Select Committee on Trade and Industry Minutes of Evidence


Second memorandum by the Engineering and Machinery Alliance (EAMA)

1.  INTRODUCTION

  1.1  The Engineering and Machinery Alliance (EAMA) is a newly-formed umbrella trade association, representing a cross-section of members covering 4,000 companies closely involved in engineering and manufacturing throughout the UK with particular emphasis on capital goods, tooling, machinery and plastics.

  1.2  The individual trade associations maintain their identities and creativities, but have come together to represent a united position regarding the role of manufacturing in the UK. The membership is unanimous in believing that the contribution of manufacturing to the UK economy as a whole is grossly undervalued, particularly in the Treasury and the media, primarily through lack of knowledge and understanding.

  1.3  As a consequence, no action has been taken to address the long-term decline of manufacturing in the UK, or the short-term problems which have faced manufacturing due to the special economic conditions of the past three years, resulting in the so-called "two tier" economy. The Treasury have been lulled into a false sense of security by the current strength of the UK economy relative to other G7 economies and our European competitors, a growth which is driven by consumer expenditure, fuelled by excessive borrowing, which is a bubble waiting to burst. Future economic growth may be buoyed by increased public expenditure on health and education, but unless we can create the wealth, the jobs and the export goods, the tax revenues will be insufficient to support it.

  1.4  The EAMA shares many of the views of the EEF, the CBI and other like-minded alliances, including many trade unions, about the importance and role of manufacturing in the UK. The Committee may well be surprised by the degree of unanimity amongst those making representation to it. However, many of these larger organisations have substantial resources to research and prepare their cases, but all too often these are tempered by a need to represent the interests of a broad variety of members (ie not limited to manufacturers), or to protect the interests of a sector such as aerospace or automotive. Some have close relationships with Government departments to protect. None are really representing the views of the SME manufacturers, who are the essential lifeblood of manufacturing in the UK, who contribute the majority of output and jobs, and who are the true driving force behind innovation and growth.

  1.5  EAMA, however, is well placed to represent to you the views of SMEs because some 92 per cent of its members' companies are SMEs, as are the majority of their customers. EAMA does not have a specific sectoral vested interest, it recognises that its members' best interests will be served if the whole of manufacturing working in the UK can be strengthened and stimulated towards long-term growth.

2.  ECONOMIC BACKGROUND

  Much of the economic background to the current situation has been well rehearsed in papers submitted by other bodies, including CBI and EEF and we agree with most of the conclusions drawn but we do think that there are some issues raised by the data, which have not been fully explored.

  The economics of competitiveness and productivity has both long and short-term dimensions, which we will briefly examine.

2.1  The long-term situation

  2.1.1  Back in 1996, the MTTA published a paper titled The UK's Investment performance—The Reality. In this document, prepared by Oxford Economic Forecasting, one table stands out even now, some 10 years after the date to which it refers. Figures for 1992 from Penn World Tables showed the following international comparisons of capital stock per worker:

Table 1

CAPITAL STOCK PER WORKER, 1992
Value at 1985 $ ppp* Index, UK = 100
UK22.5100
Germany50.0 (approx) 222
France37.5167
Italy33.8150
US36.0160
Japan41.3184
Korea18.080
Taiwan25.7114

Source: Penn World Tables.

*purchasing power parities.

Unfortuantely, we don't have up to date comparable figures for this measure, but the DTI's own 2001 Capex Scoreboard for the top 500 UK companies showed accumulated capital stock per employee at £115,000 compared to £185,000 per employee internationally, a huge difference when considering the potential productivity of individual workers. The same source revealed that for the last four years total CAPEX for the UK top 500 grew at a compound rate of 10 per cent compared to 12 per cent internationally demonstrating a continuously widening gap between the UK and its overseas competitors.

