APPENDIX 23
Memorandum submitted by the Engineering
and Machinery Alliance
BACKGROUND
The Engineering and Machinery Alliance (EAMA)
represents over 1,000 SME manufacturers with a turnover of some
£3 billion split pretty evenly between finished capital goods
and components for capital goods. Typically these firms export
60-80% of their production.
Our membership is representative of the mechanical
engineering sector, where 13,000 firms typically employ 23 people
with an average turnover of some £2.5 million. In 2005, they
exported £25.4 billion and ran a positive trade balance for
the UK of some £4 billion. Last year's export sales were
6.7% up on the previous year. Mechanical engineering firms' value
added tends to be at the higher end of the range of metals using
industries.
Our sector is characterised by research and
particularly development in a continuous 4-5 year product innovation
cycle, providing tailor-made solutions with a high degree of specialisation,
mostly based either on complex products or a high degree of precision.
Our customers are worldwide in industries such as food, aerospace,
printing, paper, motor, medical, plastics and general engineering.
Some comparisons:
|
| Mechanical
engineering
| Basic metals
& fabricated
metal products *
| Electrical
engineering
| Chemicals | All
manufacturing**
|
|
| Average company sales | £2.6 million
| £1.4 million | £2.8 million
| £13 million | £3.0 million
|
| Exports as % of sales | 70%
| 28% | 66%
| 64% | 41%
|
| Sector trade balance | + £3.8 billion
| -£733 million | -£16.9 billion
| + £3.8 billion | -- £65 billion
|
| Value added per employee | £40k
| £36k | £45k
| £72k | £44k
|
| Average no employed per firm | 23
| 14 | 23
| 60 | 22
|
| No of firms in sector | 12,906
| 29,543 | 15,567
| 3,736 | 154,946
|
|
Sources:
Sector data—Annual Business Inquiry (June 2006, reporting 2004 data)
Exports—UK Trade 15.2.06
Notes
* Export data: iron & steel, non ferrous metals and other metals
** Export data: trade in goods
|
Conclusions
— UK mechanical engineering firms sell a higher
percentage of their products abroad—75% more than the average
for UK manufacturing as a whole.
— With relatively limited resources (23 employees
per firm), the sector's trade balance has been consistently positive
and is the same as the chemicals sector, where companies are much
bigger (60 employees per company).
EAMA's origins are in the DTI's recommendation in 2001 that
likeminded associations should band together to better represent
their industries. The eight trade associations in EAMA are:
— British Automation and Robot Association (BARA)
— British Plastics Federation (BPF)
— British Paper Machinery Suppliers Association
(BPMSA)
— British Turned Part Manufacturers Association
(BTMA)
— Gauge and Toolmakers Association (GTMA)
— Manufacturing Technologies Association (MTA)
— Printing, Publishing and Converting Suppliers
Association (PICON)
— Processing and Packaging Machinery Association
(PPMA)
Note: The total number of firms in these associations
exceeds 1,000. EAMA"s figures relate to firms involved in
mechanical engineering only.
GENERAL ECONOMIC
ENVIRONMENT
At first glance there are some similarities between the current
economic environment and the conditions that prevailed when we
last submitted evidence to the Committee (in 2002).
The economy entered 2006 in a similar way to the start of
2002, recovering from a low point (neither of these low points
were recessions, as the economy continued to grow). In both cases,
the slowdown was really caused by one very weak period; the second
quarter of 2001 and the first quarter of 2005 respectively. Interest
rates are slightly higher now than four years ago. In 2002, interest
rates ran at 4% compared to 4.75% now. This however is not a dramatic
increase.
Sterling's rate of exchange has strengthened significantly
over the same period against the dollar and the yen and remained
stable against the euro.
Commodity prices on the other hand are very different. Oil
and steel prices have doubled (more or less). Other metals including
stainless and copper are at near record highs.
As a result there has been a severe squeeze on margins so
that manufacturing profitability and investment does not look
to have improved much at all since 2002.
In fact UK manufacturing investment has fallen some 40% since
1997 according to National Statistics" 2006 Annual Business
Inquiry (data up to 2004). This makes exporting all the more important
for our members and the mechanical engineering sector as a whole.
