Examination of Witnesses (Questions 101-119)|
TUESDAY 26 FEBRUARY 2002
101. Good morning, Mr Fletcher. Do you want
to introduce yourself and your colleagues?
(Mr Fletcher) Yes. My name is Ian Fletcher.
I am head of policy at the British Chambers of Commerce.
(Ms Low) Sally Low. I am in the policy team at the
British Chambers of Commerce.
(Mr Peel) John Peel. I am the managing director of
a company in Crawley making radiotherapy equipment bucking the
trend industrially, in that we deal with cancer which is growing
at about 20 per cent per annum and therefore the company is doing
the same. I also with my other hat chair Sussex Enterprise, which
is a Chamber of Commerce delivering Business Link for the SBS.
102. Thank you for your written submission to
the Committee. The opening comment you make in your memorandum
is that manufacturing is currently experiencing the worst results
since the recession in the early 1990s. Could you give a brief
overview of the manufacturing sector from your point of view?
(Mr Fletcher) We have seen the sector under significant
pressure for two or three years now because of the sterling/euro
exchange rate in particular and the impact that is having on manufacturers'
pricing competitiveness. However, that was predominantly an export
driven problem and the sector as a whole continues to grow in
the United Kingdom. At the start of 2001 however we have seen
three quarters of significant decline because of global events
and our third quarter survey illustrated this very well in that
it was conducted the week before the events of 11 September, which
showed that the global demand was having a significant impact
on the sector. I anticipate you particularly would like a small
firms perspective and the manufacturing sector. From our survey,
small manufacturers do not constitute a large proportion of exporters.
They have been more severely affected than the larger counterparts
in terms of export sales and investment. Of particular concern
to us in the third quarter of last year was cash flow. We saw
the worst cash flow situation ever for those companies. On a more
positive note, our quarter four survey showed that things seemed
to be bottoming out and quarter three may have been the trough
of their experiences. The curiosity perhaps is that overall this
has been almost 100 per cent driven by external events so in terms
of policy solutions and monetary policy in the United Kingdom
it could not deliver a particular solution to this problem. We
have been in the rather curious situation of looking as much to
the actions of the European Central Bank and Federal Reserve to
help out the United Kingdom manufacturers as we have to the Bank
103. You quite reasonably point out that sound
macroeconomic policy for the economy is not the same as a sound
policy for stability for manufacturing. What do you see as the
main obstacles to recovery? What can improve? What are the key
factors that could improve forms of manufacturing today?
(Mr Fletcher) It is a case of world demand. Only that
is going to deliver the activity which is going to help our manufacturers
out of the trough. The longer term problem of price competitiveness
and the euro/sterling exchange rate they seemed to be able to
cope with in terms of their competitiveness.
(Mr Peel) I am a medium enterprise, 165 persons. My
supply chain is tending to be smaller companies. For me to live,
they have to be a really excellent supply chain. My fear is that
some of them will fall by the wayside, not because they are poor
manufacturers delivering poor quality, but simply because they
cannot make a profit. They do not export necessarily but I export
95 per cent of everything I manufacture, so they are impacted
ultimately. As far as enabling the country to be better off in
terms of manufacturing, very difficult. I do not think there is
a single answer but stability is the key and a recognition that
that stability must provide confidence for the manufacturers of
Sir Robert Smith
104. Mr Fletcher is talking about how the small
companies were not so exposed to export. Is there any way of judging
how much of the next stage in the chain is exposed to export and
therefore they are secondary victims?
(Mr Peel) As in do we have a statistic?
(Mr Fletcher) From our economic survey, proportionately
about 80 per cent of medium size manufacturers export, about 90
per cent of large and only about 40 per cent of the micro, small
106. Can you say roughly of the 60 per cent
how many supply the medium and the large to do their exports and
how many supply directly?
(Mr Fletcher) I cannot. I can see if I can find those
figures for you.
(Mr Peel) As a sample of one, of 120 key suppliers,
my guess would be that over 50 per cent of those do not export
107. They supply you and if you cannot export
they have no one to supply.
(Mr Peel) Correct.
108. If the key problem is world demand - and
you emphasise in your memorandum the importance of the exchange
rate - what should the government do?
