Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 101-119)



Mr Berry

  101. Good morning, Mr Fletcher. Do you want to introduce yourself and your colleagues?

  (Mr Fletcher) Yes. My name is Ian Fletcher. I am head of policy at the British Chambers of Commerce.
  (Ms Low) Sally Low. I am in the policy team at the British Chambers of Commerce.
  (Mr Peel) John Peel. I am the managing director of a company in Crawley making radiotherapy equipment bucking the trend industrially, in that we deal with cancer which is growing at about 20 per cent per annum and therefore the company is doing the same. I also with my other hat chair Sussex Enterprise, which is a Chamber of Commerce delivering Business Link for the SBS.

  102. Thank you for your written submission to the Committee. The opening comment you make in your memorandum is that manufacturing is currently experiencing the worst results since the recession in the early 1990s. Could you give a brief overview of the manufacturing sector from your point of view?
  (Mr Fletcher) We have seen the sector under significant pressure for two or three years now because of the sterling/euro exchange rate in particular and the impact that is having on manufacturers' pricing competitiveness. However, that was predominantly an export driven problem and the sector as a whole continues to grow in the United Kingdom. At the start of 2001 however we have seen three quarters of significant decline because of global events and our third quarter survey illustrated this very well in that it was conducted the week before the events of 11 September, which showed that the global demand was having a significant impact on the sector. I anticipate you particularly would like a small firms perspective and the manufacturing sector. From our survey, small manufacturers do not constitute a large proportion of exporters. They have been more severely affected than the larger counterparts in terms of export sales and investment. Of particular concern to us in the third quarter of last year was cash flow. We saw the worst cash flow situation ever for those companies. On a more positive note, our quarter four survey showed that things seemed to be bottoming out and quarter three may have been the trough of their experiences. The curiosity perhaps is that overall this has been almost 100 per cent driven by external events so in terms of policy solutions and monetary policy in the United Kingdom it could not deliver a particular solution to this problem. We have been in the rather curious situation of looking as much to the actions of the European Central Bank and Federal Reserve to help out the United Kingdom manufacturers as we have to the Bank of England.

  103. You quite reasonably point out that sound macroeconomic policy for the economy is not the same as a sound policy for stability for manufacturing. What do you see as the main obstacles to recovery? What can improve? What are the key factors that could improve forms of manufacturing today?
  (Mr Fletcher) It is a case of world demand. Only that is going to deliver the activity which is going to help our manufacturers out of the trough. The longer term problem of price competitiveness and the euro/sterling exchange rate they seemed to be able to cope with in terms of their competitiveness.
  (Mr Peel) I am a medium enterprise, 165 persons. My supply chain is tending to be smaller companies. For me to live, they have to be a really excellent supply chain. My fear is that some of them will fall by the wayside, not because they are poor manufacturers delivering poor quality, but simply because they cannot make a profit. They do not export necessarily but I export 95 per cent of everything I manufacture, so they are impacted ultimately. As far as enabling the country to be better off in terms of manufacturing, very difficult. I do not think there is a single answer but stability is the key and a recognition that that stability must provide confidence for the manufacturers of the future.

Sir Robert Smith

  104. Mr Fletcher is talking about how the small companies were not so exposed to export. Is there any way of judging how much of the next stage in the chain is exposed to export and therefore they are secondary victims?
  (Mr Peel) As in do we have a statistic?

  105. Yes.
  (Mr Fletcher) From our economic survey, proportionately about 80 per cent of medium size manufacturers export, about 90 per cent of large and only about 40 per cent of the micro, small firms.

  106. Can you say roughly of the 60 per cent how many supply the medium and the large to do their exports and how many supply directly?
  (Mr Fletcher) I cannot. I can see if I can find those figures for you.
  (Mr Peel) As a sample of one, of 120 key suppliers, my guess would be that over 50 per cent of those do not export directly.

