Select Committee on Work and Pensions Minutes of Evidence

Examination of Witnesses (Questions 20 - 39)

MONDAY 20 MAY 2002


Mr Sarwar

  20. The Shipbuilding Forum established in 1998 set targets for increased competitiveness. This broad based group comprised of representatives from across the industry and was the very first time that all the parties crucial to the future of the industry had sat down together at the same table. How competitive is the UK shipbuilding industry? What more could be done to improve competitiveness and revitalise the industry?
  (Mr Culley) Only a few years ago the United Kingdom built 0.25 per cent of the global market; that was its global market share. A couple of years ago that was 1 per cent. So we are fighting over 1 per cent of the total global market share of shipbuilding. In terms of competitiveness, yes, we have strengths. The University of Newcastle provided a report very recently which showed that the UK yards had lower wage costs than was experienced elsewhere in Europe and they reckoned the shipworkers in the UK had excellent skills, however poor exchange rates, poor levels of investment and a poor track record of collaboration between the yards—and I refer again to my experience in Germany—mitigated this. Also productivity figures showed that the UK yards are at a disadvantage to European and Korean yards, and in the UK yards typically have to make up a 7 per cent price differential to match European competitors. An important lesson we learned from the German visit built on similar conclusions from the Shipbuilding Forum visit and the Shipbuilders and Shiprepairers Association visit to the Netherlands. That lesson was the lesson of collaboration to compete. Both the Dutch and the German yards had examples of mechanisms designed to help bring the yards together so the available capacity could be used effectively to secure orders and the costs could be cut. In Holland, they have a central steel cutting centre and in Germany, as I mentioned earlier, they have this maritime industries co-ordinator. That is not to say there are not similar things beginning to occur in the UK. We believe the Shipbuilding Forum is an important step forward in bringing the industry players together, and it has been a success in so doing. Your second question, Mr Sarwar?

  21. What more could be done to revitalise the industry.
  (Mr Culley) I think I may have covered some of that.
  (Dr Crawford) Could I make a general point? There is an absolute correlation in the developed economies, and it may also stretch into the developing world economies, between the levels of capital investment and skill intensity. The more you invest in capital, the more you invest in the workforce, there is an unsurprising by-product, and this is true in almost every industry, and it is that you become more productive and competitive. It is not exclusive, there are other issues such as the exchange rate, but industries which are high in capital intensity and high in skill investment tend to be less vulnerable to market movements, including currency fluctuations and so on. Indeed it is the direct experience of the United Kingdom that manufacturing industries which are highest in productivity gain and highest in international competitiveness unsurprisingly score highest in investment factors. I guess the short answer is, the more you invest, whether directly by the private sector or by Government, the more likely it is you will be internationally competitive, whether you are making computers or building ships.

  22. Do you believe that one of the reasons why there is a poor performance of the industry in the UK in comparison to European countries and Asian countries is that our Government has not invested in the industry and did not meet the challenge? European countries and Asian countries are investing huge sums of money in the industry and there are hidden subsidies, and that is the reason why our share of the market is so low.
  (Dr Crawford) I defer to my colleagues who are more expert in the history of this. I think a recent report by Steve suggests that over time, over the decades of decline, there have been significant levels of under-investment with the not surprising end-result. I can only repeat what I have just said, it is the case in all manufacturing sectors, with some exceptions which are quite unique, that the more you invest in people and the more you invest in machinery, the more competitive you become.
  (Mr Inch) I think certainly the gist of our submission in advance of the meeting is that there has been under-investment in product and processes, under-investment in the workforce in the shipyards, there has been a procurement environment which has made life difficult for the yards because it is very much feast and famine as time passes, and I think the UK industry has missed a lot of the shipping markets which other nations have successfully exploited. There are a lot of niches in the commercial market which Britain has simply missed out on.
  (Mr Culley) To address the question which Mr Sarwar raised in respect of hidden or illegal subsidies, the European Union has put considerable effort into investigating malpractice, and I must say I understand they are currently frustrated and are proposing a complaint to the World Trade Organisation in respect of practices in Korea. This is predicated on the notion that it is difficult to determine that the Koreans can build ships, as they do, where the prices are unsustainable without subsidy. The Korean Government appear to be offering support through debt restructuring, but I am no expert in these matters and would not want to get into that. However, there do seem to be three problems if we are to address the question of subsidies. The first is that the EU itself is considering re-introducing subsidies for European yards, and my understanding is that the UK Government at present are opposed to this, feeling that subsidies will not work. If they did, Europe would merely be emulating the Korean shipyards. Secondly, there are existing European examples of subsidy. I mentioned a moment ago the £200 million invested in Wismar in East Germany to make that yard viable and modern. Although that was done legally within Europe under the re-unification process, it nevertheless could give a very strong counter-argument to the Koreans. Finally, I quote a very senior European official on subsidies to shipyards, and his view was many of these are anecdotal and unproven.

