Select Committee on Trade and Industry Minutes of Evidence

Examination of Witnesses (Questions 80-100)




  80. Are they going to other parts of Europe or not coming to Europe at all?
  (Mr Temple) That is a good point. I think both is the answer but the trend of the figures started before the dip of the global economy really bit, so you could see there was a trend even at that stage.
  (Mr Peedle) Just in a little bit more depth, I think it is both. It is the impact of the exchange rate as well but I think the trend of manufacturing projects and funding of direct investment in manufacturing in the UK had levelled off before the impact of the exchange rate could be taken into account. There are probably other factors as well—competition from outside Europe and the other matters we were discussing earlier.

  81. We could take the Hyundai example where it would appear that they were able to satisfy a declining European market from a home base which was not having to satisfy an east Asian level of demand which had been anticipated as being higher, and therefore they were able, because some of the products were eminently transportable, as it were, to make use of capacity that was idle at the home base which precluded the need for them acquiring or investing in new capacity in difficult times in Europe where the demand was falling anyway. Surely there is a bit of that as well? It is the effect of not necessarily the global turndown but the beginnings of one in terms of specialist markets or specific markets on which some of the investors were dependent either for the money coming through, or where they had capacity because that market had declined. There are several microfactors in the one equation, are there not?
  (Mr Temple) You are absolutely right that there are all those, and that is why it is very difficult to give a general answer that covers everything. There are clearly elements of that but I think the simple answer is inward investment in manufacturing distinctly taking another dive. We must be careful not to paint a dramatically terrible picture again, because it is not all like that. You get people like Honda who take a very long-term view and invest against a grand, long-term plan. Still a lot of companies do that but, ultimately, that is usually where it is an on-going investment on top of what is already part of the plan. It is when you take a breakpoint and somebody starts reassessing what their position is that we are taking a fairly vulnerable situation.

Dr Kumar

  82. Mr Temple, you have championed one key element to increase productivity which is the introduction of lean manufacturing, but looking at the figures only 33 per cent of UK firms have adopted it across organisations. Why do you think this is? Is there lack of awareness of the potential benefits from this, and what needs to be done?
  (Mr Temple) First of all, it is a fundamental part of addressing all these economic issues. This is an area of self-help that you can do something about and that is why we have championed to get that message across. It is not just for government but for industry itself to do things.
  (Mr Peedle) The figures you quote are exactly right, about a third of the companies that we surveyed had applied lean manufacturing across the whole of their organisation. There was another 10 per cent that did have plans to do lean manufacturing and just had not gone down the lean road as of yet, and when we looked at the performance of productivity and profitability of those companies, there did seem to be a link between lean manufacturing and productivity. Basically, those doing lean manufacturing intensively were the ones tending to have higher profitability and productivity as well. Yes, there is very much a polarised up-take of lean manufacturing in the UK; there is a big chunk—just over 40 per cent in our survey—that have not done any lean manufacturing at all. In terms of the way we investigated that, we did try and go further in the survey with evidence that we asked for or questions we asked, and basically there seems to be a combination of factors why more firms are not doing lean manufacturing. By far and away the biggest constraints, certainly in terms of our survey result, was attitudes to change within the company. We feel that very much reflects employee and employers' attitudes, but there did seem to be some inherent inertia within companies in the UK that made them a little bit reluctant to take on change and to take on new processes with lean manufacturing being the key example. Also, however, right up there was a general understanding and a feeling certainly within managers—and this is managers who were interviewed commenting on their views on other managers—that there was a lack of understanding; that maybe not everybody was aware of exactly what lean manufacturing meant. Yes, a lot of people have done a very small amount of lean manufacturing and have some understanding of a small aspect of it, but in terms of a proper full understanding of what it is and the benefits it can bring, there does seem to be a problem there. Also underlying that is a general lack of what we call lean skills across all employees within a company—we are talking there about management, supervisors and the workforce. Even if a company or a manager wanted to implement lean manufacturing, he would probably find that across the whole of their employees they did not have enough skills to pursue it with the right intensity, which is one of the crucial areas. We found when comparing UK firms here in the UK with US-owned firms in the UK and with US manufacturers in the US that those people gaining the significant results from lean manufacturing were doing it very intensively, and that requires a great deal of understanding and a high level of lean skills.

