Homespun revolution: First the cotton mills went. Now the defence industry is wilting - but Lancashire ingenuity is weaving a hi-tech future, Diane Coyle reports

IT STARTED life in 1980 as Pete & Pam Computers, founded and run from their house by two social workers. P & P in 1994 is a listed computer services company with turnover of pounds 250m and 820 employees. Half of them are based at the head office, making P & P one of the biggest local employers. And head office is in a tranquil hamlet in one of Britain's lowest unemployment areas.

The success of the company started by Pete and Pam Fisher is typical of the area's impressive record of creating new jobs in new industries - a record that would take most people by surprise. Anyone asked to hazard a guess about which part of Britain has the lowest unemployment would probably opt for a city such as Cambridge, with plenty of thriving hi-tech companies, or perhaps a genteel southern town full of pensioners, like Tunbridge Wells.

The correct answer is Clitheroe, a small Lancashire mill town. Its unemployment rate was 3.5 per cent at the end of November. Neighbouring towns, meanwhile, are faring nearly as well. Lancashire's unemployment rate is only 8 per cent, nearly two points below the national average, even though it includes the higher jobless rates of large towns such as Rochdale. A swathe of the North-west of England is quietly prospering, relatively undamaged by the recession.

New businesses, mainly small and hi-tech, are reviving the bleak industrial landscape of derelict cotton mills. There are no comprehensive statistics on the number of small and medium-sized firms being set up, but such has been their success in creating jobs that most parts of Lancashire that had enjoyed assisted area status from 1979 lost it last August.

Sir David Trippier, formerly the Rossendale MP and minister for small firms and enterprise from 1983 to 1987, speaks of a second industrial revolution. A non-executive director of P & P and on the board of two other Lancashire hi- tech companies, one a biotechnology start-up, the other a computer systems house, he offers an explanation of the region's employment success: 'This area has a tremendous amount of entrepreneurship, which had been dormant for a long time because of over-dependence on traditional industries. There was not enough diversification of the industrial base, but that problem has now been addressed.'

Seeing the grip the heritage business has on parts of Lancashire makes this optimistic account surprising. There is no end of looking back. Those traditional textiles and footwear manufacturers were for the most part destroyed by the early 1980s recession. Most of the cotton mills are closed, the sirens that once announced the start of the shift to the entire town all silent. Yet the visitor is not allowed to forget that this was the cradle of the greatest technological inventions of the 19th century.

One of the cotton towns that earns a living from its past is Ramsbottom, huddled at the foot of the Rossendale valley. John Kay, inventor of the flying shuttle, lived there, within an easy horseback ride of the inventors of the spinning jenny and the mule, another spinning innovation. In Sir Robert Peel it produced the prime minister who repealed the Corn Laws in 1846, ending the protection agriculture had enjoyed at the expense of manufacturing exports.

In 1980, Ramsbottom had 28 cotton mills. Now it has none. Instead there are a steam railway run by enthusiasts, gift shops, and just up the road a textiles museum. The Rotary Club stages Dickensian markets. The local authority has cleaned the grime of a century of weaving and spinning from the stone terraces in the town centre and built new car parks for the welcome influx of tourists.

This poignant celebration of past glories takes place only because the glories have well and truly vanished. The first recession (as local business people invariably refer to it) dealt a mortal blow to King Cotton. Even so, there is a consensus that any firm that survived the experience emerged stronger for it. As Julian Hulse, the chief executive of the Manchester Chamber or Commerce, puts it: 'The viciousness of the cutbacks companies had to make last time around made management very tight. It's hard to avoid the cliches about being lean and efficient, but they are true. We are able to take advantage of any upturn early.'

These characteristics are proving their value, for the recent recession produced a new casualty in the defence industry. The North-west is one of the most defence-dependent regions in Europe. But the big companies - Ferranti, British Aerospace, GEC, Royal Ordnance - have axed thousands of Lancashire jobs, either directly or indirectly through local suppliers. BAe has announced another 800 redundancies in Lancashire within the past 10 days.

For an area to lose one big industry would seem like a stroke of bad luck. To lose another within a decade ought to have finally destroyed its economic prospects. Yet even the decline of defence employers is seen as having some welcome side-effects.

One Preston company whose business used to be supplying aircraft control systems to the defence industry, mainly BAe, is Datel Technology. Graham Pugh, its managing director, says it was decided to diversify two years ago.

