Briefing Paper from the Welsh Economy
Research Unit, Cardiff Business School: Manufacturing and Trade
in Wales
INTRODUCTION
The purpose of this paper is to provide the
Welsh Affairs Committee with a summary of the current state of,
and prospects for, manufacturing and manufacturing trade in Wales,
and to highlight a series of policy relevant issues relating to
the development of manufacturing in the region. The remainder
of the paper is structured into two main sections and conclusions
as follows:
SECTION A: WELSH
MANUFACTURING AND
TRADE: CURRENT
SITUATION AND
GENERAL ISSUES
— An examination of the current state
of the regional manufacturing sector, encompassing sector performance,
problems and general and policy-relevant issues relating to the
past and future development of Welsh manufacturing.
SECTION B: SPECIFIC
ISSUES ON
WELSH MANUFACTURING,
INWARD INVESTMENT
AND TRADE
— UK central government (Department
of Trade and Industry (DTI) and Foreign and Commonwealth Office
(FCO)), and EU involvement as it relates to the development of
manufacturing in Wales, the development of policy, and inter-linkage
with regional government and its agencies.
— Role of the Welsh Assembly Government
(WAG) and the Welsh Development Agency (WDA) in supporting Welsh
manufacturing trade, inward and outward manufacturing investment.
— Themes relating to Welsh manufacturing
including: regional support of indigenous manufacturing small
and medium sized enterprises (SMEs); the effect of tariffs on
Welsh manufacturing and trade; and the linkages between the Welsh
higher education sector and the local manufacturing base.
SECTION C: SUMMARY
OF WELSH
MANUFACTURING ISSUES
The final section of the paper concludes and
highlights the main issues arising from sections A and B of the
paper. It is emphasised that this paper is in the form of a briefing
note. As such it is only possible to summarise the context and
issues facing the development of, and current policy on Welsh
manufacturing and trade.
A. WELSH MANUFACTURING
AND TRADE:
CURRENT SITUATION
AND ISSUES
A.1 Inward investment in Welsh manufacturing
Table A.1 provides an economic snapshot of the
Welsh manufacturing sector. In 2001 the sector employed an estimated
191,000 people (some 15% of total Welsh employment) and accounted
for around one quarter of regional gross value added (Cambridge
Econometrics, 2003). In few UK regions does manufacturing make
up such a high proportion of gross value added.
Table A.1 Manufacturing in Wales: Snapshot
|
| Employment (2001): | 191,881
|
|
| Largest sectors (% of total) |
|
| Food and drink | 11.9%
|
| Chemicals and plastics | 12.7%
|
| Basic metals and metal products | 17.3%
|
| Electrical and optical | 14.9%
|
| Motor vehicles and transport equipment |
9.9% |
| Others | 33.3%
|
| Share of Welsh employment (2001) | 15%
|
| Share of Welsh GVA (2000) | 25%
|
| Exports (2002) | £6.2 billion
|
| Imports (2002) | £5.7 billion
|
|
Source: Cambridge Econometrics, 2003
Figure A.1 shows Welsh manufacturing employment as a proportion
of total employment. The sharp downward trend in the early 1980s
is a reflection of the large number of manufacturing redundancies,
particularly in steel, during the poor economic conditions of
the period. Wales lost an estimated one-third of its manufacturing
employment during the early 1980s. The maintenance of relatively
high levels of manufacturing employment in Wales during the mid
to late-1980s, and on into the early 1990s, is largely due to
the success of the region in attracting inward investment, and
to favourable global economic conditions. For example, Hill and
Munday (1994) estimated that in the period 1982-92 Wales gained
around 16% of the inward investment jobs and projects coming to
the UK, making it, relative to its size, the most successful UK
region in attracting inward investment. The success of the location
marketing effort has been linked to generous regional preferential
assistance (automatic regional development grants (RDG) followed
by the discretionary regional selective assistance (RSA) under
the 1982 Industry Act), competitive labour costs, and improved
road infrastructure (ie improvements giving easier access to consumer
goods markets in the South east and to the Channel ports). Also
important was the location marketing effort of the WDA, particularly
in Asia (Munday, 1990).
A.2 Sharp fall in manufacturing output and employment after
1997
Figure A.1 demonstrates the sharp fall in Welsh manufacturing's
share of total employment after 1997. The Annual Business Inquiry
reveals that between 1998 and 2001 just over 20,000 jobs were
lost in Welsh manufacturing, or around 10% of total manufacturing
employment. Manufacturing job losses have been replicated in other
regions. However, components of Welsh manufacturing were hit particularly
hard by poor trading conditions, global pressures for rationalisation
and restructuring and the improving cost and location competitiveness
of areas in central and eastern Europe. During this later period
elements of regional manufacturing were also damaged indirectly
by the South-east Asian crises (see problems at LG Semiconductor
(Newport) and Halla Engineering (Merthyr Tydfil)), and by structural
problems in the Japanese economy which affected further investments
being planned or undertaken by extant investors.
Figure A.1: Welsh manufacturing employment as a proportion
of total: 1980-2002
Source: Annual Employment Survey and Annual Business Inquiry
(various years), and Cambridge Econometrics, 2003.
The index of Welsh manufacturing output (Figure A.2) provides
further evidence of the sharp recent downturn in activity. In
2003Q1 the index of Welsh manufacturing output was nearly 10%
below the 1995 level. Figure A.3 shows manufacturing industries
that have seen the largest losses of output. Of particular note
are textiles, basic metals and electrical and optical equipment.
