Memorandum by The British Chambers of
1.1 The British Chambers of Commerce (BCC)
represents 135,000 businesses that are members of local Accredited
Chambers of Commerce spread throughout the UK. As such, we are
in the main representative organisation for small and medium-sized
employers in this country.
1.2 We very much welcome the opportunity
to submit evidence to the Committee as representatives of a broad
cross-section of manufacturers.
2.1 Our most recent quarterly economic survey
for the fourth quarter of 2001 shows that manufacturing is currently
experiencing its worst results for exports, investment and employment
since the recession of the early 1990s.
2.2 However, comparing our survey results
for quarter three (taken just before 11 September) with quarter
four, suggests that the terrorist attacks in the US have had little
long-lasting effect on manufacturing activity or confidence in
aggregate, although for some individual manufacturing and service
sector firms, whose prospects are closely reliant on the international
travel industry, the effects have been significant.
2.3 Looking at slightly longer-term trends
our survey shows that the sector suffered a sharp deterioration
in exports throughout 2001 stemming from the unwinding of activity
in high-tech sectors and faltering overseas demand. The rate of
deterioration in exports accelerated in quarter three, but stabilised
in quarter four.
2.4 Chart 1 (overleaf), which is taken from
ONS data, shows that whilst high-tech manufacturing industries
have been disproportionately hit by the slowdown in global demand,
the sector as a whole has also been grappling with a second longer-term
pressurethe strength of sterling against the euro, which
has hit output and severely constrained firms' ability to raise
prices. As a result, profit margins are historically very low,
official figures show that manufacturing profitability was 4.3
per cent in Quarter three 2001, compared with 12.5 per cent in
the service sector.
2.5 Our own survey shows that smaller manufacturers
have suffered the worst deterioration in export sales over the
past two quarters, although only about half of those in the one
to 19 employee bracket export. Smaller sized manufacturers have
also performed worst in the UK market as the "export"
effect has filtered down supply chains.
3.1 The sector's proportional contribution
to the nation's total output has been in decline for several decades.
Measured as a percentage of gross value added it is down from
24 per cent in 1989 to below 19 per cent now. However, in absolute
terms the sector's gross value added continues to grow, the decline
in proportion being due to rapid growth in output form the service
sector, a trend to be expected in most industrialised nations.
For example, in the EU, only Ireland has seen its manufacturing
sector's contribution to growth increase as a proportion of value
|Employment in manufacturing sectors in 1995 and 2000
|Manuf food products and beverages||453,426
|Manuf tobacco products||6,623
|Manuf apparel; dressing/dyeing fur||154,877
|Tanning/dressing of leather, etc||42,565
|Manuf wood/products/cork, etc||80,804
|Manuf pulp, paper and paper products||113,329
|Publishing, printing, repro recorded media
|Manuf coke, refined petroleum products
|Manuf chemicals and chemical products||249,840
|Manuf rubber and plastic goods||229,614
|Manuf other non-metallic products||143,357
|Manuf basic metals||140,271
|Manuf fabricated metal products, etc||419,994
|Manuf machinery and equipment nec||383,822
|Manuf office machinery and computers||44,316
|Manuf electrical machinery/apparatus nec
|Manuf radio, tv/communications equipment
|Manuf medical, precision instruments, etc
|Manuf motor vehicles, trailers, etc||221,156
|Manuf other transport equipment||146,283
|Manuf furniture; manufacturing nec||184,890
|Total of above sectors||3,994,473
3.2 Equally, although the sector's share of employment
is down from 21 per cent in 1990 to about 15 per cent now, this
is again not out of step with the trend in other industrialised
3.3 Such trends reflect underlying structural shifts
in our economy, which in the case of manufacturing are best illustrated
by looking at some of its sub-sectors. Table 1 shows that with
respect to jobs the constituent parts of our manufacturing sector
are not all cutting back on workforce numbers, but facing different
challenges, which are driven by different factors.
4.1 The extent of the UK's productivity gap with other
leading industrialised countries has been well documented in several
studies published in recent years, for example reports by McKinsey
(1998), O'Mahony (1999) and HM Treasury (2000 and 2001). Whether
measured by output per worker, output per hour worked or total
factor productivity, the UK lags France, Germany and the United
States, although the productivity gap will differ depending on
the measurement used. Taking the latter, UK total factor productivity
lags France by about 20 per cent, the US by 18 per cent and Germany
by 13 per cent. The manufacturing productivity gap is if anything
larger than this.
4.2 The exact size of any gap is not really as important
as the fact that a sizeable gap exists. Even if UK productivity
exceeded that of these other nations pursuit of higher productivity
would still be a valid policy and organisation goal as ultimately
higher productivity is the route to rising wealth and standards
5.1 One of the most noticeable differences between the
UK and other industrialised nations, which may help explain the
productivity gap, is our capital stock. Decades of under-investment
by private and public sectors has left UK workers using significantly
lower amounts of capital than their foreign counterparts, as chart
5.2 Nevertheless, the UK makes extremely efficient use
of the capital it has. It is worth stressing that having too much
capital can also have adverse effects. Japan for example, has
suffered from over-investment, where so large a share of national
income has been invested that some of it has been wasteful and
the returns have often been very small. However, having such a
large gap in capital stock between us and other nations such as
France, Germany and the US is we believe one of the main explanations
of our productivity gap.
