Examination of Witnesses (Questions 40
- 59)
WEDNESDAY 18 JUNE 2008
MR MIKE
BIDDLE, MR
VINCE OSGOOD,
DR HERMANN
HAUSER AND
MR FERGUS
HARRADENCE
Q40 Chairman: Vince, the EPSRC report
on investment stated you had £68.2 million in projects "of
direct relevance to plastic electronics". What does "direct
relevance" mean?
Mr Osgood: It means we support
long-term basic strategic and applied research. We can identify
within that £68 million of research, training and Knowledge
transfer activities that feed in directly to the plastic electronics
chain. Some of the things that Richard Friend mentioned this morning—the
chemistry, physics, engineering and materials science that underpin
plastic electronics, we can identify specifically. There are broader
areas of chemistry, and other areas, even mathematics, that may
in time relate to it, but do not have that direct link at the
moment. It is things[1]
that we can identify that are playing within the plastic electronics
space that is the 68 million.
Q41 Chairman: We will come on to
the funding of developments later with Hermann, but sticking with
research at the moment, is there a tendency to be—if not
quite picking winners in terms of research, actually moving in
the direction of saying, "We are only going to fund this
research council in those areas which we can actually see having
some tangible benefit"? Does that not militate against your
core mission?
Mr Osgood: Our prime criterion
is to fund high-quality research. Unless it is high-quality research
in whatever area, we will not fund it. You are right to say that
there has been an increased emphasis in recent years on demonstrating
that the research that we fund has an impact. That requirement
has been there on the research councils since the original research
councils of 1965. Certainly building on the White Paper of 1993,
Realising our Potential, we said that the research that
we should do should contribute in some shape or form to both the
economic competitiveness of the UK and its quality of life. It
has to be high-quality research first.
Q42 Chairman: You do not believe
that has been compromised!
Mr Osgood: I do not believe it
has been compromised. We have certainly given increased emphasis
in our delivery plan over the next three years to a number of
mission-focused programmes and cross-Council programmes in areas
of national priority, energy being one, healthcare another, and
security. All of those require high-quality research and training,
and that is where the research councils come in.
Q43 Chairman: Fergus, talking about
specific missions, were you with the old DTI?
Mr Harradence: Yes. Technically,
I am on loan from the Department for Business, Enterprise and
Regulatory Reform.
Q44 Chairman: You have just been
loaned! Right—so long as you are not loaned to the Scottish
Office we are all right! The DTI developed a proposal together
with UK Displays and Lighting, for a managed funding programme
for a very exciting programme for plastic electronics; and yet
the proposal was never funded. Can you tell us what the stumbling
block was there and the lessons to be learned; and is this something
that could be funded in the future with perhaps TSB filling the
void?
Mr Biddle: The programme that
was discussed was prior to myself joining the Technology Strategy
Board, which became an executive non-departmental public body
in July of last year. What I can say is that in regard to current
investment of Technology Strategy Board money, some of it, in
conjunction with Research Councils, amounts to £38 million
to date, which is not a million miles away from that £50
million that was discussed as part of that investment programme.
We look at things on a case-by-case basis. We always justify any
investment we make against four criteria: can the UK do it; is
now the time to act; can we add value; and is there a global market?
You mentioned earlier about picking winners; I would not say we
are doing that, but we are trying to pick people who make sure
they can exploit the science and technology within it. It is all
very well to do good science for science's sake, but at the end
of the day we are trying to help UK businesses to make money.
That is where we are trying to put our investment, and that is
the amount of investment we have made.
Q45 Chairman: You listened to my
earlier comment that part of the motivation for this particular
case study was the comments of Sir David King. He spoke so passionately
about this area, but there was a hidden criticism that I picked
up in his comments to the Committee: that we do need to start
picking winners, and that plastic electronics is a potential winner;
and that unless we start to back it we will not move anywhere.
Yet this project with UK Displays and Lighting, which seemed to
be an incredibly exciting project, has just died a death.
Mr Biddle: The important part
there, though, is that it is not just a case of throwing money
at the problem—if you will excuse the phrase. That always
helps, but, let us be honest; there is also a recognition in businesses
themselves. I was at meetings with UK Displays and Lighting when
they were discussing what they should be doing for the future,
and some of those people have submitted evidence to this session.
