Examination of Witnesses (Questions 1
- 19)
TUESDAY 16 SEPTEMBER 2003
WELSH ECONOMY
RESEARCH UNIT
Q1 Chairman: Welcome, Mr Jones, to
the Welsh Affairs Committee.
Mr Jones: Thank you.
Q2 Chairman: Sorry to hear that your
partner is not able to be here.
Mr Jones: No, she is stuck on
the A48 behind a nasty accident. She has been passed by two police
cars and an ambulance. She will come in if she is able to get
here.
Q3 Chairman: At least you are here.
Thank you very much. If we can start off with a general question.
What do you think is the state of health of the manufacturing
industry in Wales and does that reflect just the situation in
Wales or is it UK-wide?
Mr Jones: One would not characterise
the situation as good. There are probably two separate factors,
if you like. Firstly, we have got long-term decline in manufacturing
employment which we have seen over several decades evident in
all OECD countries by and large starting from maybe the mid-1970s.
Secondly, more recently we have seen specific shocks to the Welsh
manufacturing economy from these foreign set of characters; some
are sectoral, some are more general. For example, the sectoral
would include things like Corus' de-investment in various parts
of Wales, the Asian shock, which affected a number of sectors,
obviously those more allied to inward investment where we saw
some inward investment drop because of the Asian crisis and the
ongoing high level of sterling for much of the last five years
certainly did not help the exporting parts of Welsh manufacturing.
Additional to the long-term decline we have seen several, if you
like, one-off shocks which have nevertheless been quite significant
in affecting prospects in manufacturing and employment in manufacturing.
Q4 Mr Williams: Talking about the
regional aspect of manufacturing in Wales, the Development Board
for all Wales when it was in existence actually managed to stimulate
manufacturing within an area where there was no tradition of manufacturing
and for a period of time mid-Wales actually showed a growth in
manufacturing, manufacturing jobs. What do you see as the prospects
for manufacturing in the rural areas in the future?
Mr Jones: I think there are two
linked problems for, if you like, more remote areas as far as
manufacturing is concerned. Where we have seen resistance to the
trend of declining output and employment has tended to be, by
and large, in areas which have good access to markets, good transport
infrastructure and so on. Mid-Wales and rural Wales more generally
will face difficulties because of the access problems that they
face in comparison with other areas of Wales. For example, let
us think of along the M4 corridor where land is scarce in very
good locations, obviously places like heads of the Valleys and
beyond tend to benefit from that, but when you get de-investment
the reverse happens and as the better sites become available again
very close to the very high quality infrastructure they tend to
be the last to go and the first to come back. That will be the
problem for rural areas, keeping hold of what they have got. I
think we have seen KTM as one big example where there have been
these problems. I do not think rural Wales has suffered worse
than some of the Valleys which have similar access problems, I
think they have that in common.
Q5 Albert Owen: You mentioned the
M4 and as a northern MP I would like to discuss the A55 as well.
Do you think there has been an impact on manufacturing since the
A55 has been completed?
Mr Jones: Anecdotally and in recent
conversation, certainly with Wrexham County Borough officers,
they seem to think their experience of the last few years is far
more closely allied to the UK experience in that they have managed
to hold up in manufacturing far better than the rest of Wales.
That is just anecdotal and I do not know how far the figures reflect
that. Certainly along the A55 I would characterise that in exactly
the same way as the M4 and the access to the North-West markets,
but that is because north-east Wales is by and large part of the
north-west England manufacturing cluster, if I can use such a
word, and that has been a buffer against lower demand in Wales.
Yes, certainly I would use exactly the same characterisation for
the north-east part of Wales.
Q6 Mr Caton: You very kindly produced
a briefing paper for us which we were discussing just before you
came in and I think we have all found it very useful. In that
you set out that during the period 1982-92 inward investment to
Wales was proportionally high in comparison to the rest of the
United Kingdom. However, since 1997 there has been a sharp fall.
