THE substantial 9.5% setback in the Siebe share price yesterday will probably take some time to claw back as nervousness about short-term prospects may well overcome the merits of what is perhaps the best managed major British engineering company.

What hit sentiment yesterday was that Siebe had failed to reach its10% organic growth target, managing only 6.7% in

pretty tough market conditions in some areas.

But competitors, and particularly the small players, will take no pleasure from Siebe's discomfiture. They will be looking at the record operating margins of 16.6% and then chief executive Allen Yurko's decision to accelerate the cost-cutting programme which will hit the company for #100m over the next two years but generate annual savings of #60m.

Investment is being poured into software as the company focuses on control systems and automation. These will constitute as much as 98% of the business within the next two or three years.

The Yurko strategy has been to set ever more demanding targets, which has seen earnings per share in the past decade jump 154% to 62p despite the two bad years of the recession in the early 1990s.

There is an ominous note for all major manufacturers.

Behind the 7.5% compound improvement in Siebe labour productivity lies the transfer of production.

At present, some 25% of the group's labour force is in low-cost countries but that proportion is rising to 40%.

It is a question of paying less than $3 an hour in Mexico or Malaysia for employees who can produce as well as those in America, Britain and Europe costing $15 an hour.

But Yurko is unrepentant and said that management is a process of unending re-structuring which should be charged almost daily to profits rather than a big bang every couple of years.

There is no alternative if the business is to thrive at the expense of the second and third divisions.

It may take a little bit of courage, but Siebe is certainly worth buying as it demonstrably understands its challenges and has the ability to overcome them.