They recognise that part of the value-added is to try and attract
new thinking into the area through entrepreneurship, business
leaders and creative designers. There is an element where you
can help by investing in the centre and there is an element—we
talk about innovation climate in the Technology Strategy Board
and part of that is making sure we bring people together. Our
recent strategy was entitled Connect and Catalyse for that
very reason: we recognise that although we have £1 billion
to spend over the next three years in conjunction with the regional
development agencies and the research councils, that that is just
a pot of money; it is what you do with that and how you can leverage
that investment for the benefit of the UK.
Q46 Chairman: The TSB has identified,
quite rightly in my view—I do not speak for the rest of
the Committee—a role for it in bringing things together
and acting as this very, very strong broker, particularly in the
plastic electronics industry, which is an emerging technology
with significant potential, as we have seen. Clearly, you have
identified that there is a lack of joining-up, but what is it
that is not joined up?
Mr Biddle: One of the examples
I can give is not in the plastic electronics arena but it is something
we are doing through our innovation platforms, and that is to
do with low-carbon vehicles. We are working on an integrated delivery
programme that tries to do exactly that; recognising that there
is a lot of good research going on in the science base; recognising
that there is a lot of business-applied research going on; and
also looking for businesses and venture capitalists to pull that
through. Sometimes, seeing the pathway through that can be difficult
for people trying to interact with organisations like ours. We
are trying to show that there is a path there, so through that
integrated delivery programme, which admittedly is in the low-carbon
vehicle space, we are trying to achieve that joined-up approach
which you mentioned.
Q47 Chairman: But you see that there
is a need for that within plastic electronics?
Mr Biddle: I think the need there
is for us to connect and catalyse. I know it is the tag line for
our strategy, but we will look at investment decisions on a case-by-case
basis with regard to whether we may have competitions et cetera;
but there are things we are already doing. We need to be looking
at what we are already doing and how we can leverage that. Part
of that £38 million I mentioned was approved just last week,
which is a large project totalling £12 million, and it is
an investment of over £6 million by ourselves, which is not
something that is currently public so I cannot announce it here,
but the new investment now is in something that is very, very
exciting for this technology area. That is something that we will
continue to be interested in in the future.
Q48 Chairman: So you are excited
by this!
Mr Biddle: I did pick up on that,
whether we should be excited! I do think it is exciting. I think
the UK has an opportunity within this. One point I would like
to make, if possible, is that everyone always looks and says that
we can do R&D in this country, but we cannot do manufacturing,
but I am all for "bigging up" the UK and I think we
should sing about ourselves a bit more. For example, in our high
volume manufacturing strategy that we published recently we pointed
out that by GVA[2]
the UK was the sixth largest manufacturer in the world last year.
People forget that and say it has all gone, but if you accept
that fact and you do not fight for it then it is going to happen;
and it is important that we try and champion it and make sure
that things can happen.
Chairman: Hallelujah!
Q49 Dr Iddon: Mr Hauser, how important
has venture capital been in starting up the UK's plastic electronics
industry?
Mr Hauser: I am only familiar
with two companies that are Cambridge-based: Cambridge Display
Technology and Plastics Logic. In terms of the amount of capital
we have raised in the CDT, I think it was in the order of £50
million—although this is a dollar-denominated industry so
if I make a mistake in dollars, please forgive me. We have raised
about £100 million, $200 million for Plastic Logic.
Q50 Dr Iddon: What made Plastic Logic,
in your estimation, such a good investment? Was it people, invention
or what?
Mr Hauser: Well, I am excited
about this. In fact, I am very excited!
Q51 Chairman: This is the theme now!
Mr Hauser: You have to be a believer
and put your money where your mouth is in this industry of venture
capital. What I see is that although it might not blow the silicon
industry out of the water tomorrow, the potential of plastic electronics
is at least equal to the potential of silicon technology, which
has been around since the 1950s and so has had sixty years to
mature. We are just at the very beginning of plastic electronics,
but it is such a historic and unusual event that practically 100%
of our electronics is made out of a material called silicon and
here we are at the threshold of a new material that the world
accepts is a very interesting new way of doing it, which is a
lot cheaper to produce and a lot more environmentally friendly,
and addresses new products. It reaches the parts that silicon
cannot reach and so you can make light, flexible e-readers out
of it; and silicon systems cannot do it because you need a glass
substrate, which makes the e-book brittle and too heavy. If you
want a reading experience that is akin to paper, where you hold
it in one hand and lean back and change hands and read it with
the other, as we do with paper, then at the moment this is not
possible with the silicon-based industry. I have a prototype in
my briefcase—but this is a public meeting and we are only
launching the product now so I cannot show it to you. I am happy
to show it to you afterwards, and I hope that you will be very
excited when you see it! It is the best quality I have seen to
finally replace paper.