So far the move has been a success. The company has recently nearly doubled the number of systems and software engineers it employs and has moved into new premises, thanks to a pounds 5m contract to supply station information management systems for London's Jubilee Line Underground extension. It has installed a system at British Transport Police's London HQ.

Mr Pugh says: 'Defence technology is leading-edge technology with many spin-offs for other industries.' Out of the defence industry contraction in Lancashire have emerged start-ups ranging from systems and software companies such as Datel to makers of medical technology and diagnostic equipment.

Like other companies, Datel finds in former defence industry workers a plentiful supply of skilled labour, which is a big attraction of the region for technology companies. Having such well-respected educational establishments as the University of Manchester's Institute of Science and Technology also helps.

John Poole, a relocation expert with the Stafford-based consultancy National Startpoint, says that because of shrinkage in aerospace and defence in the North-west 'the recruitment potential is good for employers seeking skilled tradesmen and engineers, particularly for the mechanical, electro-mechanical and electronics industries.'

Andrew Calvert, a spokesman for Lancashire Enterprises, the county's biggest development agency, said: 'New businesses tend to be smaller companies serving niche markets and using the technology skills base. That is probably very healthy in terms of employment.'

His observation provides the clue to why Lancashire has done better at creating jobs than other regions with high-profile policies of offering big grants to attract inward investment. The big-name companies offer a lot of jobs in one fell swoop, but never as many as the host region has lost with the decline of its previous big industries. The policy has also left other regions, such as the North-east, still heavily dependent on individual industries. For creating jobs, small firms are better. For sustaining them, diversification is needed.

Other Lancashire agencies fostering new business agree with this diagnosis. Joyce Livesey of Rossendale Enterprise says: 'We have weathered the recession this time around because we had diversified into areas like computers and hi- tech. The number of start-ups in these areas fluctuates but has been increasing again.'

Further up the valley, Blackburn council's economic development officer, Stephen Hoyle, agrees. 'There has been a pick-up in recruitment by firms taking advantage of the high skills base.' He reports, for instance, serious interest in local recruitment by a large communications company.

The Manchester Chamber of Commerce, which co-ordinates the 12 north-western chambers, says electronics companies are moving steadily into the region because of the impressive skills base. Julian Hulse, its chief executive, says: 'We shouldn't start popping the champagne corks yet, but these signs are very encouraging.'

Lancashire labour is not only skilled but cheap. National Startpoint cites Lancashire managerial salaries of pounds 10,838- pounds 26,520, compared with pounds 13,400- pounds 33,100 in the South-east. Weekly wages for operatives can be more than 25 per cent lower than in the South-east.

'It is no secret,' says Martin Lee, finance director of the USM-listed Crown Eyeglass, which started with four employees in 1984 and now employs more than 100 staff in Blackburn, 'that this part of the world has a low cost base'.

George Marcall, marketing director of the holiday company Airtours, employer of 700 staff in Helmshore and 200 near Manchester Airport, rates this as the region's principal attraction: 'Our overheads are much lower than they would be in the South. We have absolutely no intention of moving.' Indeed, Airtours is seeking planning permission to build a bigger head office near its existing HQ, in what will be the Rossendale Valley's biggest new development for many years.

Lancashire has, too, the other advantages that the development agencies love to flaunt in their brochures. Rents are low: pounds 6 a square foot for office space in the smaller towns, pounds 9.50 in Preston, and as little as pounds 3.50 for industrial premises. There is a good transport infrastructure, making it the home of the distribution fleets of such leading companies as ICI and Marks & Spencer.

The North-west as a whole is a large market, since it is the UK's most populous region after the South-east. The lovely Lancashire countryside appeals to a large population of well-heeled commuters who travel to work in Manchester, Leeds or Preston.

The commuter phenomenon is itself a result of the extension of the motorway network during the past 15 years. Northern urban professionals have flocked to live in charming stone cottages surrounded by beautiful moorland rather than the depressing terraces of the conurbations. Contrary to popular image, much of the industrial North is rural.

Their salaries have helped to sustain the county's housing market. It did not share fully in the southern boom, but neither did it collapse. House prices in the North-west as a whole have fallen in only one quarter, and then by very little, according to Halifax Building Society figures. A four- bedroom house in Lancashire's yuppie belt can cost a respectable pounds 130,000 - not too different from prices in the London suburbs.