For example, in basic metals, output levels in 2003Q1 were a third
lower than in 1997Q2, and in textiles around 50% lower. The significance,
in terms of employment, of some of these sectors is shown in Table
A.1.
Figure A.2: Index of Welsh and UK Manufacturing Output
(1995=100)
Source: www.wales.gov.uk/statistics
Figure A.3: Index of Output in Selected Welsh Manufacturing
Sectors (1997Q2-2003Q1)
Source: www.wales.gov.uk/statistics
A.3 Worst affected manufacturing sectors
Table A.2 provides an overview of job losses in the worst
affected manufacturing sectors.
Table A.2 Selected sectors suffering employment losses
1998-2002
| Sector | Jobs lost 1998-2001
| Key companies losing employment/closures
| Factors | Current sector
prospects
|
| Textiles and garments | 4,407
| Baird Group, Dewhirst, Laura Ashley | Competitive imports.
Key clients outsourcing to lower cost production locations (eg M&S).
| Poor outside niche markets. |
| Basic metals and metal products | 5,374
| Corus, Alcoa, ASW | Global restructuring and rationalisation.
Poor domestic demand.
Exchange rates.
Tariffs.
| Poor in `heavy' production, better in processing (eg coatings etc). Overall output of sector expected to fall to 2010.
|
| Electrical and optical | 5,199
| Sony, Hitachi, Aiwa, LG Phillips, LG Electronics, Matsushita.
| Competitive locations in eastern Europe.
Competitive imports.
Mature products phased out.
Limited new inward investment.
| Improving particularly in medical and optical products. Some growth of output in sector expected to 2010.
|
| Auto-motive | 710 | Calsonic. Krupp-Camford, Fenner, KTH, Exide, Lucas-SEI, Ford (Visteon)
| Labour intensive elements relocated to central Europe.
Restructuring and downsizing in UK auto makers.
| Some growth of output expected to 2010 in selected components suppliers.
|
The severe losses in Welsh manufacturing have been mitigated
in part by strong growth in private services and the non-market
sectors of the Welsh economy. Consequently recent announcements
of manufacturing redundancies in the first half of 2003, have
been juxtaposed with news of considerable increases in employment
in other sectors of the regional economy, notably in education,
health and public administration. However, whilst overall employment
growth is welcome, the decline of employment and output in the
regional manufacturing sector is of some concern, particularly
in the context of the longer term strategic goals of the WAG relating
to reducing the GDP gap with other UK regions, and improving the
innovative and learning capacity of the region.
A.4 Growth expected in some manufacturing groups
Whilst Table A.2 focuses on the bad news, it should be noted
that some Welsh manufacturing sectors have weathered the storm
better than others.
One of the difficulties with Table A.2 is the broad level
of sectoral aggregation. Then, for example, there are elements
of the electricals, and metals sectors which are facing better
prospects. A recent study for the WDA (Welsh Economy Research
Unit, 2002) identified more tightly defined Welsh industries with
the strongest developmental prospects in terms of factors such
as:
— regional and sector core competencies;
— economic trade possibilities within the region;
— overseas trade possibilities; and
This study identified manufacturing industries which scored
strongly on the above characteristics and that might be of relevance
to new policy developments. Industries included:
— paper, printing and publishing;
— selected chemical products and pharmaceuticals;
— materials—(including structural metals);
— medical and precision instruments;
Although only accounting for around 15% of Welsh employment,
manufacturing continues to be of economic significance, as will
be the attraction of new inward investment into the manufacturing
sector. Factors connected to the significance of manufacturing
in the regional economy are now reviewed.
A.5 Manufacturing in Wales is comparatively well paid
Earnings in Welsh manufacturing are typically closer to UK
averages, than earnings in sectors such as financial and business
services. For example in 2000, male and female manufacturing gross
weekly earnings were only around 7-8% lower than the UK average.
In faster growing elements of the services sector (particularly
financial and business services) earnings are as much as 25% below
UK averages. The continued loss of manufacturing employment in
Wales coupled with gains in areas such as financial and business
services, where the pay gap between Wales and the UK is substantial,
could contribute to widening of the income per capita gap. Closing
the gross value added per capita gap is a critical overarching
theme of the WAG economic strategy A Winning Wales.
A.6 Welsh manufacturing is the key contributor to regional
exports
Table A.3 summarises recent Welsh export performance. This
reveals that in 2002 Welsh exports were worth £6.2 billion,
and that Wales continues to have a positive trade balance on manufactured
goods. For many Welsh manufacturers, particularly those from overseas,
the regional base continues to be a bridgehead to the wider European
marketplace. Unfortunately the recent output losses (see above)
have been in the main exporting sectors. The WAG have highlighted
in a recent consultation that the development of improved international
trading performance is key to improving the prosperity of the
region (WAG, 2001).
Table A.3 Summary of Welsh Manufacturing Exports and
Imports (£m)
|
| Exports | 2000
| 2001 | 2002
|
|
| EU | 4,569.24
| 4,735.79 | 4,494.87
|
| Non-EU | 1,845.27
| 1,946.73 | 1,705.25
|
| Total | 6,414.51
| 6,682.52 | 6,200.12
|
| Imports | |
| |
| EU | 1,856.33
| 1,967.99 | 2,281.28
|
| Non-EU | 3,740.71
| 3,780.12 | 3,416.53
|
| Total | 5,597.03
| 5,748.11 | 5,697.82
|
| Exports-Imports | |
| |
| EU | 2,712.91
| 2,767.80 | 2,213.59
|
| Non-EU | -1,895.44
| -1,833.39 | -1,711.28
|
| Total | 817.48
| 934.41 | 502.30
|
|
Source: UK Trade International. Note: Table only covers trade
in goods.