Mr Robertson

  23. You were talking about the productivity of the workforce earlier, would you say that productivity on the Clyde is due to the fact we have not invested in the tools and plant required there, and if in fact we had a level playing field productivity would be, if nothing else, on a par with other countries?
  (Mr Culley) I guess that is almost self-evident if we do not have that kind of investment. I mentioned earlier about the practice I saw in Hamburg of two men cutting huge bodies of steel with a computer and a laser, and if that kind of facility and resource and training was available to the yards here you would expect to see similar levels of productivity.
  (Dr Crawford) There is no evidence anywhere that I have seen in British manufacturing where our productivity levels are lower when subjected to the same level of capital investment in skills.

  24. Can I talk about subsidies. Korea is a pet hate of mine, which I have raised on many occasions on the floor of the House. There have been other subsidies given to other yards in other countries, and some of them have been hidden very well using EU money. Of course when you look at it, it does not look like a subsidy, but it subsidises the yards rather than the orders. Did you have a look at this and see whether we could use similar subsidies?
  (Mr Culley) We did not have a look at this because our main task was to make sure we could ensure, as far as we could, we could work with others, the unions, and BAE SYSTEMS themselves, to make sure there was a robust future for shipbuilding on the Clyde. Like, I guess, many around these tables we have all heard allegations of illegal payments being made to other EU countries, but I repeat the earlier comment I made from a very senior European Union official who was responsible for this, that many of these are anecdotal and unproven.

  25. Do you think there should be an investigation into it?
  (Mr Culley) I would bow to your greater experience in these matters, Mr Robertson.

Mr Duncan

  26. Much of the debate over many years and indeed today has focused on acquiring orders for domestic defence purposes. What are the prospects, both immediately and following on from the £75 million investment in the next 10 years, for export orders? What is the international environment like over that kind of timescale?
  (Mr Inch) The Scotstoun Yard has shown it can be a successful exporter of any high quality ships because it has done work for the Brunei Government and Malaysia. The problem with exports is that export orders take a very long time to come to fruition, the lead time from starting discussions to placing orders may be years in several cases, and it is not simply a case of quoting a price, there is a whole complex financial position attached to these things. You asked earlier about the robustness of the strategy, I think it has to be said that there are risks in the strategy, and one of the risks is that export orders are part of the strategy, so it is important that the yard gets support during the length of time it takes to develop and move from discussion to the order book. There are other issues there like the level of sophistication of the ships which the export markets might want. Ron said in one of his earlier responses that quite often the countries which might want to export ships do not want the sophisticated level of equipment we have to offer because (a) because it is expensive to maintain and (b) it is expensive to buy in the first place. So there may be issues about designing down ships to meet particular markets, and that is perhaps an issue which BAE SYSTEMS should be asked about.
  (Mr Culley) The export of naval ships is a fundamental element of this strategy and for the strategy to be successful. One of our jobs is to keep an eye on that strategy, to make sure the investment programme is going along and everything that has been intimated by BAE SYSTEMS is actually taking place, and one of these is that there should be an order won for one export order per annum. I have signed a confidentiality agreement and so will not be able to go into any detail, but I can say I have looked at the approach which BAE SYSTEMS are taking to exporting. As Steve has said, the gestation period in hunting down and winning these orders can take several years, but I was genuinely impressed by the thoroughness which BAE placed on addressing these matters. It has to be seen now whether it is going to be successful.

  27. Following up on the point which both of you have made, the long gestation period for export orders, has there been an inclination, as the industry has gone through some very difficult times, to focus on domestic defence orders because they are easier and shorter-term to acquire when actually the longer-term interest might have been to pursue export orders?
  (Mr Culley) The strategy calls for both. It is very important that if the Government or the MoD had not ordered or made available six Type 45s, we would be in crisis. There is no question about that. The fact of the matter is, they did. It has been won by BAE SYSTEMS, they have been built on the Clyde, and if we manage to secure—and I use the royal "we"—a further export order per annum, we will fulfil the strategy.

