Select Committee on Trade and Industry Minutes of Evidence


ANNEX ONE

7.  SECTOR FOCUS

  7.1  Analysis of the generic issues facing manufacturing give part of the story, and of course the macro issues are common to many. But in addition, it is important to understand the circumstances that are unique to individual sectors and therefore for government to have a strong sector focus in its manufacturing support.

  7.2  The sectors detailed below are intended to give a flavour of these differing circumstances and requirements, rather than in any way attempt to represent the totality of manufacturing.

Aerospace

  7.3  The United Kingdom aerospace industry is one of the most successful of all our manufacturing sectors and one that is genuinely world class. The United Kingdom is the largest player in Europe and a global presence second only to the US, with a turnover in 2000 of $18.25 billion and employing over 150,000 people in 2000, making it the largest aerospace employer in Europe. In fact, a third of all aerospace jobs in the EU are within the United Kingdom. Aerospace as a whole contributed a positive £3.8 billion to the United Kingdom trade balance in 2000. In real terms, the industry has contributed an average of £2.5 billion to the trade balance each year for the past 10 years.

  7.4  Clearly the global aerospace industry has been the most directly affected by the aftermath of 11 September. United Kingdom aerospace is the most globalised aerospace industry in the world, and whilst this usually works in our favour, in this case it has meant that United Kingdom aerospace has been more exposed than most to the effects of the downturn.

  7.5  The Society of British Aerospace Companies (SBAC) has calculated that since 11 September, the United Kingdom has suffered 22 per cent of the job losses in the global aerospace industry, compared to a market share of 13 per cent. SBAC expects at least 40,000 jobs to be lost in United Kingdom aerospace, with the effects falling heavily on the supply chain,—with at least 26,000 job losses anticipated. SBAC estimates suggest that for every job lost in leading companies, a further three are lost in the supply chain. It is possible that some of the best supplier companies may not survive the loss of revenue.

  7.6  These short term impacts are set against a backdrop of globalisation and consolidation throughout the industry. Whilst United Kingdom aerospace companies are well placed to take advantage of these developments, capacity and employment may be threatened by increased outsourcing and the location of production overseas.

  7.7  Looking ahead, it is crucial that "strategic control" over investment continues to rest in the United Kingdom, and that the degree of technology leadership acquired by United Kingdom aerospace companies in key programmes and markets remains high. The supply of technologically skilled and qualified labour throughout the supply chain is a critical success factor.

Automotive

  7.8  The United Kingdom has traditional strengths in automotive manufacture, and the United Kingdom is home to 17 of Europe's top 20 automotive component suppliers. In terms of volumes, 2001 was a record year. 2.46 million units were registered in the United Kingdom, beating the previous record set in 1989 by almost 160,000 units. Total car production in the United Kingdom was 1.49 million, a fall of 9.1 per cent on the previous year.

  7.9  Employment in car and commercial vehicle assembly is 80,000 with a further 150,000 jobs in the automotive components sector. Total turnover for the industry is $45 billion, which equates to 5.3 per cent of GDP. Exports amount to £19 billion. Two-thirds of United Kingdom car production is exported, so clearly the exchange rate is a critical issue for the industry.

  7.10  Despite having some of the most productive plants in the world and producing record volumes, the major car manufacturers are losing money in the United Kingdom.

  7.11  In the year 2000:

    —  Ford made $7.7 billion in North America, lost $98 million in Europe, and closed one United Kingdom car plant.

    —  GM made $6.4 billion in North America, lost $275 million in Europe, and closed one United Kingdom car plant.

  Toyota lost £40 million in the United Kingdom despite sales being up by 9 per cent and reporting record profits overall.

  7.12  Many major car manufacturers are reducing their assembly or sourcing levels in the United Kingdom. A recent Study by A T Kearney has found that:

    —  Manufacturing of high sales-volume models in the United Kingdom will continue to decline in the long term, as a result of the United Kingdom remaining outside the Euro zone, excess capacity and a shift in the centre of market demand eastward in Europe.

    —  Premium car manufacturers, such as Jaguar, Land Rover and BMW, may take up some of the slack, benefiting from different economics, growing demand and broader markets.