A.7 Foreign manufacturing sector has different and significant
economic characteristics
Location marketing towards foreign manufacturing investment
is becoming more difficult for Wales as competition from locations
in central and eastern Europe, and other areas of the EU has increased
markedly over the last decade. In spite of increasing interest
in the role of indigenously controlled SMEs in the Welsh manufacturing
future, the reality is that attracting new inward investment from
overseas, and guarding the overseas manufacturing employment that
already exists will continue to be an important determinant of
regional economic prospects. Table A.4 provides information on
foreign direct investment into Wales and the UK in the 2001-02
period. The foreign-owned manufacturing sector has several notable
characteristics:
— Earnings and productivity tend to be significantly
higher in the foreign-owned sector in Wales than the domestically
owned (see UK Census of Production, 1997, Driffield and Munday,
2000, Brand et al, 2000, Munday and Peel, 1998).
— Employment in the foreign sector has been shown
to be more stable than that in the domestically owned sector (see
Bryan and Jones, 2000).
— The foreign manufacturing sector in the region
has been shown to be an important conduit for new manufacturing
and management practices (see Morris et al, 1993).
— Connected to each of the above, the presence of
the foreign-owned sector can be linked to positive productivity
spillovers into the domestic sector (Driffield et al, 2002).
Table A.4 Foreign Direct Investment: 2001-02
|
| | | Jobs
|
|
| Type | Projects
| Capital Exp(£m)
| New | Safeguarded
| Total |
| Wales | 93 |
495.782 | 5,469
| 4,248 | 9,717 |
| UK | 764 |
N/a | 34,037
| 23,801 | 57,888 |
|
Source: WDA and Invest-UK.
A.8 Manufacturing supports significant indirect employment
in Wales
Welsh manufacturing supports considerable employment in Wales
indirectly through its purchases of Welsh goods and services.
This fact has been exemplified in a recent study by Cardiff University
(2001) examining the economic consequences of recent steel industry
rationalisation. This study demonstrated that every direct job
in the Welsh steel industry supported an additional job elsewhere
in the economy as a result of local purchases and the spending
of earned income. Each £1 million of steel industry output
supported a further £0.32 million of output in other areas
of the regional economy.
Finally in this section there are some more general issues
that have been identified in research studies examining the nature
of the regional manufacturing base which are of relevance to policy
development, and the Committee investigation.
A.9 High levels of activity in manufacturing sectors which
are growing slowly at international level
A high share of Welsh manufacturing employment is in sectors
that are growing slowly at an international level and/or are utilising
mature technologies. Good examples include the production of steel,
consumer electronics (CTV), and automotive components.
A.10 Dependent nature of much of the manufacturing base
A large number of studies have commented on the dependent
nature of elements of the regional manufacturing base. This is
connected to age-old debates about the "branch-plant syndrome"
and the production-only nature of local operations (see for example,
Munday, 2000 for a review). The lack of headquarter-type operations
provides a limited functional and occupational base, and this
impacts upon the demand for skills. This problem also pervades
much of the services industry base in Wales (see Bristow et
al, 2000). At a time when policy making is becoming more devolved,
greater levels of economic activity in the market sector are controlled
externally to the region. Very few policy resources in Wales have
been used to investigate this paradoxical phenomenon.
A.11 Low levels of business R&D
Related to the above point is the low level of expenditure
by Welsh businesses on research and development. In 1999 R&D
spend by Welsh business was estimated at £203 million or
just 0.6% of regional GDP (UK average 1.2%). The lack of extensive
R&D activity in the regional manufacturing base again limits
demand for skills, and relationships with the higher education
sector (see later), as well as linking through to the region's
innovative capacity.
A.12 Manufacturing job losses have occurred in disadvantaged
areas of Wales which are least able to attract new investment
Some less-advantaged areas of Wales have been badly hit by
closures in the manufacturing sector. Examples include Blaenau
Gwent and Pembrokeshire. Unfortunately these areas are least well
placed to attract the new manufacturing or services industry investment
which has tended to cluster around the M4 corridor in the south
east of Wales.
A.13 Paucity of data of regional manufacturing
Statistical data on the regional manufacturing sector is
improving year on year. However, it is still difficult with this
extant data to examine issues such as competitive and innovative
position, ownership (ie foreign versus domestic), and levels of
manufacturing investment. The possibilities of undertaking a regular
census of foreign and domestic manufacturing activity in the regional
economy, to provide a time-series of policy relevant information,
and to support material held in the Inter-Departmental Business
Register (IDBR) and the sample based Annual Business Inquiry,
could be investigated.
SECTION B SPECIFIC
ISSUES ON
WELSH INWARD
INVESTMENT AND
TRADE
B.1 UK DTI, FCO, and EU involvement and assistance to Welsh
manufacturers
The DTI, FCO and European Commission associate both directly
and indirectly (ie through "local" organisations) with
Welsh manufacturers. This section will consider each of these
organisations, illustrating some of their connections to Welsh
manufacturers using selected examples.