The 2001 Capex report (which is limited to the top 500 companies by size) also indicated that:

    (i)Capital investment expressed as a percentage of sales is 10.4 per cent in the top 44 companies but only 5.8 per cent in the remaining 456, ie far lower (almost half) in medium sized companies.
    Comment—we believe this lower capital investment by size of company extends to SMEs for whom the risk is higher and the availability of finance is limited making them less competitive internationally.
    (ii)Only 23 per cent of the largest UK Capex investing companies are in manufacturing compared to over 50 per cent in Japan, France and Germany and 30 per cent in the USA.
    Comment—one often hears that manufacturing is declining as a percentage of GDP in al mature economies as it transfers in a global market to lower cost economies but it is clear that manufacturing still plays a major role in the G7 economies.

    (iii)The UK subsidiaries of overseas companies are generally investing in capital at a higher intensity than the UK average for their sector.
    Comment—inward investment has been a key factor in the UK economy for many years and it is an interesting question as to why overseas investors are more prepared to invest in the UK than the indigenous companies. We believe they take a longer-term view and are less demanding on immediate returns.
    (iv)All significant manufacturing sectors invest at a Capex intensity substantially below their international counterparts with the exception of UK Pharmaceuticals and Aerospace.
    Comment—pharmaceuticals and aerospace are dominated by big companies. Much of the rest of manufacturing is dominated by SMEs.
    (v)The (Capex) analysis highlights a positive correlation between investment and company performance with productivity rising with accumulated capital per employee, and profitability, value added and total shareholder return rising with investment in the future.
2.1.2Another example, covering large and small companies, would be to look at a key element of capital expenditure, namely the demand for machine tools. Given the different economic cycles across Europe and the rest of the world, cross-country comparisons are open to claims that the choice of year will distort the picture; we have shown therefore data from across four decades, with the years chosen only for the spread of years that they provide.

Table 2

DEMAND FOR MACHINE TOOLS, CURRENT PRICES, US$ MILLIONS
1962 1986 1999
1974
ValueUK=100 ValueUK=100 ValueUK=100 ValueUK=100
UK350100 5651001,080 100850100
Germany550157 8301473,230 2996,185728
France25071 49087970 901,465172
Italy20057 7101261,000 932,990352
US750214 1,9603474,410 4087,130839
Japan450129 1,4702604,090 3792,635310


Source: MTTA, American Machinist, Metalworking Insiders' Report.

Data for Germany is for West Germany only, except in 1999.

Table 2 is not intended to be a plea from the machine tool companies for people to go out and buy their products (although this would help). Rather, we have included it to show how, over the past 40 years, the UK has fallen behind our major competitors in the purchase of the equipment that lies at the heart of the manufacturing sector. Equipment that has enabled these countries to advance their levels of productivity, competitiveness and quality to the point where the Parliamentary Trade and Industry Committee has seen it necessary to hold this inquiry.

For example, while we would expect the demand for machine tools in Germany to be greater than in the UK—it is a larger economy, within which manufacturing has a larger share—this does not explain why there is a ratio of 7:1 between the size of the market for machine tools in Germany and the UK. Also, the UK has a larger economy than either France or Italy, yet our demand for machine tools trails far behind these two major competitor countries.

2.1.3The message over the long term is that the UK has consistently failed to invest sufficiently to enable the productivity of its workers to keep pace with that of its major competitors.

2.2The short-term situation

2.2.1Given that the UK has a long term productivity and low capital investment problem, the exceptional economic circumstances of the last three years have greatly exacerbated the situation putting UK manufacturing at an even greater disadvantage in the global market.

In particular we refer to the weakness of the Euro making UK goods less competitive not only in Europe but everywhere we compete against European goods, ie in the USA and the rest of the global market and in the UK domestic market. Additionally we need to consider the economic consequences of 11 September.

Before we outline the effects of these, we want to stress that we see both of these as external factors. We do not regard either of these as things, which HM Government could influence, even if it had wanted to do, but it should consider ways of creating conditions and introducing measures to help companies to cope with the changed circumstances.