  83. You mentioned resistance from employees in carrying it out. Have you tried talking to trade unions, making them aware and lending their support so they can see the merit of lean manufacturing and then perhaps talked to their employers where there is resistance?
  (Mr Temple) Yes. We have talked across the piste, frankly, to people. What is interesting is that, first of all, you have to convince the managers. Some are in denial; some have been sold things partly by consultants and it has not worked out—if you like, mis-selling; some have tried one or two items and then said they did not get results and this is back to this intensity; also you have to do it with other things. It is no use being lean and efficient on a shovel if the guy next door has a JCB because he has invested in the business as well. You have to have a combination. So we did talk to people who had done lean manufacturing as well, and they still said the problem was getting everybody convinced to come along as well. So even when we had got over the management barrier, if you like, we had the workplace barrier. What we would encompass eventually in this debate is that a lot of it comes back to skills, training, making sure that people are truly brought in to be able to be adaptive to new processes, new ideas, innovative products; it is a question of skills from the manager at the top right the way through to the person with probably the lowest job in the building. If they have not been trained or educated properly, they are scared of the change and the issues that it brings up. We have, however, some real opportunities that we can really exploit, and at this stage I should probably bring Mike in, because we have a government sponsored scheme that has shown great success in changing attitudes.
  (Mr Baunton) Industry Forum, which is what Martin is referring to, is a hugely valuable organisation. We have 33 engineers who are highly trained with some unique skills and tools that were developed with some government funding, which have demonstrated the capability of driving lean processes into businesses. To answer your direct question, however, from our experience in working across a broad range of companies and a broad range of industries, the biggest resistance is not the unions. I would not say they were a problem—in fact, in some ways they are an opportunity. Some of the more progressive unions like Amicus are working very proactively with us and are sponsoring educational courses for their members which we have participated in. The biggest resistance is in the middle management areas, typically because of the lack of skills. They maybe feel threatened; there is a lack of awareness and understanding; there is almost an element of disbelief that the magnitude of improvements can be made, because it reflects on their own capabilities. If you can go into their section and improve productivity by 30 per cent and halve the space they are using and the production time, which is typically the sort of thing we are able to do, in a sense that embarrasses them about how bad it was before and that in itself is a problem. We try to help them get over that but it is a problem. As Martin says, as you get up the line getting access to senior management, again you have the same sorts of issues in some of the companies, so there is a big educational skills issue out there that we have to address to get lean more widely adopted across businesses. Then we have to sustain it, and that is another issue. We need a cadre of people within the company itself to carry it forward. To sustain it is almost harder than doing it in the first place.
  (Mr Temple) We have to do a lot of preparatory work. A lot of the managers when you go in to companies first of all are in denial because they look at what they have done and they see how they have improved and they think they have done really well. What there is not enough of in many cases is the benchmarking across into other areas and seeing that their X per cent per annum improvement by comparison to somebody else was not very good, and they could have driven it further and harder. It is then that you can bring in help that gives them, first of all, an ability to get the awareness of their position and then the tools and techniques that help on some of these productivity improvements. It is common sense when somebody points it out to you but, you know, it is like a lot of things in life: the simple things are not immediately obvious and we have skilled people who can show us what to do, and that is what we have to push out into the broader sectors of business.

Mr Lansley

  84. Can I take you on in the context of lean manufacturing to what happens now, because you produced the report "Catching Up With Uncle Sam" which captures a lot of the information about what has been going on in relation to lean manufacturing and points to some of the things that could be done with government. What reception have you had to those proposals—things like partnership and funding from the DTI for regional seminars, to backing up the industrial forums, to extending NVQs through EMTA and so on. Do you see this programme coming on stream and what effect do you think it will have?
  (Mr Temple) I think the report has so far been successful in the way we would want it to be. It has further raised the debate in a way that was reasonably down to earth and we have had good support from member companies to drive it. We have had very good reception from both Treasury and DTI to see what we can do to develop this further, and we are at the moment looking at ways in which we can put together a proposal to develop seminars and master classes and similar on a regional basis with other companies, using existing bodies like Industry Forum or other similar forums that have been developed as suppliers of expertise on improvement. So we have been encouraged to put together, if you like, another approach. Industry Forum has tended to be sectoral, driving down the supply chain, and that has been very successful as a general rule. What we are saying is let us get to those areas that were, if you like, between the sectors. A good example would be, say, machine tools. They supply all sectors and could fall into anybody's forum but let us try and target those businesses in a region, sell the concept of lean manufacturing, get the awareness there through the seminars and utilise existing forums. Let us not build any more—they are there; they are good; too many and we might have problems on quality and capacity utilisation. Let us use the existing ones to deliver the goods because they are good at it with a good track record. We have been encouraged by the DTI to put together a proposal for a trial which would almost certainly take place in the West Midlands for, say, ten companies and, if that proves to be successful, using an existing supplier like Industry Forum, then hopefully we might be able to roll that out further. We believe that it has put the debate on the right level and has encouraged people to ask us to find a way of delivering the improvement.