And in this regard it is worth noting that the recovery in engineering
output since 2002 has been led in large part by aerospace and
mechanical engineering.
MARKETING UK PLC
BACKGROUND
1. Mechanical engineering companies are very export oriented
(see above). They have to be. They are selling to other manufacturing
businesses, where the UK market is (a) too small and (b) lacks
the growth that stimulates competitive development. This is different
to selling a broad/mass appeal consumer product. Given their size
(average 23 employees), these firms have to use their resources
in a carefully targeted way to ensure that they provide a productive
return.
2. All markets are different, so developing a new business
to business market successfully may take several visits over perhaps
two to three years. If it's not tightly managed it will be costly.
Advice and support that reduce the risks involved are therefore
helpful in these opening stages which have to be financed before
there is any return.
3. On their first visit the company will look at all
the relevant parameters, the competition, the size of the market
and some potential customers and probably agents (particularly
if the firm is new to exporting). The second visit might lead
to the firm appointing an agent from a short list and then agreeing
sales and marketing activity. So it is quite probable that it
will take at least three "visits" before a company can
expect to see any return in a new market. All or some of these
steps will be repeated in neighbouring markets. In large national
markets (e.g. China, USA, Russia), "neighbouring markets"
may be other regions in the same country, rather than other independent
states.
4. A recent EAMA survey (June 2006) found that 50% of
SME mechanical engineering firms said that they would not have
undertaken activities like exporting without the support that
they had received through a wide variety of channels including
trade associations, Business Link, UKTI and the Manufacturing
Advisory Service (see EAMA Grassroots Survey
http://www.eama.info/downloads/Grant%20report%204%20Final%207.6.06.pdf)
CASE STUDY
5. Here is a short summary of how the current system
worked when one of our members, the BTMA, arranged an outward
mission to China 9-13 October 2006.
Ian Gold, the association"s director writes:
"The BTMA is the trade association representing UK Precision
Turned Parts and Machined Component Manufacturers.
"Seventy-two full members manufacture parts to customer's
drawings on CNC turning and CNC machining centres, multi spindle
and single spindle automatics, rotary transfer and coil fed machines.
Most are certified to a minimum of BS EN ISO 9001:2000 quality
standard.
"Approximately 12 months ago we approached Karen Finegold
of the Engineering Industries Association (EIA) to assist us in
organising a visit to China.
"Karen has been fantastic, holding our hand all the
way from organising the travel agent to visa applications to producing
a brochure and visiting cards in Chinese.
"She has arranged for the Engineering Sector Specialist
in China to be our group leader. He and a colleague are helping
us arrange visits to 8 component-making factories in Shanghai
and Guangzhou.
"Naturally this work has been carried out based on
her initial quotation.
"Initially 17 companies committed to go based on an
estimate of about £2,000 total costs less an anticipated
grant of £750. The grant had to be claimed individually from
each company"s Regional International Trade Team. In June
2006 just 3 months into the fiscal year the South East and the
Scottish regions were apparently "spent out" resulting
in no grants to the companies in their region! They became casualties
of the UKTI grant lottery.
"There were no other grant offers available even though
I understand that our group is the only `all manufacturing' mission
to have gone/going to China this year.
"Karen has sought and managed to get funded by UKTI
Engineering Sector in Glasgow for the costs of interpreters and
coach transport within China plus a briefing and reception in
Guangzhou. Similarly she has managed to get the Commercial Officer
in Shanghai to provide the mission briefing at no cost.
"One additional point is that of the 17 original companies
we are now down to 14. My belief is that at least one backed out
due to the complexity of claiming the grant especially when he
believed he might be refused."
6. Obviously we don't know what the results of the mission
will be. However, we can already say:
— BTMA/EIA have arranged an important visit for
their sector to a key force on the world market.
— This is a first for the sector.
— The arrangements were not easy to make being complicated
especially by the number of different sources of funding.
— This complexity has affected the number of firms
going on this mission.
UKTI—PROSPERITY IN
A CHANGING
WORLD
7. Governments of varying hues have been about UKTI and
its predecessors for a decade or more, pretty much continuously
in the name of greater efficiency.
