Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 139 - 159)

TUESDAY 17 OCTOBER 2006

SIR GEORGE COX AND MR STEPHEN RADLEY

  Q139  Chairman: Sir George and Mr Radley, welcome to the Committee and our inquiry into globalisation. For the shorthand writer, can you identify yourselves, please?

  Sir George Cox: I am Sir George Cox. I am Chair of the Design Council.

  Mr Radley: I am Stephen Radley. I am Chief Economist of EEF.

  Q140  Chairman: Sir George, does the Cox Review on Creativity in Business have anything to do with globalisation at all? The floor is yours.

  Sir George Cox: Thank you, Chairman. The whole move towards globalisation was very much behind the report. In a world where we see what we had always assumed were the developing countries taking over not only a lot of the low-skill jobs but also progressively competing for the high-skill jobs, the question behind the report was: How do we respond to this?

  Q141  Chairman: How should we respond to it?

  Sir George Cox: I suppose the scenario we have always had in mind, as the world developed, was that what we have rather patronisingly called "the developing countries" would progressively take over many of the lower-skilled jobs—because they could bash metal sheet or they could weed plots, that is their right—and that is fine, because we are going to keep all the high-skill, intellectually interesting jobs. That is a very appealing scenario and totally unrealistic. Why should any country aspire to be the world supplier of cheap labour? That is not in Chinese history, for example. In a world like that—a world which, by the way, I think is going to create enormous wealth—the question is: What do we offer? What is unique? This applies to services just as much as manufacturing: What do we offer? You can only flourish in such a world—that is when you talk as an individual, a company in industry or a nation—by innovation, by progressively looking at new ways of applying new developments, new ways of doing things, whether it is new products, new technologies or new roots to market, whatever. The question is: In a nation which has a great record of innovation—whether you talk about creative industries or the remarkable record still of scientific innovation and discovery—how do we exploit it better? That has always been our weakness. The report addressed: What can we do, not to make us more innovative but to make companies better at taking advantage of innovation? It concentrated on the medium-sized company on the grounds that the report was pretty broad in its target anyway—and if you are a member of the FTSE 100 and you have not got the message yet I do not think the report is going to do much to change your mind. But there are thousands of companies out there with potential they do not realise. The report concentrates on how you get there to be more innovative. That is the whole background to it.

  Q142  Chairman: You and I were at breakfast together, where one professional in design said that if companies are just thinking about their design proposals at the moment, they are 10 years behind the curve of what is happening. Is that statement as realistic as that?

  Sir George Cox: I think it is. One sees—and it gives me encouragement—that there is the huge potential if companies recognise it. As you may have recalled from my report, it addressed initially why companies are not more innovative. There is a variety of reasons: complacency; unawareness of the opportunity; do not see the relevance; do not have the skills; do not know where to turn; risk aversion; et cetera. The issue is: How do you get companies to change their attitude and behaviour? I find it encouraging that the work done previously by the Design Council has found that, when you do get to a company and do expose them to possibilities, there are changes that can be brought about. One of the examples is a company which makes cutlery. You would say, "There's a doomed industry. You cannot possibly provide knives and forks competitively in this world." That was a longstanding company, going down hill; they become involved with a new design team and the results pick up tremendously. You think, "If you can do that—a manufacturing company making cutlery—my God, what you can do in other areas?" I think it is question of how you get to organisations like that, the thousands of medium-sized companies that play such a big part in the economy, and get them to realise what is happening and how they can prosper.

  Q143  Chairman: Stephen, other witnesses have mentioned to us that there will be winners and losers in globalisation. The losers will be in the low-skill areas. Is the prospect for the UK difficult in light of comments like that?

  Mr Radley: The story is not necessarily one of looking at different sectors. I do not think it is even necessarily hi-tech versus low-tech. Many of the themes have been developed in Sir George's answer there. It is about companies that are able to develop something that is unique, whether that is some innovative aspect of the product, whether it is introducing some form of design—which we find that our member companies are paying increasing attention to—or developing new revenue streams from services. In many cases, companies using their knowledge of the technology and their customers' needs to develop revenue streams from services really offers a way forward. Often that is very difficult to compete against from a low-cost country. You need to be near your customer and have a deep understanding of their needs.

