Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 1-19)




  1. Good afternoon, Secretary of State, we are pleased you have been able to join us. You have suggested that we discuss the Manufacturing Strategy but, if we have time, there are one or two other issues that we would like to raise with you which we have told your office about. We have been looking at manufacturing in a number of ways before the election and since then. It is fair to say that we were a little bit concerned that the Department, in our view, did not seem to have quite the focus that we would have hoped in respect of the needs of manufacturing. We know that steps have been taken to address the issue. Whether or not that implies acceptance of our criticisms is a different matter, which we need not go into today. Nonetheless, I would like to ask you if you could give us some idea of how you would consider the new structure of the Department is going to provide the kind of support for manufacturing that certainly some sections of British industry led us to believe they felt they were not getting.

  (Ms Hewitt) Thank you very much indeed for inviting me along this afternoon and thank you for that question. I made it very clear I think when I was appointed 15 months ago that I did not think we had given—or that we had been seen to have given—enough attention to manufacturing. I think that we did quite inadvertently let the impression grow up in our first term that we were much more interested in the so-called new economy than in the so-called old economies such as traditional manufacturing. As I have said repeatedly, I think that that distinction between the so-called new and the so-called old economies, which we hear rather less about now that the dot-com bubble has burst, is simply misleading and ignores the fact that it is manufacturing industry that is at the forefront of the application and creation of the new technologies that are transforming the entire economy. I readily accept and agree with the view that certainly this Committee and I have expressed that we needed to sharpen up our focus on manufacturing. By working together with industry, business, manufacturers and union leaders, we put in place a manufacturing strategy some months ago, on which your Committee has very helpfully reported. We are now working to put that into practice because the strategy itself, which is the first Government strategy for manufacturing for over 30 years, has been very widely welcomed, but the real issue is what we do about it. A lot of the implementation is going to fall to the Regional Development Agencies and other regional institutions. Alan Johnson, my Industry Minister, and I have been working with the RDAs to ensure that in every region, depending on the exact nature of the manufacturing base in that region, we have an effective partnership and effective delivery to support particularly the SME manufacturing. Part of that of course is being done through the new Regional Centres for Manufacturing Excellence, most of which are now up and running, while three are about to come on stream. Also, of course, we have a role nationally not only to ensure that the national environment is as good as it can be for manufacturing, but also to focus on innovation. That is where the reorganisation of the Department that came into effect in April is so important because we have now created for the first time an Innovation Group within the Department. Simply by bringing together all the different teams of officials who were working on innovation across the Department previously, we are already getting a much sharper focus and much more effective relationships with business. I hope the Committee is aware that we have now appointed a new Director General of the Innovation Group, David Hughes, who has come to us from a long career in industry, most recently from British Aerospace. That group and David himself will have the task of building on the work that we have been doing on the science base and the investment in that science base to get far more existing businesses partnering the science base and helping to apply the new technology to their own products and processes. That is going to be a key focus for the DTI over the next three years as we try and raise the determination and therefore the levels of competitiveness and productivity in British manufacturing.

  2. We got the impression, following the publication of the "Thirty-Nine Steps" that things were not going too badly. I have to say that the latest bulletin from the CBI tends to suggest that there has been a stalling of the improvement, if I can put it that way. To what do you attribute this apparently disappointing news? Perhaps you might even wish to disown it. If you do, then we would be happy to hear the reasons for that. Assuming you do not, how do you read these latest figures?
  (Ms Hewitt) You are talking about the output numbers and predictions?

