Examination of Witnesses (Questions 175-179)
MR DIGBY
JONES, MR
ANDY SCOTT
AND MR
IAN MCCAFFERTY
TUESDAY 26 FEBRUARY 2002
Mr Berry
175. Mr Jones, welcome. We are actually two
minutes ahead of schedule. Our performance this morning has been
very good. It is the temporary Chair, it makes all the difference.
In all seriousness perhaps I ought to give you the opportunity
of introducing yourself and your colleagues at the beginning.
(Mr Jones) Okay. I am Digby Jones. I
am Director-General of the Confederation of British Industry.
On my left is Ian McCafferty, my Chief Economist and on my right
is Andy Scott, my Director of International Competitiveness which
carries the brief for manufacturing.
176. Welcome again. Thank you for your written
submission and thank you for coming along this morning. As everybody
is observing UK manufacturing is in a difficult position at the
moment. I wonder if you could give a brief review of how you see
the state of manufacturing and in particular the prospects for
recovery and what the obstacles to recovery might be which need
to be addressed?
(Mr Jones) Thank you for that. Thank you for seeing
us. I am glad you have in front of you our written submission.
It is quite a good time really for you to ask us to give this
evidence because last week we issued our Industrial Trend Survey
and our Revised Economic Forecast. Just a quick snapshot of where
we are the moment. Output is expected in manufacturing to stop
falling for the first time in six months right now. Order books
are still below normal but they have risen now above the levels
pre-September 11th which is again some cautious optimism. The
smallest manufacturers are the ones who seem to have the weakest
confidence and the weakest order books and export demand is still
extremely weak. Our forecast for the economy as a whole, we expect
that to get to 1.8 per cent growth in GDP this year, the Chancellor
would disagree with us, he thinks it is going to be over two but
neither of us are talking recession. We think that growth is down
from the growth of last year of 2.4 per cent. Manufacturing output
we expect to be in decline by about 1.5 per cent this year which
compares with decline of 2.3 per cent last year. Although still
in decline the rate of decline we expect to get less but we think
it will return positive in manufacturing in 2003. Employment in
manufacturing we expect to fall by 3.4 per cent this year but
then a fall again next year by just over one per cent. That would
add up in the two years, 2002 and 2003, to job losses of about
172,000 people. The underlying trend is one of probably hit the
bottom, not getting much better but not getting any worse. In
that picture, we would look to some quite encouraging highlights.
Overall it would be right to say that Britain no longer has a
future making things which will sell around the world only on
price, ie commodities. It does not matter what it is, what they
are, if they are going to compete in the world only on price frankly
it is for yesterday. That is a difficult thing politically for
people to accept but it is true. However, in the areas of value
added, in the areas of selling on quality—quality does not
always have to just be the quality of the product, it can be quality
of delivery, it can be quality of after sale service, it can be
quality of brand, it can be reputation but anything which adds
value to the product that is made—British manufacturing
actually has a future and a good one. Also, it begs the question,
of course, what is manufacturing because manufacturing in the
21st century for Britain is going to extend way beyond traditional
classifications, actually way beyond the traditional classifications
that are used by the DTI for telling you what those figures on
manufacturing are for in the first place. So we will call for
some look again at the way these things are classified. You try
and tell a journalist that IBM, Hewlett Packard, Compaq are all
manufacturers and they look a little aghast. Software manufacturers
are manufacturers. If you try to explain that in companies like
Corus, for instance, the least skilled person in Corus today operates
a computer and they find that pretty difficult to get on board.
As British manufacturing restructures in front of our very eyes,
and it moves out of this commodity making into this specialist,
value added end, you can often see that although you see the headline
of so many job losses, these people actually do get re-employed
quite quickly if they have a skill because there is a skill shortage
in manufacturing in Britain and they do move in to other jobs.
One set of figures which is rarely talked about is yes, you read
that 1,200 were made redundant here, 1,000 there, how many of
them actually walk straight into another job? It is far more than
anybody ever thinks if they have a skill, if they do not then
it is a more sorry tale. I guess going forward we would call for
that above all else, which is constant up skilling and reskilling
and training of people in manufacturing so that as it restructures
they are equipped to deal with it. That is, of course, also the
greatest protection that anybody working and employed in manufacturing
can have. Not employment regulation, not more legislation, but
just be so well skilled for the manufacturing of the 21st Century
that no employer would dare let you go, no employer would dare
treat you badly, dare not pay you well, dare not give you flexible
time because, frankly, if you are skilled they need you badly.