5.3 The UK workforce falls behind that of Germany and
France in terms of skill levels and basic numeracy and literacy.
In the mid-1990s about 23 per cent of British adults had very
low literacy skills and 21 per cent had very low numeracy skills,
compared with 12 per cent and 7 per cent respectively in Germany.
5.4 The productivity of any particular workforce will
be driven by the skills employees have and how hard they work.
There is evidence to suggest that the UK manufacturing sector
lags behind the US at getting the most out of its people. For
example, work by the EEF
suggests that incentive or profit-related pay is less commonplace
in this country. Likewise, workplace practices such as individual
performance appraisal, employee suggestion and other involvement
5.5 The same research by the EEF
indicates that take up of lean manufacturing techniques in the
UK lags that in the US and that the use of such methods correlates
with higher productivity and profitability. In 40 per cent of
the manufacturing businesses the EEF surveyed no lean manufacturing
techniques are used and in a sizeable proportion of the rest the
full benefits are not being derived, because the use of such techniques
is not adopted across the whole business.
5.6 Innovation is critical to manufacturing in two respects.
First, it can help improve processes and therefore raise productivity,
and second, product innovation can help generate value, allowing
companies to charge more for relatively the same amount of inputs.
5.7 Chart 3 illustrates that the UK has bucked the trend
of its main international rivals in recent decades, devoting less
expenditure as a percentage of GDP on R&D, when most of them
have been devoting more.
5.8 Recent evidence from the DTI's R&D Scoreboard
2001 indicates that overall average UK R&D intensity is only
2.1 per cent of sales, which is half the international average
of 4.2 per cent and within these figures there is significant
sector variation, with strong levels of R&D in pharmaceuticals
and aerospace somewhat masking poor levels in most other sectors.
5.9 The BCC's Burdens Barometer shows that the cumulative
cost of regulations to business introduced during the period 1997-2002
is £15.6 billion. This figure was calculated in May 2001,
using the Regulatory Impact Assessments (RIAs) that are required
to accompany new regulations. In addition to pure cost, what RIAs
do not assess is opportunity coststhe other use that entrepreneurs
could make of their time focusing on productivity issues.
5.10 The AA has estimated that the cost of congestion
to our economy is in excess of £19 billion. We believe this
has a large impact on UK productivity. How can we expect our businesses
to be productive when employees arrive late and in no fit state
to work, when simply arranging business meetings becomes a logistical
test, and when there is no guarantee that goods will arrive on
timea critical aspect of modern just-in-time manufacturing.
For certain parts of our manufacturing sector ICT infrastructure
is also an issue. Figures published by the OECD show that the
UK ranks 22 out of its members in terms of access to broadband
Economies of scale
5.11 The size and relative homogeneity of the US market
will make some contribution towards the superior productivity
of US businesses. For UK companies to produce equivalent volumes
will entail exporting and thus a factor that will influence UK
productivity is ease of access to markets abroad. Differences
in taste, however, mean that the homogeneity of the US market
is not always easy to replicate in Europe and thus down time for
changes to production lines will have some impact on manufacturing
productivity in the UK which will not be the case in the US.
5.12 UK exporters have had to cope with an exchange rate
in "old money" of DM3.00 or above since Quarter four
1999. This has had a significant effect on firms' price competitiveness
both at home and abroad. The decline in exports has not been as
great as perhaps anticipated and certainly prior to the effects
of the global slowdown of this year most firms' strategies appeared
to be to forsake profit margins to maintain market share.
5.13 Table 2 shows the results of one study that has
tried to quantify some of the above factors' contributions to
the UK's productivity gap against Germany and the US.
DECOMPOSITION OF THE UK'S PRODUCTIVITY* GAP, 1999 (PER
|Total factor productivity||69
| Other factors||4
|Total productivity gap||100
Source: Crafts and O'Mahony, 2000 (*Labour productivity defined
as output per hour worked).
6.1 The sector's contribution of 20 per cent to GDP and
nearly four billion jobs should be sufficient reason to appreciate
its importance to our economy. However, there are several other
good reasons why the UK needs a vibrant manufacturing sector.
6.2 The first, is its impact on the UK's balance of payments.
In recent months the combination of lower exports and more imports
has meant that in absolute terms the UK trade deficit has been
at record levels, although expressed as a percentage of GDP it
remains below historical peaks. All countries must ultimately
pay their way in the world and whilst the overall current account
deficit is still not large in comparison with the late 1980s,
a persistent large deficit would leave the UK exposed to fluctuations
in investment income and dependent on our ability to attract capital
inflows, unless we can address our trade deficit. Arguably the
most probable way to do that is through reducing the deficit on
our trade in goods, by exporting more manufacturing value.