  3. Yes, the ones that came out on 22nd and 23rd of this month.
  (Ms Hewitt) What I am hearing all around, and I am hearing it directly from manufacturers as well as from these surveys, is just enormous uncertainty about what is happening in very significant parts of the world economy. That is crystal clear in America where "uncertainty" is the word you hear over and over again. It is certainly true in relation to many of our continental European partners. When you have, frankly, very sluggish growth and uncertainty in two major economic blocks and Japan still suffering recession, inevitably that has a knock-on effect on the performance, but also on the perceptions and expectations, of manufacturers in Britain. We have delivered, I think, in the United Kingdom a remarkable record of macroeconomic stability, and manufacturers all the time are saying to me, "Gordon Brown did exactly the right thing." We have low interest rates. We have a macroeconomic climate that we have never previously had, but we cannot completely insulate the United Kingdom, which is a very open trading economy, and rightly so, from what is happening in so many other markets. So companies which trade in particular with Germany, for instance, or with America or in the past with Japan, are suffering. Those which have other markets, in south-east Asia for instance, are often doing better because those markets, and of course the Chinese market, remain robust. But, in terms of the United Kingdom itself, we, as you know, are expected by the OECD and IMF to be the fastest growing major European economy in 2002, but we cannot completely protect our manufacturers from the problems that they are encountering in those other markets, nor can we protect them from the problem that is caused for them at the moment by the weakness of the euro. Those two factors are very difficult for a number of our manufacturers.

  4. Should we not exercise some caution in quoting OECD figures about expanding economies and do you not take account of the fact that it is manufacturing that we are discussing here and that UK manufacturing is not in as healthy a condition as a number of our major competitors, whether this is for currency reasons or for lack of investment historically? Is it not the case that our manufacturing base shrunk by a considerable amount last year, of the order of 7%, which the French and the Germans did in slightly greater amounts but, by the same token, they started from a far higher position and they have further to go until they become as low as we are as a share of our GDP in respect of manufacturing. To talk blithely about the OECD is to ignore the fact that we are discussing manufacturing.
  (Ms Hewitt) No, I am certainly not talking lightly at all about it, Chairman, because many of our manufacturers are taking very tough decisions indeed, but of course they are also dependent not just on the state of health or otherwise of major overseas markets but on the health of the UK market, and the fact that the UK economy is continuing to grow faster than other industrialised countries and that consumers remain confident is very important for many of our manufacturers who are selling directly into that market. As far as other countries are concerned, as you rightly say, all the major industrialised countries have seen and are seeing a reduction in manufacturing output. I think it is actually a bit unfair to our manufacturing industry to suggest that we are in a completely different position. In fact, if you look at the percentage of national output, this is going back to 1999 and it is difficult to get the most up-to-date figures, that was the starting point: in fact UK manufacturing output was 19% of our total; in America it was 16%; in France it was 18%; in Germany it was 22%. All major well-off industrialised countries have a manufacturing base that is a minority of their total output. For all the reasons that this Committee has said and I have discussed and put in the Manufacturing Strategy, that sector is incredibly important to the health of the whole economy. My concern is that we should not repeat the experience we had in the mid-1990s when recovery came and our manufacturing industry did not grow dramatically compared with the manufacturing sectors of Germany, France and the United States, which did. That is a very real concern, particularly given the drop-off in manufacturing investment that we are seeing at the moment.

Jonathan Djanogly

  5. Just on the Government's Manufacturing Strategy, looking at the strategy, I think the document itself is set up very coherently, the "Seven Pillars of Wisdom" included. I believe this document came out a couple of months ago. Then a month ago, you came out with a further statement, which was attacked, that it was the poor management skills of manufacturers which partly led to the productivity gap. Looking at that announcement compared to your policy document, the fact of the matter is that it is not mentioned in your policy document at all. Frankly, and this is what manufacturers have said to me, they get the feeling from the two documents that you were somehow firing from the hip, if you do not mind me using the expression, by calling management poor and there was no rationale for you doing so.
  (Ms Hewitt) I am certainly not shooting from the hip. This is very much part of the strategy. In the strategy document itself, you will see that one of the pillars was this whole issue of best practice. If you look at the reasons why our manufacturing sector lags behind Germany and France in productivity and output per hour, one of the reasons for that is the poorer take-up, on average, of best practice and weaker adoption of manufacturing techniques. I think that is the responsibility of management. Of course, another of the pillars of the Manufacturing Strategy was skills. Everyone thinks of skills as being about workforce skills and, yes, that is hugely important, but the reality is, as we have said on a number of occasions, that a better skilled individual can only actually make their full contribution if the entire team and the entire organisation is well-managed. My comments are not directed specifically towards manufacturing. What I said recently was that the best of British management is the best in the world, and that is undoubtedly true, and they are running a number of world-class companies, based here or in other parts of the world, but the average is well below the best. As the Council for Excellence in Management and Leadership recently pointed out, we have a long tail of under-performing management, some in parts of the SME sector, some in middle management level. It is an issue that is of enormous concern, particularly to the leaders in manufacturing. That is where it fits within the strategy, and that is where it fits in our analysis of the productivity gap.