That would also call for a strategy for manufacturing to be published
by the Department of Trade and Industry probably for the first
time in modern Britain. We would call for that now. That would
be not the model that has been followed over decades by some of
our European rivals which is "those are some sectors, we
are going to pick some winners, we are going to pump lots of taxpayers'
money into it and when it works with the market, great, when it
does not we will subsidise even if the rules say we cannot".
We are talking about a strategy that says here are some global
champions, and Britain has more global champions in the field
of automotive, in the field of pharmaceuticals, in the field of
aerospace, and in many other areas as well, more than we ever
really acknowledge, and they are today global champions, they
are doing a damn good job: major on them, major on clusters around
some totems, around universities, around those global champions
of which I spoke, around infrastructure projects such as regional
airports, such as ports, such as rail and motorway hubs, anywhere
where you can cluster businesses around it. Then the policy of
Government, every regulation they wish to undertake, every taxation
initiative they wish to impose, every training and skills and
R&D initiative they wish to undertake, every investment they
make in infrastructure, should be in accordance with that strategy
of supporting those global champion motivated structures. That
in itself, we would hope, would facilitate some joined-up Government
which currently is sadly lacking, so that the Treasury, DTI, DEFRA,
DFID, anybody else, DTLR, when they undertake any initiative should
be checking it off against the agreed strategy. It is a public
document which would say, just very shortly, "is what we
are doing in accordance with those aims to get it right?"
Lastly, in my opening remarks if I could just say we do see some
obstacles to that happening. I would guess in specific terms you
could look at two and one would be red tape and regulation, a
lot of which is in accordance with the British mentality of regulate
first and then make the system work around it, whereas we would
say every single time somebody wishes to put another regulation
down, is it really in accordance with furthering the manufacturing
of Britain in a value added area in the 21st Century? Secondly,
for all of the tax breaks which help, and I hope in the Budget
we will see them in training and R&D and other areas, for
instance is the Climate Change Levy in the way it is implemented
the way to encourage people to stay employed in manufacturing?
I can give you an example of 600 people in Wales, for instance,
who probably are going to be out of work simply because the company
they work for actually does not fit into an area where you can
negotiate a discount in the Climate Change Levy. It does not mean
that the business does not want to achieve those Kyoto targets,
it does not mean that the business does not want to take its place
in being a cleaner environment in Britain but it would say the
way it has been implemented, the regulatory environment, has militated
against employment. I cannot believe Labour voters in those parts
of Wales actually ever voted for a Government that was going to
put them out of work because of the poor regulatory way that a
laudable objective has been implemented. Lastly, if you speak
to any business anywhere, anybody who works in business, they
would say they need to get their goods to market, they need to
get their people to work. If you look at both the transport infrastructure
and the planning regime in which that infrastructure has to operate
it militates against competitiveness for manufacturing going forward
because manufacturing is the key exporter of the country, it has
to get its goods around. If you look at our competitors, one of
the reasons for their competitive productivity over us is they
have got a first class infrastructure, it does facilitate that
mobility of people and goods over and above the United Kingdom.
Thank you very much.
Mr Berry: Thank you very much.
Dr Kumar
177. Mr Jones, in your submission to this Committee
you highlighted with charts and detailed information that one
of the major reasons for low productivity of manufacturing is
lack of capital investment and this is a debate that has been
going on in the CBI and TUC ever since I can remember for most
of my adult life. I wonder if you can say what are the main reasons
for this and what do we do about it?
(Mr Jones) I will pass two comments and then I will
ask Ian to come in on that. One of the reasons is that a great
deal of the manufacturing in Britain is done by smaller businesses,
middle ranking and smaller businesses, and if you compare the
attention given by capital markets to the Mittelstandt in Germany,
for instance, and that to middle companies in Britain, the distinction
is alarming. Middle sized companies in Britain, big manufacturers
in their way, make a huge contribution to manufacturing, do not
get access, are not seen as fashionable by the market and, therefore,
they are ignored or they are not on the radar screen of investors.
Secondly, there is an atmosphere where the markets do not believe
that the growth can come out of manufacturing from the same way
that it can come out of other sectors and, therefore, they tend
to fly into other sectors and in a way, rightly, the liberalisation
of the market in Britain, which in the medium to long-term does
pay dividends, of course does militate at times against manufacturing
for investment opportunity compared with other sectors. Those
are a couple of reasons.
(Mr McCafferty) I would say two things. One is over
the long-term the uncertainty and the volatility of the macro-economy
has played a major part in suppressing investment performance.
Clearly in more recent years the inflation rate has not only come
down but has become more stable and the economy also but in recent
years we have seen a significant decline in the rates of return
available to manufacturing, hence another suppressant on manufacturing
investment. I think there is a long-term reason, which is the
history of uncertainty in terms of the economy, and more recently,
largely linked to cyclical conditions in the world economy, low
rates of return available.
