Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 175-179)



Mr Berry

  175. Mr Jones, welcome. We are actually two minutes ahead of schedule. Our performance this morning has been very good. It is the temporary Chair, it makes all the difference. In all seriousness perhaps I ought to give you the opportunity of introducing yourself and your colleagues at the beginning.

  (Mr Jones) Okay. I am Digby Jones. I am Director-General of the Confederation of British Industry. On my left is Ian McCafferty, my Chief Economist and on my right is Andy Scott, my Director of International Competitiveness which carries the brief for manufacturing.

  176. Welcome again. Thank you for your written submission and thank you for coming along this morning. As everybody is observing UK manufacturing is in a difficult position at the moment. I wonder if you could give a brief review of how you see the state of manufacturing and in particular the prospects for recovery and what the obstacles to recovery might be which need to be addressed?
  (Mr Jones) Thank you for that. Thank you for seeing us. I am glad you have in front of you our written submission. It is quite a good time really for you to ask us to give this evidence because last week we issued our Industrial Trend Survey and our Revised Economic Forecast. Just a quick snapshot of where we are the moment. Output is expected in manufacturing to stop falling for the first time in six months right now. Order books are still below normal but they have risen now above the levels pre-September 11th which is again some cautious optimism. The smallest manufacturers are the ones who seem to have the weakest confidence and the weakest order books and export demand is still extremely weak. Our forecast for the economy as a whole, we expect that to get to 1.8 per cent growth in GDP this year, the Chancellor would disagree with us, he thinks it is going to be over two but neither of us are talking recession. We think that growth is down from the growth of last year of 2.4 per cent. Manufacturing output we expect to be in decline by about 1.5 per cent this year which compares with decline of 2.3 per cent last year. Although still in decline the rate of decline we expect to get less but we think it will return positive in manufacturing in 2003. Employment in manufacturing we expect to fall by 3.4 per cent this year but then a fall again next year by just over one per cent. That would add up in the two years, 2002 and 2003, to job losses of about 172,000 people. The underlying trend is one of probably hit the bottom, not getting much better but not getting any worse. In that picture, we would look to some quite encouraging highlights. Overall it would be right to say that Britain no longer has a future making things which will sell around the world only on price, ie commodities. It does not matter what it is, what they are, if they are going to compete in the world only on price frankly it is for yesterday. That is a difficult thing politically for people to accept but it is true. However, in the areas of value added, in the areas of selling on quality—quality does not always have to just be the quality of the product, it can be quality of delivery, it can be quality of after sale service, it can be quality of brand, it can be reputation but anything which adds value to the product that is made—British manufacturing actually has a future and a good one. Also, it begs the question, of course, what is manufacturing because manufacturing in the 21st century for Britain is going to extend way beyond traditional classifications, actually way beyond the traditional classifications that are used by the DTI for telling you what those figures on manufacturing are for in the first place. So we will call for some look again at the way these things are classified. You try and tell a journalist that IBM, Hewlett Packard, Compaq are all manufacturers and they look a little aghast. Software manufacturers are manufacturers. If you try to explain that in companies like Corus, for instance, the least skilled person in Corus today operates a computer and they find that pretty difficult to get on board. As British manufacturing restructures in front of our very eyes, and it moves out of this commodity making into this specialist, value added end, you can often see that although you see the headline of so many job losses, these people actually do get re-employed quite quickly if they have a skill because there is a skill shortage in manufacturing in Britain and they do move in to other jobs. One set of figures which is rarely talked about is yes, you read that 1,200 were made redundant here, 1,000 there, how many of them actually walk straight into another job? It is far more than anybody ever thinks if they have a skill, if they do not then it is a more sorry tale. I guess going forward we would call for that above all else, which is constant up skilling and reskilling and training of people in manufacturing so that as it restructures they are equipped to deal with it. That is, of course, also the greatest protection that anybody working and employed in manufacturing can have. Not employment regulation, not more legislation, but just be so well skilled for the manufacturing of the 21st Century that no employer would dare let you go, no employer would dare treat you badly, dare not pay you well, dare not give you flexible time because, frankly, if you are skilled they need you badly. That would also call for a strategy for manufacturing to be published by the Department of Trade and Industry probably for the first time in modern Britain. We would call for that now. That would be not the model that has been followed over decades by some of our European rivals which is "those are some sectors, we are going to pick some winners, we are going to pump lots of taxpayers' money into it and when it works with the market, great, when it does not we will subsidise even if the rules say we cannot". We are talking about a strategy that says here are some global champions, and Britain has more global champions in the field of automotive, in the field of pharmaceuticals, in the field of aerospace, and in many other areas as well, more than we ever really acknowledge, and they are today global champions, they are doing a damn good job: major on them, major on clusters around some totems, around universities, around those global champions of which I spoke, around infrastructure projects such as regional airports, such as ports, such as rail and motorway hubs, anywhere where you can cluster businesses around it. Then the policy of Government, every regulation they wish to undertake, every taxation initiative they wish to impose, every training and skills and R&D initiative they wish to undertake, every investment they make in infrastructure, should be in accordance with that strategy of supporting those global champion motivated structures. That in itself, we would hope, would facilitate some joined-up Government which currently is sadly lacking, so that the Treasury, DTI, DEFRA, DFID, anybody else, DTLR, when they undertake any initiative should be checking it off against the agreed strategy. It is a public document which would say, just very shortly, "is what we are doing in accordance with those aims to get it right?" Lastly, in my opening remarks if I could just say we do see some obstacles to that happening. I would guess in specific terms you could look at two and one would be red tape and regulation, a lot of which is in accordance with the British mentality of regulate first and then make the system work around it, whereas we would say every single time somebody wishes to put another regulation down, is it really in accordance with furthering the manufacturing of Britain in a value added area in the 21st Century? Secondly, for all of the tax breaks which help, and I hope in the Budget we will see them in training and R&D and other areas, for instance is the Climate Change Levy in the way it is implemented the way to encourage people to stay employed in manufacturing? I can give you an example of 600 people in Wales, for instance, who probably are going to be out of work simply because the company they work for actually does not fit into an area where you can negotiate a discount in the Climate Change Levy. It does not mean that the business does not want to achieve those Kyoto targets, it does not mean that the business does not want to take its place in being a cleaner environment in Britain but it would say the way it has been implemented, the regulatory environment, has militated against employment. I cannot believe Labour voters in those parts of Wales actually ever voted for a Government that was going to put them out of work because of the poor regulatory way that a laudable objective has been implemented. Lastly, if you speak to any business anywhere, anybody who works in business, they would say they need to get their goods to market, they need to get their people to work. If you look at both the transport infrastructure and the planning regime in which that infrastructure has to operate it militates against competitiveness for manufacturing going forward because manufacturing is the key exporter of the country, it has to get its goods around. If you look at our competitors, one of the reasons for their competitive productivity over us is they have got a first class infrastructure, it does facilitate that mobility of people and goods over and above the United Kingdom. Thank you very much.