Both of these problems should be regarded as external shocks to the UK economy and the manufacturing sector in particular; the most obvious analogy is the recent foot-and-mouth crisis which was a situation which had to be dealt with and mitigated and was external to sectors such as agriculture and rural tourism.

2.2.2Chart 1 tracks the exchange rate over the past decade. It is clear that our exchange rate against the US$ has moved relatively little, especially since 1993, while there has been a large swing in the rate against the Deutschmark and in the trade weighted rate (this is heavily influenced by European rates).


Most notably, there was a significant weakening of the European currencies from the middle of 1996 and again during 1999.

Over this period, our exports of goods have continued broadly to grow against a background of falling export prices; the latter has been necessary for companies to retain their place in overseas markets, both within Europe where the weak euro has a direct effect and in third markets (such as the USA), where our European competitors have an even greater exchange rate generated price advantage than we do.

2.2.3This is borne out in data for profitability in the manufacturing sector in the UK, which is shown in chart 2, alongside data on investment by the manufacturing sector.


This chart shows two trends, neither of which are coincidences!

2.2.4Firstly, given the trends for exchange rates, UK exports of goods and relative export prices which we have already mentioned, it is no surprise that there are two distinct declines in profitability; these run from the start of 1998 and from the middle of 2000, in both cases about 12-18 months after the significant changes in the sterling/euro exchange rate. We would suggest that there is causal link here, the time delay being generated by the fact that export contracts can be agreed at (relatively) fixed prices for this sort of period before "something has to give".

2.2.5The second trend is the decline in investment which happened from the start of 1999, roughly a year after the first round of falling profitability. The UK has a propensity to use retained earnings for investment, so it should not come as a surprise that lower profits lead to lower investment, again with a time lag.

UK investment has continued to fall; one stark statistic will demonstrate just how dramatic this has been. In the third quarter of 2001 (the latest period for which data is available), ONS figures show that investment by the Engineering and Vehicles sector was 30 per cent lower than it had been in the third quarter of 2000! Overall investment figures have held up reasonably well because of the service sector, which dominates the data, just as it does for the economy as a whole.

2.2.6The consequence of falling profitability and low levels of investment over the last three years has been the severe weakening of the manufacturing sector. SMEs and sub-contractors in particular take the brunt of volume reductions and price pressures and their finances are hit by poor cash flow and weak balance sheets meaning they are unable to borrow to invest. It is a dangerous downward spiral that must be checked and reversed by some innovative government initiative to boost confidence and investment.

2.2.7The situation is made worse by the apparent "two tier" economy of recent years where the service industry appears to make up for the decline of manufacturing including soaking up the job losses. However, this service industry growth is based on high levels of consumer expenditure fuelled by low interest rate borrowing—a short-term feature which even Sir Edward George describes as unsustainable.

2.2.8It should also be remembered that manufacturing contributes 64 per cent of all exports. If this significantly drops due to the less competitive position of UK manufacturing discussed above it will be difficult to make up the shortfall with services which are more difficult to sell overseas.

2.2.9The second external shock to the UK manufacturing sector was the events of 11 September. These came as a shock to everyone and even now the full effects are hard to define. Work done by Oxford Economic Forecasting suggests that these attacks may have reduced UK GDP by about half of one percentage point in 2001 (by way of contrast, the foot-and-mouth crisis is estimated to have an impact of quarter of one percentage point at most).

However, it is clear that most of this impact has been felt in manufacturing and in investment in particular. Confidence is an important factor in the economy, but it is vital to investment; the attacks on 11 September caused confidence to disappear in a few minutes, with companies across the economy immediately suspending any expenditure that was not absolutely essential, most notably investment. Unfortunately, we don't yet have investment data for the final quarter of 2001, but we expect it to show a sharp decline.

2.2.10The CBI Quarterly Industrial Trends Survey provides some evidence; in the October 2001 survey, investment intentions for plant and machinery fell sharply from an already weak position and in the January 2002 survey, these intentions showed no sign of a recovery in investment spending, at least in the short-term. These investment intentions are now as weak as they were at the start of 1999—chart 2 demonstrates the outcome of such weak intentions; previously, the current low level was last reached in 1991 at the depth of the last major recession in the UK economy.