  85. Are you reasonably confident that there is not a tendency to pick up on an idea whose moment has arrived but to mischaracterise it and distort it and make it fit your own circumstances, rather than make it deliver what was intended to happen? I was struck by a relatively large proportion of those who were engaged in lean manufacturing doing things like supplier development and continuous improvement and things of that kind which fit their philosophy, but the least number are doing step change when step change might be what is required. In the first instance, you would think radical change in manufacturing processes would be one of the first things you look at in terms of lean manufacturing, yet only 14 per cent, or a smaller proportion, are doing that.
  (Mr Temple) A lot of the problems that we have had, as I said earlier, have often been a lot of people peddling what was in their kitbag regardless of whether it fitted the circumstances. The great thing about the issues around the work that Industry Forum has done is that a lot of it is down to just very good sense and practice, and lean manufacturing linked with the other things is invariably down to basically good business practice, but it is making sure we stitch that all together. In a lot of cases you find that when people have been looking at the Industry Forum approach, there have been substantial improvements. In fact, the figures are so big that a lot of people are saying, "I cannot believe that, it is not real", but by getting really into the detail, the real guts of the problem, you find you can have a major effect.
  (Mr Baunton) Specifically, too, there are companies that sadly attempt a step change when probably it is too late. They have got themselves into a position where they are hopelessly unprofitable and they see the step change as the sort of nirvana that will turn them into a profitable company. But, in fact, they do not have the philosophy and the management support that would make them successful, and if they had had it in the first place they probably would not be in the unprofitable position. So it is not any great surprise that the companies that are the most successful with lean are also doing other things. They would typically be companies that would also be investing in training, even through the tough times; they would be working other initiatives, be they class A or supplier development or quality improvement activities—other types of team-working activities in the facility—so in a sense they are companies already sensitised to the need for change but to the point specifically about lean and the work that Industry Forum does, it does give the opportunity in a focussed area to make a dramatic step change which can establish a whole new set of targets well beyond what, maybe, the company was used to.
  (Mr Peedle) You emphasised that it might be a problem with lean that people can pick certain parts and tailor it to what they need, but that in a sense is one of the strengths of lean manufacturing: that there is a whole host of tools that people can use. Certain tools might be more applicable in certain manufacturing circumstances and certain sectors, but in terms of step change that is one part of lean manufacturing and is a different approach to continuous improvement, and that is the whole beauty of it: that it might be the case that some companies will go down step change if that is the route they adopt and which is more suitable but others will go through the process of continuous improvement. You therefore get, hopefully, companies going through both routes but meeting the same amount of improvement over the long term.


  86. Two points: Mr Baunton, could you send us a note on the work of the Industry Forum, because it would be helpful to have it in our evidence? You have been very generous in giving us background today, but I think it would be useful to have some written material on the work of it, the scale of it, the number of firms, and also the great success stories. If you could do that it would be helpful; we do not want to paint this universally gloomy picture because we know there is a lot of good work going on. Also, what struck me about the lean manufacturing approach was that it need not necessarily be particularly expensive. Would that be correct? Could you talk a little bit about that side of it? I know we are coming on to incentives and so on in a minute, and you mentioned a firm that might be in the toils and where, short of a miracle, nothing is going to improve their fortunes really, but with a firm that is strapped for cash but doing well, how much would it cost them to introduce these changes?
  (Mr Baunton) Let me answer that in two or three different ways—firstly, by giving you a very practical example in my own company of a lean concept that we applied. We have a paint facility which was running out of capacity and, because of environmental considerations, it is modern but it would have been very expensive to add more capacity. Effectively we would have had to have doubled the size of the paint plant. We decided the paint plant was probably in need of some lean thinking so we put a team to work on this, and we effectively doubled the productivity through the paint plant and avoided completely investment in a new plant. At the same time, we had less people at the end of it than at the start; we were able to re-deploy the people elsewhere. You can say that is somewhat embarrassing but it meant we could use our assets far more effectively, and it did not have any detrimental effect on the quality of the paint finish or on the product coming out at all. So that is a very practical example, and there are many more like that. In the written information you have asked for I will give you one or two examples that have happened in other companies like that. If you look at the improvements that can be made, the techniques are relatively simple—almost applied common sense—and they do not cost a lot of money to implement. There is a period of time you need for training and education; obviously we have the skills in terms of the toolkits that we have developed ourselves; and we have the Industry Forum engineers that go in; but the basic principles are to understand the process flow, to model that process flow; and look for ways to speed up and improve each step of the process and make it more integrated. In many cases, therefore, you are able to release surplus machinery, surplus labour. One of the threats, that perhaps we should have highlighted earlier on, can be that the workforce could feel threatened that they might lose jobs as a result, so it is important that you do it in an environment where they are not threatened. If you are making productivity improvements, there are ways of redeploying those people elsewhere—maybe cutting back on overtime or something like that but not cutting employment. However, the tools and techniques, as I said, are very simple, and most lean companies are actually not very high investment companies in terms of their capital assets, because they are using simple techniques to make, in some cases, very complex products in a very efficient way. A good example would be the Nissan plant in Sunderland. It does not have the highest capital investment of a car plant, but it is the most productive in Europe. I am not saying the two are directly connected, but it is a very lean facility by its own productivity statistics.
  (Mr Temple) One of the things you have to remember as well is often we are talking not just about very big companies but about middle-sized companies. We talked earlier about pressures on margins, profitability; not only is it the cost of bringing this in, which is often a few thousand pounds, but there is the time and effort, and you have got to feel that there is going to be a substantive enough return for the management and the work force to commit their time and to believe in the process. That is the big barrier you have to get over when you are selling this, and that is to say it is worth taking people out and showing them that this time is going to be time well spent.