Can you elaborate on the reasons why we were successful in that
decade and also tell us a little bit more about the reasons for
the decline since then?
Mr Jones: Taking the first part
first, there are many reasons that I can only skim the surface
of. Wales' workforce is good at adapting to new realities. What
we found was that despite the fact we had lots of heavy industry,
traditional employment, the Welsh workforce, particularly new
entrants, found it relatively easy to adjust to the new demands
of inward investment in terms of flexible working practices and
so on and so forth, single union agreements. Instances of industrial
action were very rare in Wales in this period, certainly in the
latter half of that period, compared to other parts of the UK.
There was the workforce element of it. The other half related
to the WDA, the fact that Wales had its own executive agency which
was marketing Wales on a location competitiveness-type basis to
Asia and other parts of the World, America, which meant that we
had a head start in many ways over other parts, particularly England.
Scotland had a similar level of success, not as much success,
but Scotland and the SDA, Scottish Enterprise, had a similar benefit
compared to English regions. There were those two factors, investment
in workforce and the early acceptance by the WDA that inward investment
was the way to go and a concentration on that by the agency. Also,
of course, Wales has relatively good access to markets compared
to some of the other peripheral English regions, such as the North-East
perhaps which suffered in the same way but was much further from
markets than even we were. I think those sorts of factors played
a part in our success. In terms of the decline, I refer you back
to my first answer in terms of the Asian crisis certainly and
from 1997 onwards attracting new investment and following through
on things like LG, LG Electronics and LG Semiconductor, which
were problematic at that time because of the Asian crisis, but
perhaps more importantly for the future the sharp decline in general
activity in cross-border capital expenditures over that period.
From 1997 onwards globally we have seen a sharp downturn in FDI
flows and obviously, as part of that, flows into Wales and into
the UK have declined. I would say that Wales probably has not
been any worse than anywhere else, maybe a little better than
other parts of the UK, as that investment has tailed off, largely
perhaps because we have got major manufacturers here who are to
some degree embedded and some reinvestment has occurred at some
larger plants which has offset that decline in greenfield investment.
What we have seen is many more mergers and acquisitions and reinvestment
in existing plants which has taken the place of traditional greenfield
FDI. In fact, Wales has a large stock that has offset slightly
this fall in the flow of new investment.
Q7 Albert Owen: Reading through the
paper, and you have just elaborated on the period 1982-92 as being
the good years and 1997 onwards, because of the Asian crisis,
et cetera, but what about the intervening years, 1992-97?
Was there steady growth during that period?
Mr Jones: A levelling off. Without
seeing the figures in front of me it would be difficult to say
but probably best characterised as a levelling off rather than
the same sort of growth that we saw throughout the 1980s.
Q8 Albert Owen: It did not hit the
buffers in 1997?
Mr Jones: No. From 1992 onwards
we probably saw FDI flows in general decline but, as I say, I
can provide the Committee with information on that more rigorously
afterwards.
Q9 Julie Morgan: On page six of your
report you note that the decline in manufacturing in Wales has
been mitigated in part by the growth in private services and non-market
sectors of the Welsh economy.
Mr Jones: Yes.
Q10 Julie Morgan: Could you expand
on what types of employment you are referring to and could you
explain the reasons for the shift?
Mr Jones: The reasons for the
shift, again I refer back to my first answer about the long-term
shift away from manufacturing in most OECD countries, so we have
this increasingly uncompetitive production facility in developed
countries compared to where the new centres of production are.
In East Asia and increasingly in South Asia you see manufacturing
which is much more competitive. The FDI tends to go to those sorts
of areas and, therefore, what you get is a kind of hollowing out
of manufacturing in developed countries. That is happening in
Wales the same as everywhere else, obviously, as services become
both proportionally more important and the actuality of employment
increases in service sectors. What we have seen in Wales, certainly
in the late 1990s, is relatively fast growth in things like financial
and business services and transport, communications-type infrastructure
jobs. There are a couple of caveats to that, the first one being
this is from a very low base and Wales still is not particularly
specialised, certainly in financial and business services. One
would also worry about the functional base in some of those services.