6.3 The second reason why the UK needs a strong manufacturing
sector is its contribution to wealth. The sector tends to create
high-wage jobs, with gross value added per employee higher in
manufacturing than in services, and in some sub-sectors significantly
higher. To illustrate the point, with the exception of textiles,
there are few manufacturing jobs that pay the national minimum
6.4 A third reason is its impact on the service sector.
About 2.4 million service sector jobs rely directly on the manufacturing
sector and about 30 per cent of manufacturing spend is on services,
particularly transport and financial and business services.
6.5 Rather than asking why we need a manufacturing sector,
perhaps two more pertinent questions are what kind of manufacturing
sector should we aim for and how can we get to it with as smooth
and painless a transition as possible?
6.6 Table 3 illustrates manufacturing labour costs in
selected countries and value added per manufacturing worker. There
are two points to emphasise from this analysis. First, that the
labour costs in many countries will make it increasingly difficult
for UK firms to compete in low-wage, low value added manufacturing.
Second, that there is plenty of scope for the UK to improve value-added
per worker to match other countries' levels, by focusing on high-wage,
high value-added manufacturing.
MANUFACTURING WAGES AND PRODUCTIVITY STATISTICS (US DOLLARSMARKET
|Country||Labour cost per worker in|
|Value added per worker in|
|Czech Republic|| 1,876
|China||729 (1995-99) |
|India|| 1,192|| 3,118
Source: World Bank.
7.1 Government affects many of the factors that impact
on manufacturing productivity set out above and therefore can
create the right environment in which to raise it. However, as
the EEF has set out in its report "Catching up with Uncle
Sam", businesses also have a part to play, in the case of
manufacturing: increasing the uptake of lean manufacturing, adopting
new approaches in the workplace, attracting and retaining the
right people, breaking down attitudes to change, raising investment
and undertaking innovation. 
7.2 To encourage such practices requires Government to
genuinely stoke a debate that engages businesses to think about
their productivity. At present, much of that debate goes on in
Whitehall and Westminster. The imperative is to get it into the
boardrooms of UK businesses. To do so, Government must communicate
its messages in small business owners and managers' terms. Productivity
is not a word they use in everyday parlance. Ahead of its plans
to appoint a high-profile economist, we would recommend the DTI
appoint a communications guru to drive its productivity work.
7.3 In so far as it can influence manufacturing productivity
the over-riding priority of Government should be to get the basics
right, providing: a sound macroeconomic policy, a good education
system, first-class infrastructure, which includes for information
and communication technologies, a competitive tax and regulatory
environment and rigorous competition policy.
7.4 However, sound macroeconomic policy for the economy
as a whole will not necessarily guarantee economic stability for
manufacturing. As the recent past has shown, with 40 per cent
of its output traded abroad the sector has a large exposure to
demand abroad and exchange rate fluctuations. This has a couple
of policy implications. First, that economic stability at home
will not necessarily guarantee the stable conditions that are
conducive to manufacturing investment, and thus justifies the
use of tax breaks and other incentives targeted at the sector.
And second, that Government should be conscious of the sector's
greater volatility and should avoid exasperating tough trading
conditions abroad, by introducing regulatory or tax changes that
compound its problems. The ultimate objectivea highly productive
and competitive manufacturing sectorwill of course be better
placed to cope with exposure to exchange rate and trade fluctuations.
7.5 Large swathes of the UK manufacturing sector are
also facing significant structural change. To create a high earning
economy Government should provide an environment that supports
high value-added industries. The UK manufacturing sector clearly
lags many other countries in terms of capital investment, research
and development, and innovation by quite some margin. Closing
that gap quickly should be a priority.
7.6 A second key facet is skills. Government must encourage
sufficient supply of technical skills in design, science and technology,
the better exchange of ideas between academia and manufacturing
7.7 For most parts of the UK manufacturing sector the
way to complete will be by being smarter rather than cheaper.
To that end we need far greater take-up of initiatives that encourage
manufacturers to network, share best practice and benchmark. Low-value
added sectors are and will continue to come under pressure from
low-wage competitors. Some may be able to compete by expanding
markets or increasing efficiency. Others may be able to adapt,
by branching out into higher value niches. Government cannot stop
such change, but can help businesses and the people that rely
upon them adapt to it. For example, by helping industries find
time to adapt by not precipitating change through the use of tax
and regulatory policy, and by helping people upgrade their skills
throughout their working life.
7.8 In its White Paper, "Opportunity for all in
a World of Change", published last February, the Government
set out a package of measures to support UK manufacturing and
encourage greater value-added from the sector. One of the initiatives,
the manufacturing advisory service, goes live this April and potentially
could prove useful and we shall monitor its development with interest.
Catching up with Uncle Sam-The EEF final report on US and UK manufacturing
productivity-December 2001. Back
Catching up with Uncle Sam-The EEF final report on US and UK manufacturing
productivity-December 2001. Back