Richard Burden

  87. I am obviously interested in what you said about the work of the industry forum. Speaking for the West Midlands, I am glad that the developments will be taking place there. Can I take you on to another aspect of lean manufacturing. Sometimes the title covers a multitude of sins and virtues. We have concentrated particularly on the process improvement side of things. There is also within the concept the relationship side, is there not: external suppliers, OEMs, other suppliers working together and meshing together? Could you give your views on the relationship between lean manufacturing and the whole issue of development of business clusters? We have heard a lot about business clusters a little while ago. They have gone out of parlance these days. What is your take on that? I am thinking particularly about the experience of things like performance engineering.
  (Mr Baunton) You are absolutely right. The supplier base in most of the complex products, certainly in the motor industry, is extremely critical to have a high-quality product and to make it efficiently. One of the things that we want to develop within the industry forum is a lean product development process, because we think that there are a lot of opportunities in the whole product development process to take the same sorts of lean techniques you can use on the shop floor within a factory into that product development process. Back to the point about clusters: suppliers, where there is a significant logistical cost, need to be close to the manufacturers if you are going to have true flexibility. For example, I might be making a motorcar, where you have multiple changes in terms of colour and specifications. If you have bulky items like seats, you need to have those very close to the car factory to give that flexibility. Otherwise, you are building tremendous inefficiency into the system. Lean techniques would identify those components that need to be close to the factory where there needs to be flexibility. Partnership with the supplier is critical to have an efficient and lean process all the way through. Has that answered your point? Do you have a point of clarification?

  88. I suppose what you think needs to be done to take that process forward. There are two points about clusters, and one is ensuring that companies are physically close to each other, for the reasons you mentioned. The other is developing the idea of almost a community of knowledge, being able to share knowledge, share processes, share expertise, develop the whole through developing a part. How do you see that side being taken forward?
  (Mr Baunton) I think the velocity, if I can address the last point first, of product development has to accelerate, in the sense that the time it takes to develop a motorcar or any of those other components has to get shorter, because we are all used to more choice, we are all used to wanting to have the most modern things, and to that extent product life cycles are shortening. So that process needs to be efficient. There needs to be a very strong partnership between the manufacturer and the supplier partners. There is more and more out-sourcing of components as well, so those partners typically are making more than individual components today; they are making sub-systems. In some cases you are seeing clusters, but maybe not in the way that you would typically envisage. For instance, in my own factory I have logistical companies actually on site, in the building, working alongside my people. They are not on my payroll but they are in a sense a cluster—not a cluster in the sense of a supplier park just around the corner, but a deeply integrated system to make it lean. That is what we have done.
  (Mr Temple) What we have tried to embrace as an organisation, because our member companies believe it to be right, has been cautious support but tangible nevertheless of the RDA approach, that is, developing regional economic plans to drive areas forward on specific plants. We have tried to be involved in those. We have somebody dedicated to every RDA. The essence of that has been to try and make sure that there was an industrial input, to try and build some of these things wherever possible on existing competencies that actually had a long-term future relevance as well. It was for sure to try and tap into what you have talked about earlier, the pool of knowledge, as I think your phrase was. We very much buy into that, the fact that an inter-relationship with firms operating in similar fields breeds further innovation and ideas and supplies, and that in itself can be valuable. Usually, of course, that comes from major OEM or something in a region, and a lot flies off from that. We have seen certain science parks developing it in a slightly different way, which is from a pure knowledge base of expertise. In that respect, we have been supportive of the RDA approach, and anything that we can do to help them to be successful, we will be trying to do.

Linda Perham

  89. Turning on to recruitment and retention problems, you identified skill shortages as a major barrier to productivity. Have you any ideas about what the Government should be doing at this stage to improve matters for you and indeed, if you have, what they might be likely to cost?
  (Mr Temple) One of the first things that people in business keep telling us is "Please give us people who can read, write and add up." It sounds stupid, but it is so fundamental that we find this is one of the first things they say to us. They really can take people on from there; if they can do that, it is a really good start. So an education system that delivers that consistently will be of great value. The general view is one of optimism about the way it might turn out. There is also a feeling that we really have to drive those intermediate skills. The modern apprentice area, when you really look at the engine room of business, is where there are great shortages. We have available about 24,000 and we are needing about 34,000[1]—I do not think those figures are precisely correct — but there is a mismatch even today in that area. We need more. One of the things that we believe consistently should be done is to push the age up at which we can bring in these modern apprentices. We have companies who are funding people in their mid-twenties, and actually are proving to be superb, but of course, they are not covered by the system, and they really should be. These are often people who have left school, have gone a bit wild and crazy, have gone and done whatever they wanted to do, but eventually something tells them to settle down, and they are so good when they come back in. They are some of the best, most able and stable people to train, and so we should stop the almost age-ism in this, if I can put it like that. Development of the modern apprentice is important. There is the individual learning accounts. Even though that has had difficulties in recent times, it is an area that people honestly believe is of great value. We also support the idea of working together with government on developing the distance learning aspects, the Learn Direct type of approach, which is hopefully specifically built and designed to match the availability of people in the workplace, so they can learn in graduated form when there is opportunity to do so on-site or in their own time. Those are other areas in which we would see benefits.