Mr Weir

  28. Just following up on what you were saying, the Ministry of Defence and the DTI have both made clear that the yards cannot look only to defence orders for the future. I wonder if you have given any thought to commercial shipbuilding and to what extent it is possible for Clyde shipyards to compete for commercial shipbuilding orders and how interested is BAE in competing for these orders, and are there any Government incentives for doing so? Can I ask you to address whether the three yard strategy you talked about earlier is appropriate to the building of large commercial ships?
  (Mr Culley) The Task Force did not look much at the issue of commercial shipbuilding because the yards on the Clyde are now mainly naval yards, although we were impressed by the work which has been undertaken successfully by Fergusons in Port Glasgow in this regard. Commercial activity is not a Govan issue, it is a UK issue. Korea and Japan now dominate the bulk carrier and container markets, and the UK has not invested in the yards over a period where the foreign yards have reaped the benefits. Nor have the UK yards secured niche markets such as cruise ships, which France and the United States dominate. As an example, the order book for UK yards for 2001 I understand was 31 commercial ships where the Dutch alone had 248. So commercial shipbuilding has not played much of a part in considerations on the Clyde.

  29. Are you telling us there is little opportunity for the Clyde yards to extend into the commercial area? How secure a future is it based purely on defence orders?
  (Mr Culley) I think to a considerable extent the future as we know it just now will be on defence orders and will be on export orders. The ability of all yards to win orders against the Korean yards on commercial shipbuilding is at the minute I would have thought fanciful.
  (Dr Crawford) Scottish Enterprise is going to ask Scottish Enterprise Glasgow on behalf of the Scottish Enterprise network to lead a cluster analysis on shipbuilding. Included in that request will be to take a deep-seated look at the opportunities now and in the future for a whole variety of commercial shipbuilding, recognising very strongly the health warning Ron Culley attached to his comments. At a dinner with some university principals last week a leading Scottish businessman of a successful manufacturing firm expressed the view that, for example, there is a growing opportunity for an established presence in what is called the super yacht market at least at the level of technology support; his own company supplies very expensive audio systems. Ron is absolutely right to put in the very strong caveat that we will look at that as Scottish Enterprise Glasgow for the future.
  (Mr Inch) I can answer Mr Weir's question with a quote from the Shipyards Task Force which I think makes it quite clear. It says, "However, given BAE SYSTEMS current business strategy the success of this nationally important business is thoroughly dependent on the continued success of winning warship design and build contracts." So the strategy is fundamentally based on this being a defence shipyard. What the Task Force did discuss, however, is whether it gave them stability to start fishing for further work, and I think a successful business strategy would be, depend on your core business and then go out and find your subsidiaries, so to speak.

  30. Given that, and given that any naval force, whether it be the UK or an independent Scotland, has a finite demand for warships of any kind, what you are really saying is that the long-term future of these yards depends on export orders.
  (Mr Culley) Two answers to that, Madam Chairman. One, is, yes, this strategy, which is what we are commenting on today, does depend on export orders, but if I may paraphrase Steve from a moment ago, when this investment is seen within the yards and as the stability beds in, then, as my colleague, Robert Crawford, announced, we will address these matters through the cluster evaluations of the shipbuilding industry. It may be that in the longer term we would look at this but at the moment this strategy is predicated almost entirely on building warships, building for the naval market and for export.

Mr Robertson

  31. I have now looked at page 44[4] which you mentioned earlier, and it is even more vague as I read it. I do not see anything in here about investment for export work or anything which mentions the shortfall in jobs. Correct me if I am wrong, but it is 1,200 jobs which are guaranteed on the Clyde on the Type 45 Destroyers, and that leaves a shortfall of some 1,000-plus workers it has to have work for. The ALSLs will take up a lot of that slack, but where are they going to find work to keep these people employed at the level they have at the moment, or the level they have at the moment minus the 400 who are still outstanding for redundancy?

  (Mr Culley) My understanding is that BAE SYSTEMS are of the view that this 2,000 base that they hold to is adequate to build the Type 45s which will work their way through the pipeline plus one additional export ship per annum.

  32. Do they know where these export ships are coming from?
  (Mr Culley) No, and as I mentioned earlier, there is quite genuinely a very sophisticated approach to seeking out work worldwide in this regard. They have a good track record in building these ships but, as Steve mentioned earlier, they are very expensive, very sophisticated and it is currently only the Brunei Navy and Malaysia which can afford them, or has been able to afford them. We have not seen the investment which is referred to on page 44 yet but one of the tasks of the Task Force will be to make sure that is monitored.