8. As business people in the internationally traded sector,
our members are committed to competitiveness and quality in the
manufacture of their products. We are therefore a priori empathetic
to such objectives in Government. However, our customers also
expect us to make things easy for them with consistent delivery
to an agreed standard and price. Continuous change over the last
years has not helped UKTI to perform. (Perhaps four re-organisations
in six years). It has also made it more difficult (complex) for
firms and trade associations to interact effectively with the
relevant (Government) agencies involved in UK exporting.
9. Regional development strategies and the selection
of priority sectors at a regional level have not helped sectors
like mechanical engineering that are quite widely dispersed serving
other manufacturing sectors.
10. "Prosperity in a Changing World" is a high
level strategy document. As such we have a few quibbles with it
(e.g. not enough about the role and significance of manufacturing,
very inward looking), but our real interest is in how this strategy
is actually going to be implemented to help expand UK exports.
11. While we would like to be positive, some of the "mood
music" is not good from our vantage point (e.g. strong emphasis
on the financial and business services sectors, reallocation of
resources from trade to FDI, despite the findings of the Government's
own report which shows that "trade" offers a better
return to the public purse than "inward investment"—see
key conclusions in the "Final Synthesis Report—2004-05
Study of Relative Economic Benefits of UKTI Support for Trade
and Inward Investment"). Worryingly we understand that next
year the UKTI budget (as distinct from the RDAs' funds) for all
activities promoting engineering to potential customers overseas
may be as small as £400,000. If so, it's not a great deal
of money.
12. We hope that some of the current guidelines may be
changed or used more flexibly as they contain restrictions which
will make it harder for our members to enter new markets (e.g.
support for a company to be limited to a grand total of three
of all its export related visits).
Recommendations
13. Useful guidelines for our members would:
— Simplify the system, so that it is easier to find
the help that's needed/available.
— Consolidate support to a common national standard.
— Recognise that all markets are different by product
as well as geographically.
— the size of the company (and therefore the resources
that it is able to devote to a new market without a return).
— the company's/sector's export performance.
— the characteristics of the export market (e.g.
well established/close to home; emerging markets; cultural differences;
market size/potential).
— according to the type of product (innovative,
niche, common standard).
— Recognise that while income from manufactured
exports tends to revert to the community that produced it, that
activity may not be a priority in that RDA's development plan,
whereas ancillary services that supply into the sector (e.g. business
services, logistics, design) may be. In such circumstances the
ancillary services will receive support that's closed to the mechanical
engineer despite the fact that it is the manufacturer that is
covering the export risk, while the ancillary service is basically
making a home sale.
14. If UKTI and the other agencies that are involved
can take their services forward meeting these criteria they will
do much to enhance UK's exporting potential and show that this
country is just as serious about exporting as Germany, Italy,
France or the USA.
15. An important allied consideration, albeit beyond
the declared scope of this inquiry, is that of financing export
sales.
An export related issue of possible future interest
Former managing director of a company employing 90 people
with similar sized plants in the UK, and the USA says:
"What happens in Europe, in Germany for example, is
that German companies will say to you yes, we'll give you the
deposit (for you to build the machine we want) but we want a bank
guarantee that will cover the order we've placed with you, so
that we know that we will get the product or our money back. Now,
a German company can go to a German bank and say I have this order
I have this deposit to build, I need a bank guarantee and the
bank will give them the guarantee.
"In the UK what happens is our bank, in fact every
bank I've ever dealt with says yeah, sure, we'll give you the
guarantee but we want the deposit. They'll take the deposit and
then give you the guarantee. I might just as well not have the
deposit. There's no point at all in us having a deposit! It's
a big problem. As we move into Europe, we're having increasing
difficulties in persuading our customers to place orders with
us, because they always want the guarantee and I don't have the
cash sitting around doing nothing."
SKILLS SHORTAGES
1. There is a skills shortage amongst UK mechanical engineering
firms. It manifests itself in the average age of the employees,
the number of immigrants filling vacancies and the poor UK turnout
in events such as the skills challenge at past MACH shows at the
Birmingham NEC.
2. The causes are generally considered to be:
— Young people's lack of interest in engineering
— The sector's low starting wages
— Poor educational standards in mathematics and
English
— Teachers' personal lack of interest in manufacturing
— A general decline in the availability of apprenticeships.