  (Mr Baunton) I would like to add that from a company standpoint the Government could do more in terms of incentives and support for companies to train their own employees. An example would be as follows. We hire, typically, 50 graduates a year, but it takes several years to train a graduate from when they come into the company, and as far as I know, there is no undergraduate course in lean thinking, for example. Therefore, it takes a long time for them to become effective in the business, and of course, in a period when margins are under pressure, hiring people that are not immediately productive is a big problem. So the output of people into companies and the take-up of graduates in engineering is very low right now, because people are obviously cutting back. Similarly, with the work force that we have, apart from the reading and writing skills, there is a constant need to refresh skills, and we put tremendous investment of our own into the skills, but that is not mirrored right the way across our supply base or in the UK generally. I think there should be stronger encouragement proactively in things like IIP and those sorts of accreditation schemes to encourage companies to get to the right standards of training, and then maybe some sort of tax concessions or support for targeted sectors where the training is identified to be weak so that we can improve the skill base of the people already in employment. Probably, in some ways, there is a lot of focus on education and training before employment, but I am more concerned about the people who already have a job and need to change their skills.

  (Mr Temple) We certainly believe a refreshed IIP has a lot to offer. If we can take it even higher than that, we have talked about innovation, which has been very important as well for the future of British manufacturing. We are hopeful that the work coming out of the Gareth Roberts report will show that right at the top end of the scale we have got to really develop those students, the postgrads, into taking up research and being able to float between industry and academia. We have got to be able to encourage companies to work more closely with academia on research projects, and somehow in there we feel that the way we treat grants, the paying off of loans and things like that for people in the sciences and engineering, where we have the greatest shortages and the greatest opportunity for innovation, will be a great pump primer again to the areas that British industry needs most.

  90. In addressing the question of skill shortages yourselves, are you signed up to the code of practice on age diversity, where at the other end of the scale of skilled people are perhaps being asked to go in their fifties? I notice that there are not many engineering construction members of the Employers' Forum on Age, and I would have thought, particularly in the sort of companies that you cover, there would be a real problem with letting people go too early. Have you addressed that problem, of retaining people rather than getting rid of people in their fifties?
  (Mr Temple) Frankly, that is not something that is immediately on the agenda. What we have at the moment in a number of areas are skills shortages, and we are trying to hang on to skilled people wherever possible, whatever their age. There is certainly not a pushing out of the skilled people at the moment; quite the opposite. It is interesting that the loss of jobs typically has been at the low skills end. Those are the jobs that have been exported, a" propos the earlier part of the debate today. If you look at the projected figures for engineering employment, whilst we see it going down—and I am talking now about engineering as opposed to manufacturing—we think that will go down by the year 2010 to about 1.4 million, but I think 50 per cent of those will have had some sort of further education, and I think the lowest level is seen as NVQ3. Everything we are doing is up-skilling, and bringing all these new processes in nearly always requires a whole set of new skills. It is going to be fundamental right the way through in the context of life-long learning. People will have to be learning right to the end.

Dr Kumar

  91. Just to develop that point, you mentioned skills shortages and graduate training. How much of a part can a professional engineering institution play? Do you believe you are playing a sufficient part now in developing Chartered Engineer status or could you do more?
  (Mr Baunton) Again, speaking for the Institute of Mechanical Engineers, of which I am a Fellow, we have been very active in encouraging the Institution to help us in that regard, and we have a very active group in the local area where our facility is to encourage young engineers both to spread the word to schools and out into the wider community about the opportunities in engineering, and to help the engineers to apply to become Chartered Engineers get the skills and the talent that they need to become Chartered. Frankly, I do not think that status is as recognised as it should be. For whatever reason, the Institution is not recognised for the skill base that it is, and certainly does not have the sort of status and recognition that, say, an equivalent German institution would have. That is something that we perhaps need to look at and try to do something to raise the skill levels, maybe raise the standards to make it a bit more difficult to get in, but make it more prestigious at the same time. That would be a benefit. But I do not think that is the area where our skills problems are. I think the skills problems are below that level. Chartered engineers tend to be the more sophisticated technical people. It is more at the lower level that we have a problem.
  (Mr Temple) It is technician down where the biggest volume problem is, though for sure we need more quality engineers.