2.2.11We can get a further indication from the ONS series on the output of companies classified to the machine tool sector, the figures for the end of 2001 which have just been released show that total turnover, in the fourth quarter of 2001 was—22 per cent lower than in the same period in 2000, while on the same basis, net new orders have fallen by—28 per cent.

2.2.12This then is our interpretation of the background to the current economic situation in which the UK manufacturing sector finds itself.

THE KEY ISSUES FOR EAMA
We believe that there are a range of issues, which lie behind this; many of these have been developed in other papers, notably those by the EEF, the British Plastics Federation (an EAMA Member) and the CBI. There are four areas in which we believe that EAMA has something in particular to say; these are developed further in the next section and this paper concludes with a mention of the other issues where we would largely agree with the position already taken by others.

3.PRODUCTIVITY AND THE IMPACT OF HIGH TECHNOLOGY CAPITAL EQUIPMENT
3.1Over the last five years both the Treasury and the DTI have emphasised the importance of improving the UKs productivity and competitiveness but, as the recently published National Institute's quarterly review revealed, progress has been non-existent. On an hourly basis the output or value added of a US worker is 26 per cent more than his UK counterpart, a French worker 24 per cent more and a Germany worker 11 per cent more. This does not mean they work harder; they are more efficient and, as shown earlier, have significantly better equipment with which to work. In fact the change in attitudes between UK management, unions and workers throughout the 90s has given the UK a far more flexible and co-operative workforce than most of its European competitors, an asset which is not being best utilised.

Ironically, it may be that in Europe they are forced to invest in high technology and automation as a way to cope with reduced working hours and high social costs.

3.2The significance of giving a workforce the right equipment can no better be illustrated than by the productivity of one man with a JCB compared to a dozen men equipped with shovels.

3.3In modern day manufacturing the use of high technology is absolutely essential to the achieving of high quality products at a competitive price and with on-time delivery. The equipment available is highly sophisticated making extensive and effective use of the latest high powered computer hardware and software as well as the significant advances made in mechanics and electronics. This technology is continuously developing at a rapid pace and unless companies continuously invest, they very quickly fall behind their competitors. In Europe they seem to have a culture to keep investing in latest equipment even during a difficult economic climate as a way of achieving efficiency improvements and therefore cost down. In the UK we react much more dramatically to an economic slowdown—virtually stopping all non-essential expenditure including capital investment which puts us in a weaker position when the upturn comes. We believe there should be a yardstick where companies should invest at least at the same level as their depreciation charge and preferably plus 20 per cent to ensure growth.

3.4The benefits of investment in latest technology capital plant are many and varied across different industries. Most companies insist on a justification being prepared prior to any investment being made but these usually concentrate on obvious tangible benefits (faster operation, less operators, cheaper process) but ignore the intangible benefits (shorter lead times, better quality, improved working environment). Consequently, many potentially successful projects never proceed and most that do go ahead achieve far better than expected results.

3.4.1Case Study One

Westwind Air Bearings

Product—High speed spindles for printed circuit board drilling.

Problem—Huge market demand fluctuation typical of the electronic chip making industry.

Solution—Investment in a high degree of automation whilst maintaining flexibility to handle small batches; cell based flow manufacture significantly reducing lead-times, raw material and finished goods inventories by using JIT (Just in Time) principle.

Technology Used—Latest vertical turning and milling machines linked by rail-guided vehicle with powerful production control software—giving automated load/unload and parts storage.

Cost—£755,000.

Result—90 per cent reduction of movement of work pieces giving substantial reduction of production times. Shaft output increased from 350 to 800 per week, bringing in previously sub-contracted work saving hundreds and thousands of pounds. Substantial reduction of raw material, WIP and finished goods inventories. Dramatic increase in output per worker.

