When bigger is not necessarily better

The rise of China as a great exporting nation has been a huge boon for consumers in the west. But it has posed difficult problems for producers, especially those who are in the direct line of fire from Chinese competition. Should they give up what they are doing and diversify or should they battle on, hoping that innovation and superior technology will keep them ahead?

Nowhere has this dilemma been more acute than in man-made fibres, which have become dominated by Asian companies. Some 60 per cent of the world's synthetic fibre capacity is now located in China.

The result has been a massive restructuring of the industry, with most of the former leaders withdrawing from the market. Yet there is one European manufacturer, Lenzing of Austria, that has survived as a key player, not only in Europe but also in Asia. Peter Untersperger, chief executive, recently announced an expansion of its plants in China and Indonesia, and a third Asian site is planned in India. It has done this, moreover, in a sector of the industry-cellulosic fibres derived from woodpulp, which include rayon-that was once thought doomed to decline.

The rise of Lenzing is a triumph of specialisation. It is also a David-and-Goliath story that highlights why large diversified groups are not always best placed to deal with rising international competition. The Goliath in this case was Courtaulds, the British company that pioneered the development of rayon before the first world war but now no longer exists.

When the original Lenzing plant was set up in 1938, Courtaulds was the industry giant. However, DuPont had just invented nylon, opening a new line of research that posed a threat to Courtaulds'main source of profit. Nylon, polyester and acrylic fibre were synthesised through polymer chemistry, and the leading producers were chemical companies such as DuPont, Hoechst and ICI. These fibres were more versatile than rayon and had easy-care properties that cotton and wool could not match.

How to reduce its dependence on rayon was a postwar preoccupation for Courtaulds. By 1960 it had its own acrylic fibre (Courtelle) and was making nylon on a small scale; it had also diversified in other directions, including paints. Lenzing, by contrast, remained much more dependent on its core business of cellulosic fibres.

During the 1960s and 1970s, Courtaulds continued to diversify, principally in textiles and clothing. The strategy was driven by Frank (later Lord) Kearton, who believed that, through scale and new technology, textiles in Britain would cease to be a declining industry and have every prospect of becoming a growth industry once more.

By 1975, when he retired, Courtaulds was a much bigger company, with a substantial stake in fibres, including rayon. But the viscose process by which rayon was made caused environmental damage that was no longer acceptable in many countries. So the producers had to decide whether to spend large amounts of money to clean up the process or to withdraw. Courtaulds chose to stick with rayon but also to work on a novel cellulosic fibre, made by a process known as solvent spinning .

The greenness of Tencel

Many of the world's leading retailers are seeking to demonstrate their commitment to sustainability. This means, among other things, using products that are made from natural materials by processes that do not damage the environment. Marks and Spencer, for example, launched its Plan A programme, aimed at combating climate change, reducing waste and using more sustainable raw materials, in 2007; the aim is to become the world��s most sustainable large retailer. Greater use of organic cotton forms part of this plan but Tencel, made from woodpulp by a process in which virtually all the chemicals are re-used, is also an option.

This research began in 1979, and at the end of that year Christopher (later, Sir Christopher) Hogg was appointed chief executive. His task was to bring order into the empire that Kearton had created. The investment in textiles had proved to be a serious error, mainly because of rising imports from low-wage suppliers, and this side of the group needed a great deal of sorting out; Hogg eventually demerged it as Courtaulds Textiles in 1990.

After the demerger, Courtaulds was still a diversified company. The paints subsidiary, which had been expanded by further acquisitions, looked to offer the best prospects for growth. With the continuing contraction of the European textile industry, would it make sense to get out of fibres? An argument for not doing so was the progress that the researchers had made with solvent spinning. They had shown that the process was pollution-free, and that the fibre coming out of it-which was given the brand name Tencel-was stronger than rayon and could be used to make finer yarns and lighter fabrics.

The first Tencel plant, in Mobile, Alabama, came on stream in 1992, and the initial response was enthusiastic. However, partly because of quality problems in converting yarn into fabric, the market developed more slowly than Courtaulds had expected. By the second half of the 1990s, the company found itself in a financial bind. It was spending heavily on the new fibre but not generating enough cash in the rest of the group. With the share price under pressure, Courtaulds was vulnerable to a break-up bid and, in 1998, Akzo Nobel of the Netherlands bought the company.

After the takeover, Akzo Nobel retained only Courtaulds' paints division. The fibres side was bought by CVC, a private equity firm, which sold the Tencel business to Lenzing in 2004. The Austrian company was by then producing its own solvent-spun fibre, but Thomas Fahnemann, an ex-Hoechst manager who had recently been appointed chief executive, believed that buying the Courtaulds plants would give Lenzing a dominant position in a promising sector of the market. He was right. While Tencel has not become a mainstream fibre, it has achieved part of what the proponents of the project in Courtaulds had hoped for. Although expensive compared with cotton or polyester, it was used in high-end garments where its exceptional softness and drape were valued. It also had the great advantage of greenness (see right).

As a cellulosics specialist, Lenzing was a logical home for the new fibre. Cellulosic fibres, of which rayon is still the most important, represent only 5 per cent of the world fibre market but they have some properties, notably absorbency, that the oil-based synthetics lack. As a textile fibre, rayon has recovered some lost ground in recent years, thanks in part to strong demand in China, and cellulosics are widely used in advanced industrial countries in non-woven applications. In spite of strong competition from Asian producers, Lenzing is well placed to serve both markets.

Is there a moral to this story? One lesson is that large, diversified companies are not necessarily better equipped to withstand international competition than small, specialised ones; there are dangers in trying to do too many things.

Another is that violent changes of direction, such as Kearton's plunge into textiles and clothing, can have disastrous consequences.

Companies are generally well advised to concentrate on what they are best at and to build out from there.

This article is based on the author's book : The Rise and Fall of Great Companies: Courtaulds and the Reshaping of the Man-made Fibres Industry', to be published by Pasold Research Fund/Oxford University Press in September