  92. Is there not an equivalent institution that could play a part at that level?
  (Mr Baunton) There are some lower grades for membership, but unfortunately in some ways that devalues the higher grades. There is not really an equivalent institution of which I am aware, certainly.
  (Mr Temple) There is the Institute of Incorporated Engineers, which tends to look at the technician level. That is a way it might be described, but I could get into trouble for saying that. What has been attempted, and we have been a very active part of this, is the change with the Engineering Council and the development of the Engineering and Technology Board. However difficult the birth of that may have been, the essence of it has been to try and bring the institutions into a more relevant role with industry in particular, their biggest customers. I think there is an enormous job to be done there because, as has already been said, there is a wealth of information in those institutions. A lot of it has been in great danger of becoming very pure and academic, and we have to find the bridge that brings that to be relevant in terms of how it can best supply broadly business, because actually, engineers in consultancy firms and in the City would be just as valuable, so long as we have lots of them. So I think the ETB will be there to help in that role, and also the image associated with engineering and sciences and technology as well.

Mr Lansley

  93. I was struck by the disparity between the US- and UK-owned firms in their response to skills shortages and how much of a problem they find them to be. It seems to me that there is something of a mismatch between the impression of US employment practice and experience in this country of US-owned firms, such that US companies are seen as having a hire and fire mentality, but in reality they are doing much more by way of looking at performance appraisal and performance-related bonuses, more by way of training, personal development, and work/life balance. It is all there, and it is delivering high productivity. Therefore the idea that somehow we sit between Europe with a social model of employment and the US with an anti-social model of employment is a complete red herring. I state that as a proposition. It would seem to me that your evidence supports the idea that there is a major cultural shift that is required in the UK to understand what successful models on employment now look like.
  (Mr Temple) There are absolutely massive dimensions in that part of the report, some of which we are going to take further. I will ask Doug to comment on some of the statistics in the report, but taking Mike as Caterpillar Inc as well, I think he has some perspective on some of the incentives of the hire and fire, but some of the realities of what you have to do to keep people committed and working to the bottom line and so on.
  (Mr Peedle) In terms of the comparison with US-owned companies here in the UK and UK-owned companies, it is worth bearing in mind that to some extent it is a bit of an unfair comparison, because what you are comparing is multinationally successful companies in the US coming over here, which probably have a higher rate of profitability than their UK counterparts, and to some extent that puts them in a better position to implement some of these things, certainly in terms of getting good productivity. That said, you would probably be quite right to say that looking at the use of what we call work place initiatives in the report, there do seem to be higher uses of these work place initiatives, and also the things that firms are doing to attract and retain the right people. Again, that does seem to link back into productivity and profitability as well. Also, in terms of the US experience in itself, and the hire and fire mentality you mentioned, that to a certain extent can be an advantage for companies as well, particularly in times of retrenchment, when things are difficult. If you compare the performance experience of UK manufacturing in recent years, they have not had the flexibility that the US manufacturers have had, and to a certain extent the US manufacturers have not been facing the same conditions anyway. So that can be an advantage as well; to have that flexibility and to be able to encompass it with a more wide-ranging approach in the work place does appear to bring results.
  (Mr Temple) It was interesting when we studied the figures that whilst everybody included pay as quite an important issue, a lot of the US companies were putting work/life balance, skills training, and potential within the company very high up on their agenda, whereas the UK-based ones saw money as being almost the main thing, and a lot of the others tailing off rather rapidly.
  (Mr Baunton) This is an interesting question for me because I have worked for two American companies, one that was certainly very much hire and fire, and I was with that company for ten years and worked in Australia, Belgium and in the US. My present employer, Perkins, which was acquired by Caterpillar, is now another US corporation. Let me contrast the two, because I think it illustrates the point. My previous employer was a company that was very much hire and fire. The senior management rotated fairly rapidly, and there was a very strong performance-driven culture that was very focussed on short-term results, and if you did not achieve the short-term results, then you knew the consequence, and the consequence was that you were going to leave the company. It was a very unstable environment. The strategic planning was very difficult. They generated some reasonable results simply by dint of the turnover of people and to an extent a culture of fear. My current employer, Caterpillar, is in a totally different place. It is a very employee-focussed company. In fact, virtually all employees are promoted from within. If you start with Caterpillar at the lowest level, you can expect to have a life-long career with the company. All of my colleagues at the vice presidential level, without exception, have at least 25 years' experience. I am the only one who does not, because I was acquired, which makes me somewhat unique in the Caterpillar hierarchy. It is hard to generalise, giving those two examples. There are companies that are hire and fire and there are companies that are a lot more stable like Caterpillar. That is the wrong thing to focus on, if I might suggest. American companies by their nature tend to be more focussed on results, and I think a lot of American companies have recognised that the human capital in a business is what drives the results, and they are much more prepared to invest in human capital, even in tough times, and much more prepared, having said that, to take action when things are clearly not going right, and also to take risks for the long term, perhaps more so than UK employers. I certainly have no compunction about joining another US employer because I quite enjoy that environment. I think it is healthy, provided it is done with some human sensitivities.
  (Mr Temple) It is interesting that it is not that you have to be a US citizen, and that a lot of the great change has often been done by British managers operating within a different cultural environment. So we have the ability; it is just whether it is always there in the direction. Without wanting to paint a totally damning picture, there are still a hell of a lot of British companies at the leading edge doing these sort of things as well, and that is what we want to build on, rather than to damn them.