B. 1.1 DTI
The DTI, in its Business Plan for 2003-06 set out priorities,
including:
— Boosting innovation (the successful exploitation
of ideas).
— Ensuring business support increases productivity.
— Acting as the voice of business success in Whitehall
and Europe.
The following initiatives/examples illustrate the nature
of some DTI activities, and resulting relationships with Welsh
partners.
Regional Centres for Manufacturing Excellence. DTI is working
in partnership with the English RDAs and the WDA to establish
these centres in each region. Individual centres vary slightly
according to regional needs, but core services include; information/signposting;
analysis of real needs; short term practical advice; limited access
to follow-on (consultancy/research); access to training and demonstration/testing
facilities.
MAS Cymru (Manufacturing Advisory Service Wales). This is
a free advisory service for Welsh manufacturers. MAS was launched
in 2002 and is co-funded by the DTI and WAG and supported by the
WDA. The WAG aims to signal a commitment to developing the manufacturing
sector within Wales. In the new Engineering Centre for Materials
and Manufacturing (ECM2), manufacturers can gain access to free
telephone support and advice and book a free diagnostic visit
through a helpdesk. This service is hosted by the National Centre
for Product Design and Development Research (PDR) based at the
University of Wales Institute Cardiff. As part of the same initiative,
MAS Cymru has a close relationship with the Welsh Centre of Manufacturing
Excellence (WCME) based at the Manufacturing Engineering Centre
(MEC), Cardiff University. MAS Cymru will also be working closely
with other centres of expertise, particularly those within the
WDA's CETIC programme (see below). This collaboration aims to
ensure that manufacturers gain access to independent advice, develop
and disseminate best practice, access the latest information on
the implementation of world class manufacturing techniques, including
a full range of activities to support innovation, and improve
productivity to ultimately increase profits.
Figure B.1 identifies the key linkages between SMEs and the
regional centres for manufacturing, the centres of expertise,
the Small Business Service (SBS) and its network of Business Links
(BLs).
Figure B.1 Organisational Structure for the Manufacturing
Advisory Service
Source: www.dti.gov.uk/manufacturing/index.htm
Regional Selective Assistance (RSA) is the DTI's main instrument
of direct financial assistance to business. The overarching objectives
of the scheme are determined nationally, and apply to the English
RDAs and the devolved administrations. The administration and
delivery of the scheme in Wales is through the WAG. Grants are
discretionary on projects with fixed capital expenditure of over
£500,000, and which create or safeguard jobs in Assisted
Areas. Scheme criteria apply relating to true additionality of
supported projects.
The European Commission (EC) restricts the availability of
national grants in certain sectors, including man-made fibre and
yarn, shipbuilding and repair, vehicles, iron and steel, coal,
and some fishery and agricultural products.
The DTI links to both the WAG and the WDA through the delivery
of initiatives, the formulation of policy and relations with the
European Commission. The nature of working relationships between
DTI and the Assembly Government are set out in the concordat between
the cabinet of the Assembly Government and the DTI (see www.dti.gov.uk
for further details).
In relation to issues of state aid, the UK is required to
comply with EU rules, and the concordat states that:
Relations with the European Union are the responsibility
of the UK Parliament and Government. The Department of Trade and
Industry's State Aid Policy Unit has an overall responsibility
across all Departments and the devolved administrations for co-ordinating
UK policy on State aid, providing advice on the application of
the State aid rules, and taking forward all UK notifications with
the Commission services.
In addition, the concordat specifies the nature of communications
with the EU:
The Assembly will channel all communications with the European
Commission on State aid issues through DTI's State Aid Policy
Unit, which in turn is responsible for onward transmission to
UKREP in Brussels (UKREP is responsible for onward transmission
to the EC). Such communications may, for example, concern notifications
of new aid and Commission enquiries about existing aids, or developments
in Commission policy towards particular types of aid.
B. 1.2 The Foreign and Commonwealth Office (FCO)
The FCO is the UK Government department responsible for foreign
affairs. The Office works through its London Headquarters and
a network of Embassies, High Commissions and Consulates throughout
the world, and provides a range of services for UK based Companies
and for potential inward investors.
British Trade International (BTI), soon to be re-named as
UK Trade and Investment, aims to bring together the joint work
of the FCO and the DTI in support of British trade and investment
overseas and inward investment into the UK. BTI has two operating
arms: Invest UK and Trade Partners UK, and operates nationally
across government departments, the devolved administrations and
the English regions.
Trade Partners UK (TPUK) provides market information and
advice on local issues to companies visiting FCO overseas posts
from the UK. Its aim is to improve business performance through
sales and investments overseas. Each of the devolved administrations
is represented on the BTI board. Invest UK is a business service
organisation which identifies and approaches potential investors,
informs them of the benefits of a UK location, and assists them
with aspects of locating and expanding in the UK.
Ambassadors and High Commissioners also have a role in developing
contacts at the most senior level with companies which are actual
or potential investors in the UK. Invest UK is also responsible
for managing the national investor development programme, which
focuses on the needs of existing inward investors.
B. 1.3 The European Union
European Union relations regarding state aid issues have
been outlined above. However Structural Funds are the European
Union's main instruments for supporting social and economic restructuring
across the Union, and account for over a third of the EU budget.
Various structural funds (see www.wefo.wales.gov.uk) are providing
support to Wales during the period 2000-06 through a number of
programmes.
