Select Committee on Trade and Industry Minutes of Evidence

Memorandum by The British Chambers of Commerce


  1.1  The British Chambers of Commerce (BCC) represents 135,000 businesses that are members of local Accredited Chambers of Commerce spread throughout the UK. As such, we are in the main representative organisation for small and medium-sized employers in this country.

  1.2  We very much welcome the opportunity to submit evidence to the Committee as representatives of a broad cross-section of manufacturers.


  2.1  Our most recent quarterly economic survey for the fourth quarter of 2001 shows that manufacturing is currently experiencing its worst results for exports, investment and employment since the recession of the early 1990s.

  2.2  However, comparing our survey results for quarter three (taken just before 11 September) with quarter four, suggests that the terrorist attacks in the US have had little long-lasting effect on manufacturing activity or confidence in aggregate, although for some individual manufacturing and service sector firms, whose prospects are closely reliant on the international travel industry, the effects have been significant.

  2.3  Looking at slightly longer-term trends our survey shows that the sector suffered a sharp deterioration in exports throughout 2001 stemming from the unwinding of activity in high-tech sectors and faltering overseas demand. The rate of deterioration in exports accelerated in quarter three, but stabilised in quarter four.

  2.4  Chart 1 (overleaf), which is taken from ONS data, shows that whilst high-tech manufacturing industries have been disproportionately hit by the slowdown in global demand, the sector as a whole has also been grappling with a second longer-term pressure—the strength of sterling against the euro, which has hit output and severely constrained firms' ability to raise prices. As a result, profit margins are historically very low, official figures show that manufacturing profitability was 4.3 per cent in Quarter three 2001, compared with 12.5 per cent in the service sector.

  2.5  Our own survey shows that smaller manufacturers have suffered the worst deterioration in export sales over the past two quarters, although only about half of those in the one to 19 employee bracket export. Smaller sized manufacturers have also performed worst in the UK market as the "export" effect has filtered down supply chains.


  3.1  The sector's proportional contribution to the nation's total output has been in decline for several decades. Measured as a percentage of gross value added it is down from 24 per cent in 1989 to below 19 per cent now. However, in absolute terms the sector's gross value added continues to grow, the decline in proportion being due to rapid growth in output form the service sector, a trend to be expected in most industrialised nations. For example, in the EU, only Ireland has seen its manufacturing sector's contribution to growth increase as a proportion of value added.

Table 1
Employment in manufacturing sectors in 1995 and 2000
Industry1995 2000Change
Manuf food products and beverages453,426 476,9915.2%
Manuf tobacco products6,623 5,043-23.9%
Manuf textiles175,468 133,888-23.7%
Manuf apparel; dressing/dyeing fur154,877 94,013-39.3%
Tanning/dressing of leather, etc42,565 22,605-46.9%
Manuf wood/products/cork, etc80,804 78,999-2.2%
Manuf pulp, paper and paper products113,329 95,690-15.6%
Publishing, printing, repro recorded media 340,491353,9123.9%
Manuf coke, refined petroleum products 26,02529,17112.1%
Manuf chemicals and chemical products249,840 233,983-6.3%
Manuf rubber and plastic goods229,614 225,262-1.9%
Manuf other non-metallic products143,357 130,027-9.3%
Manuf basic metals140,271 113,033-19.4%
Manuf fabricated metal products, etc419,994 383,089-8.8%
Manuf machinery and equipment nec383,822 351,930-8.3%
Manuf office machinery and computers44,316 50,78114.6%
Manuf electrical machinery/apparatus nec 171,117169,454-1.0%
Manuf radio, tv/communications equipment 122,867125,6142.2%
Manuf medical, precision instruments, etc 135,532131,834-2.7%
Manuf motor vehicles, trailers, etc221,156 216,438-2.1%
Manuf other transport equipment146,283 166,40813.8%
Manuf furniture; manufacturing nec184,890 199,1257.7%
Total of above sectors3,994,473 3,799,845-4.9%

  Source: ONS.

  3.2  Equally, although the sector's share of employment is down from 21 per cent in 1990 to about 15 per cent now, this is again not out of step with the trend in other industrialised nations.

  3.3  Such trends reflect underlying structural shifts in our economy, which in the case of manufacturing are best illustrated by looking at some of its sub-sectors. Table 1 shows that with respect to jobs the constituent parts of our manufacturing sector are not all cutting back on workforce numbers, but facing different challenges, which are driven by different factors.


  4.1  The extent of the UK's productivity gap with other leading industrialised countries has been well documented in several studies published in recent years, for example reports by McKinsey (1998), O'Mahony (1999) and HM Treasury (2000 and 2001). Whether measured by output per worker, output per hour worked or total factor productivity, the UK lags France, Germany and the United States, although the productivity gap will differ depending on the measurement used. Taking the latter, UK total factor productivity lags France by about 20 per cent, the US by 18 per cent and Germany by 13 per cent. The manufacturing productivity gap is if anything larger than this.

