Select Committee on Scottish Affairs Minutes of Evidence


Examination of Witnesses (Questions 284 - 299)

WEDNESDAY 10 JANUARY 2001

MR IAIN DUFF AND MR ROLAND DIGGENS

Chairman

  284. Good afternoon. Could I apologise for the fact that the first session slightly over-ran our estimated time but I am aware of the fact that you were sitting in the audience and I hope you found it enjoyable. Can I ask you first of all, in welcoming you to the Committee, to introduce yourselves to the Committee?

  (Mr Duff) Thank you, Chairman. Firstly, my name is Iain Duff, I am the Economist and Policy Manager of the Scottish Council for Development and Industry.
  (Mr Diggens) Good afternoon, everybody. My name is Roland Diggens, I am the Government Affairs Manager for SCDI and as a fairly small organisation we do a bit of multi-tasking so Iain and I make up the core of the policy team as well.

  285. Thank you for that. Are there any opening submissions that either or both of you would like to make to the Committee, appealing to you not to disrupt the structured agenda we have.
  (Mr Duff) Thank you for inviting SCDI to meet with the Committee today. It has been quite some time since SCDI has appeared before the Committee. As a brief introduction I will just describe SCDI and then touch on our submission. SCDI is an independent, broadly based membership network which seeks to strengthen its members', and hopefully Scotland's, economic competitiveness by formulating policies that encourage sustainable economic prosperity. As far as this particular inquiry is concerned, SCDI's submission concentrated on the Scotch whisky industry although, as you are aware from this morning and other evidence, there is much more to the Scottish drinks industry than that product. However, SCDI has traditionally given support to the whisky industry given its intrinsic place in the Scottish economy and Scottish industry. Our membership also boasts many of the major whisky producing companies. It is also an area where we have built up some degree of knowledge and felt most confident in presenting views that we hoped would add some value to the inquiry. Therefore, whilst recognising the significant contribution that is made by other drinks products to the Scottish economy, we felt that it most appropriate to concentrate on whisky. Since the memorandum was submitted late in 1999 I have to inform the Committee that when preparing for this meeting I was rather shocked to discover there is a bit of an error in paragraph four on page two of the memorandum[8]. I can only apologise to the Committee for any confusion and I can clear that up either now or in later questioning. Furthermore, the figures in the submission have been updated since it was originally sent and obviously any updated figures can be presented to the Committee.

  286. We would be grateful for that. Mr Diggens, do you want to add anything?
  (Mr Diggens) Perhaps I could just add, although Members of the Committee probably already know this, that SCDI is well known for the production of the Scottish Export Surveys particularly of long standing manufacturing exports but also the primary and service sectors as well, so we will try to provide additional information along those lines if that is interesting.

  287. Although you said that it has been some time since the SCDI appeared before the Committee, it has regularly submitted written evidence to us on various inquiries and you do circulate all Members on a regular basis with packs of information, which is appreciated and thank you for that. Can I begin by saying, as you yourself said, you stressed the importance in your memorandum of several aspects of the importance of whisky to the Scottish economy in terms of, for example, employment. However, it is clear that employment in whisky has fallen in recent years and the Scottish Whisky Association figures suggest that total employment in whisky fell by 19 per cent between 1994 and 1999. In common with other manufacturing sectors, most of this reduction in employment has been driven by the need to increase productivity. Has the economic importance of whisky to Scotland fallen in recent years? Would you agree that, because there is a continuing need to seek increased productivity, it is likely that employment in the whisky industry, as in most other manufacturing sectors, will fall even further in the future? Do you have any concerns about this?
  (Mr Duff) Yes, I think the trend is certainly downwards, and even when you include the linkages, which are fairly substantial for the Scotch whisky industry, into other areas, such as agriculture, then the impact, certainly in the rural areas, will be a downward trend and, as for any industry as it starts to contract, it is a concern as to where the jobs are going. The Scottish economy as a whole is doing fairly well, it is a healthy economy. Manufacturing in general has been under some pressure over the last few years but the downward trend is there and we have to always look at how the economy balances out these trends in industries and how the aggregate employment can be kept buoyant. The downward trend is there and, as a Scottish economic development organisation, we would be concerned with that trend.

  288. Is the continuing downward trend inevitable or can anything be done to stop it or reverse it?
  (Mr Diggens) It is probably fairly obvious and certainly previous witnesses giving evidence have mentioned that in employment that is related to the industry, for example in pubs, restaurants, hotels, there is a shift away perhaps from employment in the manufacturing side of the industry into employment in the service side, tourism related employment, and obviously there is quite a lot of marketing employment involved in the urban areas as well now.

  Chairman: Mr Duff, you referred to the linkages to other sectors and it would be an appropriate point to bring in Mohammad Sarwar.