  Mr Berry: Thank you very much.

Dr Kumar

  177. Mr Jones, in your submission to this Committee you highlighted with charts and detailed information that one of the major reasons for low productivity of manufacturing is lack of capital investment and this is a debate that has been going on in the CBI and TUC ever since I can remember for most of my adult life. I wonder if you can say what are the main reasons for this and what do we do about it?
  (Mr Jones) I will pass two comments and then I will ask Ian to come in on that. One of the reasons is that a great deal of the manufacturing in Britain is done by smaller businesses, middle ranking and smaller businesses, and if you compare the attention given by capital markets to the Mittelstandt in Germany, for instance, and that to middle companies in Britain, the distinction is alarming. Middle sized companies in Britain, big manufacturers in their way, make a huge contribution to manufacturing, do not get access, are not seen as fashionable by the market and, therefore, they are ignored or they are not on the radar screen of investors. Secondly, there is an atmosphere where the markets do not believe that the growth can come out of manufacturing from the same way that it can come out of other sectors and, therefore, they tend to fly into other sectors and in a way, rightly, the liberalisation of the market in Britain, which in the medium to long-term does pay dividends, of course does militate at times against manufacturing for investment opportunity compared with other sectors. Those are a couple of reasons.
  (Mr McCafferty) I would say two things. One is over the long-term the uncertainty and the volatility of the macro-economy has played a major part in suppressing investment performance. Clearly in more recent years the inflation rate has not only come down but has become more stable and the economy also but in recent years we have seen a significant decline in the rates of return available to manufacturing, hence another suppressant on manufacturing investment. I think there is a long-term reason, which is the history of uncertainty in terms of the economy, and more recently, largely linked to cyclical conditions in the world economy, low rates of return available.
  (Mr Scott) A couple of the other areas are in terms of improving the dialogue and the relationship between industry generally and City and fund managers and analysts in the City. I think it is an area that we flagged up in the work which we did jointly with the TUC looking at the whole productivity initiative, that there are areas there where in terms of a greater understanding we have some companies that have a very good dialogue with those institutions, a very clear understanding that investment today results in returns in the future and the more we can improve that dialogue the more we can improve that flow of communications to understand the value and importance of that investment to the business. I think the second area, which again we have flagged up in our own work as well as jointly with the TUC, is the need to improve management expertise and to improve management skills and that is, again, linked through to the investment issues as well, enhancement of that skills base within the businesses is also critical in terms of investment for the future.
  (Mr Jones) One interesting point was that Patricia Hewitt chose to give her speech on manufacturing a few weeks ago at the offices of Merrill Lynch in the City which we thought was excellent because it was trying to increase the mental approach to tomorrow's manufacturing in the very place there is a source of capital as opposed to going off to what journalists would call industrial heartlands. We thought that hopefully would start a better understanding of tomorrow's value added manufacturing. Of course, the moment you go into value added the opportunity for growth is high and that is a message we have to get across better.