Procedures and rules relating to the Funds are established
at the programme level by the EU. The programme or initiative
objectives are then agreed between the EU and the WAG. The funds
are managed by the Assembly, and are administered through various
partnerships established throughout Wales. During the programme
period, the WAG is required to demonstrate progress towards stated
objectives.
There are a number of general issues arising from the above.
First, a number of European, national and local organisations
provide both direct and indirect assistance to Welsh manufacturing.
In many cases, similar schemes or initiatives are governed and
implemented by different organisations making it difficult for
manufacturers with limited search time to identify the most appropriate
organisation to contact. Related to this, the nature of the connections
between these different organisations and departments is far from
transparent.
B.2 Role of the WAG and the WDA in supporting Welsh manufacturing
trade, inward and outward manufacturing investment
A large proportion of the WDA's general activity has the
objective of improving the competitiveness of the regional economy
and hence its trade performance. In particular:
— Programmes to support general markets for Welsh
goods and services (for example, Source Wales).
— Programmes to improve the innovative capacity
of indigenous firms (for example, Regional Technology Plan, and
with the WDA having responsibility for SMART Cymru (connected
to the DTI national framework, see section B.1.1), and involved
in the development of a series of new sector Techniums throughout
Wales).
— Programmes to improve Welsh business access to
new information sources, and the internet.
— Sectorally based development programmes and support
forums (eg Welsh Electronics Forum, Welsh Automotive Forum).
— Programmes to improve and support the development
of indigenous entrepreneurial capacity (eg Finance Wales, partly
funded by European structural funds).
— WDA is one of the partner organisations in the
new framework surrounding WalesTrade International (see below).
However, one of the main ways that WDA activity seeks to
support manufacturing trade performance of Wales is through its
location marketing activity. The Agency maintains marketing offices
in a number of key global locations. Overseas manufacturing investors
located in Wales make a significant contribution to overseas exports
(estimated to be £6.2 billion in 2002—see Table A.3).
In the longer term Welsh success or otherwise in attracting new
foreign manufacturing investment, and in safeguarding employment,
is expected to be a critical determinant of the regional manufacturing
trade balance.
In terms of location marketing much is made of the concept
of TEAM Wales with the WDA at the hub of regional co-ordination
of promotion activity. This activity has not been without problems,
with cases on record of disagreements between, for example, local
authorities and the WDA in attempts to sell particular locations
(see Munday, 1990). At the other end of the spectrum the WDA co-operates
with the FCO and DTI (see section B.1.1) in bringing firms to
Wales (see also below). In practice these linkages are blurred
with larger inward investors often approaching the regional development
agencies directly.
It is difficult to summarise the role of the WAG in promoting
trade, manufacturing and inward investment with much of the relevant
work being undertaken by agencies for which WAG is responsible.
However, the WAG directly and indirectly:
— Is committed to developing supply side conditions
through which regionally based manufacturing can prosper.
— Recognises that a successful manufacturing sector
plays an important role in overall economy prospects.
— Takes a lead in the development of manufacturing
sector specific initiatives.
— Is a conduit for EU and UK government incentives
for manufacturing.
— Commissions research on the regional manufacturing
sector to form basis for new regional specific initiatives.
Whilst, WAG can do little to influence macro-economic conditions
and exchange rates, it does actively promote Welsh trade (see
strategies outlined in A Winning Wales). In Wales, the WAG takes
the explicit lead in overseas trade promotion rather then the
WDA. The WAG has provided services similar to those which were
undertaken by the Welsh Office prior to devolution. Amongst the
main services and initiatives are:
— The "New Exporter" programme.
— Trade mission administration, and sectorally based
missions.
— Special export assistance to firms in Objective
1 area.
— Wales European Information Centre.
— International Trade Fund.
— Global Enterprise Programme.
The WAG has claimed a new direction in its trade promotion
role with the publication of A World of Opportunity during
March 2003 which outlined strategic directions for WAG's WalesTrade
International. It is claimed that WalesTrade International will
assist Welsh companies to establish themselves abroad and with
objectives for the organisation set in terms of:
— Developing new export capacity.
— Increasing the value of exports.
— Promoting key exporting sectors.
— Providing more "joined-up" delivery
of services.
— Monitoring performance of Welsh exports.
It is early days for WalesTrade International, and it is
difficult to see how far the services it provides will differ
from what has been previously available. However, the strategy
document highlights that the resources dedicated to the area have
been "significantly increased". Moreover there appears
to be a focus on directing resources towards potentially "winning"
sectors, and on more general aspects of internationalisation (ie
connecting Welsh firms to more general international business
opportunities including joint ventures, strategic alliances, and
technical collaboration) rather than just physical trade. The
strategy highlights that assistance is available to any organisation,
but the practical measures hint very much at assisting the indigenous
SME base, although it remains larger firms, and inward investors
that dominate Welsh exports.
Within the new strategy the initial consultation elements
of partnership are also emphasised strongly, and summarised below.
The precise nature of these partnerships is unclear from the documentation
relating to WalesTrade International.
Figure B.2 WalesTrade International—Interrelationships
Several points are made regarding the developing policy and
activity of the WAG to help Welsh firms export:
— It is unclear why the overseas export promotion
effort is headed up by the WAG as opposed to the WDA which already
has representation abroad, and also has connections with UK embassies
and consulates abroad (see also section B.1).