3.4.2Case Study Two

Roscomac Ltd

Product—Sub-contract engineering company variety of products including pumps and hydraulic manifolds.

Problem—Improve efficiency and reduce cost whilst managing fluctuating volumes.

Solution—Substantially reduce the number of different machining operations by combining them on a multi-function machine with automation—one hit machining.

Technology Used—Multi-axis—one hit machining; vertical turning centres with driven tools and low cost automation.

Cost—£800,000.

Result—Single-cycle working has halved overall lead times, reduced non-productive operations (setting and inspection and work in progress has almost been eliminated.

One operator handles two machines so doubling his productivity.

3.4.3Case Study Three

KV Engineering Ltd

Product—Sub-contract engineering to various industrial sectors—transport, agriculture, medical and semi-conductors.

Problem—To reduce lead times and maximise productivity whilst improving product quality and reducing costs.

Solution—Invest in latest technology machinery to achieve reduction of machining operations and one hit machining principle.

Technology used—Latest technology mill-turn centre with twin spindles and automated material feed.

Cost—£200,000.

Result—Machining time reduced from 30 minutes to 11 minutes, lead-times reduced from 30 days to one day. Manufacturing costs reduced by 25-30 per cent.

3.4.4Case Study Four

Lewmar Marine Ltd

Problem—Lewmar already had robot loaded CNC lathes—"state of the art" technology when installed 15 years ago, with a well proven production process. The equipment needed replacing but how could savings be achieved to justify the investment?

Solution—Re-engineer the process to use latest machine tool technology available; adopt lean manufacturing techniques and increase level of automation.

Technology used—Four large vertical lathes with driven tool capability, linked by a conveyor track using standard "Euro" pallets for fully automated machining.

Result—Lead times reduced from eight weeks to two weeks, thus substantially reducing inventory and cycle times reduced by 10 per cent. Economic batch sizes reduced from 1,000 to 100 parts.

3.5The above are examples of how new technology can dramatically improve a company's performance and help it to adopt modern manufacturing methods to enable it to compete in the global market. Two companies are OEMs and part of substantial groups, the other two are SMEs providing sub-contract engineering capacity and components to OEMs. Unfortunately they are the exception in terms of investment and vision and resources. The cost of high technology capital goods is high, preventing many SMEs from taking the steps necessary to enable them to compete effectively. More significantly many SMEs do not have the confidence, particularly after their experience of the recent economic slowdown, the "external shocks" and the consequences of the "two tier" economy. The situation needs strong and positive action by the government to boost confidence in manufacturing, to reverse the downward trend and to kick start investment.

3.6One method is Capital Allowances; in particular, we believe they should be targeted to SMEs, which will help reduce the cost. We would also point out the inconsistency of the current 100 per cent allowances for IT equipment (office equipment), which cannot be claimed for modern computer controlled machinery, which often has a higher level/power of IT than the computers which attract the increased allowances.

Approximately 20 to 30 per cent of the cost of a CNC machine tool relates to the computer hardware and software and the electronics which are the heart and brain and without which it cannot achieve its performance. Ironically the CAD CAM software and desktop computers used to prepare programs for the machine tool attract 100 per cent capital allowances for small firms. There seems no logic to differentiate the two, other than additional cost to the Treasury, but the potential productivity gains from investment in machine tools is far greater than office computers will ever be.

3.7We are all aware that there is huge resistance in the government and especially the Treasury to any proposal for grants to encourage investment as compared to tax incentives. However, we do believe the current situation is exceptional and many SMEs are not making profits and so tax incentives (enhanced capital allowances) are not an incentive. Grants have the added advantage of immediate boost to cash flow at the time of investment when it is most needed. Without labouring the point, we would simply draw attention to the SEFIS (Small Engineering Firms Investment Scheme) of 1982 which is still today considered to be the most successful incentive ever given to SME engineering firms which enabled many of them to take the big leap from conventional machining into computer controlled machining. We believe today's circumstances justify a similarly bold initiative.