The arrival of commuters has boosted the growth of services. Alan Townend, a Durham University expert on the Northern economy, says the growth of the service sector has made an important contribution to employment in Lancashire. He pinpoints Preston and Manchester, along with a string of smaller towns such as Accrington, Blackburn and Burnley, as centres of services growth. A Cambridge Econometrics forecast for the entire North-west expects continuing growth in the number of service sector jobs - 180,000 in the private sector between 1993 and 2005, including jobs in financial services in Manchester.

Confidence is certainly rising on the tide of economic upturn. The Chambers of Commerce survey for the latest quarter shows steady progress in sales, and capacity utilisation is at its highest level for three years. Manufacturers' investment plans are up. The CBI's latest survey of the North- west confirms: 'For the fourth successive survey, optimism concerning the general business situation has risen.'

Cautious northern businessmen do not like to make too much of the upturn, but the commercial property market shows undeniable signs of improvement. The surveyors DTZ Debenham Thorpe in Manchester report that since late last year there has been a marked increase in the number of inquiries about all kinds of commercial property.

For example, George Tate, the firm's retail expert, says: 'Looking ahead into 1994 and 1995, retailers expect a big improvement and want to jump on the bandwagon before it starts rolling. They don't want to miss the best opportunities, so the development is happening now.' He lists more than a dozen large-scale retail developments or refurbishments that have recently been either completed or started in the North-west, and concludes: 'So much has been going on in the region that it must indicate stronger optimism.'

Office and industrial property markets have been a little less buoyant, but DTZ Debenham Thorpe has noted a revival of speculative developments in both cases, again during the past few months. 'The dark satanic mills syndrome has been put to rest,' says an industrial property expert, Brian Birtwistle. 'Everybody around here is looking forward. People look at this region in a different light.'

It can be difficult to distinguish between the excitement that an upturn in the economic cycle is bound to generate and confidence about longer-term prospects. Even so, there are good reasons for believing the revival of northern pride to be well founded.

One of the roots of long-term success has been the work of some of the development agencies. The biggest, Lancashire Enterprises, was created by Lancashire County Council in 1982, at a time when unemployment had doubled to 12 per cent in two years. Its purpose was always job creation. Unlike many similar agencies, it has always provided all the services new businesses might need, from training programmes to venture capital.

John Goddard of Newcastle University's regional studies centre says this co-ordination has given start-ups in Lancashire an advantage, even though it has never been able to offer grants on the same scale as competing regions, such as South Wales or the North-east.

Lancashire Enterprises claims the credit for 22,000 jobs in the past decade, and has invested pounds 14m in about 200 small and medium enterprises. It is one of the biggest landlords in the region, managing 4.5 million square feet of commercial property with a book value of more than pounds 26m.

Andrew Calvert, its spokesman, naturally believes Lancashire's winning streak will continue. He says that the county's low priority for UK government aid has been irrelevant because of its success in extracting money from Europe - more than pounds 20m in 10 years, including, recently, funds from Konver, the EU's defence conversion fund.

The most important seed of future prosperity, however, is the sheer number of new technology firms. Jonathan Diggines, a venture capital specialist with Murray Johnstone in Manchester, suggests that one reason is the large number of small-to-medium owner-managed or family firms in the North-west. He says: 'This area is a rich source of potential deals. It is very conservative, and has been slow to adopt venture capital, but that is changing as the medium- sized firms grow. The quality of potential deals has improved during the past five years.'

Without doubt, many of these firms will fail. Moreover, for the time being, impressively low unemployment does not translate into above-average regional prosperity. GDP per head is below the national average, although it is a flawed measure - prices are probably lower than in other parts of the country, and the natives also insist the quality of life is superior.

Enough new businesses seem to have been springing up in Lancashire to guarantee its future jobs and growth. P & P, the computer firm, has its head office in Ramsbottom. So has TNT, the distribution company. Airtours is a few minutes' drive away. The town has a prosperous gloss that the heritage business alone could not have generated. Its population is affluent enough to sustain a dozen decent restaurants, including one recommended by the Good Food Guide. In the heyday of the cotton industry there were none - only three fish and chip shops.

Cloth caps and clogs are consigned to history. P & P's Sir David Trippier says: 'We in Lancashire have many assets. The thing we have been best at is selling ourselves short, but that is changing.' There is little doubt that civic confidence is high, despite the loss since 1980 of the region's big industries. Lancashire is riding on a remarkable new wave of entrepreneurship, a century after the first industrial revolution.

(Photographs omitted)