Chinese buyer signals northeast's pivotal role in ocean machines

The recent £130m purchase by a Chinese company of a British pioneer in advanced underwater machines illustrates how northeast England has become a global leader in ocean technology.

An early 1970s start-up, Soil Machine Dynamics is now the world's second-biggest provider of remotely operated underwater vehicles (ROVs) and a manufacturer of advanced submarine engineering machines. It is also the only company to build deepwater mining equipment to extract gold and copper ore from the Pacific seabed at depths of 1,600m.

A pioneer in applying ploughing to the ocean bed, SMD grew as North Sea oil boomed and fibre optic technology developed, becoming a leader in seabed trenching for pipes and cables.

SMD and the Newcastle University academics who founded it have helped to create a cluster of world-class ocean technology businesses in the northeast. The company was bought last week by CSR Times Electric, wholly owned by rail transportation equipment company China South Rail.

The region's subsea sector - equipment, technology and methods used in oil and gas, telecommunications, renewables and defence - consists of around 50 companies with a £1.5bn turnover, supporting 15,000 jobs. The northeast controls 7 per cent of the £20bn world market, second only to Aberdeen in the UK, which as a whole has a 45 per cent share.

This strength is underpinned not just by local innovation but a long heritage of marine engineering. SMD's Wallsend base, beside the river Tyne, is where Turbinia, the first steam turbine-powered vessel and once the world's fastest ship, was built in 1894 for Tyneside engineer Sir Charles Parsons.

The site will become the global headquarters for the deepwater equipment division being set up by its new Chinese owner. CSR Times Electric will also help SMD to base a subsidiary in China to develop its presence there.

Capital spending on global submarine systems in 2014-18 has been forecast to reach $117bn, according to CSR. Yet at present there is almost no domestic Chinese enterprise involvement in the rapidly growing ROV market because of the high technical threshold and large investment required. Buying SMD should allow CSR, which has 90,000 employees, to overcome these challenges.

Ding Rongjun, president of CSR, said: "We intend to build up a cluster of deep ocean industry. SMD is an important part of that." The deal chimes with the Chinese government's plan to move into ocean engineering equipment manufacturing and achieve a 35 per cent international market share by 2020, while also localising more of its domestic supply.

SMD's chief executive Andrew Hodgson and his management team will remain in charge of day-to-day functions. "The beating heart of SMD has been and will remain in the northeast of England," he said.

He expected the deal to improve access to markets such as west Africa as well as China. "They [CSR] share our ambitions for the business."

In the 1990s SMD became a family business led by founder Alan Reece. In 2008 Inflexion, a private equity company, acquired 60 per cent for £21m; Mr Reece's son John and the group's management and employees held the rest. CSR has bought the entire company.

SMD has made three-quarters of the trenching equipment supplied globally. It now serves hydrocarbons, telecoms, nuclear, renewables and mining markets and has 350 employees. Turnover last year was £85m, with earnings before tax, interest and depreciation of £9.6m.

Alan Reece is no longer alive but the Reece Group is a big Tyneside engineering presence; among its companies is defence specialist Pearson, whose products include ploughs to clear buried mines.

Tony Trapp, one of SMD's academic co-founders, has since created more northeast subsea companies: first the Engineering Business, sold to IHC, and then offshore and subsea group Osbit.

Other new sectoral investments in the region include a £7m extreme engineering centre and a £10m hyperbaric (oxygen therapy) test centre, which are helping to rejuvenate Newcastle riverside sites.

Mr Trapp said had mixed feelings about SMD's sale. "To sell it to the Chinese is disrespectful to the past - but the past doesn't matter, it's the future. What people have to do is invent new technologies and new industries to do it again."

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