Examination of Witnesses (Questions 139
TUESDAY 17 OCTOBER 2006
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
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
jobsbecause they could bash metal sheet or they could weed
plots, that is their rightand 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 thata world which, by the way, I think is going to
create enormous wealththe 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 worldthat
is when you talk as an individual, a company in industry or a
nationby 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 innovationwhether
you talk about creative industries or the remarkable record still
of scientific innovation and discoveryhow 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 anywayand 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 seesand it gives me encouragementthat 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 thata
manufacturing company making cutlerymy 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 designwhich we find that our member companies
are paying increasing attention toor 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 shrunkand we are looking at it being around about
15% nowbut 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 liketo
name an outstanding manufacturing companyRolls Royce, over
half their revenue now comes from services. It is not easy to
put a simple classification any more between manufacturing and
Q145 Mr Love: Yes, but I am sure
you would not argue that that is the whole answer to why manufacturing
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 problemindeed, a lot of major industrial countries
arebut 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
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 Bombardierthe 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
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 Leylandin fact,
I was the minister who sold Shorts to Bombardier.
Sir George Cox: Yes, good move,
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
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
appealingand 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 customerand that is one of great thingsand
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 doomyou know: The
world is changing and we are sliding down the scalebut
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'sthey 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
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
Q159 John Thurso: You paint, quite
rightly, a rosy picture in relation to some companiesand
I have one in my constituency which has done exactly the samewhere
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.