3. And this despite a big infusion of funds in schooling
at all levels.
4. In its recent report aptly titled "Learning to
Change", the EEF concludes:
"There is a clear need to move from this fragmented
approach to a system which genuinely understands the skill needs
of business and can influence provision accordingly. Employers
need to be able to make informed choices about what training their
business needs, how they access it and be sure that it is of a
high quality. In order for this to be achieved there is a need
to rationalise the number of institutions engaged in this process.
This will not only make policy easier to understand but it will
also reduce the duplication and waste ingrained in the current
system.
"The government needs to transform how demand for
skills is assessed and provision influenced. Any reformed planning
and funding system has to be driven primarily by one body. In
addition, the aims, responsibilities and objectives of all the
components in the learning and skills sector should be clearly
defined and transparent."
5. Our members agree. Our report of June this year (see
EAMA Grassroots Survey
http://www.eama.info/downloads/Grant%20report%204%20Final%207.6.06.pdf)
found members confronted by a bewildering array of different organisations,
creating prime opportunities for consultants to advise companies
through a complex web of national, regional, local and sector
organisations.
6. Simplification and clarity in the system are both
needed. But so is flexibility. Keep in mind that most SMEs have
their own way of doing things. Employees are expected to be flexible
in a way that might appear novel in a larger company. So the training
and skills development that the firms seek may not be covered
by the local providers in the depth that the firm wants. Sector
training organisations clearly have a role to play here, not necessarily
as direct training providers but as assessors of locally relevant
training provision and as signposting services.
7. Although the sector skills council for Science, Engineering
and Manufacturing Technologies (SEMTA) had a poor reputation amongst
companies in our sector a few years ago, there are definite signs
that this is now changing. A successful UK mechanical engineering
industry requires that SEMTA adapt and deliver services that make
a demonstrable difference to firms' confidence in planning and
commissioning skills development and training over the next 24
months.
Apprenticeships
8. It does seem to be true that the industry has turned
its back on apprenticeships. However, it does not take much "scratching"
to uncover support for the concept, even in firms that have dropped
them. They are generally seen as the best way to bring on young
people and develop them into skilled, well motivated employees.
9. The problems are generally said to relate to the image
of the industry and where this has been overcome to other companies
poaching "trained" employees so that they save on the
cost of doing the training themselves.
10. We are not aware of any enhanced training tax relief
for a company. If the UK is to stay at the forefront of business
practices and new manufacturing methods training is crucial to
competitive performance particularly in a progressive and export-oriented
manufacturing environment like mechanical engineering. Training
doesn't come cheap. And an apprentice is not productive until
he/she has completed.
Case study
11. The chairman of a member company writes:
"We employ 300 people in the UK at three plants, two
of which we acquired recently in a take-over.
"We have run a three-year apprenticeship programme
for many yeas at our original factory, taking on three apprentices
each year, so that we have nine going through at any one time.
They come to us through the local careers partnership.
"Each apprentice has a work book recording their training,
studies and achievements. It's a successful programme for us.
Many of the senior positions in the company are held by former
apprentices. The problem is that we can only afford to pay them
£7,000 a year while they are doing their apprenticeship and
they can earn £12,000 down the local TESCO"s. As a result
quite often around the third year we find apprentices dropping
out of the programme, lured by the promise of more money in the
pocket today. We do all sorts of things to keep them onside for
example we involve the parents from day one so that they are fully
aware of what their child is doing, of the skills they are acquiring
and the progress they are making.
"We are now introducing the same scheme in the two
other factories, where the culture was quite different and where
frankly the so-called apprenticeships were really a way to engage
cheap labour."
12. Although the apprentices' salaries are low they are
a heavy burden on the employer (£63,000 a year) for nine
"non productive" employees who, when they reach the
end of their study and training period are not saddled with debt,
unlike the contemporaries at university, but will be fully qualified
engineer technicians ready for productive employment.
Recommendation
13. What would be helpful here and to similar schemes
would be if the Government gave tax relief to the apprentices
on what they earn while they go through their three-year course.
This should be specifically limited to training schemes where
there is documentary evidence of regular assessment and progress.
After all Government is prepared to allow university students
to pay back their loans once they are earning over £15,000
year.