  107. They supply you and if you cannot export they have no one to supply.
  (Mr Peel) Correct.

Mr Berry

  108. If the key problem is world demand - and you emphasise in your memorandum the importance of the exchange rate - what should the government do?
  (Mr Fletcher) In terms of prospects for recovery, we conducted a survey towards the start of this year with HSBC and covered 14,000 firms. It illustrated that, looking at the manufacturing sector as a whole, it had as many high performers as any of the other sectors in our economy. There was as much a proportion of those in the manufacturing sector that were enjoying growth in excess of 20 per cent as other sectors. The problem was that a number of large manufacturing sectors were seeing a decline of between one and 20 per cent of their turnover, but no higher an amount than other sectors were seeing. There does not seem to be a larger proportion of manufacturing firms than firms in the economy as a whole that are significantly suffering but there is a large tail of manufacturers that have had some impact from the various events. In terms of solutions, we have called for certain things. We believe that, first and foremost, the government should be concentrating on getting the basics right, maintaining a stable monetary policy so that the 60 per cent of output that relies on domestic demand does not go the same way as the 40 per cent that relies on overseas demand. There are other things such as not accentuating the problems that manufacturers experience with taxes and regulations and ensuring that we continue to invest in transport infrastructure so that they are able, from a productivity perspective, to operate their time management systems as effectively as possible. We were very concerned during the third quarter with a particular cash flow problem and we asked for some deferment of tax in the same way that the government had deferred taxation for businesses affected by foot and mouth. I do not know if that is still a worthy policy goal. The cash flow situation seems to have been improving over the fourth quarter of last year.

Richard Burden

  109. To take you back to the issue of supplies and small firms and whether any of those are involved in export. I recognise you have not got the figures and this may be something you need to give us a note on but anecdotally perhaps you could give your impressions. One of the problems is that sometimes we refer to suppliers as an undifferentiated whole and obviously there are differences: first tier, second tier and between sectors. As well as there being an impact, which you have identified, particularly the problems of a manufacturer who is involved in exports having a knock-on problem with suppliers, how far do you see it being a problem between suppliers? In other words, first tier suppliers may be typically multinational companies which then would put the squeeze on smaller suppliers further down the line that would not be involved in export but would be involved in servicing bigger suppliers. How far do you think that is an issue?
  (Mr Peel) This is very difficult to discern. You have described a very complex situation. What I see is that with 120 suppliers I can look at those almost on a daily basis and tend and care for them, especially if they are smaller. We would not penalise in cash flow terms. Payment on time is key. What you cannot be certain of is that they are doing the same to the next layer down and, as you rightly point out, the next layer down could be a multinational. I do not think there is a simple answer to your question other than trying to use the supply chain as well as one can in terms of ethics and communication. This is as much about communication and talking up or talking down manufacturing as it is about cash flow.

Dr Kumar

  110. Mr Fletcher, in your submission, section five, "Factors Affecting Manufacturing", you have quite well laid out a chart which highlights the lack of capital investment as a major reason for the low productivity. Do you have any ideas of the reasons for low productivity compared to other countries and how can we overcome this problem?
  (Mr Fletcher) In terms of our stock of capital investment, it is our stock of capital that is the problem. It is a long term problem which probably goes back 30 or 40 years. Making good that significant shortfall in capital is something that is going to take time to remedy. The major reason for it is the lack of economic stability at home and the monetary policies that were pursued over the past 30 or 40 years and the knock on impact that had on the capital markets in terms of a drive towards short termism rather than long term investment. As I have set out in my evidence however the changes have taken place in the more secure monetary policy that we now pursue. It will not by itself remedy all the manufacturers' problems because there is that 40 per cent of output that is still very exposed to demand abroad and the exchange rate. If we were looking for a reason to justify particular incentives such as capital allowances being targeted, that is a good reason for targeting the manufacturing sector because it does not have that stability at home.

  111. Are you saying that the monetary policy that has been pursued in other European countries has been much more stable over the last 40 years comparatively to our country?
  (Mr Fletcher) I believe that is the case. If you look at the likes of our German competitors up until three or four years ago the conduct of monetary policy by the Bundesbank was very well respected because of the stability that it ensured for its domestic manufacturers.