We have seen increases in employment but they tend to be characterised
certainly not by indigenous business growth so much as call centre-type
employment for the most part certainly in parts of the service
sectors, which is often difficult to characterise. If one thinks
of SWALEC, for example, or a company like that which is nominally
a utilities company, a lot of that employment should probably
be in services because it is call centre-type employment. It is
difficult to trace these changes sometimes through the official
figures. We have seen, again through cost competitiveness and
the Welsh workforce, through the delights of the Welsh accent,
increases in things like call centre employment at the same time
as manufacturing employment has decreased. In very recent years,
following increased government expenditure on public services,
we have seen a fairly significant increase in public sector employment
in Wales. I think the figures from 2001-02 to the year following
show something like 40,000 jobs increased in what we characterise
as public sector employment. So, in addition to that private service
employment, we have got very many more jobs in education, health
and public administration driven by increased resources available
and through Objective 1 type funding as well.
Q11 Julie Morgan: With call centres,
do you think there is a danger that they will now start moving
out of the UK? I say that because in my constituency, Cardiff
North, Tesco have said that they are moving their call centre
UK-wide activities to Bangalore.
Mr Jones: Yes.
Q12 Julie Morgan: This has caused
quite a lot of upset in the area. Do you think this is a pattern
that we are going to see with call centres that are in Wales?
Mr Jones: It is a pattern we are
already seeing. The new 118 services are an ideal example of that
where the majority of those are overseas. We did a very quick
piece of work on this recently and you pay a call centre operator
in India 10 times less than you do in Wales, the cost difference
is of that order of magnitude. On the other side, there may be
a customer backlash against this, it is a bit early to say. Certainly
there is disgruntlement, not only amongst your constituents but
more generally.
Q13 Julie Morgan: I am trying to
resist this move with Tesco's but I am told it is the global economy.
Mr Jones: Yes, and those cost
pressures are very pressing. Even if one were to successfully
stave off competition from other geographic locations, looking
ahead into the medium and longer term one would worry about the
sustainability of these jobs anyway. Certainly with the developments
in the Internet and with computerised customer interfacing technology,
I think in 20 years these jobs by and large, certainly at the
lower end of the functional scale, the very simple sort of jobs,
simply may not exist in developed economies as computerised and
Internet type customer interfacing takes over. Those two issues,
the geographic competition and technology developments, mean that
the call centre basket is probably not the best one to put all
your eggs in.
Q14 Julie Morgan: Then to go on to
the next page in your report where you cite WDA's research study
which lists eight manufacturing industries that scored strongly
on the WDA's criteria for strong development prospects. Do you
agree with the WDA's assessment and, if so, why?
Mr Jones: We undertook the work
for the WDA so we think that it was a good piece of research,
obviously.
Q15 Julie Morgan: You agree with
it.
Mr Jones: Yes. But there are a
number of caveats to that piece of work. Firstly, it was a pilot
study, the methodology was new, innovative and quite sophisticated
and we would want to do it again with a far wider range of respondents
to get a much better feel of the industries. Secondly, the growth
sectors that we analysed were to some degree self-selected by
the WDA and ourselves with reference to statistical information.
So we looked at the high GVA sector, high gross value added sectors,
but the WDA, with the best will in the world, wanted us to look
at things like biotechnology, optronics and so on, which are designated
growth areas into the long-term certainly. There was an element
of self-selection there. That is not to say that Wales is moving
in and of its own accord into these sorts of sectors, but rather
the WDA, with advice, has identified these as potential growth
areas for the future. In some of these sectors, even if they take
off, even if biotechnology takes off in Wales—the Gene Park
is a fantastic success—we are still not looking at employment
in the tens of thousands, or even in the thousands, these are
specialised jobs and they are not the answer for the vast majority
of the Welsh workforce. They may be very high value added and
they may add greatly to Wales' industrial mix, but we are not
talking about big employing sectors by and large. There are those
sorts of issues to think of. They are not good for business start-ups.