(Mr Scott) A couple of the other areas are in terms
of improving the dialogue and the relationship between industry
generally and City and fund managers and analysts in the City.
I think it is an area that we flagged up in the work which we
did jointly with the TUC looking at the whole productivity initiative,
that there are areas there where in terms of a greater understanding
we have some companies that have a very good dialogue with those
institutions, a very clear understanding that investment today
results in returns in the future and the more we can improve that
dialogue the more we can improve that flow of communications to
understand the value and importance of that investment to the
business. I think the second area, which again we have flagged
up in our own work as well as jointly with the TUC, is the need
to improve management expertise and to improve management skills
and that is, again, linked through to the investment issues as
well, enhancement of that skills base within the businesses is
also critical in terms of investment for the future.
(Mr Jones) One interesting point was that Patricia
Hewitt chose to give her speech on manufacturing a few weeks ago
at the offices of Merrill Lynch in the City which we thought was
excellent because it was trying to increase the mental approach
to tomorrow's manufacturing in the very place there is a source
of capital as opposed to going off to what journalists would call
industrial heartlands. We thought that hopefully would start a
better understanding of tomorrow's value added manufacturing.
Of course, the moment you go into value added the opportunity
for growth is high and that is a message we have to get across
better.
Richard Burden
178. If I could continue on that theme of trying
to encourage or create a climate of greater encouragement for
our own Mittelstandt, if you like, as well as welcome things like
making speeches on manufacturing in the City, what would you see
as being the institutional barriers to creating that? Some of
the other evidence we have had, not all of it, was trying to identify
some fairly big institutional barriers both in terms of the structure
of Government, the relationship between different Government departments,
but also the actual structure of the finance sector in our economy.
That particular evidence was stressing the need for a much stronger
regional dimension. The argument given is if you look at other
places, America, Germany and so on, it is not an accident that
you are talking about federal states. How important do you think
this regional dimension is?
(Mr Jones) By institutions you do not just mean financial
institutions?
179. No.
(Mr Jones) I suppose one of the answers to this is
someone might say that, you and I, Richard, we might say that,
might we not, but at the end of the day if you come from the West
Midlands, for instance, you will understand why a Regional Development
Agency which is properly funded and given the discretion to spend
the money can make a massive difference to manufacturing, because
as manufacturing restructures in an area of such an enormous number
of small and medium sized businesses they have to have the confidence
to invest in tomorrow's manufacturing. Nowhere is that more relevant
than in an area which has totally depended on making things and
selling them to a bigger business. That is a very difficult and
a very brave thing for a business to do. Part of it is smaller
businesses do not like giving away slices of the action very much
because that entrepreneurial flair which has led them in the first
place does not admit partners that well, to get capital in it
usually comes with some sort of equity dilution, and the personality
of smaller businesses does not fit that well in Britain with that.
To have a functional RDA which has more money can actually stimulate
the value added side of manufacturing and do it in a different
way around the country. The way the West Midlands might do it
will be totally different from the North East, different from
Yorkshire and, frankly, it will be different again from the Medway
Towns, for instance, they are all manufacturing homes but they
have different reasons and different problems and challenges.
I am very hopeful that the RDAs will not only succeed but will
be a great institutional agent for change in manufacturing. You
cannot have a Government that just says "we are going to
turn the tap on and off and, secondly, we are going to tell you
how to spend it", that will not work because it is different
in different places. We also need the local institutions, I have
in mind particularly local authorities and local planning authorities,
to understand just how globally mobile manufacturing is today.
You cannot rely on manufacturers just staying around, they can
just as easily go to the Czech Republic or China. Whilst smaller
businesses might not be able to do that, they rely on bigger businesses
being there for that cluster effect I talked about, the bigger
business will go. In this job I have been quite surprised actually
at the lack of understanding and the lack of knowledge of the
true change in manufacturing that has gone on in the United Kingdom.
I am surprised at the lack of knowledge in local authorities.
They do not understand the mobility of 21st Century business.
So it needs an institutional appreciation of the change, it needs
institutional encouragement and not just putting money in but
creating an environment in which it will succeed, but then it
needs the drive from Central Government as well. The drive essentially
also comes from access to cash capital but that is a two-way street
because it needs businesses to take that on board as well. The
changing face, remember, also means that a lot of these businesses
get their capital from New York, they get their capital from Frankfurt,
they do not need to get it from London. That is not a bad thing
because there are a lot of companies that are investing in Germany
and America as well but what it does mean is that the smaller
businesses can feed off the bigger businesses, they are the ones
that need the capital as they restructure.
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