Mr Sarwar

  289. Thank you, Chairman. The Scottish Council's memorandum also mentioned that whisky is important because it is "strongly tied to other sectors" in Scotland. It noted that whisky buys 82 per cent of its purchases from other Scottish sectors compared to an average 56 per cent for Scottish industry as a whole. Would it be fair to say that because the whisky industry is mostly composed of large multinationals, their commitment to Scotland is uncertain? Does it have any concerns about the ownership structure of the whisky industry?
  (Mr Duff) Well, whisky by definition has to be made in Scotland, so in terms of distilling the product and the distilleries will continue to have to have a Scottish base. The ownership and in terms of where it sources its marketing, say, does not necessarily have to be in Scotland. As your previous witnesses said, there is a certain Scottish image in a Scottish brand, so if there were linkages there, that they want to be seen as a Scottish product, the advantage there then I would hope—hope—is that the owners of the individual companies would see that advantage in being associated with the Scottish economy and with Scotland. It is more a hope rather than whether we as an organisation can do anything about it and what the industry themselves can do. Industries in a competitive market always have to be aware of the cost pressures of being an efficient industry. Hopefully the Scottish economy and other Scottish industries can provide the services they need at the appropriate costs and will be able to compete but, as with any other industry, it is a global industry and the pressure to source their products worldwide is always on them. In terms of the agricultural content, the glass that goes to the bottles, the packaging, there are lots of good, high quality suppliers to the industry already in Scotland. Those figures that are taken from the Scottish input/output tables on the linkages, are much higher than the Scottish average. I am hopeful that the industry and the industry owners are aware of what the rest of the Scottish economy can offer them. We, as SCDI, would have to monitor that situation and interact with the industry to ensure how they go about that and take that forward.

  290. Scotland is known worldwide because of Scotch whisky and it sometimes surprises me that even when you go to Third World countries the one thing they ask about Scotland is the Scotch whisky. What concerns me is that in future with these competitions and takeovers and the competitiveness of the industry, would it be possible that other people would start manufacturing this in other parts of Britain or worldwide somewhere else?
  (Mr Duff) Legally they cannot do that for Scotch. That part of the industry is insulated from that. There are pressures globally and it is the same for any manufacturing industry. For companies that are marketing, producing and selling in a global marketplace there are always pressures and they have to look at how well they do that so their impact on their home market, wherever they choose to base themselves, is how they see themselves and how they want to interact with that home base.

Chairman

  291. Following up Mr Sarwar's point, the Committee has already heard from the soft drinks industry that all the cans are manufactured in England. We were also told on a visit that it would be quite feasible to bottle the product in England and presumably label it, so you could have the admin staff, marketing staff, labelling and bottling all carried out in England with disastrous consequences for many parts of Scotland. In my own constituency in the early 1980s they closed a factory that made glass bottles for the whisky industry and several hundred people lost their jobs and they switched to production elsewhere. How worried are you about that possibility coming about?
  (Mr Diggens) It is interesting that it can sometimes work in the other direction as well. There is a very large bottling plant in the Fife area which is a spirits production plant, gin, rather than a whisky production plant. Sometimes the strength of our large companies can help to actually grow brands and grow portfolios in Scotland. There are specific skill sets in Scotland, particularly on the distilling side of things, perhaps less so in the technical manufacturing process, the supply process, for things like glass and bottling. There is a cluster of activity in spirits and whisky in particular in Scotland and it has a certain strength about it. I think the major companies that operate in Scotland actually appreciate that and do their best to make the most of it.
  (Mr Duff) I think the days of, if you like, protectionism in this day and age have to have gone and it is up to individual companies, suppliers, right through the supply chain, to compete to ensure that they are producing the goods and services that the ultimate purchaser wants to buy. There are two sides to this, as Roland said. If we can compete with the best in the world, which we should be aspiring to do, then there should not be a problem. That would be SCDI's approach to the global market, if you like, with any company in any industry.