Most of the sectors we looked at require very high levels of capital
expenditure to be involved in things like optronics, electronics,
automotive, which we looked at as well. These things are not part
of an SME-type strategy, small business start-up, so we mention
that caveat as well. Also, there are issues which are difficult
to pick up using the data that we have. For example, if one looks
at, say, Panasonic in Cardiff, which has lost employment considerably
in the last two to three years, on the face of it that looks like
a bad news story but when you look at the fact that they have
shifted from making analogue TVs and videos to digital camcorders,
which require less people but are a more appropriate futuristic
product, if you like, it is maybe not such a bad news story. Some
of these issues you have to be careful of. Even when you look
at a very specific sector, something like TVs and radios, within
it includes some growth elements and some declining elements.
Finally, I would say that what we did find was even in these growth
sectors, these nominal growth sectors, many of the characteristics
of the old Welsh economy were still there, so they tended to be
dependent on non-Welsh companies either for contracts or part
of a supply chain, a logistics chain, which had its executive
power outside the principality, there were problems with things
like access to high level skills, which characterised the old
traditional Welsh economy also. Even in the growth sectors we
found several areas of weakness which were common to many of those
sectors.
Q16 Julie Morgan: So there is not
a major shift in the type of manufacturing industry in Wales?
Mr Jones: No, the large employers
in manufacturing are still things like automotive, aerospace and
steel, even though there are not too many left, supplying sectors,
and down the value chains for those sorts of industries. We are
not seeing a rebirth of sunrise industries in Wales, what we are
seeing is the WDA attempting to identify potential sunrise industries
in the hope of being able to help those develop and grow.
Q17 Albert Owen: What do you consider
most important in the current climate, attracting new inward investment
or protecting the existing investment that is in Wales?
Mr Jones: I am probably going
to have to hedge this one and say both. I draw your attention
to the fact that there is less FDI out there, certainly new FDI,
and there is more and more mergers and acquisitions-type activity,
so that will give us difficulties in attracting new investment.
I would probably say that in terms of keeping what we have the
difficulties are even worse. As we saw with Corus, to give you
the obvious example, when a company faces serious cost pressures
which it thinks are due in part to the geographical location of
its business, it is next to impossible for a regional government
to stop that company disinvesting in that region. At no point
did Corus seriously entertain the notion that they would not close
the rolling plant at Llanwern. When you look at the sort of money
that these companies do lose week on week and the level of resources
that regional governments have, or regional bodies, the two are
of a completely different order and the economic reality is that
keeping your existing investments will always depend on the economic
bottom line. There are things you can do at the margin and I know
that obviously we have been very successful at keeping Ford through
many rounds of cost cutting in Ford Europe, and I think the attitude
of the regional government has helped there, but really it is
predicated on a bottom line which is sustainable. Not a good news
story either.
Q18 Albert Owen: You gave an example
of shifting from analogue to camcorders, is that more important
do you think?
Mr Jones: Yes, moving up the value
chain you could characterise that as. It is trying to make sure
any opportunity there is for the relatively high skilled nature
of the Welsh workforce to be utilised to make high value products,
not having a graduate in a call centre but rather having the available
skills employed fully. I think that is a problem in Wales. Because
we have this narrow functional base, many companies only do one
sort of thing here, and that is production. It can be difficult
to get a full range of skills employed in Welsh business and that
is a problem that can be addressed perhaps trying to help companies
move up the value chain so that high value commodities mean that
you can produce longer in relatively high cost locations.
Q19 Albert Owen: Let me just finish
on this. You mentioned the call centres and the drift to places
like India. We were talking to the CBI yesterday and they said
about our employment laws being slacker than, say, Germany whereas
although the costs are more in places like Germany we are losing
that base. Do you think we should be looking at stemming that
drift away?
Mr Jones: I am not sure of the
CBI's point. Were they were saying that we were losing out to
Germany?
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