  Q144  Mr Love: Could I take us to manufacturing industry. In the last 20 years, it has now halved in size. It is now down to 15-16% of the overall workforce in this country. Some people think that is related to the exchange rate of the pound against major currencies. Separating that out, if we had a competitive exchange rate, what size would manufacturing be in this country, and is there a future for manufacturing?

  Mr Radley: With respect, I would like to pick you up on some of the assertions you have made there. Certainly if you look at the number of people employed in manufacturing, it has continued to fall and we would expect that to continue to be the case. At the moment it is slowing. It does not necessarily have to be at the pace it has been, but the onward movement of productivity will mean that manufacturing can produce more with less people. If you look at its share as a size of the economy, it has shrunk—and we are looking at it being around about 15% now—but a lot of that is due to the fact that other parts of the economy, business services, financial services, have grown so much more strongly. It is also a little bit of a statistical illusion, because manufacturing has contracted out a lot of activities it did itself before. Before, it employed a host of consultants, cleaners, security staff, caterers, whatever, and they are now in the service sector. They buy in those services. Also, in many cases the prices of manufactured goods have been falling and that reduces its share in the economy in the way that the statistics are measured. In terms of factors that will affect its prosperity, if you look at the period in the early part of this decade, when we had a high exchange rate against the euro, we also had a severe downturn in the world economy which was intensified by the events of September 11 and the rise of China and other low-cost countries as major players. That was a real shock to the system for manufacturing. Since then, we have seen a steady improvement in productivity and its competitiveness. According to EEF's own survey, export orders balances are the best for nine years, despite there being a strong exchange rate. We have found that manufacturing has become a lot more resilient. It has taken a lot of steps to improve its productivity and reduce its costs.

  Sir George Cox: If I may add to that, I think that is absolutely right when we look at the figures. I started my career in an aircraft company and the factory I was at had about 10,000 employees, but an awful lot of those were cleaning the factory, providing the food, services and transportation, and now would be reclassified as services because they would no longer be employed by the company. The second thing is that a lot of things now are difficult to classify. If you look at a modern day fighter aeroplane, an awful lot of the investment in that is in software. If you are writing software to control that, is that manufacturing or not? Then if you look at a company like—to name an outstanding manufacturing company—Rolls Royce, over half their revenue now comes from services. It is not easy to put a simple classification any more between manufacturing and the rest.

  Q145  Mr Love: Yes, but I am sure you would not argue that that is the whole answer to why manufacturing has declined.

  Sir George Cox: It is certainly not the whole answer. Absolutely not.

  Q146  Mr Love: Could I take you on then to a comparison with the United States. They are facing a similar problem—indeed, a lot of major industrial countries are—but that does not, as I understand it, appear to be the case in Germany. If we had a more competitive exchange rate, would the size of our manufacturing increase similar to that of Germany, or are we in a cycle that will maintain us at the same level as America?

  Mr Radley: At a very simple level, if we had a cheaper exchange rate against the euro and the dollar we would probably have faster growth in manufacturing and we might have stronger growth in exports. There are, in some cases, benefits from having a stronger exchange rate. For example, it helps to cushion companies against the rise in raw material prices, oil, commodities and other raw materials, which tend to be priced in dollars. A stronger exchange rate also means that people at home have a higher standard of living. Their disposable incomes are growing more strongly, so it creates a strong market. It is not necessarily the case that there is a host of disadvantages in having a strong exchange rate, but we really need to look at the fundamental causes of how manufacturing prospers in some countries more than others. We would have to look at things like innovation, links with universities, regulation, our skills' base, whether our tax system is competitive. That is one thing that has concerned us: if you look at the period over the last 10 years, our tax system has progressively become less competitive. We used to have a lower tax burden than the OECD. Our tax burden as a share of the economy is now four percentage points higher than the OECD and the gap with the euro zone has narrowed significantly. For manufacturers, who will often struggle to pass on rising costs to their customers, a lot of increase in taxation does have significant implications for their competitiveness.

  Q147  Mr Love: Others will come on to ask you questions about those detailed areas that you have talked about, but may I press you on one thing. You say that manufacturing is more competitive now; its productivity has been going up. Also, the level of foreign ownership of our manufacturing base has gone up significantly in recent years. Are they better at getting it right on manufacturing than we are?