  4.2  The exact size of any gap is not really as important as the fact that a sizeable gap exists. Even if UK productivity exceeded that of these other nations pursuit of higher productivity would still be a valid policy and organisation goal as ultimately higher productivity is the route to rising wealth and standards of living.



  5.1  One of the most noticeable differences between the UK and other industrialised nations, which may help explain the productivity gap, is our capital stock. Decades of under-investment by private and public sectors has left UK workers using significantly lower amounts of capital than their foreign counterparts, as chart 2 illustrates.

  5.2  Nevertheless, the UK makes extremely efficient use of the capital it has. It is worth stressing that having too much capital can also have adverse effects. Japan for example, has suffered from over-investment, where so large a share of national income has been invested that some of it has been wasteful and the returns have often been very small. However, having such a large gap in capital stock between us and other nations such as France, Germany and the US is we believe one of the main explanations of our productivity gap.


  5.3  The UK workforce falls behind that of Germany and France in terms of skill levels and basic numeracy and literacy. In the mid-1990s about 23 per cent of British adults had very low literacy skills and 21 per cent had very low numeracy skills, compared with 12 per cent and 7 per cent respectively in Germany.

Self motivation

  5.4  The productivity of any particular workforce will be driven by the skills employees have and how hard they work. There is evidence to suggest that the UK manufacturing sector lags behind the US at getting the most out of its people. For example, work by the EEF[1] suggests that incentive or profit-related pay is less commonplace in this country. Likewise, workplace practices such as individual performance appraisal, employee suggestion and other involvement schemes.


  5.5  The same research by the EEF[2] indicates that take up of lean manufacturing techniques in the UK lags that in the US and that the use of such methods correlates with higher productivity and profitability. In 40 per cent of the manufacturing businesses the EEF surveyed no lean manufacturing techniques are used and in a sizeable proportion of the rest the full benefits are not being derived, because the use of such techniques is not adopted across the whole business.


  5.6  Innovation is critical to manufacturing in two respects. First, it can help improve processes and therefore raise productivity, and second, product innovation can help generate value, allowing companies to charge more for relatively the same amount of inputs.

  5.7  Chart 3 illustrates that the UK has bucked the trend of its main international rivals in recent decades, devoting less expenditure as a percentage of GDP on R&D, when most of them have been devoting more.

  5.8  Recent evidence from the DTI's R&D Scoreboard 2001 indicates that overall average UK R&D intensity is only 2.1 per cent of sales, which is half the international average of 4.2 per cent and within these figures there is significant sector variation, with strong levels of R&D in pharmaceuticals and aerospace somewhat masking poor levels in most other sectors.


  5.9  The BCC's Burdens Barometer shows that the cumulative cost of regulations to business introduced during the period 1997-2002 is £15.6 billion. This figure was calculated in May 2001, using the Regulatory Impact Assessments (RIAs) that are required to accompany new regulations. In addition to pure cost, what RIAs do not assess is opportunity costs—the other use that entrepreneurs could make of their time focusing on productivity issues.


  5.10  The AA has estimated that the cost of congestion to our economy is in excess of £19 billion. We believe this has a large impact on UK productivity. How can we expect our businesses to be productive when employees arrive late and in no fit state to work, when simply arranging business meetings becomes a logistical test, and when there is no guarantee that goods will arrive on time—a critical aspect of modern just-in-time manufacturing. For certain parts of our manufacturing sector ICT infrastructure is also an issue. Figures published by the OECD show that the UK ranks 22 out of its members in terms of access to broadband technology.

Economies of scale

  5.11  The size and relative homogeneity of the US market will make some contribution towards the superior productivity of US businesses. For UK companies to produce equivalent volumes will entail exporting and thus a factor that will influence UK productivity is ease of access to markets abroad. Differences in taste, however, mean that the homogeneity of the US market is not always easy to replicate in Europe and thus down time for changes to production lines will have some impact on manufacturing productivity in the UK which will not be the case in the US.

Exchange rates

  5.12  UK exporters have had to cope with an exchange rate in "old money" of DM3.00 or above since Quarter four 1999. This has had a significant effect on firms' price competitiveness both at home and abroad. The decline in exports has not been as great as perhaps anticipated and certainly prior to the effects of the global slowdown of this year most firms' strategies appeared to be to forsake profit margins to maintain market share.

  5.13  Table 2 shows the results of one study that has tried to quantify some of the above factors' contributions to the UK's productivity gap against Germany and the US.

Table 2

Physical capital3155
Total factor productivity69 45
of which:
  Other factors4 14
Total productivity gap100 100

  Source: Crafts and O'Mahony, 2000 (*Labour productivity defined as output per hour worked).


  6.1  The sector's contribution of 20 per cent to GDP and nearly four billion jobs should be sufficient reason to appreciate its importance to our economy. However, there are several other good reasons why the UK needs a vibrant manufacturing sector.

  6.2  The first, is its impact on the UK's balance of payments. In recent months the combination of lower exports and more imports has meant that in absolute terms the UK trade deficit has been at record levels, although expressed as a percentage of GDP it remains below historical peaks. All countries must ultimately pay their way in the world and whilst the overall current account deficit is still not large in comparison with the late 1980s, a persistent large deficit would leave the UK exposed to fluctuations in investment income and dependent on our ability to attract capital inflows, unless we can address our trade deficit. Arguably the most probable way to do that is through reducing the deficit on our trade in goods, by exporting more manufacturing value.

