Select Committee on Trade and Industry Minutes of Evidence

Memorandum by EEF


  1.  In March 2001 the EEF produced an interim report on US-UK manufacturing productivity Lessons from Uncle Sam based on in-depth interviews with senior managers in manufacturing companies on both sides of the Atlantic. It highlighted the importance of improved productivity for UK manufacturing competitiveness and looked at reasons behind the productivity gap between US and UK manufacturing. It emphasised a number of reasons for the gap and the lessons that UK firms could learn from the experience of their US counterparts.

  2.  The final report Catching up with Uncle Sam was published in December 2001. It further investigated some of the issues raised in the main findings of the interim report. In particular, a Productivity Survey was conducted by NOP of 352 EEF member companies by NOP to provide further evidence on the uptake of lean manufacturing, use of workplace initiatives, issues surrounding firms' ability to attract the right people and barriers to investment. The report goes on to look at how employers and government can work together, tackle the issues relevant to them and boost productivity growth.


  3.  There are many measures of productivity and the size of the gap between US and UK varies depending on which one is used. The often-quoted Treasury estimate of the productivity gap with the US is 45 per cent but this refers to data on GDP per worker and when the data is adjusted for hours worked the gap is closer to 25 per cent.

  4.  EEF research for the interim report showed that some UK companies were more productive than their US counterparts, but in general a productivity gap does seem to exist between UK and US manufacturing. However, the crucial issue for policy makers and manufacturing is how to narrow the gap, rather than debating the exact size. In fact, even if there were no productivity gap, boosting productivity in the UK would still be vital to improving manufacturing competitiveness and overall living standards.


  5.  It is often forgotten in the productivity debate that there are structural reasons as to why US manufacturing might be more productive than that in the UK.

  6.  The US manufacturing sector is in a better position to exploit economies of scale given that the sector itself is much larger, the domestic market is much bigger and the economy is less open. The homogeneity of this large domestic market means that US manufacturing industry can benefit from higher volumes and fewer product variations.

  7.  The performance of the US Information and Communications Technology (ICT) manufacturing sector in the second half of the 1990s was much stronger than in the UK. Given that it makes up a larger share of the business sector, it will have had a larger impact on the overall productivity performance.

  8.  While the structural issues of economies of scale and role of ICT manufacturing can help to explain part of the productivity gap with the US, they do not explain it away totally. There are a number of other areas where UK manufacturing can learn from the experience of US firms to boost productivity and these are looked at in detail below.


  9.  The under-performance of UK manufacturing investment relative to US manufacturing has been a long-term problem over the last 30 years. The chart below shows that US firms have persistently had more capital at their disposal per hour worked relative to UK manufacturers. UK manufacturing investment has been volatile over the economic cycle but the level of investment relative to the size of the manufacturing sector has remained flat over the long-term.

  10.  The EEF Productivity Survey shows that there has been little improvement in manufacturing investment over the last 12 months and that firms are not planning to dramatically alter their investment performance over the coming 12 months. National Statistics data confirms that the situation continues to deteriorate with manufacturing investment falling further.

  11.  A lack of manufacturing investment has undermined company performance and is expected to continue to do so over the next 12 months.

  12.  The economic climate of recent years has significantly constrained manufacturing investment. The three key barriers to investment; lack of demand, uncertainty over future demand and the exchange rate all undermine current and future profitability. While these factors are difficult to tackle outside of tackling macroeconomic stability, it is crucial that their side effects on manufacturing investment and competitiveness are addressed.

  13.  The EEF survey shows clearly the link between investment and company performance. First that have increased investment over the last 12 months are more likely to have seen strong growth in productivity and profitability.

  14.  If increased manufacturing productivity is a serious economic goal then it is crucial that the long-term trend of under-investment in manufacturing is broken and that the negative impact that the economic climate of recent years has had on investment and productivity is counteracted.


  15.  The EEF's Interim Report highlighted that US manufacturers seem to get more out of the lean manufacturing by applying it more intensively and across the whole of their organisation. The EEF Productivity Survey provides new evidence on the extent of lean manufacturing in the UK and the barriers to its uptake.

  16.  It shows that many firms are applying lean manufacturing across the whole of their business and reaping rewards in terms of improved performance. Yet there is a significant proportion of firms that has not undertaken any lean manufacturing and is therefore missing out on the benefits. The take up of lean manufacturing in the UK is very polarised with a third of firms pursuing it across the whole organisation, while just over 40 per cent are not undertaking any lean manufacturing.

  17.  Those firms that are pursuing lean manufacturing are reaping the rewards in terms of improved productivity and company performance. In the UK, there is also a greater proportion of US owned companies using all the key lean manufacturing tools than is the case for domestically owned firms.

  18.  There are a number of barriers which prevent firms from undertaking lean manufacturing and which help explain why more firms are not using lean techniques. The most commonly cited barrier is attitudes to change within the firm, which reflects the attitudes of both employers and employees and causes inflexibility. There is also a general lack of understanding of lean and the benefits it can bring, while a shortage of the right lean skills persists at all levels within the firm.