Q52 Dr Iddon: In your estimation,
why could we not keep Plastic Logic in this country and why did
we lose them? The point has been made earlier that it was better
to lose them to Germany than to Asia, but why did we not spin
them out as a manufacturing company in Britain?
Mr Hauser: This is a very good
point, and I have been asked this question many times. The answer
is that we did not lose it to Dresden. The best way of thinking
about it is in a number of dimensions. First, where did the £100
million end up that we spent on this? The first £30 million
or so was directly spent in Cambridge on doing the R&D and
employing the people—and there are about 100 PhD level people
employed in Cambridge. That is where a third of the money went.
Two-thirds of the money is going to be spent in the factory in
Dresden—but look at where that money went! That money did
not go to Germany; that money went to the equipment that comes
from Asia. As you rightly said, we have got to be very grateful
that we managed to get this into Europe at all. When we looked
for a site to put our plastic electronics factory, we worked together
with KPMG on 290 different sites all over the world because, clearly,
it is our fiduciary duty, as investors, to find the best possible
production site for this. Wales was the closest in the UK, and
it made it up into the top six out of the 207, so that was not
bad—but it was a sad experience. The three final sites were
New York, where we got the best subsidy and a free part of the
East Fishkill, which was the big IBM research laboratory for silicon.
We could have had that one for free, and the politicians said
we could have fantastic subsidies, but we had to meet the Governor.
I said: "I do not want to meet the Governor. Tell me the
formula you use." That left Singapore, where there was a
clear formula: "You invest that much, employ that many people;
this is the subsidy you get." It was the same as Dresden:
it was formulaic, so we could make a business plan out of that
rather than having to go and sidle up to politicians. The final
decision for Dresden was based on the following criteria—and
then I will tell you how we almost came a cropper. The first criterion
was the availability of highly qualified staff. Dresden was Silicon
Saxony and that has 10,000 people employed in large-scale manufacture
for AMD—the number two microprocessor in the world—100%
of AMD's microprocessors come from Dresden. They had shut down
their Austin facility because Dresden was so much better. There
is a large Siemens factory that employs over 5,000 people. So
we had access to the right people who knew about high-quality,
high-yield manufacturing, which is a skill honed over many years.
The biggest surprise to me—because if you had asked me whether
we were going to put this factory in Europe I would have said
"absolutely no chance" when we started this—but
when we arrived in Dresden we were met by the Burgermeister, the
Mayor, and all his team. He said: "We really want you here.
We want plastic electronics. It is a key strategic imperative
for us to have this here—what do you want?" I said:
"Well, in Singapore they are going to build us a factory
in six months; can you build us a factory in six months?"
He said: "Yes, sir. What else do you want?" This is
Germany; this is Europe. I said to him? "Show me the last
factory that you built in six months." He pointed out the
window and said: "See that building over there?" I said
"yes"—it was a huge thing. He said: "This
is the central distribution hub for FedEx for the Eastern Bloc—we
built that in four months." I said: "Okay, how do you
get planning permission? If we try to build anything in the UK
it takes a year before I get planning permission." He said:
"It is very simple, sir. We will give you planning permission
to dig a hole. By the time you have dug the hole we will have
all the other planning permission."
Q53 Chairman: It is not like Harrogate—I
will tell you that!
Mr Hauser: We signed this deal
in May last year. They said: "We will have the building built
in six months. They had it built in six months. We have put all
the equipment in and we are switching on the factory in September.
At the moment we are a week ahead of schedule. This is unheard
of in Europe. The last reason, it must be said, of course, is
that at that time it was the last year that they were a category
4 area in Europe, so they could give us more subsidies than anywhere
else in Europe.
Q54 Dr Iddon: That is an interesting
story, and I am sure there are some lessons to be learned there.
It is a "can do" attitude, obviously, and I appreciate
that. Are venture capital companies falling over themselves now
to invest in this area of manufacture?
Mr Hauser: No, it is still a big
risk. We have just managed to raise another $50 million, but it
is still tough because you have to be a believer in this new category
of e-readers and e-books. We believe that it is going to be the
I-pod of text, but other people think that it might still take
a few years yet.