  Mr Radley: You are right. If we look at EEF's own membership, we estimate that just over one-third of our members are foreign owned, and there are significant benefits from foreign ownership in terms of exposure to new management ideas, technology, developing new products and services. Our feeling is that foreign ownership has been overall very positive for manufacturing. But it is a slightly unfair comparison. You are looking at the largest and the best companies in the world that are investing in UK-owned companies, so you are obviously going to see a benefit from the influx of foreign ownership. People have studied this in depth, and if you compare the best UK-owned multinationals with the best foreign-owned ones we compare very well. Where we struggle often is that we have an under-performing tail of medium-sized and smaller companies which could do a lot better.

  Q148  Mr Love: Your answer was slightly different. Being that foreign ownership is becoming much important to us, should we focus our activities on our attempt to attract greater foreign direct investment? If we should, how should we do that?

  Sir George Cox: That is a very good question. On foreign ownership, just talking from personal experience, I sit on the board of Shorts in Belfast which is owned by Bombardier—the biggest manufacturing unit in Northern Ireland and I think the second biggest employer in Northern Ireland in any field. I think it has benefited enormously from being owned by the Bombardier group. It is a very demanding management. We have found that Belfast competes very well with other plants that Bombardier has around the world. I think foreign ownership has brought a vigour and discipline which was not there before. That, as Stephen has already said, is a great advantage of foreign ownership. How do we attract more? I do not think "we" in a collective sense can do it. I think companies which have potential are always there as targets for people to come in and say, "We can make more of the potential than you are making already." I can see what happens at a company level but I do not think you can pull a lever to get more or less of it. That is my view. You see it happening in other fields, by the way. You see it happening, at present, in stock exchanges: consolidation happening around the world. One can impede it at the time, but it is very difficult to bring it about. I mean, there are natural forces there we cannot—

  Q149  Mr Love: When Martin Wolf came to us we talked about the motor manufacturing industry, and he said that he did not think that the decision of Peugeot would affect other manufacturers that were here. He was sceptical about Britain being able to attract further investment in the motor manufacturing industry because of globalisation. Should we be ruthless and say, "That's not our future. Our future is the much more hi-tech, high value-added area"? Is that the way we should go? How do you see it?

  Mr Radley: If you look at the future of foreign direct investment into this country, it is likely to be a lot more innovation/research and development intensive, and, on the whole, you are less likely to see large volume employers/mass production investing in the UK. They are more likely, if they are seeking to find a route into the European markets, to be investing in Central and Eastern Europe.

  Q150  Mr Love: Does that not mean that the level of workforce participation will continue to decline below 10%?

  Mr Radley: Possibly. I think it is important, when you seek to encourage companies to seek to invest in this country, that we do not send out a message to potential investors that we are just interested in research and development. That is something we have picked up anecdotally. I think perhaps we have not intended to do that but, for all the best reasons, that message has sometimes gone out. In many cases you need to see research and development and some production located close together, because a lot of innovation is actually about experimentation. It is important that we do not send the wrong message out. Companies that are part of a large group are often competing for investment with lots of different sites, and if we send out that sort of message it can make life more difficult for them.

  Q151  Peter Viggers: I would like to ask about ownership. "Wimbledonisation" is a word used about the City of London: we provide the pitches but we do not have any of the top players. I take the point that foreign ownership can bring in innovation, and we have Nissan and Honda to take the place, as it were, of British Leyland—in fact, I was the minister who sold Shorts to Bombardier.

  Sir George Cox: Yes, good move, sir.

  Q152  Peter Viggers: So I am sympathetic to foreign ownership. But is there, at the end of the day, something special about a BP or a Cadbury Schweppes which is controlled from a boardroom in the United Kingdom?

  Sir George Cox: My view is that I do not get terribly hung up on ownership. Let me give you another example from my own experience. I sit on the board of Euronext, which is the group which owns the Paris Stock Exchange, the Brussels Stock Exchange, the Amsterdam Stock Exchange, the Lisbon Stock Exchange, the London Futures Exchange, and at the moment is endeavouring to merge with the New York Stock Exchange to make a big, consolidated group. I get apoplectic at reading the press about the "French" group Euronext. If you look at the breakdown of shareholding, there is a far bigger British than French shareholding in Euronext: about 26%. It is about a quarter British-owned. I do not think ownership matters; what matters is where management is run from. If the management is strong and powerful, then it will be sited where that is. Similarly, with Shorts, what is very important about Shorts is not just the ability of the factory but the design capabilities there. When they talked about launching the new series of airlines, the "C" series, there was debate about what was to be done there, and the wings were going to be built in Belfast. But the important thing was not just the wings, but that the design authority was going to remain there. So issues like that are far more important than where the ownership is. Ownership in the global world is very difficult to pin down. It is moving all the time.