3.8Investment in high technology machining and automation can often be seen as labour "saving" ie fewer jobs for the same output; one operator to two or three machines. It is also notable that recent increases in headline productivity have mostly been achieved when companies have finally had to lay off workers whose skills they had been trying to hang on to until economic recovery which did not come in time.

We would, however, argue that wise investment will improve the productivity of the current workforce and will boost morale so that investing companies at least expand their sales with the same workforce or more often even find it necessary to recruit.

An added benefit of investment in new technology is that it always comes with training packages to raise significantly the skill levels of the investing company's workforce—usually without increasing wage costs.

4.THE EXTERNAL SHOCKS TO THE SECTOR
The Economic background section of this paper set out our case in this area. It is worth emphasising again however, that we regard the exchange rate, especially the weakness of the euro, as external to the UK economy and is a situation, which HM Government has to accept as a "given" in setting economic policy.

4.1With regard to 11 September, HM Government would probably argue that it had supported those sectors of the economy which were most affected and, in particular, they would point to the support provided—quite rightly—to the airline industry, especially in respect of the insurance market and the losses incurred from the closure of US airspace.

It is our contention however, that they have done nothing for other sectors which have been hit just as badly, including manufacturing. Our "problem" is that the impact is less obvious, takes longer to emerge from the statistics but is probably longer lasting. Strategically however, the impact on UK plc is likely to be much more serious unless something is done to turn around the investment cycle.

4.2A major part of the problem is confidence; a factor that is notoriously hard to measure and just as difficult to influence. It is certainly true that sound management of the economy, stable inflation, etc are all measures, which help to engender confidence. However, in the face of a massive external shock such as the effects of 11 September and, we would argue the continued weakness of the euro, we believe that some positive steps are needed by HM Government to restore some confidence in the manufacturing sector.

4.3Clearly such measures need to be targeted. The welcome reduction of interest rates has helped the economy overall, but this has been concentrated in the consumer and housing sectors and had little impact on manufacturing.

A measure such as the permanent extension of capital allowances would have a number of advantages. It would send a positive signal to the manufacturing sector that HM Government was interested and actually cared—words are not enough in such extreme conditions; it could be targeted to smaller companies or to specific pieces of equipment which will improve productivity and competitiveness and, ironically, in the current climate, it would probably not have much impact on the cash-flow to the Treasury (companies are not making that much profit and, by the time they are—hopefully as a result of the investment this measure would stimulate—the first year cost will be outweighed by the cash-flow to the Treasury from the increased profits).

5.CLIMATE CHANGE LEVY
5.1There is an ever increasing amount of evidence that the impact of the climate change levy has been worse for manufacturing, in particular SMEs compared to other sectors.

5.2The majority of SMEs will not benefit from rebate through a Negotiated Agreement and therefore the levy is not revenue neutral. It is estimated that increased energy costs to the engineering industry is some £170 million, while the offset against that cost from national insurance rebate ranges from 20 per cent to 50 per cent.

5.3The use of the IPPC Regulations as the criterion for the application of the levy is highly questionable since it is an indicator of pollution and not energy intensiveness. Some unavoidably high-energy using sectors lie outside IPPC.

5.4The net increase in costs have, for the most part, had to be borne by the companies and not passed on to their customers.

5.5EAMA believes that the tax should be withdrawn and replaced with more evenly impacting mechanism, such as a carbon tax or voluntary agreements to achieve energy reduction.

6.SKILLS
The changing business climate means that Companies must be able to be flexible and respond quickly to change. This is a particular challenge to SMEs.

Summary of the changing face of skills needs

    —multi skilling/greater flexibility;
    —ability to deal with change;
    —personal/generic key skills;
    —specific technical skills;
    —IT literacy;
    —management/leadership;
    —customer service skills;
    —ability to keep "continuous learning".

Main reason for skills shortage

6.1Difficulties in recruiting external people with the right skills/qualifications for the job.

6.1.1Poor image of engineering and not enough young people being attracted into a career within the sector.