    —  Suppliers will continue their flight to the Euro zone and low cost economies such as Poland and Hungary, as a way of meeting manufacturers' demands for lower costs and Euro pricing.

    —  Remaining United Kingdom suppliers must focus on the premium sector and achieve the quality and technology levels that are a prerequisite of serving those customers.

  7.13  Looking forward, key issues for the sector are:

    —  Skills, particularly vocational training in manufacturing disciplines.

    —  Achieving genuine partnership between unions and employers.

    —  Long term investment in modern equipment and R & D.

    —  Support from government for manufacturing.

Steel

  7.14  United Kingdom steel producers have successfully raised productivity by 10 per cent per annum or nearly four-fold in the last 25 years. However, the industry is suffering from weak steel prices worldwide, chronic surplus steel capacity, a bias across industry to overproduce, which is all against a backdrop of exchange rate pressure. Between 1996 and 2000 the average sterling price of each tonne of steel exported fell from £410 to £300. In addition, cost burdens such as the climate change levy has fallen disproportionately on the steel sector, with the levy estimated to take £10 million out of United Kingdom based steel firms.

  7.15  A report commissioned by United Kingdom Steel in June 2001 (undertaken by Business Strategies) found that the United Kingdom steel industry has weathered the storm of increased global competition better than many of the United Kingdom's "traditional" manufacturing sectors. This is due largely to the productivity gains that have been made, though clearly the transformation has impacted on the number of jobs employed in the sector.

  7.16  The report concluded that in order to maintain a viable steel industry in a tough global environment, the support of an engaged and willing government, addressing concerns in the following areas, is vital:

    —  The reduction of global overcapacity in steel in an orderly fashion.

    —  Arresting the continuing erosion of the United Kingdom manufacturing base, which is essential for the viability of a steel-producing sector.

    —  An improvement in the taxation regime for the industry (including capital allowances and business property tax).

    —  A reduction in the burden of energy costs.

    —  The elimination of unfair subsidies wherever they exist.

    —  A resolution of trade issues in a way which safeguards the United Kingdom's position.

Chemicals

  7.17  The United Kingdom possesses the sixth largest chemicals industry in the world. It generates a trade surplus of £4,550 million, of which £2,447 million is in the area of pharmaceutical preparation.

  7.18  The December 2001 Economic Bulletin from the Chemicals Industries Association highlighted that United Kingdom chemicals output growth is weakening, which reflects the global economic slowdown. Overall output growth was forecast to slow from 4.1 per cent in 2000 to 3 per cent in 2001 And 1 per cent in 2002. Although world demand was already slowing, the events of September 11 undermined prospects of an early recovery.

  7.19  The deterioration in the macro-economic situation combined with the major swings in energy prices has had a major impact on the world chemical industry. Industrial markets—especially petrochemicals and polymers—have been more seriously affected than consumer markets and pharmaceuticals.

  7.20  The relative price of sterling against a weak euro continues to undermine UK competitiveness. Some chemical companies have indicated an increasing number of customers, particularly in engineering/engineering polymer markets and textiles, either going out of business or transferring activities to countries in the euro-zone. Rising costs due to new legislation, such as the climate change levy and increasing environmental charges are also undermining the case for operating from the UK.

  7.21  Looking forward, the Foresight Chemicals panel—which reported last year—felt that the UK chemicals industries will have to operate in an increasingly competitive global marketplace, but that we do have the assets that can ensure future success. These include commitment to scientific excellence, advanced technology, working to high operational standards and an integrated supply chain. The Foresight Chemicals panel put forward the following requirements for future success:

    —  A stable economic and legal framework to encourage long-term investment in capital and intellectual assets.

    —  A cost competitive edge so we can seize opportunities at regional and global levels.

    —  A need to implement sustainable development principles.

    —  Only to be subject to regulations based on sound science and risk-benefit analyses.

    —  Integrated chemical supply chains, and industry "clusters" that bring the benefits of close proximity.

    —  Multidisciplinary approaches to identify new processes, products and services, by building upon the strengths of the UK's science, engineering and technology base.

    —  Ability to attract and train skilled, flexible workforce, committed to excellence.

    —  Motivation to found "start-up" companies by academics and create "spin-out" businesses from industry.


 
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