Sir Robert Smith

  94. My constituency is in the north-east of Scotland, and there is a big skills shortage on the oil and gas side of things. The interesting thing in some of the seminars and meetings we have had to look at it is that it is not unique to this country. Talking to companies around the world and in that sector, it is a worldwide shortage. How does your skills shortage in what you are talking about compare with the challenges in competing countries?
  (Mr Temple) It is very difficult to give you a statistical answer, but I have to say in the developed countries, when I sit in the European forum and discuss it, frankly a lot of the same debates are going on, invariably in the same areas, apprentices and this sort of thing, so very similar issues. But that should not be surprising either, because at the heart of whether a company does well or not is the ability of its people to utilise its opportunities. It is whether they can be innovative, whether they can change, and whether if the company invests, the people are capable of using that equipment effectively. I spent 30 years in industry, and in those early years I used to go around the world building brand new pieces of capital plant and equipment. I used to see the most fabulous plant going into some of these places like Venezuela and Egypt and places like that, and I would go back two years on—and I had seen plants going even in the UK, which we sometimes mock ourselves about, but I saw the productivity coming out of our plant in the UK and looked at the even better plant in these other countries, and it was terrible. It was filthy, broken down, and it had not achieved a third of its output. The difference is frankly the way in which the people were trained and managed and directed, because the equipment was the same and the resources were often better. The whole key to this is how you manage and motivate people. That is why all the developed countries are having the debate, because that will be what keeps us ahead of everybody else: our knowledge, our skills and our ability to apply it and to change. We ship all this business out to the Far East or Eastern Europe, particularly the components. It is arrogant to think that these people are going to be happy to be the donkeys. They are not. They are going to aspire to our lifestyle and what we do. They are going to look at our products and improve them, and the only way we can win that sort of race is by keeping our skill set ahead enough to keep that gap we have today. It is a debate that everybody in the developed world is having. I think, to be fair, we are probably having it more intensely than some people.

  95. One unrelated question, the debate about redefining what manufacturing is in terms of measuring. Is that something you have thought about at all?
  (Mr Temple) Lots.

  96. We were talking to the minister about this idea that manufacturing is not being properly captured any more because of the related activities which should be counted as manufacturing, which we do not do under current statistics.
  (Mr Temple) It is becoming extremely difficult, I have to say. As your Chairman will know, if you look at something like a machine tool, it is one of the things that epitomises manufacturing, both as a product it makes and the thing it uses, and typically it is a chunk of metal, but no, it is not. It has computers in it. Who supplies them? It has software to drive it. Who supplies that? Are they manufacturers? They are an integrated part of the process. They have training which is sometimes supplied by others, and they have satellite diagnostics. All of these things are an integral part of that manufacturing process, but do not fall within the SIC definitions. It is important to try and get a handle on the debate as to that which manufacturing now can be seen to encompass, but you can also waste a lot of time on it.


  97. In conclusion, can we talk about tax incentives and things like that. I realise that there are different horses for different courses here. Could we have a look at corporate venture. We have a number of SMEs in the UK, small family companies who are loathe to give up a bit of their asset base, loathe to concede control of their company to other investors. Do you think that the American model of corporate venture of that kind is necessarily appropriate for the UK or do you think we need a major cultural change first?
  (Mr Temple) This is a very difficult area for us, first because I do not know the combined knowledge of my colleagues this side of the room, but we did actually raise this at our economic policy committee. I think it was at the last meeting. There was a distinct lack of interest, a feeling that there had been a lot of problems in this area. It depends which phase you are in, I have to say. There are some which relate to the nurturing of new business, which a lot of people would tick, but you are talking about companies turning over to this, and there was great concern about the timescales and the rates being charged and the way in which the businesses were being controlled and then what their preparation was for the future. I have to say, we were not backed very firmly about whether or not we should be taking this as an issue much further. They were concerned about it in a very negative way.
  (Mr Baunton) The view was that the rates of interest being charged and the sort of financing costs would force people to take unwarranted risks. That was not going to sit easily in the culture here in this country, whereas in the States it appears to sit easily.
  (Mr Temple) It had been seen there as a great driver of new business, which was something we were trying to pick up and see the extent to which it could be realistically transferred here. That was the crux of the debate.
  (Mr Peedle) Also, in terms of the impact that it could have, in certain circumstances, members will probably say corporate venturing would bring advantages to both companies, but in terms of actually tackling the fundamental issues relating to manufacturing at the moment, it is probably not high enough up on the agenda for us to concentrate on.