— There is limited quantitative and qualitative
economic information available on the direction of Welsh exports,
and volumes. Some information is becoming available from HM Customs
and Excise on export directions but this data may need further
development if it is to be used to target sectors that require
assistance. WAG has already announced a biennial Export Survey
of over 1,000 businesses in Wales to gain new insights into needs.
B.3 The impact of trade tariffs on Wales
Trade tariffs, anti-dumping duties, and increased trade regulation
could have both positive and negative impacts on an Welsh economy.
For example, the high costs of exporting to the EU, and related
anti-dumping duties, have provided incentives for direct investment
into the UK and other European economies. The boom in consumer
electronics and office automation equipment investment into Wales
during the 1980s is an example of how European trade restrictions
served to create valuable employment opportunities (Munday, 1990).
However, for those manufacturers located in Wales, and exporting
outside of the EU, country tariffs impact directly on competitiveness.
Table A.3 earlier showed that an estimated £1.7 million of
goods were exported from Wales to countries outside of the EU
(27% of total exports).
The best recent example of trading difficulties arising from
tariffs relates to the steel industry. In March 2002 controversial
US tariffs on imported steel came into effect. The tariffs, of
up to 30% on top of normal duties, were designed to protect the
US steel industry from a flood of imports. However, these tariffs
were ill received by the European Union, Japan and other steel
exporting economies, where steel industries have been rationalised
to compete in the world market, often resulting in significant
jobs losses.
The EU, Japan, South Korea, China, Switzerland, Norway, New
Zealand and Brazil appealed against the tariffs, taking the case
before the World Trade Organisation (WTO). The WTO found the emergency
United States steel tariffs to be against its rules, although
the US are appealing against the decision. Retaliatory sanctions
have been considered by the EU on products such as textiles and
fruit and vegetables. However, the EU trade commissioner remains
confident that the US will eventually comply with the WTO's demands.
The steel industry in Wales has responded to global economic
pressures with programs of restructuring and rationalisation.
Sales to the EU and elsewhere have been impacted by exchange rate
difficulties, as well as falling demands for steel in some key
sectors as, for example, other products and technologies increase
in importance. In addition subsidies to steel makers in some other
European countries have caused added difficulties for the UK industry.
In this context, the added problems generated by US tariffs generate
further problems to an industry already in severe difficulty.
Undoubtedly recent trade disputes surrounding steel have impacted
negatively on employment and output in firms such as Corus.
Figure B.3 shows export data by broad sector, and aims to
identify those parts of the economy which would be most vulnerable
to changes in trading conditions. As already noted, the steel
industry in Wales is a significant exporter. Exports from the
basic metals sector (which includes iron and steel, aluminium
and other metals) were an estimated £840 million in 2002,
just over 20% of which were outside the EU. In the chemicals,
motor vehicles, office machinery, TVs and instruments sectors,
exports were estimated to have exceeded £800 million in 2002.
In a study of Welsh growth sectors (Welsh Economy Research
Unit, 2002) industry experts were asked to rank external industry
risk from actual or potential tariff barriers in key export markets.
Significant export risks were identified in a number of important
sectors (ie those included in figure B.3), such as organic chemicals,
electronics, optronics and medical devices.
In summary, a high proportion of Welsh overseas trade is
directed towards the European Union meaning that tariffs are less
of an issue than general regulations and exchange rates. The economic
desirability of the increasing Euro-centric nature of Welsh trade
is open to question.
Figure B.3 Welsh Overseas Exports by Broad Sector,
2002, £m.
Source. HMCE
B.4 Issues surrounding regional support for indigenous manufacturing
SMEs
In Wales, as in other regions of the UK, there continues
to be confusion in the policy-making community as to what constitutes
an indigenous manufacturing SME. In terms of EU structural funding
requirements, an SME gaining support is expected to be independently-owned
(ie not part of a larger national group) and employing less than
250 people. Unfortunately very few strategic documents (including
A Winning Wales) dealing with the SME sector in Wales accurately
define the nature of businesses being targeted, with SME being
a catch-all term, and with anecdotal evidence suggesting that
definitions of SME are vulnerable to adjustments to meet qualification
criteria for resources. Ultimately with definitions reliant on
an employment cut-off of 250 employees, then included firms would
be expected to have more differences than similarities.
The general policy of supporting manufacturing (and other)
SMEs in Wales is predicated on the perceived role of small manufacturing
firms in innovation, employment provision, exporting, the creation
of economic diversity (particularly relevant to Wales with its
historically narrow manufacturing base) and entrepreneurial spillovers
(see Edwards et al; 2003, WAG, 2001). Good quality and
verifiable economic data on the contribution and economic significance
of indigenous manufacturing SME sector in Wales is difficult to
find. The UK Census of Production (1997) found that manufacturing
units employing less than 200 people contributed 44% of manufacturing
value added in Wales—however, much of this contribution
is linked to subsidiaries of much larger firms. The contribution
of indigenous manufacturing SMEs to innovation performance and
exports is even more difficult to detect. General commentary (see
Bryan and Jones, 2000) on the manufacturing SME sector in Wales
has identified several characteristics including:
— relatively low formation rates;
— poor innovatory performance;
— relatively lower levels of labour productivity,
and profitability;
— relatively higher dependence on short term sources
of finance; and
— relatively low earnings and poorer employment
conditions linking through to underlying job quality and skills
employed.