  19.  The survey results show a clear link between the use of lean manufacturing and higher productivity and profitability. The chart below shows a higher proportion of firms in the high productivity brackets that has used four plus lean tools compared with those that had done no lean manufacturing.

  20.  If we are to improve the uptake of lean manufacturing in the UK and improve productivity it is clear that policy should focus on raising awareness of the benefits of lean manufacturing, assisting firms to apply lean manufacturing within their organisation and facilitating a step change in lean skills across all employees.


  21.  Workplace initiatives refer to a whole range of practices designed to offer employees greater incentives and improve employee involvement and communication. The US experience in the 1990s provides convincing evidence that new workplace practices have been a contributing factor to productivity growth in its manufacturing sector. It is not the adoption of any single practice that is crucial but the combination of a number of them and the involvement of employees in decision making.

  22.  The EEF Productivity Survey shows that UK manufacturers are embracing new workplace practices with many firms in the UK using output monitoring, individual performance appraisal and to a lesser extent employee involvement, suggestions schemes and total quality processes. However, incentive or profit-based pay is not used as widely as US-owned firms in the UK are making greater use of all forms of workplace initiatives than their UK-owned counterparts.

  23.  The key goals of firms introducing workplace initiatives are raising productivity and profitability, and increasing employee participation and satisfaction. The chart below shows that over 80 per cent of firms implementing workplace initiatives find them successful at achieving these goals.

  24.  In response to the question of what they see as the key constraints on the uptake of workplace initiatives, firms cited attitudes to change (of both employees and management) as by far the most important barrier to the take up of workplace initiatives.

  25.  The EEF Survey provides strong evidence of a link between the use of workplace initiatives and improved productivity and profitability in UK manufacturing. More widespread use of new workplace initiatives is clearly a vital ingredient for improved growth in manufacturing productivity.


  26.  The EEF Productivity Survey looked closely at whether firms' ability to attract and retain the right people is undermining company performance. It showed that while many firms are successful in attracting and retaining the right people, nearly a quarter struggle. The vast majority of those that struggle regard this as one of the key problems the company faces.

  27.  Offering good basic salaries is the key method of attracting and retaining skilled individuals in UK manufacturing. A much lower proportion of firms is offering bonuses, training, personal development, employee input and a better work/life balance as ways to attract and retain skilled individuals.

  28.  Pay and skills shortages in the wider economy are the key reasons why firms struggle to attract and retain the right staff (see chart). This suggests that firms cannot get round all these difficulties simply by offering more non-salary benefits. Improved training is also a crucial factor in overcoming the barriers to firms attracting and retaining skilled individuals.

  29.  The results also show that a higher proportion of US-owned firms based in the UK offer their employees a better work/life balance, bonuses, training and personal development compared to their UK owned counterparts. As a result, they are less constrained by difficulties in attracting and retaining skilled individuals.

  30.  Both employers and government can do more to ensure that firms are able to attract and retain the people with the right skills.



  31.  The planning process as it currently operates constrains manufacturing productivity by delaying or preventing firms from moving to new sites or extending current premises and therefore improving the layout and flow of the production process. The EEF believes it is vital that the government frees up the planning process and the CBI document "Planning for Productivity" emphasises many of the concerns of UK manufacturers. In particular that:

    —  It is too slow, too often, on decisions that are vital for a firm's competitiveness.

    —  There are too many uncertainties surrounding decisions, which translate into higher risks and costs for business and there is a serious lack of transparency.

    —  There is a widespread feeling that the process reaches bad decisions.

Burdens on business

  32.  The EEF has regularly warned of the damage done to industry by the increasing burden of regulation. It adds to business costs, diverts management time away from more productive uses such as increasing efficiency and limits the flexibility of companies to respond rapidly to changing circumstances.

  33.  The EEF's productivity work has emphasised the need for firms to be able to concentrate on boosting productivity through increasing the use of lean manufacturing, new initiatives in the workplace and doing more to attract and retain the right people. New employment legislation coupled with burdens such as the climate change levy impinges seriously on firms' ability to push for improvements in these three areas. Continuous improvement is an ongoing daily process and anything that hinders managers ability to focus on it, reduces their scope to make productivity improvements.

  34.  It is essential that the government increases its efforts both to reduce the current burden of regulation and to limit the impact on business of further measures.


  35.  A competitive transport system is crucial to sustained productivity improvements. It is essential that raw materials and components are delivered at the right time, without delay and that firms can move goods easily to market. It is vital that the government concentrates on delivering the planned increases in spending on the infrastructure and that it meets the transport needs of the manufacturing industry.

There are issues for Government and employers

  36.  It is clear that, if we want to boost productivity in the UK, government and employers will have to tackle the issues relevant to them. This will mean that employers focus on improving the understanding/uptake of lean manufacturing, adopting new approaches in the workplace and using new methods to attract the right staff. At the same time it is essential that the government can deliver on stimulating more capital investment, developing the infrastructure, improving the uptake of lean manufacturing, addressing skills shortages and encouraging more innovation.

  37.  If both parties can make inroads in all these areas, we can expect to see improvements in the productivity performance of UK manufacturing. Only with action on all these fronts can we seriously expect to start to narrow the gap with our competitors.

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Prepared 13 June 2002