Sir Robert Smith

  292. In your memorandum you make the point that much of the initial spirit production has the virtue of providing "a few well paid jobs in rural areas of limited population and alternative employment opportunities", but we see in the industry a lot of consolidation and the concentration of production in terms of driving forward economies. Employment, therefore, has been dropping off and in Grampian it has fallen by 25 per cent between 1994-99 and in Tayside by 64 per cent. Do you think that the increased concentration of production means that the economic support whisky provides for fragile communities has decreased? Is this a process that will continue? What concerns does the Council have about this?
  (Mr Duff) As I said in answer to the previous question the trend is down, there is no doubt about that. There was a very good report done by the Aberdeen Council, I think it was, on the future of the Aberdeen economies which showed that rural areas are particularly under pressure. Rural areas throughout Scotland are particular policy issues and particular problems going from the Borders right up to the Highlands and Islands into rural Aberdeenshire. We are concerned. In SCDI we have regional committees which hear first hand the pressures that these communities are under. As far as whisky is concerned, the trends are downward. How we, or anyone indeed, can resist that change, as it is to do with efficiency gains to keep in a competitive market, is very difficult. You will have to ask the individual industries how they feel about what is the best way to take that forward. Yes, SCDI is concerned about the fragility of rural economies in general and what opportunities are available to the people there to keep sustainable communities there and where are the alternative employment opportunities and, indeed, education, skill levels. We have the University of the Highlands and Islands coming on stream. Initiatives such as that across the economy have to be supported to keep the rural communities sustainable and to keep employment opportunities in there. Whisky will have a continuing role in that but it is a concern. It is knowing where we, as an organisation, can add value to support the local authorities and the Scottish Executive in general to keep these issues at the forefront to do something about them.
  (Mr Diggens) Certainly the evidence that we collect from the Primary Sector Export Study has pointed to very, very hard years right through the mid-1990s for agriculture; less so for forestry but perhaps also for fisheries. I think there is a feeling among these industrial sectors that they do not any longer control their own destiny but they are heavily regulated from outside. There is a feeling that smaller producers are very, very hard pressed, very, very pushed.

  Chairman: That is perhaps an appropriate point at which to turn to ownership.

Mr Brown

  293. Thank you very much, Chairman. In recent years we have obviously seen both Diageo and Allied Distillers who seem to have moved high quality jobs from Scotland south of the border to England. Between 1994 and 1999, employment in whisky outside Scotland grew by 114 per cent because of the transfer of sales, marketing and obviously admin and office jobs. I appreciate you have partly touched on this but do you think that Scotland has lost management and marketing jobs because the whisky industry is owned outside Scotland? If so, is this a trend that is really to continue?
  (Mr Duff) Again, the ownership of any company in any industry is one that is increasingly under the pressure of globalisation. Although we have concerns and we would like to see more core functions retained in Scotland where there is decision making, and that is an ideal hope we would have for Scottish industry and the Scottish economy, it is very difficult to resist those pressures in this day and age. Where you might question whether a particular takeover should go ahead based on what can be very complex company decisions about how they will make the organisation or that product in a global market, it is very difficult to resist that in this day and age. We would certainly hope—this applies to any industry—when there is a takeover that for the new owners, or the new company that it becomes, the Scottish workforce, the Scottish economy in general and suppliers will be there, they will be the best in the world, there will be a cluster, to use the in-term, of skills there that will ensure that those sorts of opportunities for senior management, decision making, research and development, those core functions, are kept in Scotland. It is very difficult to resist that, I think, other than to make sure that our economy and our businesses are competing effectively already to ensure that there is no reason for them to move and they are kept within the local area.

Mr Welsh

  294. You have described the vulnerability of one of Scotland's major industries and you have said that international trends are difficult to resist. Are you really saying that resistance is futile? One possible consequence of external ownership is the apparent loss of high quality jobs and this would have an adverse effect on the local economies and individuals who want a senior management position probably would have to leave Scotland to do so. Can I ask you, in general business decisions would it be true to say that many of the important business decisions which affect the industry are now largely taken outside of Scotland? If that is so, what effect has this had on the Scottish economy?
  (Mr Duff) I think historically if you look at the figures even in terms of depopulation, within the economics community and the academic community there is a notion that Scotland has lost some of the more entrepreneurial, high potential people to depopulation. That is a now fairly well recognised issue. Part of that will be because the opportunities for senior management positions just are not in Scotland. What can we do to try to resist that from now? That has already happened, that is an historical fact. What can we do to try to bring people back in, to try to make the opportunities available to our graduates or other people? It is all to do with how the individual companies, I think, the processes and the way they produce and market themselves, enable people to want to stay in Scotland. It is how to break that vicious circle of opportunities outwith Scotland and to bring those back in, to keep those. It is a very difficult issue which I certainly do not have an answer to, I have to say. I do not think resistance is futile in that we should not be trying to ensure that the Scottish economy gives companies the opportunity to be successful and, therefore, leaves no reason, or reduces the reasons, for moving management posts and other jobs outwith Scotland. It is a very difficult situation when you are talking about individual company decisions. We have to ensure, as I have said, that the economy is healthy enough to reduce that pressure on companies to move jobs out.

  295. Would it be accurate to now describe the Scotch whisky industry as a branch-plant economy?
  (Mr Diggens) I think that might be a little unfair. In relation to Diageo's activity, it has a new headquarters building in Edinburgh, for example. There has perhaps been a move from smaller plant locations towards a control location that is more central, in the case of Diageo that is in Edinburgh. As some of the companies that were here giving evidence before us mentioned, there is still a lot of headquarters activity in Scotland.