6.1.2Poor careers advice—careers advisors are biased towards academic route and do not sell the work-based route, which seems labelled as an option for the less able.

6.1.3Poor level of maths and science teaching in schools and serious teacher shortages in these areas. Lack of expertise within schools to deliver proposed vocational GCSE in engineering. Not enough schools interested in introducing the qualification due to costs involved. This compares badly against other vocational qualifications such as business and tourism.

6.1.4EMTA** estimates that industry needs 36,000 Advanced Modern Apprentices in training to meet industry needs. There are currently 26,000. The introduction of the Graduate Apprenticeships (GAS) and Foundation degrees in engineering are a step in the right direction. However, there is currently no support for the implementation of GAS. If SMEs are to take on graduates, there needs to be adequate financial support for them to do so. We welcome the proposals for a more flexible curriculum (for 14-19 year olds), which places more emphasis on integrating work place learning with academic study.

6.2The lack of people already employed within companies who are flexible/multi-skilled enough to adapt to changes and different working practices.

6.2.1A key issue for engineering companies is "upskilling" their current workforce. However, this is often ignored in small companies who believe they do not have the time or money to release people for training.

6.2.2As many employees have a number of different roles, companies cannot afford for them to be off site too long. There is a demand for training providers to be more flexible and to provide shorter, distance learning type courses.

6.2.3Engineering employers face a serious issue of retaining skilled staff, especially graduates who are increasingly mobile.

6.2.4Training providers, such as Group Training Associations and Colleges of FE, are finding it increasingly difficult to survive in a climate of tightening financial restraints/restrictions and lack of funding. In some parts of the country there is a serious lack of engineering provision. It is very expensive to equip engineering institutions with up-to-date machines/equipment, which is a problem for private training providers who cannot get access to Government grants. EMTA suggests more partnerships between Government and Industry, whereby employers receive tax relief for supplying equipment/resources at reduced costs to trainers. EMTA is lobbying strongly for Group Training Associations, which in the most part have charitable status, to be eligible for the same support as Colleges of FE.

6.2.5We welcome the introduction of Centres of Vocational Excellence but at present only FE colleges can bid to gain a centre of excellence. EMTA is lobbying for Group Training Associations to gain this status, as they are mostly hubs of engineering excellence.

6.2.6Across all areas of engineering, the main occupations remain assemblers and operators but due to changing business demands—ie increased demand for innovation, flexibility and ability to adapt to change—there is an increasing demand for professional engineers and graduate level technicians which needs to be addressed by both industry and the Government.

6.2.7There are serious skills deficiencies in areas such as: design engineers, design and development engineers, mechanical engineers, chemical engineers, CNC operators, and CNC programmers.

** EAMA endorses EMTA's ongoing work programme set out in its publication "The Sector Workforce Development Plan for Engineering Manufacture 2001-05 (produced February 2001), extracts from which are quoted.

7.OTHER POINTS
There are ranges of other issues which EAMA regards as important, but which we have not included in the main focus of our submission. These can be summarised as follows:

7.1The Department of Trade and Industry Reviews/Relationship with HM Treasury:

7.1.1We have some concern over the proposals by Mrs Hewitt for re-structuring of the Department, although a recent letter from her office does indicate that some of our worst fears from the initial announcement may be unfounded. We strongly believe that the Department should retain a sectoral focus and, although we recognise that there is a need to strengthen the regional elements, this must not be at the expense of the sector activity.

7.1.2According to the article on international comparisons of productivity in the December 2001 edition of Economic Trends, there is a Public Service Agreement between DTI and HM Treasury that states, "the DTI should narrow the productivity gap between the UK and its competitors". It is our belief that the DTI should make more of this requirement in its discussions and negotiations with HM Treasury; if necessary, HM Treasury should be challenged to either put in place measures to improve productivity in the UK or to provide the DTI with sufficient resources to undertake this task itself, as it sees fit and free from intervention from the Treasury.