Richard Burden

  178. If I could continue on that theme of trying to encourage or create a climate of greater encouragement for our own Mittelstandt, if you like, as well as welcome things like making speeches on manufacturing in the City, what would you see as being the institutional barriers to creating that? Some of the other evidence we have had, not all of it, was trying to identify some fairly big institutional barriers both in terms of the structure of Government, the relationship between different Government departments, but also the actual structure of the finance sector in our economy. That particular evidence was stressing the need for a much stronger regional dimension. The argument given is if you look at other places, America, Germany and so on, it is not an accident that you are talking about federal states. How important do you think this regional dimension is?
  (Mr Jones) By institutions you do not just mean financial institutions?

  179. No.
  (Mr Jones) I suppose one of the answers to this is someone might say that, you and I, Richard, we might say that, might we not, but at the end of the day if you come from the West Midlands, for instance, you will understand why a Regional Development Agency which is properly funded and given the discretion to spend the money can make a massive difference to manufacturing, because as manufacturing restructures in an area of such an enormous number of small and medium sized businesses they have to have the confidence to invest in tomorrow's manufacturing. Nowhere is that more relevant than in an area which has totally depended on making things and selling them to a bigger business. That is a very difficult and a very brave thing for a business to do. Part of it is smaller businesses do not like giving away slices of the action very much because that entrepreneurial flair which has led them in the first place does not admit partners that well, to get capital in it usually comes with some sort of equity dilution, and the personality of smaller businesses does not fit that well in Britain with that. To have a functional RDA which has more money can actually stimulate the value added side of manufacturing and do it in a different way around the country. The way the West Midlands might do it will be totally different from the North East, different from Yorkshire and, frankly, it will be different again from the Medway Towns, for instance, they are all manufacturing homes but they have different reasons and different problems and challenges. I am very hopeful that the RDAs will not only succeed but will be a great institutional agent for change in manufacturing. You cannot have a Government that just says "we are going to turn the tap on and off and, secondly, we are going to tell you how to spend it", that will not work because it is different in different places. We also need the local institutions, I have in mind particularly local authorities and local planning authorities, to understand just how globally mobile manufacturing is today. You cannot rely on manufacturers just staying around, they can just as easily go to the Czech Republic or China. Whilst smaller businesses might not be able to do that, they rely on bigger businesses being there for that cluster effect I talked about, the bigger business will go. In this job I have been quite surprised actually at the lack of understanding and the lack of knowledge of the true change in manufacturing that has gone on in the United Kingdom. I am surprised at the lack of knowledge in local authorities. They do not understand the mobility of 21st Century business. So it needs an institutional appreciation of the change, it needs institutional encouragement and not just putting money in but creating an environment in which it will succeed, but then it needs the drive from Central Government as well. The drive essentially also comes from access to cash capital but that is a two-way street because it needs businesses to take that on board as well. The changing face, remember, also means that a lot of these businesses get their capital from New York, they get their capital from Frankfurt, they do not need to get it from London. That is not a bad thing because there are a lot of companies that are investing in Germany and America as well but what it does mean is that the smaller businesses can feed off the bigger businesses, they are the ones that need the capital as they restructure.

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