Linda Perham

  112. In the next part of your memorandum, 5.3, you mention the deficit in skills in this country compared to, say, Germany and France and basic literacy and numeracy. This is a considerably important difference. Are there measures that you think should be put in place to address that?
  (Mr Fletcher) I will say a few words and then let John speak because it is a particular passion of his. From our perspective, the skills issue has two or three different facets to it, if you are looking at productivity. Firstly, there is the immediate problem of skill shortages. The ONS has recently published data which suggests that we have about 150,000 vacancies in this country that are vacant because of skill shortages. Those tend to be proportionately skewed towards the manufacturing sector. It tends to be skilled, manual, technical and professional labour. Those skills are particularly difficult to find for employers. In that perspective, we do have concerns about the policies that we pursue, the high targets for getting people to enter higher education. A lot of people are being drafted into level four skills, degree levels skills and, in graduating, finding that the jobs they go into are level three and modern apprenticeship type jobs. That seems a waste of government resource in terms of having to train people twice plus employers are not getting the skills that they need. The second problem is skills gaps in the labour market itself. The ONS estimated that there were 800,000 skills gaps, individuals that employers believe do not have the skills to do the job that they want them to do. They were more skewed towards the service sector and it tends to be more generic skills, things like communication, literacy and numeracy. The government rightly has made that a priority and it seems to be intent on tackling that problem. The third issue is are we aspiring to have the types of skills, the high value added industries that will generate the wealth in the future? Clearly, there are certain sectors that we would wish to encourage, things like biotechnology, where it is driven by knowledge and skills. Overall, different issues, but we would agree that skills are important to the productivity agenda for various reasons.

  113. You said at the beginning your first point was about possibly we are channelling too many people into higher education that do not need that level and you need people at, say, level three but your last point was that we need skilled people, the high achievers as well, to compete with other countries in Europe and the US.
  (Mr Fletcher) It is a case of quantity. We do not seem to have the number of people that we need with level three skills to meet the current demand for those skills. We do seem to have an excess of people who have level four skills. Looking at the types of degrees people are doing, there is a lot of criticism in the press that people are not doing the correct subjects. I do not know if I agree with that entirely.

  114. What are the correct subjects?
  (Mr Fletcher) There are criticisms that we do not have enough people doing engineering degrees. The number of people doing engineering degrees has not changed much over the past decade. There is not a deficit. The main changes seem to be that fewer people are doing the academic minded degrees and more are doing things like computer skills. Quite positively, there has been about a 35 per cent increase in people doing design which is a critical aspect of attracting value to our manufacturing sector.
  (Mr Peel) I have a passion for this subject. I suppose it comes from the fact that I was an apprentice in Coventry in a machine tool company and they gradually pushed me up to go through a first degree and, when they found they had not got the tailoring quite right, through a second one. That company is now defunct. That shows what happens to industry over time. However, that does colour my judgment today and for years, whenever I have had the opportunity in a company the size I am in now, I train my own. We have a policy which ensures that somewhere between four and five per cent of all hours are spent on training, but we also believe in education. I have had 11 individuals going through Open University MBAs, for instance, and that takes them an hour a day for seven years. They need real encouragement to start that and all the way through. That trains a straightforward operative right the way through to being a full manager. That does not necessarily give them all the skills they need. In the background, I encourage education; in the foreground, training at whatever rate. The product I am making is going upmarket in terms of skill requirements all the time. For instance, we put a complete shop floor through an upscaling exercise from mechanical fitting, generally speaking, through to electrical, through to electronic as the requirements have changed over the years. I personally believe in doing the best to train your own. As to what the government can do about it, we have to ensure that the local Learning and Skills Council delivers the goods and tailors local courses appropriately to local needs. I am sure that is going to be a difficult thing to achieve but it is not impossible. I would also encourage smaller companies to be treated in a differential manner. A company of over 100 should make its own way in the world. A company of 15 may need a subsidy of some sort to allow an individual to go off and do training of a concentrated nature.

  115. The point about training is that most of the businesses in this country are small businesses, almost 100 per cent. It is difficult if you have, say, four or five people, to let someone off whether you are providing the training or whether the government is helping you out, because you lose a key worker from a small workforce.
  (Mr Peel) There is no simple way through that. Encouragement by the supply chain. Let me give you an example. It is imperative that all my suppliers have ISO 9000, the quality standard. With the assistance of Business Link going back some six or seven years, we arranged courses for both companies, in terms of management, and the workers, to bring those up to the standard that we required. We have done the same thing on EN14001, the environmental standard. Pressure from supply chains and assistance from the larger players does no harm at all.

Sir Robert Smith

  116. I wondered if the personnel departments of many companies have been your worst enemy in your concern about level four qualifications for level three jobs in the sense that, at times when there are quite a lot of applicants just hitting the extra hurdle of a degree being required when really it is not crucial to the job. Would that be a criticism?
  (Mr Fletcher) That would be a fair criticism. There is a status symbol that goes with a degree that perhaps we need to tackle. Part of the government's current agenda, various papers published over the past few weeks in terms of the 14 to 19 learning and the Performance and Innovation Unit's current report on adult skills is trying to tackle that discrimination between different qualifications and make vocational qualifications of equivalent status to degrees.