  33. Has the investment shown any kind of flexibility, so that they could use the investment for making export ships?
  (Mr Culley) As I mentioned earlier, a proportion of the £75 million—I do not have the notes in front of me—was vague or indeterminate and that would render the sum flexible for the purposes you have just mentioned.
  (Mr Inch) I think it is worth commenting in terms of exports that BAE SYSTEMS has set up a separate export shipbuilding division within it, which has about 20 people working on identifying potential markets, forming relationships with potential collaborative partners. So they do seem to be taking this very seriously.
  (Mr Culley) One of the other tasks of that unit is to find ways of making the systems less sophisticated and therefore less expensive, so we can compete with the Germans. The Germans have a much more modular approach to this and one of the things the unit is going to do is look closely at how they do this.

Mr Lyons

  34. That strategy which you have just described, Mr Culley, is there not an in-built constraint there in terms of somebody who wants a very short timescale for a delivery in terms of the numbers you have spoken about?
  (Mr Culley) If a warship was ordered by a foreign navy at short notice?

  35. Yes, in terms of delivery at short notice. Are you not constrained by these numbers?
  (Mr Culley) I guess they would be, almost by definition. The task would be to redeploy staff and recruit more staff to fulfil that order.

Ann McKechin

  36. You have mentioned the potential value of collaborative ways of working which are used by other EU states in particular, has the Task Force Report led to any revised practices within the UK shipbuilding industry being discussed? Would any of these have beneficial consequences for Clydeside?
  (Mr Culley) I understand the Task Force Report has been discussed at the Shipbuilders Forum. I further understand the DTI will report back to the June meeting of the Task Force on what progress has been made but I am not aware of the details of that just now.

Mr Sarwar

  37. Is the skill base in Clyde shipyards appropriate? Are training or re-training opportunities sufficient? The Task Force expressed some concern about skill shortages and pointed out that 20 per cent of the Clydeside workforce was over 56 years of age. What efforts are being made to encourage young people into the shipbuilding industry?
  (Mr Culley) The Task Force share your concerns, Mr Sarwar, that 20 per cent of the workforce is over 56 years old. There has been a comprehensive training needs analysis undertaken and it is accepted that certain occupations are at risk. One of the things that BAE SYSTEMS are actively seeking to negotiate and have been negotiating within the trade unions over the piece is flexibility agreements to avoid the hire-and-fire approach which Steve mentioned a bit earlier when they can secure improvements in productivity. That will come about as a consequence of investment in plant and also investment in people, and that is something BAE SYSTEMS actually have a good reputation for.

Mr Robertson

  38. Can I ask you about training. They are setting up, I believe, modern apprenticeships. What happens a lot of the time with modern apprenticeships, they do the apprenticeship and at the end of it they are without a job. What kind of safeguards are we putting in place to ensure that not only do these modern apprentices get jobs at the end but we can attract the right kind of calibre of person into the industry, which we hope will be sustained for a long time?
  (Mr Culley) I stand to be corrected here but my recollection was that BAE SYSTEMS in announcing redundancies intimated that they would not make redundant anyone undertaking a modern apprenticeship, and that they would retain them for a further period of one year. I can say that if you compare the industry in the UK with its counterpart in Germany, there does seem to me in Germany to be a comprehensive approach taken to persuading young people to join the yards. I do not know the answer to this but I would hazard a guess that the average age of the workforce or 20 per cent of the workforce in Germany is not 56 years old. It seems to be far younger than that. We do have to have a very close look at the image of the yards. A few weeks ago I was asked to step in for the Minister for Enterprise, Transport and Lifelong Learning and to speak at a conference in Liverpool on shipbuilding, and the poster for that was commented upon by all, and that conference was attended by shipyard workers from Tyne, from Barrow, from Birkenhead, from all over the UK. The poster was of a more experienced man who was covered in grime with a bonnet to one side of his head, and it frankly made the shipyards look like they were antiquated. In Germany that would have been someone in an open neck shirt carrying a laptop.

  39. Did you discuss with the company how to attract people and give the industry the kind of face-over that is required to make it look like a forward-thinking company and attract some of the top graduates and some of the best school leavers?
  (Mr Culley) The fact of the matter is, Mr Robertson, we do have some of the top graduates, we do have these people, it is whether there is sufficient investment to do this increasingly for the future. If you step into the design shop of either yard in Scotstoun or indeed Barrow, it is very impressive high-tech, green plants in the corner, a very modern atmosphere there with the highest technical specifications available. In Barrow I was able to don what appeared to be a crash helmet with a viser which was virtual reality, and the computer image which was on the monitor in front of me when I put that device on permitted me to walk around inside a warship in my mind, as it were. So the technologies are there. The issue is whether or not we can actually draw that to the attention of the potential workers of the future.

4   Clyde Shipyards Task force Report, January 2002. Back

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