14. The cost of running an apprenticeship, in supervisory
time and money terms encourages SMEs (the smaller firms in particular)
to feed off the training schemes run by the larger companies.
We believe that it would be useful to find out whether these are
serious hurdles or whether they could be cost efficiently overcome
with an enhanced tax relief on the company"s training costs.
Such a scheme would of course extend well beyond our sector.
THE UK'S
COMPARATIVE POSITION
15. In his interim report for HM Treasury published in
December 2005, Lord Leitch says:
"Our nation's skills are not world class. We run the
risk that this will undermine the UK's long-term prosperity. Productivity
continues to trail many of our main international comparators.
Much more needs to be done to reduce social disparities. Improving
our skill levels can address all of these problems.
"... Despite our weak performance, I am struck that
too many of us in the UK do not perceive that higher skills are
crucial to long-term prosperity. It is also clear from my analysis
that, despite substantial investment and reform plans already
in place, by 2020 we will have managed only to `run to stand still'.
On our current trajectory, the UK's comparative position will
not have improved. In the meantime, the world will have continued
to change and the competitive environment will be even harsher."
16. A four-country comparison study by one of EAMA's
members (British Plastics Federation) underlines these points.
It found that:
— UK firms tend to give lower priority to training
than firms in France, Germany and the Czech Republic.
— A large proportion of UK respondents invest in
training when there is either critical need, Health and Safety
concerns or an opportunity to increase sales. Interviewees in
the other three countries tend to link training much more closely
to both continuous improvement of production processes and the
introduction of new technology.
17. There is some debate as to how accurately the current
SIC codes reflect real manufacturing activity today. However,
using these figures we can see that UK manufacturing has lost
critical mass employing 3.4 million, compared to 7.5 million in
Germany. Also according to the stats, German manufacturing companies
tend to be larger than their UK counterparts, nearly 30% larger
in fact, employing on average 28 people compared to our 22. Both
of these factors may affect attitudes towards training provision.
18. Meanwhile UK teachers" views of manufacturing
need changing.
A member reports:
Following a local school visit to our factory, the teacher
was heard to say to the class as they were leaving: "If you
don't want to get your hands dirty as in there you had better
concentrate on working hard at school to get a better job."
CONCLUSIONS
1. UK mechanical engineering is a strong exporter consistently
contributing a positive trade balance.
2. The sector is based on SMEs using what are commonly
regarded as typical UK engineering strengths (eg flexibility,
creativity, practicality and conform to the Government's ideal
of higher value added.
3. These companies have to export because the UK market
is not big enough.
4. In a globalising world with a high premium on productivity
and niche specialisation, these firms need simple support systems
that are easy to access and understand. (By support we do not
mean subsidy).
5. Competition is "hotting" up. It is time
to sharpen UK export effectiveness. The Treasury driven strategy
for UKTI is quite inward looking. The budget allocation looks
small compared with the task in hand.
6. Part of the rationale for regionalisation was to help
SMEs in the local economy by improving delivery. This works for
businesses trading locally. But there is a mismatch for mechanical
engineering SMEs:
(a) The sector is broadly dispersed so it is not commonly
regarded as a priority economic activity regionally (unlike tourism
or aerospace).
(b) They have to be outward facing to gain markets overseas
(c) They are likely more concerned about meeting international
customer standards or linking into national or foreign supply
chains than local ones.
7. Regional development strategies may not be terribly
helpful either for skills and training development because the
benchmark for an open, internationally traded sector is set by
global competition which is better interpreted at sector rather
than regional level. New forms of partnership may be needed to
meld these skills, detailed knowledge and delivery channels.
8. More flexibility is also needed in the system to take
out cost and complexity and insert sector driven excellence.
9. The Government has made big progress in areas such
as post-16 education. But sectors must be more involved in helping
firms achieve their skills and training goals.
10. Apprenticeships are effective. They would have a
better image if they held some publicly privileged status. This
might be achieved by making youngsters on approved apprenticeship
schemes eligible for a discount on their PAYE below a modest level
(eg £7,000). Such an allowance would also have the primary
purpose of encouraging young people to stick with it to obtain
their skills credentials.
27 September 2006
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