  Q153  Peter Viggers: The other argument is that, with a board of a company based in a particular country, should they need to retrench, they will retrench back to that country and give second priority to the overseas activity.

  Sir George Cox: I do not think that is likely to be the case if the company is, as you say, ruthlessly managed. If you retrench, you will retrench to where it is best to have things done. I do not think we ought to get terribly nationalistic. Good international boards do not. They will site things: Where is the best thing to have that designed? Where is the best place to have that manufactured? That is the mood I find in big companies now.

  Q154  John Thurso: Sir George, I was struck by one sentence particularly in the review, where you said, "The model of the UK becoming an all-service economy, the world's leading repository of professional skills, is enormously appealing—and totally unrealistic"—in part, because it is unrealistic to imagine that other countries will not be developing. How big a threat is that to UK plc?

  Sir George Cox: I think that is a very big problem. There is an assumption that certain things are almost ours by right. We have no reason to think that at all. I think there is still an image here of China being a country full of paddy fields and a grow-in culture, and you are talking of a nation here which for 18 of the last 20 centuries was the world's most advanced nation scientifically and culturally. When you talk about the advance of those countries, there is nothing Machiavellian about them, nothing hostile about this. What they are doing in such countries, in investing in hi-tech industries and a highly qualified workforce, is admirable. It is not anti us. You just have to say: In a world where this place is picking up, other countries will do the same. It is wrong too to focus just on those countries, because the debate we are having here is taking place in every industrialised nation. There is a recognition that the race has hotted up and you just have to run faster to be a part of this. You can look at almost every field and say: Why should that reside here? That applies to the City of London and it applies to almost every field of professional services. I think this is a tremendous competitive threat. It is not that it is such a shift from manufacturing to services; this goes right across the board. I think it is a terrific threat.

  Q155  John Thurso: Presumably, as they develop, they also encounter the problems. Martin Wolf drew our attention to the skill shortages in the IT industry in India. To what extent do the problems of development mitigate the threat to us and leave us an opening?

  Sir George Cox: I think to quite a large extent. I had some research done for my report by Professor Heskett who is based out in the Far East. We said, "Let's put a bit of flesh on the bones of this competitive threat." He points out a number of good points there. It is very difficult, in countries which have never served a customer, to be alert to markets, particularly product design and service design. This was brought home to me a few years back when the company I was heading up was running a programme for the senior figures in the province of Tianjin. We had them over and the programme was going very well. The whole Chinese delegation were very numerate and very astute, but the one thing they were finding it hard to come to grips with was marketing. I remember the question being asked of the Chairman, through an interpreter of the person running the tutorial for them: "Mr So-and-So, your role is that you run the refrigerator factory. What are your goals?" He said, "My goal is that I have to produce 30,000 refrigerators a month." He was asked, "But have you thought of who those refrigerators go to?" to which he replied, "Yes, the next 30,000 people on the waiting list for refrigerators." That is where it comes from. You have a market here which is much more alert to the customer—and that is one of great things—and it is going to take them time to catch up with that. And there are plenty of impediments. These countries are not just sailing ahead; many of them have to bring about an awful lot of change. We are not talking about a scenario of doom—you know: The world is changing and we are sliding down the scale—but I think there are terrific opportunities. Moreover, as these countries develop, there are going to be tremendous markets. The world is going to generate enormous wealth over the next half century, much more than we have seen so far. The issue is: How much of a slice of it are we going to get?

  Q156  John Thurso: How best can UK businesses return that perceived threat into an opportunity and use the growth of those industries to places like India and China to our advantage?

  Sir George Cox: The issue for me is alerting them to what is happening and alerting them to the possibilities. I think the world is full of possibilities if you have the wit to take advantage of them.

  Q157  John Thurso: Is part of the problem the fact that we all look at it simply as a threat and rather ignore the opportunity?