One key issue is whether resources should be focused on the
identification and support of indigenously-owned manufacturing
SMEs, as opposed to other manufacturing units in Wales. The underlying
issue here is the extent to which indigenous ownership is a key
factor in the developmental debate surrounding SMEs. On the positive
side there is some expectation that faster growing indigenously
owned manufacturing SMEs may provide a greater diversity of occupational
opportunities in headquarters-type functions.
Policy to support manufacturing SMEs in Wales has tried to
address the dual problems of improving the environment for business
start-ups and firm growth, and addressing perceived areas of market
failure relating to factor resources for growth. One key element
of perceived market failure has been access to capital, with banks
charging higher rates to SMEs, or having a preference for lending
to firms with lower risk of failure. Unfortunately the framework
of support to small manufacturing firms has often been confusing
or poorly targeted. Surveys have found that small manufacturing
and service firms often do not have the time to go through the
complex search procedures necessary to access the available resources.
Moreover, some targeted firms simply have no desire to grow. Ongoing
attempts are being made to streamline support and business advice,
and reduce bureaucracy, but there is still much to be done. Under
the devolved assembly several initiatives have been developed
to support the WAG's Enterprise Action Plan including projects
to:
— improve entrepreneurial activity in the social
economy;
— improve the entrepreneurial supply side in schools
and colleges; and
— improve access to financial resources (for example,
through EU co-funded Finance Wales).
In addition projects have been undertaken to simplify the
application procedures for Regional Selective Assistance for SMEs,
seek means of reducing the regulatory burden on SMEs, and to assist
indigenous SMEs to win more business from the public sector (Evans
and Pickernell, 2002).
The critical issues relating to support of SMEs in the manufacturing
sector are summarised as follows:
— Accurate identification of the characteristics
of market failure as it applies to SMEs in the manufacturing sector,
and the extent to which policy tools address underlying structural
problems that hinder entrepreneurial development in Wales.
— Continuing confusion over which organisations
in Wales ( and elsewhere) can offer different types of services
even in the presence of the Business Connect network, which is
soon to be replaced by Business Gateway. There still exists a
high degree of duplication of services even within discrete geographies.
As the number of initiatives and strategies has mushroomed then
co-ordinating the various policy instruments at different spatial
levels has become more difficult.
— Growing concern over the large numbers of people
involved in researching the needs of SMEs and in providing various
support services. Some managers in SMEs have complained of the
churning of similar initiatives under different names, and the
growing size of the "support" industry. Meanwhile, SME
support agencies and their sub-contractors report difficulties
in generating sufficient demand for their services.
— Difficulties for manufacturing SMEs to access
European structural funds directly because of complex and time-consuming
application and approval procedures.
— The nature of the connection between policy on
SMEs and the overarching strategic objectives of the WAG in terms
of GDP per capita and employment targets. In particular the extent
to which the human and financial resources used to support SMEs
may be used more efficiently to support other developmental objectives.
B.5 Linkages between Welsh higher education and the local manufacturing
base
The majority of Welsh higher education institutions (HEIs)
commit themselves in their mission statements to contribute to
the economic, social and cultural development of the region. In
this context associations with the local manufacturing base are
a key means through which this objective is achieved. Moreover,
relationships between Welsh universities and global manufacturing
enterprises also make them a potential conduit for best practice
manufacturing, managerial and operational techniques. Examples
abound of instances where the results from projects carried out
by university staff within Wales for international manufacturing
organisations and management/technical consultancies have then
been re-applied to local manufacturing businesses (see for example,
Edwards et al, 2003).
The larger HEIs maintain links with the local manufacturing
sectors in the following ways:
— Consultancy and bespoke services: in these cases
local manufacturers usually wish to access the skills of particular
individuals or research groups mainly in terms of technical consulting,
management consulting, or in order to gain access to university-owned
equipment, perhaps for technical testing purposes. Examples of
the type of links generated here can be found by reference to
the websites of Cardiff and Glamorgan Universities (see www.cardiff.ac.uk/racd
and www.glam.ac.uk/business).
— Academic research: individual academics and groups
maintain research links with local firms to promote university
research agendas. A significant proportion of the publications
listed in the Research Assessment Exercise (RAE) returns for individual
HEIs in Wales relates to research that involves collaboration
with local manufacturing firms. It is noteworthy that in most
cases firms provide time to fill in surveys, and partake in interviews
and workshops at no explicit charge to the individual researchers.
— Training and education: this ranges from short
one day courses, to longer periods of more formal accredited training.
A survey of the websites of the main HE providers shows that key
areas include training in management (MBAs, DBAs and accredited
short courses), accounting (full and part-time courses leading
to professional accounting qualifications), engineering, purchasing,
quality assurance, manufacturing management, information technology,
and languages.
— Recruitment: the HEIs have mechanisms for directing
graduates to potential local employers and vice versa.
— Commercialisation of research and technology transfer:
Relationships in these cases may be based on licensing agreements,
the development of joint ventures or spin-out companies or via
collaborative R&D. For example at Cardiff University there
is a list made available on the website which provides details
of new licensing opportunities. Moreover the university also collaborates
with Cardiff County Council in the provision of business incubator
space (Cardiff Business Technology Centre and Cardiff Medicentre).