7.2Regulation

7.2.1Like many other groups in manufacturing we believe that the increased burden of regulation is an important issue in our competitiveness. We are particularly concerned by the impact of regulation on the SME sector. The demand on already limited resources and the cost of regulation puts many small manufacturing companies, who are already fighting for survival, in a very precarious situation. Examples of this would be:

    (i)Working Time Directive—necessity to maintain detailed records and communicate with staff.
    (ii)Health and Safety—necessary but huge administrative burden.
    (iii)Pensions—requirements for separate audit even for the money purchase scheme invested by third party—additional cost £1,800 per annum.
    (iv)Taxation—Inland Revenue and Customs and Excise are increasing inspection visits and being particularly pernickety.

    (v)New car benefit rules—a very inequitable change requiring management time to investigate the consequences, formulate new policies and negotiate with very unhappy staff with additional costs to meet increased tax burden.
    (vi)Maternity and paternity leave—pose cost and organisational problems, particularly in SMEs.
7.2.2In discussions with fellow Europeans it is evident that the UK government and civil service apply the European regulations with greater vigour than any other nation, especially the more southerly states who do not even apply CE marking to industrial machinery and certainly few have ever heard of the working time directive.

This enthusiasm is proving very expensive to SMEs in particular.

7.2.3Company management also have to devote time to find out what new regulations are being proposed in order to object if necessary which itself is time consuming. For instance, current threats to our businesses are posed by:

    (i)The proposal that the DTI drop the UK's opt out from the maximum 48-hour week in 2003. Neither employers nor employees want this and the likely repercussions are huge.
    (ii)Ageism—likely to be carried to the extreme in 2004-05 when it will be illegal to set a retirement date in contracts of employment. Employers will be forced to keep on elderly staff or face being taken to industrial tribunals and promotion opportunities will be blocked for younger staff.
7.2.4These are just a sample of the many regulations, which occupy too much management time and stop managers running efficient businesses.

7.2.5We would call on the Government to take notice of this and to examine the way our European partners are enforcing regulations. The Government needs to reduce the current burden of legislation and to limit the introduction of new measures that would have a disproportionate bad effect on the SME sector.

7.3SMEs and the Cost of Finance

We are concerned by the high cost of finance faced by SMEs in this country compared to our major competitors. Banks still consider loaning to small manufacturing companies a risky business compared to other ventures. Therefore the cost of borrowing for these companies is often more expensive, in some cases 5 per cent over base rates which has a profound effect on investment.

7.4Short Termism

Capital investment in manufacturing is generally a long-term function—a modern machine tool would be expected to give a return over 10 years. Unfortunately in the UK companies are looking for faster returns and typically justifications for capital expenditure require a two year pay back.

This partly comes from institutional investors looking for higher dividend yields and the 2001 Capex Scoreboard reported that dividend disbursements expressed as a percentage of long-term investment increased from 19.9 per cent in 1988 to 34.5 per cent in 1997. Clearly the higher the dividend payments the less retained profits are available for long-term investment.

Similarly, it appears that companies see the acquisition route as a faster route to growth than internal investment. Consequently, expenditure on acquisitions relative to capital investment increased from 50 per cent to 102 per cent over the period 1988-97.

8.FINALE
8.1EAMA very strongly believes that manufacturing has an important role to play in the economy of the UK and reports of its inevitable decline are ill-informed and dangerous. We still have some excellent manufacturers in the aerospace, automotive, Formula One, medical and telephone and satellite industries. Many of these are SMEs and all have proved resilient in adverse economic circumstances. They all create wealth and jobs and excellent goods for home and overseas markets. Many service industry companies and jobs rely heavily on the demand created by the manufacturing industry and its employees as does much of the public sector.

8.2We accept that some low cost, low value added goods can be produced more economically in low cost economies, but if these industries migrate abroad it is essential that they are replaced in the UK by high added value manufactured products which need investment in high technology and high level skills but give some good returns. This, we believe, is where government should have a strategy and should encourage a positive attitude and growth in manufacturing.


 
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