(Mr Fletcher) In terms of prospects for recovery,
we conducted a survey towards the start of this year with HSBC
and covered 14,000 firms. It illustrated that, looking at the
manufacturing sector as a whole, it had as many high performers
as any of the other sectors in our economy. There was as much
a proportion of those in the manufacturing sector that were enjoying
growth in excess of 20 per cent as other sectors. The problem
was that a number of large manufacturing sectors were seeing a
decline of between one and 20 per cent of their turnover, but
no higher an amount than other sectors were seeing. There does
not seem to be a larger proportion of manufacturing firms than
firms in the economy as a whole that are significantly suffering
but there is a large tail of manufacturers that have had some
impact from the various events. In terms of solutions, we have
called for certain things. We believe that, first and foremost,
the government should be concentrating on getting the basics right,
maintaining a stable monetary policy so that the 60 per cent of
output that relies on domestic demand does not go the same way
as the 40 per cent that relies on overseas demand. There are other
things such as not accentuating the problems that manufacturers
experience with taxes and regulations and ensuring that we continue
to invest in transport infrastructure so that they are able, from
a productivity perspective, to operate their time management systems
as effectively as possible. We were very concerned during the
third quarter with a particular cash flow problem and we asked
for some deferment of tax in the same way that the government
had deferred taxation for businesses affected by foot and mouth.
I do not know if that is still a worthy policy goal. The cash
flow situation seems to have been improving over the fourth quarter
of last year.
109. To take you back to the issue of supplies
and small firms and whether any of those are involved in export.
I recognise you have not got the figures and this may be something
you need to give us a note on but anecdotally perhaps you could
give your impressions. One of the problems is that sometimes we
refer to suppliers as an undifferentiated whole and obviously
there are differences: first tier, second tier and between sectors.
As well as there being an impact, which you have identified, particularly
the problems of a manufacturer who is involved in exports having
a knock-on problem with suppliers, how far do you see it being
a problem between suppliers? In other words, first tier suppliers
may be typically multinational companies which then would put
the squeeze on smaller suppliers further down the line that would
not be involved in export but would be involved in servicing bigger
suppliers. How far do you think that is an issue?
(Mr Peel) This is very difficult to discern. You have
described a very complex situation. What I see is that with 120
suppliers I can look at those almost on a daily basis and tend
and care for them, especially if they are smaller. We would not
penalise in cash flow terms. Payment on time is key. What you
cannot be certain of is that they are doing the same to the next
layer down and, as you rightly point out, the next layer down
could be a multinational. I do not think there is a simple answer
to your question other than trying to use the supply chain as
well as one can in terms of ethics and communication. This is
as much about communication and talking up or talking down manufacturing
as it is about cash flow.
110. Mr Fletcher, in your submission, section
five, "Factors Affecting Manufacturing", you have quite
well laid out a chart which highlights the lack of capital investment
as a major reason for the low productivity. Do you have any ideas
of the reasons for low productivity compared to other countries
and how can we overcome this problem?
(Mr Fletcher) In terms of our stock of capital investment,
it is our stock of capital that is the problem. It is a long term
problem which probably goes back 30 or 40 years. Making good that
significant shortfall in capital is something that is going to
take time to remedy. The major reason for it is the lack of economic
stability at home and the monetary policies that were pursued
over the past 30 or 40 years and the knock on impact that had
on the capital markets in terms of a drive towards short termism
rather than long term investment. As I have set out in my evidence
however the changes have taken place in the more secure monetary
policy that we now pursue. It will not by itself remedy all the
manufacturers' problems because there is that 40 per cent of output
that is still very exposed to demand abroad and the exchange rate.
If we were looking for a reason to justify particular incentives
such as capital allowances being targeted, that is a good reason
for targeting the manufacturing sector because it does not have
that stability at home.
111. Are you saying that the monetary policy
that has been pursued in other European countries has been much
more stable over the last 40 years comparatively to our country?
(Mr Fletcher) I believe that is the case. If you look
at the likes of our German competitors up until three or four
years ago the conduct of monetary policy by the Bundesbank was
very well respected because of the stability that it ensured for
its domestic manufacturers.
112. In the next part of your memorandum, 5.3,
you mention the deficit in skills in this country compared to,
say, Germany and France and basic literacy and numeracy. This
is a considerably important difference. Are there measures that
you think should be put in place to address that?
(Mr Fletcher) I will say a few words and then let
John speak because it is a particular passion of his. From our
perspective, the skills issue has two or three different facets
to it, if you are looking at productivity. Firstly, there is the
immediate problem of skill shortages. The ONS has recently published
data which suggests that we have about 150,000 vacancies in this
country that are vacant because of skill shortages. Those tend
to be proportionately skewed towards the manufacturing sector.
It tends to be skilled, manual, technical and professional labour.
Those skills are particularly difficult to find for employers.