  98. I was only meaning in the case of the small to medium sized company, the family business, not listed in any way, perhaps where the elderly MD sees, making a sexist point, that he has two daughters, neither of whom are natural engineers or interested in it; they may have professions elsewhere. It might be sons who are not interested. They have families who no longer wish to proceed with the business, and it will either fold or someone else will come in with new money through an opening of equity. This is a problem, but you do not see there is an appetite for addressing it?
  (Mr Temple) There is not, but because it is a question that we felt of some value when we raised it, I would prefer, if it is acceptable, to send you a short note in response to that question which would probably give a rather better response than we feel capable of doing now.

  99. It was something which we were conscious of when we were in the States about three years ago, that in the new equity economy that they were talking about on the west coast at that time—they might not be talking about it with quite the same enthusiasm now, but it was nevertheless an opportunity which had a fiscal dimension which we had not really addressed in the United Kingdom. The other thing is could you expand on your desire for a simplification of some of the tax incentives, and enterprise investment schemes? I know you have some views on this. There are incentives that are difficult to get hold of, that kind of thing.
  (Mr Temple) It is a very complex area. Often when we have made approaches about certain schemes that are available, people have told us this is available and that is available and the money has not been taken. Then when you go back and say to these businesses "Why haven't you done it?" there is a vast array of issues. Often, where the scheme is specifically for something, and you have to find the right scheme rather than say, "I've got a problem" and find a solution, so you have to fit it almost the wrong way round, and there is a lack of knowledge very often as to what those schemes are. In fact, when we were doing the DTI review we tried to get a map of all the schemes, and it was impossible; there is not one in the DTI either. That must tell you something about the difficulty of this. That is not knocking the DTI. They have been there for good reason, but it is impossible to find the answer to the problem. It is best to be able to say, "This is the problem. In the broad scheme of things, we think we can give you an answer that will solve the problem." Also, we found that it was just difficult for a lot of people to fill the forms in and get it right. A lot of companies are not very good at filling in forms. We certainly saw a role for ourselves to try and help people to stitch that together. They were also not always good at looking at how it fitted in with their business, so it was knocked out on those grounds. If I can give a simple answer, it is that it is complex; too complex and too difficult to see through. The intention of the DTI to simplify this, to make less schemes but give people a broader remit for interpretation—I am on about the civil servants having a broader remit of interpretation—to match the problem rather than to match the grant I think is going to be a much more sensible way of going about it, which we would support wholeheartedly.

  100. One last point. The DTI is undergoing a process of change—whether we know not, but what we have seen so far is that there is devolution, regional offices have become more significant, and they will have budgets. Yesterday we had the Society of British Aerospace Companies, and we asked them whether there was a problem with sectors, if you sacrificed the sector for the devolved approach and instead of a national view of an industry, you end up with nine regional views plus Scotland, Wales and Northern Ireland. What is your experience so far? Is this causing concern?
  (Mr Temple) From an EEF standpoint, we are a regional body, and we work also very closely with the RDAs. As we said earlier, we are trying to drive those developments as best we can on behalf of business and our members. We actually see great value in driving a regional agenda, if we are going to get good regional economic growth. That said, there are absolutely definitely trade issues where the knowledge and the relationship between some key people within the DTI and that sector is invaluable, because on trade issues, on standards, on the issues around it, you cannot just pick it up by turning up and getting a quick briefing. You have really got to understand what you are talking about. Therefore you have to have a combination of both of those. There may be debates about whether the existing sectors within the DTI carry the same weight as they used to, and it may well be necessary to move those around a bit, but you have to have some deep sectoral knowledge on trade matters particularly, which in economic development are a different issue. We can work either way.
  (Mr Baunton) I am also a member of the Automotive Innovation and Growth team, and we have been making some strong recommendations to Mark Gibson and the group in the DTI that there needs to be a strong automotive directorate, because of the focus of automotive and major vehicle manufacturers and the component supply industry. I think he has taken that on board and I believe that he is going to incorporate that. We think that is very important. Also, just as a slightly humorous aside, we in our own company have had some experience of some of the regional organisations, which for the reasons that Martin outlined are obviously a very positive development in many aspects, because they are devolving responsibility down to groups that are more able to allocate the investment monies in an effective way. Our own head office in Caterpillar has received representations from two different regions from the UK to encourage Caterpillar to invest in the UK. We have invested over $2 billion in the last three or four years, and we have over 11,000 employees here, so I would suggest that is probably not a cost-effective use of civil service time to go to Caterpillar head office, and the competition between the two groups, trying to encourage Caterpillar to invest in one region rather than the other is also not terribly helpful. I worry about the confusion that there may be for other investors who genuinely want to come here for the first time: they may be spoiled for choice, and may want to play off one region against the other in terms of location. That is probably not the best thing for UK plc.

  Chairman: I do not think that is a new problem! We have taken up far more of your time, gentlemen, than we had anticipated, but I think it has been very useful, and we are very grateful because you have been able to give us a balanced view of the situation in the engineering industry. It has been extremely helpful. We are grateful to you, and look forward to getting the additional information on the forum and on other areas, and anything else you would like to supplement your remarks with we would be very happy to receive.

1   Witness's correction: The number actually required by industry at present is 36,000. Back

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