  Sir George Cox: Absolutely. You get the odd company that looks at the opportunity and you see huge successes. I do believe that with an imagination in this world there is terrific opportunity in every field. It is happening all the time. Let me give you an example. Very often the people who really do well out of technology are not the people who originate it. Companies may make losses (from PCs to mobile phones) but it is the people who take advantage of the capabilities offered. If we had sat here 10 to 15 years ago, we would have been looking at the internet and saying, "Where are the great opportunities coming from this?" One of the things you might wish to have said is "Auctions." It is tailor-made for auctions: anybody can sell to anybody at any time of the day round the world. Terrific. Who is going to take advantage of that? Well, it must be Phillips and Sotheby's and Christie's—they have the reputation, they understand the business, they have the money. Forget it. It is eBay. eBay. That could be have been started here, anywhere. You do not need a big domestic market to start a project. It is the wit and the imagination to take advantage of it, and they did not. The big people in the market did not. That is the kind of thing. They were not looking at it. They were not looking sideways. Well, they had their business: "Of course people are always going to come to our auction rooms." Forget it. Auctions were going to grow on a scale they had never dreamt of, and they were not going to play a major part in it. That is the kind of thing. Whilst we are sitting here today, there are things which in 10 years' time will be so obvious, and big world players will be saying, "We could have done that." Well, why didn't we?"

  Q158  John Thurso: Because we will not have thought of it. Could I turn to the question of off-shoring and direct this question to Mr Radley. There are clearly winners and losers in off-shoring. The TUC in their evidence to us pointed to the fact that, whereas the whole of the UK economy might gain, for the specific worker who has lost their job in manufacturing very often a replacement job comes in at a lower-paid sector. They have suggested to us that companies who have a benefit from off-shoring should insure their workers, so that the loss that they suffer is compensated. Do you think that is a realistic proposal and one that could be the way forward for redistributing the gains?

  Mr Radley: To answer your question, could I slightly step back from that. If you look at off-shoring, it is not simply a case of moving some production abroad, which means that we lose out here. Often it is not a zero sum game. We do find that some companies are investing abroad to reduce costs but in some cases that means that leads them to expand the company. A classical example is Dyson, which moved some production abroad but has substantially improved its profitability, has invested more in R&D here and has grown the company. So it does not have to lead necessarily to a net loss of jobs. In many cases what companies are doing to invest abroad is to complement activities here. You find, for example, that it enables companies to speed up the rate at which they develop new products and the rate at which they innovate because they are working around the clock. I think there are many reasons to off-shore and in many cases it is also to get close to the customer abroad, to tap into some of these rapidly growing markets in China and India and the rest of the world, so it does create a lot of opportunities. Your starting point, that there are dangers for people in less skilled jobs in terms of lower increases in their standard of living or losing their jobs, is a significant one. We need to invest in people's skills right throughout their lives. This means improving standards in schools, particularly improving the number of people taking science, engineering and mathematical subjects in schools and higher education, and improving the levels of attainment and promoting apprenticeships. It also means ensuring, when companies invest money in skills and public money is invested in skills, that that delivers value for money. Those are the key priorities. Recently, EEF has set out some recommendations, because our concern is that large amounts of public money and company money have been invested in skills but in many cases that is not delivering the significant outturns, in terms of driving up our skill levels, that it should be.

  Q159  John Thurso: You paint, quite rightly, a rosy picture in relation to some companies—and I have one in my constituency which has done exactly the same—where the whole company has grown. The increased manufacturing is abroad, but the number of people in Rochester has grown as a result of the development. In the specific case of MG Rover, where a vast amount of the work has gone very abruptly overseas, large numbers of people who worked perfectly well and were perfectly good employees have been thrown into unemployment. Most are now back in work, but earning, on average, £3,500 less than they were. That was a specific case put to us by the TUC in their evidence, with the suggestion that one could, for a relatively small amount of money, have an insurance scheme so that those workers would be compensated for that. Do you see that as a realistic or worthwhile scheme that we should be looking at?

  Mr Radley: If you look at the case of Rover, the taskforce there was extremely effective in terms of finding job opportunities for a lot of people. In many cases, other manufacturers did snap up many of the workers. I would choose to highlight another aspect. There is a segment of people who have still not been able to find new jobs and these are the people who lack basic numeracy and literacy skills. That is the priority area, to make sure that everybody in work has the required standard of numeracy and literacy. That provides the building block. If people have that in place, they are much more likely to acquire new skills quickly and improve their job opportunities and their earning opportunities.


 
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