  6. It is still not mentioned in your strategy under Pillar 5?
  (Ms Hewitt) It is one of the issues. In the much more detailed document that we recently published, the report from the Council and our response on management, you will find the whole thing is about the skills of management in order that they can actually get the best performance out of the best skilled workforce. They go together.

Richard Burden

  7. I would like to look at investment and the regional angle. In the Manufacturing Strategy, there was quite an emphasis on the potential of the Regional Venture Capital Funds. I think, when you made your response, you said there were three that were up and running at that stage: East Midlands, North-East and North-West England. I noticed last week that there was a Parliamentary Question which indicated that expanded beyond that. This is a parochial point and I still keep an eye on the West Midlands in that, but it is good to see that they are expanding. Could you perhaps give us a view, as well as the amounts of money concerned, as to how you see those funds working and how you actually see this being put through into practice so that they will be able to make investments in SMEs with greater potential? What will the mechanisms be for that?
  (Ms Hewitt) First of all, at a regional venture level, as the Committee is aware, it took us longer to get these funds off the ground because, in order to get state aid approval, we effectively had to persuade the Commission to rewrite the state aid rules. We were inundated in terms of European policy but it delayed the start of the funds. What those funds will do is to start meeting fully a real gap in the market that we identify, which is more venture capital investment in growing firms below the half million mark, which is where the private venture capital sector typically comes in. Although the venture capital funds are not restricted to manufacturing, there is no doubt that they will be particularly valuable sources of funding for the smaller and medium-sized manufacturing firms, particularly the more innovative firms that are looking to grow. One of the things that has held back British manufacturing is that it is often so difficult for them to get reasonably long-term serious funding. You are very well aware of this in the West Midlands. I am very struck to find how often the really successful, medium-sized firms that I visit, which are making huge investments in the new equipment, which they have to do to stay at the leading edge, are private firms, family-owned firms where the family is willing to make the long-term investment; in some cases they are firms that have gone public, found that it was not working for them because of the pressure for short-term results, and gone back to being a private firm via a management buy-out or employee buy-out, or whatever. Regional Venture Capital Funds are, quite rightly, being run by professional management, and will help both to fill that gap and to meet strategic objectives of the RDA economic strategy for that particular region. In terms of the centres of manufacturing excellence, we have got the West Midlands one up and running and they and several of the others have already opened for business and are taking clients and advising clients. The remaining three, which are London, Wales and the East of England, will come up in the next month or so.

  8. Stay with the venture capital funds for a second and perhaps we will come back to the centres. The issue, if you like, of unlocking new sources of finance in that way is something a number of commentators, not least perhaps the Work Foundation, have put quite a lot of emphasis on in terms of developing—or giving meat, if you like—to the regional agenda. How will you see the success or otherwise of the Regional Venture Capital Fund programme being evaluated? Without wishing to preempt any evaluation you make, would you see a potential for trying to broaden out some of that experience to meet some of the objectives of bodies like the Work Foundation?
  (Ms Hewitt) I am not aware of the most recent proposals of the Work Foundation on this. In terms of how we should evaluate their success, the first key benchmark was: could they raise the additional funding from the private sector? They were always constructed as public/private partnerships where we would put in a significant amount of taxpayer funding but the balance of more than £100 million would come from the private sector. That has been achieved already. The next key indicator for me is going to be how successful they are at finding real, good quality investment propositions. It is no good having money to put in the bank. That will be the next stage. So far, from the informal reports I have had, they are very encouraging but actually in looking at the portfolio of investment and seeing how quickly they can get the money out, it will be the next stage where we can make sure we are on track. Then, thirdly, we will want to look at the success of their investment. I would not expect every single investment they make to be successful; that is not in the nature of venture capital. But we will obviously be looking for firms to grow and succeed as a result of this venture capital investment which might well not have done so otherwise if we had not come in.