Mrs Lawrence

  117. The other side of getting the best out of your staff in terms of productivity has to be staff motivation and I was very interested to read what you said between 5.19 and 5.21 on workplace initiatives. Can you quantify the difference that other non-pay factors can make to staff recruitment and retention? You mentioned training but personal development planning and work life balance initiatives and things like that?
  (Mr Peel) My experience in this is providing that training but it is the whole package that counts. It is the ability to have a sick scheme which takes somebody who is receiving a reasonable amount of pay in the short term if they are sick right through to total disability, without there being a break. That is attractive to some people. As is having a good pension at the end of their working life. I personally find that it is the communication of where the company is going. Every individual in the company has a right to know what they are doing and why. If you are communicating well, you are ensuring that those you have brought into the company are retained. We have a retention rate for shop floor employees which is almost 100 per cent. If you go to software workers, the replacement rate will probably be about 20 per cent per annum, so there is a huge variation there. To get people into a company, it is not just the wages; it is the whole package and retaining them is a lot about communication, concentrating on them as individuals. We happen to do a team briefing using the Industrial Society model and quarterly reviews. We keep our employees very much alive as to what we are achieving and we keep them interested in their jobs.

  118. I was looking in paragraph 5.19 to the Uncle Sam series of reports by the Engineering Employers' Federation and the fact that it makes the point that it is not one particular factor but a combination, not the adoption of one particular factor but the combination of several. I wondered what emphasis on the various packages had worked out to be the best approach, involving the workforce in decision making, that sort of thing. Could you expand a little more in terms of what you found to be best practice?
  (Mr Peel) We do a lot of benchmarking. First of all, involving employees in making decisions. To recount an anecdote, I had a gentleman leave the company recently, after some 20 years. He took me over to the board which shows our turnover which had gone up and up and up in that period. He said, "John, we spend too much time at meetings." I pointed at this board and said, "Yes, we may spend an awful lot of time at meetings but look what we have accomplished." He was a shop floor worker so he had been "hands on" the job and he did not understand that planning the work was just as important and getting the ideas from the employees. I once made a dreadful mistake at a quarterly review by getting annoyed with the audience who were asking a lot of difficult questions and saying to them, "Okay, on Monday bring your brains to work". I realised over the weekend that I had not only just made an idiot of myself but I had said a truth. That was getting the employee involved in improving the job they are doing, even eliminating the job they are doing to improve the company. That is a major benefit to all. That is where we first found engagement with the workforce in general, through that sort of motivation, getting them involved. I come on to communication which I have talked about enough already. Thirdly, direction. It is a little like dealing with children. They have to perceive the same reaction for the same force on each occasion. If you vary it, the results will not be consistent and the individual does not know what is going to happen. Again, a lot of training and quality improvements, the tools of quality and, generally speaking, improving the individual's lot.
  (Mr Fletcher) Before we came here today, we unearthed a piece of research which looked at the amount of hours that are lost because of lack of direction which shows the United Kingdom as performing poorly compared with other competitors. We will make that available to the Committee to illustrate the point.

Mr Chope

  119. Can I draw Mr Peel out on his own experience, which shows that on the job and in the job training can be much more valuable than people going off to higher education and then going into industry? I have a constituent who runs a very large aerospace engineering company and he says, "Give me the lad straight out of school and I will be able to make him into a really first class engineer, perhaps send him off to university afterwards, but if you send him off to university first he is finished by the end of the university course. He is totally unemployable and unsuitable for industry." That seemed to fit in with your own personal experience and with some of the experiences you have had as an employer. Do you think that the government is putting too much emphasis on getting people straight from school into further and higher education, rather than getting them into jobs where they can train on the job and in the job?
  (Mr Peel) I have a deepening suspicion that you are trying to put words into my mouth. I believe that the modern apprenticeship is an excellent route for an individual if they happen to be of that mind. Their minds can be changed by advice. If I look at my own experience as an individual, I went through a sandwich course essentially for my first degree and that I found to be an excellent way of dealing with education in one six months and the practical application in the next or vice versa. That is the best I have seen work in practice as well. I would back the view of your particular constituent in aerospace.

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