In that perspective, we do have concerns about the policies that
we pursue, the high targets for getting people to enter higher
education. A lot of people are being drafted into level four skills,
degree levels skills and, in graduating, finding that the jobs
they go into are level three and modern apprenticeship type jobs.
That seems a waste of government resource in terms of having to
train people twice plus employers are not getting the skills that
they need. The second problem is skills gaps in the labour market
itself. The ONS estimated that there were 800,000 skills gaps,
individuals that employers believe do not have the skills to do
the job that they want them to do. They were more skewed towards
the service sector and it tends to be more generic skills, things
like communication, literacy and numeracy. The government rightly
has made that a priority and it seems to be intent on tackling
that problem. The third issue is are we aspiring to have the types
of skills, the high value added industries that will generate
the wealth in the future? Clearly, there are certain sectors that
we would wish to encourage, things like biotechnology, where it
is driven by knowledge and skills. Overall, different issues,
but we would agree that skills are important to the productivity
agenda for various reasons.
113. You said at the beginning your first point
was about possibly we are channelling too many people into higher
education that do not need that level and you need people at,
say, level three but your last point was that we need skilled
people, the high achievers as well, to compete with other countries
in Europe and the US.
(Mr Fletcher) It is a case of quantity. We do not
seem to have the number of people that we need with level three
skills to meet the current demand for those skills. We do seem
to have an excess of people who have level four skills. Looking
at the types of degrees people are doing, there is a lot of criticism
in the press that people are not doing the correct subjects. I
do not know if I agree with that entirely.
114. What are the correct subjects?
(Mr Fletcher) There are criticisms that we do not
have enough people doing engineering degrees. The number of people
doing engineering degrees has not changed much over the past decade.
There is not a deficit. The main changes seem to be that fewer
people are doing the academic minded degrees and more are doing
things like computer skills. Quite positively, there has been
about a 35 per cent increase in people doing design which is a
critical aspect of attracting value to our manufacturing sector.
(Mr Peel) I have a passion for this subject. I suppose
it comes from the fact that I was an apprentice in Coventry in
a machine tool company and they gradually pushed me up to go through
a first degree and, when they found they had not got the tailoring
quite right, through a second one. That company is now defunct.
That shows what happens to industry over time. However, that does
colour my judgment today and for years, whenever I have had the
opportunity in a company the size I am in now, I train my own.
We have a policy which ensures that somewhere between four and
five per cent of all hours are spent on training, but we also
believe in education. I have had 11 individuals going through
Open University MBAs, for instance, and that takes them an hour
a day for seven years. They need real encouragement to start that
and all the way through. That trains a straightforward operative
right the way through to being a full manager. That does not necessarily
give them all the skills they need. In the background, I encourage
education; in the foreground, training at whatever rate. The product
I am making is going upmarket in terms of skill requirements all
the time. For instance, we put a complete shop floor through an
upscaling exercise from mechanical fitting, generally speaking,
through to electrical, through to electronic as the requirements
have changed over the years. I personally believe in doing the
best to train your own. As to what the government can do about
it, we have to ensure that the local Learning and Skills Council
delivers the goods and tailors local courses appropriately to
local needs. I am sure that is going to be a difficult thing to
achieve but it is not impossible. I would also encourage smaller
companies to be treated in a differential manner. A company of
over 100 should make its own way in the world. A company of 15
may need a subsidy of some sort to allow an individual to go off
and do training of a concentrated nature.
115. The point about training is that most of
the businesses in this country are small businesses, almost 100
per cent. It is difficult if you have, say, four or five people,
to let someone off whether you are providing the training or whether
the government is helping you out, because you lose a key worker
from a small workforce.
(Mr Peel) There is no simple way through that. Encouragement
by the supply chain. Let me give you an example. It is imperative
that all my suppliers have ISO 9000, the quality standard. With
the assistance of Business Link going back some six or seven years,
we arranged courses for both companies, in terms of management,
and the workers, to bring those up to the standard that we required.
We have done the same thing on EN14001, the environmental standard.
Pressure from supply chains and assistance from the larger players
does no harm at all.
Sir Robert Smith
116. I wondered if the personnel departments
of many companies have been your worst enemy in your concern about
level four qualifications for level three jobs in the sense that,
at times when there are quite a lot of applicants just hitting
the extra hurdle of a degree being required when really it is
not crucial to the job. Would that be a criticism?