  296. I am a bit concerned about the vulnerability. What can SCDI do about it? You have said whisky has to be manufactured here but an international company can then take that product elsewhere, they can do anything they like with it, they can close down the distillery that produces it if it does not suit them. If the warehousing, management decisions, investment, and other activities are taken elsewhere surely this leaves even the remaining production in danger? I am asking you, is the whisky industry therefore due to suffer the usual consequences of a branch factory situation? What effect would that have on employment prospects in Scotland?
  (Mr Duff) These are individual company decisions. It would be very difficult for anyone from the Scottish Executive, the UK Government or SCDI, to alter any of those decisions. We would see our role as ensuring that there are policies in place to make decisions of that type less necessary. If companies want to move those types of opportunities outwith Scotland there has to be a reason for that. Is it because it is more efficient elsewhere? What we want to ensure is that from a pub policy point of view there is no reason from that source for companies to do that. The support should be there so that they wish to remain within Scotland to make their decisions there, they have the people available coming out, the high quality graduates and other employees in Scotland so they can keep those jobs there. That is how I would see SCDI's role, in ensuring that the policy is in place so that pressure is not great and Scotland can be shown to give opportunities to people and that the decision is not necessary.

  297. I am glad that you want to see the maximum jobs retained in Scotland. What you are describing is a situation where there is a danger that we can arrive at a position where Scotland produces a product but with no added value to it. What can be done about that?
  (Mr Duff) That is a risk. We see the connections, the linkages, in, say, the computer industry. Although there is work to try to keep value added within Scotland and increase the value added there are still quite a few assembly type jobs. What can be done to stop that happening in the whisky industry? Again, it is ensuring that the reasons that these functions may be moved are as low as possible, that there is no pressure to do that because they can all be serviced through some sort of cluster support, so each of the supplying networks are there, they are efficient, the transport networks are there, the people are available to fill those posts and progress within them, those functions can be met and carried out efficiently within Scotland. The policies in place for that have to be the taxation regime from a UK level, that Scotland's economy is seen as a nice, stable base in which to do business and that the standard of living is high. There is a wide range of measures that can be taken in order to make the Scottish economy attractive for companies to do business within and keep those functions in Scotland.
  (Mr Diggens) I think also in terms of the international ownership of the assets, it is perhaps quite a bleak picture that you are painting. A company like Diageo has plants internationally and I could not give you specific details of the example but I do know of one plant, a bottling plant, which has received investment in the last few years and is actually an award winning plant within the Diageo group and would, therefore, hope to compete and attract some of the work if not from other parts of the world, other parts of Britain for other types of spirits that need to be bottled. There is the potential for a competitive Scottish plant to actually attract work in as well as potentially to lose it. Obviously, it depends on the performance of the individual plants, and that depends on levels of company investment and the skills of the workers involved. We would argue that in Scotland it is important to try to raise skill levels particularly. It is certainly the case that there are very competitive Scottish plants in an international environment.

  Chairman: We will move on to tourism and image now.

Mr Tynan

  298. The Council have noted that "Whisky's long-standing traditions and reputation give it a special place within Scottish culture". There has been an increase in "whisky tourism" in Scotland, however the Scottish Whisky Association figures show that visitor centres only employ around 300 people in Scotland, that is about 2.7 per cent of all jobs in the whisky industry. How important do you believe whisky tourism is to Scotland, especially in rural areas? Do you see its importance increasing in the future?
  (Mr Duff) I think the tourist industry as a whole is a significant industry for Scotland and, recent events with Visit Scotland notwithstanding, I think it holds a lot of potential. In relation to the tourism concerning whisky, because of whisky's well known global image and brand, I would hope that the potential for that side of the whisky industry is high and will help to bring tourists to the outlying, peripheral areas of Scotland based on the already good image that the industry has through the core product. I am quite confident that with the right marketing that is an area where there is potential to increase the value added, if you like, from the whisky industry based on a more service oriented experience that the distilleries and the tours can provide.
  (Mr Diggens) Whisky is obviously a completely distinctive product so it gives one more unique, distinctive product and service for the Scottish tourism industry to use to try to attract visitors, it is one more string to their bow.

  299. Would you like to hazard a guess at the growth you could see with the right marketing conditions with regard to job opportunities in other tourist sectors?
  (Mr Duff) The tourism figures rely on so many other types of data. It could be that the strong pound has deterred visitors. It is so difficult to put a figure on what the potential demand could be. I would not like to hazard a guess, even a ball park figure, on the growth. All I will say is that it is something that is marketed and you just have to go to the north-east of Scotland, there are links with the local tourist boards up there. It is marketed as a tourist trail, if you like, where there is signage and things to push that. I hope that there is substantial potential for growth but I would not like to hazard a figure on how good it could be.


8   Note: The accompanying memorandum pp 104-107 includes the correct version of paragraph 4. Back


 
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