  9. In relation to the national centres of excellence and expertise that you mentioned, one thing that I have picked up a bit has been the confusion in the minds of people involved in manufacturing in the regions about how far those centres are actually being projected as, if you like, bricks and mortar or places that will be the centres of excellence in manufacturing or how far they represent a network and, if it is the latter, how that develops. Could you speak about that?
  (Ms Hewitt) This is very much about a network. It is about getting really practical advice and expertise into the hands of manufacturing SMEs. Although some of the centres have got a physical presence quite often in the building of one of the partners in the consortium that is running it, this is not about expecting manufacturers to come to a centre, which may be a very difficult thing for them to do. This is about having a network of specialist and expert advisers who can go out to the manufacturer, do an initial diagnosis of what it is they actually need, and then make sure, either directly or by calling on the right kind of expertise, that they get that help. That obviously involves a lot of marketing, and we are trying to do that with direct mail, business links, through other intermediaries, the trade press and so on, but it is certainly beginning to work. To give you one example from your own region, the Centre of Manufacturing Excellence got a phone call approach, I think it was, from an SME manufacturer that wanted advice on how they could improve the quality of their suppliers. They were totally dependent on local suppliers; they wanted to have more of a choice. The adviser went out to them and sat down and got to know the company. He began to understand their needs. The upshot is a much more exciting piece of work than simply saying, "There are some other suppliers that might be useful to you", and which actually involved working with the company on new products, one in particular, and improved processes right down into their supply chain. That is a nice example of the kind of expertise that can be brought in. Behind the centres is, as it were, the Manufacturing Advisory Service, which is a network of centres of expertise in manufacturing that is all around the country, often based in academic institutions, specialising in technical textiles, for instance, can be called on to help a particular textile firm, wherever it is located, get the expertise that it may need.

  10. My last question: with the RVCFs that were being talked about, it was said at that time that RDAs would be expected to review their own strategy for the coming years to ensure that manufacturing was reflected properly within it. Could you tell us how far those revisions have actually taken place amongst the RDAs? Again, on the issue of monitoring and evaluation, how do you test beyond the venture capital funds whether in those nuances in manufacturing RDAs have been successful and are delivering?
  (Ms Hewitt) The work is very well advanced on this. What we have done is to say to each of the RDAs that we want them to work with local partners, industrialists and trade unionists in particular, to develop their approach to manufacturing. They all have a manufacturing context within their broader Regional Economic Strategies, but it has not been brought out and discussed with the manufacturing community of the region as a manufacturing document. They have all been doing that and in some cases in fact they have already held regional conferences on manufacturing before I held our national summit last December. We will be publishing all those regional manufacturing documents. I will shortly be meeting all the chairs of the regional development agencies to review where they have got to on that. We will then be able to set a benchmark for each of the regions. We will be setting benchmarks within those documents and we will be able to measure progress on that. For all of the regions, the crucial component is going to be work on innovation and getting the manufacturing base partnering with the science base, so that we not only get new spin-off companies out of the science base, but we get the existing companies benefiting from the work that is going on in the science base. The North-West RDA has been making real progress on that with the science partnership they have set up in the north-west. The West Midlands RDA, with the technology corridors, is beginning to show some real success, for instance in Malvern, the centre where I opened an extension recently, and again we are seeing that in other regions as well. But we need to get each RDA focussed on that. We need the partners in each region understanding what it is the RDA is committed to, getting involved in those efforts and then holding them to account.