(Mr Fletcher) That would be a fair criticism. There
is a status symbol that goes with a degree that perhaps we need
to tackle. Part of the government's current agenda, various papers
published over the past few weeks in terms of the 14 to 19 learning
and the Performance and Innovation Unit's current report on adult
skills is trying to tackle that discrimination between different
qualifications and make vocational qualifications of equivalent
status to degrees.
117. The other side of getting the best out
of your staff in terms of productivity has to be staff motivation
and I was very interested to read what you said between 5.19 and
5.21 on workplace initiatives. Can you quantify the difference
that other non-pay factors can make to staff recruitment and retention?
You mentioned training but personal development planning and work
life balance initiatives and things like that?
(Mr Peel) My experience in this is providing that
training but it is the whole package that counts. It is the ability
to have a sick scheme which takes somebody who is receiving a
reasonable amount of pay in the short term if they are sick right
through to total disability, without there being a break. That
is attractive to some people. As is having a good pension at the
end of their working life. I personally find that it is the communication
of where the company is going. Every individual in the company
has a right to know what they are doing and why. If you are communicating
well, you are ensuring that those you have brought into the company
are retained. We have a retention rate for shop floor employees
which is almost 100 per cent. If you go to software workers, the
replacement rate will probably be about 20 per cent per annum,
so there is a huge variation there. To get people into a company,
it is not just the wages; it is the whole package and retaining
them is a lot about communication, concentrating on them as individuals.
We happen to do a team briefing using the Industrial Society model
and quarterly reviews. We keep our employees very much alive as
to what we are achieving and we keep them interested in their
118. I was looking in paragraph 5.19 to the
Uncle Sam series of reports by the Engineering Employers' Federation
and the fact that it makes the point that it is not one particular
factor but a combination, not the adoption of one particular factor
but the combination of several. I wondered what emphasis on the
various packages had worked out to be the best approach, involving
the workforce in decision making, that sort of thing. Could you
expand a little more in terms of what you found to be best practice?
(Mr Peel) We do a lot of benchmarking. First of all,
involving employees in making decisions. To recount an anecdote,
I had a gentleman leave the company recently, after some 20 years.
He took me over to the board which shows our turnover which had
gone up and up and up in that period. He said, "John, we
spend too much time at meetings." I pointed at this board
and said, "Yes, we may spend an awful lot of time at meetings
but look what we have accomplished." He was a shop floor
worker so he had been "hands on" the job and he did
not understand that planning the work was just as important and
getting the ideas from the employees. I once made a dreadful mistake
at a quarterly review by getting annoyed with the audience who
were asking a lot of difficult questions and saying to them, "Okay,
on Monday bring your brains to work". I realised over the
weekend that I had not only just made an idiot of myself but I
had said a truth. That was getting the employee involved in improving
the job they are doing, even eliminating the job they are doing
to improve the company. That is a major benefit to all. That is
where we first found engagement with the workforce in general,
through that sort of motivation, getting them involved. I come
on to communication which I have talked about enough already.
Thirdly, direction. It is a little like dealing with children.
They have to perceive the same reaction for the same force on
each occasion. If you vary it, the results will not be consistent
and the individual does not know what is going to happen. Again,
a lot of training and quality improvements, the tools of quality
and, generally speaking, improving the individual's lot.
(Mr Fletcher) Before we came here today, we unearthed
a piece of research which looked at the amount of hours that are
lost because of lack of direction which shows the United Kingdom
as performing poorly compared with other competitors. We will
make that available to the Committee to illustrate the point.
119. Can I draw Mr Peel out on his own experience,
which shows that on the job and in the job training can be much
more valuable than people going off to higher education and then
going into industry? I have a constituent who runs a very large
aerospace engineering company and he says, "Give me the lad
straight out of school and I will be able to make him into a really
first class engineer, perhaps send him off to university afterwards,
but if you send him off to university first he is finished by
the end of the university course. He is totally unemployable and
unsuitable for industry." That seemed to fit in with your
own personal experience and with some of the experiences you have
had as an employer. Do you think that the government is putting
too much emphasis on getting people straight from school into
further and higher education, rather than getting them into jobs
where they can train on the job and in the job?
(Mr Peel) I have a deepening suspicion that you are
trying to put words into my mouth. I believe that the modern apprenticeship
is an excellent route for an individual if they happen to be of
that mind. Their minds can be changed by advice. If I look at
my own experience as an individual, I went through a sandwich
course essentially for my first degree and that I found to be
an excellent way of dealing with education in one six months and
the practical application in the next or vice versa. That is the
best I have seen work in practice as well. I would back the view
of your particular constituent in aerospace.