In June 2021 Prime Minister Boris Johnson set out to establish a new ministerial council to provide strategic direction on how science and technology can be used to tackle some of the world’s biggest societal challenges and help to “level up” the UK. Steve Unger looks at lessons from history to explore how the UK might better establish itself as a global tech leader.
The technology sector is dominated by global giants, mostly based in the United States (US) and the Far East. Policymakers in the United Kingdom (UK) and the European Union want to strengthen domestic capability, as a source of economic growth, and to improve the security of supply chains.[1] But the technology sector is subject to strong scale economies, creating a practical limit to what can be achieved using the policy levers available at national level.
The challenge we face today is not a new one. During the 20th century several European countries were able to create globally successful suppliers of telecommunications equipment – Ericsson (Sweden), Siemens (Germany), and Alcatel (France) – despite facing fierce competition from US suppliers. The UK failed to do so, despite having dominated global telecommunications during the 19th century. It’s instructive to look at these experiences and consider what can be learnt from them.
Siemens AG is now an industrial giant, manufacturing products from fridges to trains. It was founded in 1847, by Werner von Siemens, to produce equipment for the newly invented electric telegraph. Siemens led the creation of the Prussian state telegraph network – starting with a telegraph line from Berlin to Frankfurt, then the most ambitious project in continental Europe. The company quickly grew internationally, winning a major contract to build the Russian state telegraph network. Werner’s brother Wilhelm moved to the UK and founded a subsidiary to manufacture and lay submarine cables, a business where the UK was then globally dominant. Over time Siemens diversified, producing many different products which harnessed the power of electricity.
Ericsson is now a major supplier of communications technology and one of the world’s leading suppliers of 5G mobile networks. It was founded in 1876 by Lars Magnus Ericsson to manufacture telephone equipment. Ericsson benefitted from an early partnership with Henrik Thore Cedergren, founder of the independent telephone company which served Stockholm. Competition between this company and the state-owned incumbent made Stockholm the most vibrant market for telephony in the world, with lower prices and higher market penetration than any other comparable city. But this domestic market was relatively small, and Ericsson quickly expanded internationally. For example, by 1900 around half of Ericsson’s revenue was generated from the United Kingdom.
The development of equipment manufacturing in France took several twists and turns. For several decades following the end of the first world war, the French market was dominated by a US firm ITT (International Telephone and Telegraph). ITT had started out as a network operator, building telephone networks in Puerto Rico and in Cuba, before being commissioned by the Spanish government to create the network now known as Telefonica. In 1924 it acquired the overseas assets of Western Electric, the manufacturing arm of the US Bell system, making it the major US-owned supplier active in Europe.
French administrations responded with initiatives designed to strengthen domestic suppliers. Particularly important was the creation in 1944 of a national telecommunications research centre called CNET (Centre National d’Etudes des Télécommunications). CNET carried out pioneering research on digital telephone exchanges, which it handed over to the French company CIT-Alcatel to commercialise, leading to the first operational system in the world. During the late 1970s and early 1980s a series of interventions, including a forced nationalisation of all major manufacturers, merged CIT-Alcatel with local subsidiaries of Ericsson and ITT. When the companies were privatised again, Alcatel was the dominant supplier to the French market. It went on to be a major player in global telecommunications markets, and is now part of Nokia, one of the world’s leading suppliers of 5G networks.
The experience in the United Kingdom was less fortunate. The country had a strong track record in equipment manufacture and, during the late 19th century, pioneered the use of subsea cables to build the world’s first global communications network. But the approach taken by the British Post Office to the procurement of telephone equipment, after nationalisation gave it control of the domestic telephone market, proved to be disastrous.
From the 1920s onwards the Post Office established a series of “Bulk Supply Agreements” which governed the procurement of equipment. These amounted to a series of state-sponsored cartels. Between four and eight manufacturers were party to each agreement, and these suppliers were required to establish a committee to allocate orders between themselves. Technical specifications of equipment were fixed by the Post Office, as were prices. The agreements fragmented the domestic manufacturing industry and made it difficult for any individual supplier to innovate.
By the 1970s, when the process of digitising the UK telephone network started, three domestic suppliers of telephone exchanges remained: GEC, Plessey, and STC. Digitisation required the development of a new type of telephone exchange, which came to be known as ‘System X’. A decision was taken to divide the manufacture of this exchange between the three suppliers, coordinated by the Post Office.
This did not work out well. The 1977 Carter Review, whose recommendations for reform started the process that led to the privatisation of BT, highlighted poor management by the Post Office of the System X programme. The System X exchange was successful in the UK, but it was never exported in significant volumes. GEC and Plessey merged to create a company which subsequently became known as Marconi, and Marconi went bust in 2005 following a failure to win a key BT contract. Thus ended the UKs capability in industrial scale telecommunications manufacturing.
The lesson from these varying experiences is that there is no single path to success. But it is possible to extract some pointers:
- The experiences of Ericsson and Siemens suggest that a vibrant domestic market provides a useful starting point, but that early international expansion to gain scale is critical.
- The emergence of Alcatel as a global player shows that directed R&D, combined with state-sponsored consolidation, can be effective, despite the process offending traditional Anglo-Saxon policy sensibilities.
- The UK suffered from the worst of both worlds. The domestic market for its companies was fragmented in the name of competition, then centrally managed in a manner that undermined competition.
As so often in economic policy, identifying the ingredients for success is easier than specifying the steps in the recipe. But getting the right ingredients – outstanding research, encouraging expansion internationally and a strategy which recognises the benefits of both scale and competition – is a vital first step.
[1] See for example the UK’s 5G supply chain diversification strategy, and the speech by EU Commissioner Thierry Breton at Hannover Messe Digital Days.
Image: The Post Office Tower, The National Archives, CM 22/195 (40)
The views and opinions expressed in this post are those of the author(s) and not necessarily those of the Bennett Institute for Public Policy.