— Provision of conferences and networking facilities:
A good example of the latter is the Cardiff University Innovation
Network which provides a series of regular meetings on topics
of relevance to local firms. Part of the Network is the Innovation
Marketplace which identifies needs and opportunities for local
firms and offers free advisory, problem solving and sign-posting
services (www.innovation@cf.ac.uk)
A new development with ramifications for relationships between
Welsh universities and locally based manufacturing is the creation
of the Centres of Excellence for Technology and Industrial Collaboration
(CETIC) Programme co-funded by the WDA and ELWa. There were 20
CETICs originally accredited in Wales during 2001. The individual
CETICs can provide consultancy, research capability and training
to industry in their area of expertise, and have personnel trained
to promote linkages with commercial clients. CETIC areas at present
include built environment, micro-technology, manufacturing engineering,
and magnetics technology.
There are several issues relating to Welsh manufacturing
and HEI linkages. First, the value of relationships between Welsh
HEIs and industry has grown during the 1990s, and this is largely
due to increases in demands for technical services and consultancy
(see eg HHEW, 1997). However, universities often place a lower
"value" on funds generated from industry, as opposed
to funds from "blue chip" sources such as the main UK
research councils. Fundamentally, monies from industry are viewed
as a secondary funding source. This environment is slowly changing
particularly as a result of the findings from the Dearing Committee
examining the role of higher education in the economy (NCIHE 1997a,
NCIHE 1997b). HHEW (1997) identified something of a paradox between
the real world relevance of research undertaken in support of
industry by Welsh HEIs, and drawbacks in terms of research not
being `leading edge' and largely limited to testing of existing
ideas.
Second, there are limits on the depth of linkages that can
be developed by universities with local firms. This is caused
in large part by the under-developed functional base of local
manufacturing, and the absence of decision making structures.
For example, few manufacturing companies operating in Wales feature
high levels of R&D spending which may inhibit HE linkages.
Moreover, the functional base places limits on the demand side
for graduates in areas such as business and engineering.
Third, in the mechanisms through which Welsh HEIs are appraised
(particularly RAEs) participating departments are not always rewarded
for the industrial relevance of research, creation of spin-out
companies, or their role in wealth creation. Emphasis continues
to be placed on publications in largely academic (rather than
applied/practitioner) journals.
In summary the value of links between Welsh HEIs and the
local manufacturing sector appear to be increasing, but there
is still potential for improvements. This potential has already
been recognised in A Winning Wales which has emphasised
the importance of higher education institutions in improving the
innovative potential of the regional economy.
SECTION C: SUMMARY
OF WELSH
MANUFACTURING ISSUES
The final section of this briefing paper summarises the main
points from sections A and B:
— Manufacturing in Wales employed an estimated 191,000
people in Wales in 2002 (some 15% of total employment) and accounted
for around one quarter of regional gross value added.
— There has been a sharp fall in Welsh manufacturing's
share of the total employment after 1997. In 2003 the index of
Welsh manufacturing output was nearly 10% below the 1995 level.
Between 1998 and 2001 around 20,000 jobs were lost in Welsh manufacturing,
or around 10% of the total manufacturing employment. Causes included
poor trading conditions, global pressures for rationalisation
and restructuring, and the improving cost and location competitiveness
of areas in central and eastern Europe.
— The reduction in employment and output in the
regional manufacturing sector is of some concern, particularly
in the context of the longer terms strategic goals of the WAG
relating to reducing the GDP gap with other UK regions, and improving
the innovative and learning capacity of the region. Jobs in Welsh
manufacturing are relatively well paid, and manufacturing make
a large contribution to overall Welsh overseas exports. Moreover,
manufacturing creates significant indirect employment in Wales
through its purchases of other locally produced goods and services.
— Manufacturing plants from overseas are characterised
by higher earnings and productivity than their domestically owned
counterparts, and have been shown to be an important conduit for
new manufacturing and management practices, and positive productivity
spillovers into the domestic sector.
— Wales features high levels of manufacturing activity
in sectors which are growing slowly at an international level.
Moreover studies have commented on the dependent nature of elements
of the regional manufacturing base. This is connected to the low
level of expenditure by Welsh manufacturers on R&D.
— A large number of European, national and local
organisations provide both direct and indirect assistance to Welsh
manufacturing. Similar schemes or initiatives are governed and
implemented by very different organisations. This can create difficulties
for firms seeking to target appropriate service providers. The
overall framework to address business needs would still benefit
from streamlining.
— The rationale for overseas export promotion effort
to be headed up by the WAG as opposed to the WDA is unclear. The
WDA already has representation abroad, and also has linkages with
UK embassies and consulates abroad.
— The largest proportion of Welsh manufacturing
overseas trade is directed towards the EU. Hence tariffs are less
of an issue than general regulations, and exchange rates.
— Several issues were identified with respect to
support of manufacturing SMEs. These include: how far policy tools
address underlying structural problems that hinder entrepreneurial
development; confusion over which organisations in Wales offer
different types of services; duplication of services even within
discrete geographies; and co-ordination problems in policy delivery.
The nature of the link between policy on SMEs and the overarching
strategic objectives of the regional economy in terms of GDP per
capita and employment targets should be clarified.
— The value of relations between Welsh higher education
institutions and regional manufacturing has grown during the 1990s,
and this is largely due to increases in demands for technical
services and consultancy. However, funds from industry are still
viewed as a secondary funding source. There are limits imposed
on the depths of university-manufacturing industry ties in Wales
caused in part by the limited functional and value added base
of the latter.
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