  6.3  The second reason why the UK needs a strong manufacturing sector is its contribution to wealth. The sector tends to create high-wage jobs, with gross value added per employee higher in manufacturing than in services, and in some sub-sectors significantly higher. To illustrate the point, with the exception of textiles, there are few manufacturing jobs that pay the national minimum wage.

  6.4  A third reason is its impact on the service sector. About 2.4 million service sector jobs rely directly on the manufacturing sector and about 30 per cent of manufacturing spend is on services, particularly transport and financial and business services.

  6.5  Rather than asking why we need a manufacturing sector, perhaps two more pertinent questions are what kind of manufacturing sector should we aim for and how can we get to it with as smooth and painless a transition as possible?

  6.6  Table 3 illustrates manufacturing labour costs in selected countries and value added per manufacturing worker. There are two points to emphasise from this analysis. First, that the labour costs in many countries will make it increasingly difficult for UK firms to compete in low-wage, low value added manufacturing. Second, that there is plenty of scope for the UK to improve value-added per worker to match other countries' levels, by focusing on high-wage, high value-added manufacturing.

Table 3

CountryLabour cost per worker in
manufacturing 1990-94
Value added per worker in
manufacturing 1990-94
Czech Republic  1,876   5,094
China729 (1995-99)
South Korea10,74340,916
India  1,192  3,118
Malaysia  3,42912,661
Bangladesh     671   1,711

  Source: World Bank.


  7.1  Government affects many of the factors that impact on manufacturing productivity set out above and therefore can create the right environment in which to raise it. However, as the EEF has set out in its report "Catching up with Uncle Sam", businesses also have a part to play, in the case of manufacturing: increasing the uptake of lean manufacturing, adopting new approaches in the workplace, attracting and retaining the right people, breaking down attitudes to change, raising investment and undertaking innovation. [3]

  7.2  To encourage such practices requires Government to genuinely stoke a debate that engages businesses to think about their productivity. At present, much of that debate goes on in Whitehall and Westminster. The imperative is to get it into the boardrooms of UK businesses. To do so, Government must communicate its messages in small business owners and managers' terms. Productivity is not a word they use in everyday parlance. Ahead of its plans to appoint a high-profile economist, we would recommend the DTI appoint a communications guru to drive its productivity work.

  7.3  In so far as it can influence manufacturing productivity the over-riding priority of Government should be to get the basics right, providing: a sound macroeconomic policy, a good education system, first-class infrastructure, which includes for information and communication technologies, a competitive tax and regulatory environment and rigorous competition policy.

  7.4  However, sound macroeconomic policy for the economy as a whole will not necessarily guarantee economic stability for manufacturing. As the recent past has shown, with 40 per cent of its output traded abroad the sector has a large exposure to demand abroad and exchange rate fluctuations. This has a couple of policy implications. First, that economic stability at home will not necessarily guarantee the stable conditions that are conducive to manufacturing investment, and thus justifies the use of tax breaks and other incentives targeted at the sector. And second, that Government should be conscious of the sector's greater volatility and should avoid exasperating tough trading conditions abroad, by introducing regulatory or tax changes that compound its problems. The ultimate objective—a highly productive and competitive manufacturing sector—will of course be better placed to cope with exposure to exchange rate and trade fluctuations.

  7.5  Large swathes of the UK manufacturing sector are also facing significant structural change. To create a high earning economy Government should provide an environment that supports high value-added industries. The UK manufacturing sector clearly lags many other countries in terms of capital investment, research and development, and innovation by quite some margin. Closing that gap quickly should be a priority.

  7.6  A second key facet is skills. Government must encourage sufficient supply of technical skills in design, science and technology, the better exchange of ideas between academia and manufacturing businesses.

  7.7  For most parts of the UK manufacturing sector the way to complete will be by being smarter rather than cheaper. To that end we need far greater take-up of initiatives that encourage manufacturers to network, share best practice and benchmark. Low-value added sectors are and will continue to come under pressure from low-wage competitors. Some may be able to compete by expanding markets or increasing efficiency. Others may be able to adapt, by branching out into higher value niches. Government cannot stop such change, but can help businesses and the people that rely upon them adapt to it. For example, by helping industries find time to adapt by not precipitating change through the use of tax and regulatory policy, and by helping people upgrade their skills throughout their working life.

  7.8  In its White Paper, "Opportunity for all in a World of Change", published last February, the Government set out a package of measures to support UK manufacturing and encourage greater value-added from the sector. One of the initiatives, the manufacturing advisory service, goes live this April and potentially could prove useful and we shall monitor its development with interest.

1   Catching up with Uncle Sam-The EEF final report on US and UK manufacturing productivity-December 2001. Back

2   Ibid. Back

3   Catching up with Uncle Sam-The EEF final report on US and UK manufacturing productivity-December 2001. Back

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