Second memorandum by the Engineering and
Machinery Alliance (EAMA)
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
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
2.1 The long-term situation
2.1.1 Back in 1996, the MTTA published a
paper titled The UK's Investment performanceThe 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:
CAPITAL STOCK PER WORKER, 1992
|Value at 1985 $ ppp*
||Index, UK = 100|
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
Commentwe 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
(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.
Commentone 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.
Commentinward 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.
Commentpharmaceuticals and aerospace are dominated
by big companies. Much of the rest of manufacturing is dominated
(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
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.
DEMAND FOR MACHINE TOOLS, CURRENT PRICES, US$ MILLIONS
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 UKit is a larger economy,
within which manufacturing has a larger sharethis 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
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
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 borrowinga 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 1999chart 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 was22
per cent lower than in the same period in 2000, while on the same
basis, net new orders have fallen by28 per cent.
2.2.12This then is our interpretation of the background to the
current economic situation in which the UK manufacturing sector
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.
3.1Over 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 slowdownvirtually
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
ProductHigh speed spindles for printed circuit board
ProblemHuge market demand fluctuation typical of the electronic
chip making industry.
SolutionInvestment 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 UsedLatest vertical turning and milling machines
linked by rail-guided vehicle with powerful production control
softwaregiving automated load/unload and parts storage.
Result90 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
ProductSub-contract engineering company variety of
products including pumps and hydraulic manifolds.
ProblemImprove efficiency and reduce cost whilst managing
SolutionSubstantially reduce the number of different machining
operations by combining them on a multi-function machine with
automationone hit machining.
Technology UsedMulti-axisone hit machining; vertical
turning centres with driven tools and low cost automation.
ResultSingle-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
ProductSub-contract engineering to various industrial
sectorstransport, agriculture, medical and semi-conductors.
ProblemTo reduce lead times and maximise productivity whilst
improving product quality and reducing costs.
SolutionInvest in latest technology machinery to achieve
reduction of machining operations and one hit machining principle.
Technology usedLatest technology mill-turn centre with
twin spindles and automated material feed.
ResultMachining 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
ProblemLewmar 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?
SolutionRe-engineer the process to use latest machine tool
technology available; adopt lean manufacturing techniques and
increase level of automation.
Technology usedFour large vertical lathes with driven tool
capability, linked by a conveyor track using standard "Euro"
pallets for fully automated machining.
ResultLead 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
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 workforceusually without
increasing wage costs.
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
providedquite rightlyto 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
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 caredwords 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 arehopefully
as a result of the investment this measure would stimulatethe
first year cost will be outweighed by the cash-flow to the Treasury
from the increased profits).
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.
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;
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 advicecareers 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
6.2The lack of people already employed within companies who are
flexible/multi-skilled enough to adapt to changes and different
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 demandsie
increased demand for innovation, flexibility and ability to adapt
to changethere 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
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
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
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 Directivenecessity to maintain detailed
records and communicate with staff.
(ii)Health and Safetynecessary but huge administrative
(iii)Pensionsrequirements for separate audit even for
the money purchase scheme invested by third partyadditional
cost £1,800 per annum.
(iv)TaxationInland Revenue and Customs and Excise are
increasing inspection visits and being particularly pernickety.
(v)New car benefit rulesa 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 leavepose 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
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)Ageismlikely 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.
Capital investment in manufacturing is generally a long-term functiona
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.
8.1EAMA 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