Sir Robert Smith

  11. For some time the UK has been number one in the EU in its ability to attract inward investment. Whilst that still may be the case, our share of the EU total has fallen from around 50% to something of the order of 25 to 30%. Clearly the rest of the EU is catching up. How can this trend be reversed?
  (Ms Hewitt) This is a hugely important issue because I do think our ability to attract inward investment is a real measure of our success as a government, but also as a country. If you take something like the car industry, which is now hugely successful in terms of volume of production, volume of exports and productivity as well as the excellence of so many of the models produced here, and you look back over 25 years, it is inward investment that has really driven the turnaround in the British motor car industry. I set great store by that. Over the last 18 months or so, we have suffered more than other European countries because we have been by such a long way the number one destination for America's inward investment and for inward investment in the electronic, telecommunication and IT sectors, and those two things of course overlap in that sector. The collapse of that sector, which is really what tipped the American economy into recession, has hit the United Kingdom as a destination for inward investment very hard indeed. On top of that, there have been a couple of very large mergers and acquisitions in Germany and France, which have also improved their figures. We have to go on working extremely hard on this to make sure that we remain, as I think all the benchmark indicators say we do, a very attractive environment for business and in particular for inward investment, but we also have to recognise that the problem of the exchange rate and the whole issue of the single currency is undoubtedly a factor, it is not the only factor, but it is a factor in the investment decisions that are being made now. For that of course we will await the assessment that we will be making before June next year of the five economic tests and the possibility of euro entry. These are certainly factors in some of the investment decisions that are being made now that will show up in the figures in future.

  12. Clearly that was the evidence we got from the Chief Executive of Caterpillar where he could not attract £100 million of American investment because it was more sensible as a company to invest within the Euro-zone for manufacturing. It was manufacturing that had to be near the market in the EU. In your response to our concerns about investment and the exchange rate, you agreed that exchange rate difficulties make trading conditions tough. You go on to say that the experience of the last 50 years tells us that changes in exchange rates do not explain difficulties in the medium or long-term. We have to recognise the slightly different exchange rate situation where there is an open market, a whole new currency block right on the doorstep. Looking at the history of the last 50 years might not be as safe an assurance that the risks in future are of the same length in the same analysis.
  (Ms Hewitt) It is important to distinguish different points here. The point I was making is that changing the exchange rate and, over a period of 50 years, progressively moving to a weaker and weaker value for sterling, has not solved our productivity problem, and indeed if you look over the long post-war period where the pound against the Deutschemark devalued progressively over decades by an enormous extent, the productivity figures moved very sharply against us. Our relative productivity simply continued to deteriorate. I was simply making the point that you cannot expect a relative improvement in the exchange rate from the point of view of exporters to compensate for the underlying problems we have in the productivity and performance of many, by no means all, of our manufacturing companies. That is an issue. Of course there is a separate issue about what happens not only to inward investment but to location divisions generally where we are part of what will be, with enlargement, an enormous single market, bigger than the USA and Japan combined, but not at the moment part of the single currency. That is a factor; it is not the only factor. In a sense, we have to redouble our efforts at the moment on all the other factors.

  13. Do you think, because you do say that in principle the Government accepts the benefit of euro membership in your response but obviously there are the tests, it would send a signal of confidence to inward investors to help them in their judgment if the Government were at least to put through a Bill that would enable the referendum—not necessarily to set the date or calling a referendum? If they saw progress towards preparation, a clear intent from the Government that this was not just a principle that they should support but if the case was right, they could actually get on and do it?
  (Ms Hewitt) I understand the Liberal Democrat policy on this issue, which has always seemed to me to involve joining the single currency quite regardless of whether or not it is a good thing for the economy. I think the really important thing for us to do is the evaluation of the five economic tests. Of course, work on that has now begun and a decision on that will be made by June of next year and we have said repeatedly that that will be the basis for the decision about entry into the single currency. Of course, if we decide that is in all our interests for the longer term, then we will move speedily and decisively to a referendum, but beyond that these are really not matters that are for me.

