & Co

Head of legal Rufus Ogilvie Smals has been at GKN for most of his professional life. “When I joined the company 25 years ago, GKN had 106,000 employees and was the second-biggest steel company in the UK. We were the world’s largest in forgings, welding equipment and fasteners. Now we’ve moved out of all that, other than automotive and aerospace.”

The FTSE 100 company has expanded its automotive operations in Eastern Europe and other developing countries and during the past six years has become the world’s largest sintering technology company.

GKN’s global capacity retains a whopping 30 relationships with law firms across the world. Only 25 per cent of these are centred in the UK, with Clifford Chance, Linklaters, Simmons & Simmons and nationally Wragge & Co taking the largest chunk.

“We outsource litigation almost in its entirety, although we don’t usually have much of it. If we do ever become involved in a US class action we might retain someone in an in-house litigation management role. We outsource real property and day-to-day minor cases. If we have a City matter, we will bring in external counsel because our directors are bound to take independent advice,” he says.

Revenue £7bn
Annual legal spend N/A
Employees 49,000
Head of legal Richard Shoylekov
Legal capability Nine
Main law firms DLA, Lovells and Slaughter and May

Richard Shoylekov has undergone a baptism of fire since joining Corus three months ago. The group has battled with a consistent downturn of profits since its inception and has weathered 13,000 job cuts in five years. But Shoylekov is optimistic for Corus’s future.

Corus was formed in 1999 by a merger of British Steel and Koninklijke Hoogovens. It manufactures, processes and distributes metal products as well as providing design, technology and consultancy services.

Shoylekov began his career at Freshfields Bruckhaus Deringer, before joining Cadwalader Wickersham & Taft. He then went in-house to Agip, the upstream oil and gas division of Eni, as head of the UK legal function, later becoming global general counsel.

BAE Systems
Revenue £13bn
Annual legal spend £5-7m
Employees 90,000
Head of legal Michael Lester
Legal capability 55
Main law firms Allen & Overy, Cravath Swaine & Moore, Linklaters and Slaughter and May

Group legal director Michael Lester has headed the legal function at aerospace and defence company BAE Systems for five years, following a tenure at GEC British AeroSpace and a private practice stint as a partner at Eversheds. His responsibility runs to all legal matters within the BAE Systems group of companies – a mammoth task considering the size of the BAE Systems empire and its acquisitive penchant.

A flurry of M&A activity has seen BAE Systems become the new owner of Boeing’s Texas-based commercial electronics business, while in the UK the company made a last-minute £355m snatch for UK tank-maker Alvis. BAE Systems also owns 20 per cent of Airbus.

Not surprisingly, Lester’s work is largely centred on M&A and much of it is not in the public domain. Specifically, Lester’s corporate activities have included the implementation of euro systems in Italy and the establishment of two joint ventures.

Lester’s team has recently focused on the Export Control Act, which deals with export technologies and broadens the existing legislation. He says: “We’ve done a lot of work on understanding the implications – we have a few experts in the company who do little else but consider the implications of the act and we are currently in discussion with the Government about it.”

Mott MacDonald
Revenue £500m
Annual legal spend N/A
Employees 8,000
Head of legal Philip Gregory
Legal capability One solicitor and seven paralegals in the UK
Main law firms Baker & McKenzie and Slaughter and May

On the day that Allen & Overy seconded Philip Gregory to a bank, he saw the in-house light. “I’d been in the commercial property department for five years before I was offered a secondment to a bank that was suffering problems. This gave me an exciting opportunity to be at the centre of a commercial organisation and I’ve never wanted to leave that environment,” he says.

Eight years and two banks later, Gregory joined Mott MacDonald as its second UK lawyer. Gregory splits his time between company secretarial matters – involving meetings, committees, risk management and policy issues – and giving advice on routine and varied matters.

The company began life as the merger of two engineering firms. Since 1990, Mott Macdonald has become less focused on pure engineering and now consults in many sectors, including education and health. It operates in more than 100 countries. The company is almost entirely owned by staff, which means Gregory deals with fellow managers as shareholders. He says this is a very good model, although it can mean that it is difficult for the company to grow beyond a certain speed and there can be generational issues. “But it has allowed us to grow as fast as we’ve wanted it to and it is a good model for turbulent times,” he says.

The company handles small acquisitions in-house, typically in the UK. Gregory says: “We’ve achieved a few acquisitions a year, not all large. We’re not heavy users of external law firms. But we have long-term relationships with three firms, ad hoc relationships with others, and we use other firms as part of a team, such as when we’re involved in joint ventures.”

Cookson Group
Revenue £1.6bn
Annual legal spend N/A
Head of legal Simon O’Hara
Employees 22,000
Legal capability One in the UK, four globally
Main law firms Clifford Chance, Freshfields Bruckhaus Deringer, Hammonds, Linklaters and Wragge & Co

Simon O’Hara trained at pre-merger Rowe & Maw before leaving to pursue an in-house career. His first foray was at Lloyd’s on the corporate side, then on to head of legal at Cookson, where he has been for the past three years. As O’Hara puts it:“I went from a highly regulated environment to one that was simply more fun.”

Materials technology group Cookson is comprised of three divisions – electronics, ceramics and precious metals. Each of the divisions has its own head and O’Hara advises each group strategically, overseeing any corporate work which is dealt with through the centre. “Cookson, like many companies, continues to review the strategic options open t
o its businesses to maximise shareholder value.”

O’Hara says Cookson outsources much of its legal work and his role focuses on the management of outside counsel. “Each firm on the panel has responsibility for discrete areas of work,” he says. “It’s simply not possible to do it all. I’m here to ensure the delivery of cost-effective legal advice, be a part of the team, to keep the channels of communication open and to ensure the board is kept involved. This is really my function.”