  14. It is important in the balance of arguments that one of the downsides obviously is that in that period inward investors will have to wait and see and will not know the answer?
  (Ms Hewitt) Let me just stress that this issue of the currency and single currency membership is only one of the factors that inward investors are taking into account. Certainly in my visits abroad and my discussions with inward investors and potential inward investors, what they are also very interested in is our outstanding science base, the fact that we still have this supply of superb engineers. Those two factors are very important and the fact that we have a very attractive tax and regulatory environment compared not with some mythical ideal, although we all move in that direction, but with the reality in the other countries that they are also considering for possible inward investment. That is why even in these very difficult times when inward investment is way down around the world, we are continuing to attract some very good inward investment projects.

Jonathan Djanogly

  15. Whilst on the general subject of the EU, a few months ago this Committee went to visit the WTO. The WTO clearly said that the bottom line was that developing countries expected, as part of the Doha Round, to see an end of European Union product subsidies if they were going to take our services. That was going to be the deal. As the Secretary of State for Trade and Industry, how do you see this for trade and industry, the impact of the Prime Minister getting a bloody nose from the French and Germans over the weekend, basically saying "no" to CAP reform until 2016 or something? How do you think that is going to impact on Doha and indeed, if we cannot deliver free trade for the poorest countries, why should they deliver anything to us?
  (Ms Hewitt) The Prime Minister has made the position absolutely clear, and we will continue to be the strongest voice arguing for radical reform of the Common Agricultural Policy within the European Union. The agreement that was reached over the weekend certainly does not match our ambitions for Agricultural Common Policy reform. It does, however, open the way to enlargement, which is important. We will continue on the basis of the mid-term review and proposals that were made in that, which we still want to see strengthened, to argue for radical reform and in particular for the de-coupling of certain income subsidies to farmers from production subsidies. That, I think, is the absolutely crucial issue from the point of view of world trade. As the Prime Minister, Clare Short, Margaret Beckett and I have all been saying recently, we well understand, even if not all of our European partners do, that delivering on the promise of the Doha Round depends to a critical extent upon the European Union grasping the nettle of agricultural policy reform. So we will just go on making that case. I am delighted that I have the wholehearted support of all parties in the House of Commons in making that case because we have got in Britain a very effective mobilisation of faith groups and the NGOs and so on. We saw that at the recent March for Trade and Justice. There is huge public support in Britain for trade justice and for the Doha Round and therefore for Common Agricultural Policy reform. What I hope the faith groups and voluntary organisations can do is, in a sense, extend their reach and build effective relationships with their counterparts in the rest of the European Union, as well as in the United States, so that, as we are making the government-to-government argument with the European Union, we are also getting a more public-to-public argument and broader support within civil society and much better understanding on the Continent of what our export subsidies are doing to low income farmers, desperately poor farmers, in their own home market, let alone what we are doing by looking at our own.

  16. Secretary of State, have you therefore accepted that this is stalled until 2016 or are you intending to sort it out?
  (Ms Hewitt) On the argument about 2006, which is where the financial horizons ran to, not as I understand it 2016, of course we are not going to sit on our hands and give up on the argument.

Roger Berry

  17. On the question of the exchange rate, I take your point that over a 50 year period sterling has devalued and our performance has not been that brilliant, but I suggest that does not demonstrate anything at all. It could be even worse if the pound had not devalued. When manufacturers come before this Committee they are invariably concerned about the exchange rate, but they are, in fairness, concerned about two things. One is the level of the exchange rate, which is why they would argue that the exchange rate actually does matter, and they do have a view about what they would like it to be or what they would like exchange rates to be tomorrow and next year and the year after. They are also concerned about the exchange rate in keeping stability, which is where the debate on the euro becomes so important. My question really is: are we alone in experiencing this view of manufacturers that the exchange rate does, after all, matter? Does the Government really feel that it is as unimportant as I think you are suggesting?
  (Ms Hewitt) I am very sorry if I have given that impression because I have said on repeated occasions that there would be very clear potential advantages, particularly to our manufacturing sector, to be gained from joining the single currency, subject to the five economic tests and all the rest of it, which very much mirror the concerns of manufacturing. I have also said, and indeed in my response to the Chairman's first question, that one of the reasons why conditions are so tough for so many manufacturing firms and manufacturing workers at the moment is the weakness of the euro and the difficulty even of highly productive firms coping with that exchange rate if the eurozone is their major market. We know that that is a huge problem for many motorcar manufacturers, even some who have got world class and world beating levels of productivity. Of course there is an issue there. That does not mean the Government can wave a magic wand over the levels of the exchange rate.


  18. One thing you have not mentioned is that one of the great successes of the last couple of years was securing the new Micra for Sunderland. The problem of course was that in securing it, the supply chain went to central Europe, and therefore it was not quite a Pyrrhic victory because we wanted it and it was important, but there was a certain hollowness about the character of the victory in so far as the supply chain was distorted or moved out of the United Kingdom, and so for every job that was received, probably half a job was lost because of that. I wondered to what extent work has taken place within the Department to take account of the potential harm that is going to be caused by increasing the size of the European Union. I accept that the gains are greater than the losses, but to what extent has an assessment been made of the losses that will come as a consequence of expansion of the European Union and the decisions that were taken last week?
  (Ms Hewitt) First of all, on the specific point about the supply chain, I think we are all very conscious, particularly in the motor car industry, that on the one hand we have had enormous success in attracting inward investment—and you mention specifically the Micra plant in Sunderland, and we certainly wanted that and we were jolly pleased to get it—but that has been coupled with a globalisation and a Europeanisation, if I can use the jargon, of the supply chain. More and more component manufacturing is being done within the eurozone, or indeed in Central and Eastern Europe, in accession countries. It is a mixed picture in terms of the manufacturing base we have kept and the part of the manufacturing base that is reducing at the moment. In terms of enlargement, perhaps I could let you have a note because we have done some work with fairly high level numbers. The bottom line is that of course the candidate countries, the accession countries, offer very low wage costs and non-wage labour costs, in many cases highly skilled people, to manufacturers who are making decisions about where to locate or where to expand. Of course, that is a competitive challenge to us and it is certainly a competitive challenge to other countries, other existing Member States, which have much higher wage and non-wage labour costs than we do. At the same time, enlargement, as I think you have indicated, is an enormous opportunity. In a sense, one looked back at what happened when Ireland and then Greece and then Portugal joined the European Union and the huge advances in living standards that people made in those countries, which then of course makes them purchasers of our exports. We are clear that the benefits from enlargement outweigh the difficulties and costs that may come. I will certainly let you have a note on that. For individual companies, perhaps those owners are meeting those location costs but for those competing against companies in countries where they can see a competitive advantage, it can be very difficult. My officials have been working with the Commission to ensure that, as far as possible, there is a level playing field on accession. We certainly have concerns about state aid in steel, for instance. It is a matter of huge concern to Corus and some of our other steel manufacturers. I raised this matter with the Polish Government when I was there a couple of weeks ago. We are still waiting for the Commission's judgment on the restructuring plan that the Polish Government put forward, but there are also concerns from coal manufacturers about, for instance, lower standards on environmental protection, health and safety, and we are continuing to discuss those with the Commission, so that there is not an unfair advantage for companies in some of those accession countries compared with our own.

  19. You would concede that the situation in relation to Ireland, Spain and Portugal is rather different from the position in relation to the Czech Republic and some of the central European countries. Their margins are rather wider at the present moment than they were when these other Member countries came in. They were poor but they were not as impoverished as these countries.
  (Ms Hewitt) No, the stretch is bigger, and it is also true that, for instance in the Czech Republic, there is a very long tradition of engineering and technical excellence.

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