Q55 Dr Iddon: You are interested
in manufacturing devices. Would the venture capital industry invest
in fabless production at the other end of the chain?
Mr Hauser: This is extremely rare;
venture capital does not normally invest in manufacturing; this
is the one exception we have made because it is so state-of-the-art.
We normally only invest in very knowledge-intensive businesses,
but here the factory is the first such factory in the world, so
in that sense it is very knowledge-intensive. There was no factory
that we could go to. As you rightly pointed out, what we would
really like to do is to have a fabless model where we just go
to somebody else to have it manufactured, but that was not possible
here. I should just add that we were lucky that we finally ended
up in Europe, because when we bought this equipment—and,
as I said, most of the capital went to Japanese tool manufacturers—we
asked them to deliver the tool to Dresden in Europe, and they
said: "Sorry, we do not do Europe. We do not have factories
in Europe and we do not have the CE mark." We actually had
to pay for the CE mark so that they would deliver it into Europe.
Q56 Dr Iddon: Your three sites were
Singapore, Dresden and Wales. It seemed that one of the important
reasons you went to Dresden was the subsidy. Was that also available
on the Welsh side?
Mr Hauser: It was, but not to
the same extent.
Q57 Dr Iddon: How big a role does
subsidy play in your decision-making?
Mr Hauser: In order of priority
it was the availability of trained personnel, and that was in
place in Dresden. The speed of response and willingness to work
with us on a very, very tight timescale—again, Dresden won—and
again the subsidy.
Q58 Mr Cawsey: Fergus, this is mainly
for you. I want to talk a little bit about the small business
research initiative. We talked to Lord Sainsbury some time ago
now, and this was part of his review. There was some concern that
this initiative is not as successful as its US counterpart, and
his recommendation was that we should make it more so. Why has
it been less successful in stimulating R&D than the American
system?
Mr Harradence: I think that when
Lord Sainsbury looked at this and wrote his report maybe identified
three reasons. First, in the UK the initiative is seen as a stand-alone
initiative for commissioning research across a whole range of
areas—a lot of it policy-relevant. It is not seen, as it
is in the US, as a process to facilitate and encourage technology
development. That is the way that it is managed in the US, and
it is managed in a fairly rigid way in order to achieve that objective.
Second, the problem in the UK is that there is no link between
SBRI and other support mechanisms and other programmes, and in
particular no link at the end of the SBRI process to standard
government procurement procedures, which again is one of the big
strengths of the US system and one of the reasons that it is so
successful in that it helps companies develop, grow and attract
investors, because there is the prospect that if you develop the
technology successfully a government body in the US in a very
large procurement project will purchase that technology, and you
effectively have first right on that. Third, there is a lack of
a quality control and auditing mechanism, which meant that a lot
of the projects that were tendered under SBRI notionally, as part
of the Departmental research budgets, were not technology-relevant,
unfocused; and there was no-one coral-ing these and auditing them
and saying, "Is this the right project; is this consistent
with the overall objective of the scheme?"—and, if
not, refusing to advertise the product and make the departments
go away and do some more work on it.
Q59 Mr Cawsey: If that is a good
analysis of all the reasons why, what are you doing now to make
sure it is more like that?
Mr Harradence: We are essentially
taking forward the implementation of the recommendations that
Lord Sainsbury made in his report. We have spent the last six
months developing a model for a reformed small business research
initiative that we are intending to pilot with the Ministry of
Defence and Department of Health this year, and hopefully the
Department for Transport as well. To give you an idea of what
the reformed SBRI will look like, we are trying to define a minimum
SBRI budget of about £100 million per annum that will be
a formal budget, not simply a percentage of departmental external
research and development budgets that fluctuate, and are parcelled
out into different bits of the organisation. Again, there is no
central management and no consistency. We would like to see each
department have an individual budget with which it funds SBRI
projects. Second, we want a more consistent structure for the
contracts, again modelled on the American SBRI approach where
you have phase 1 projects worth £50-100,000, which essentially
support the feasibility and proposals you receive from companies;
and a second phase value of between £250,000 to about £1
million, which enables you to take the development of the technology
forward if the results of the first stage are sufficiently promising.
Also, more transparent, open, systematic process for tendering
SBRI contracts through the Technology Strategy Board and also
through individual departmental websites with more regular procedures,
more consistent templates for advertising, better information
and consultative mechanisms with potential stakeholders or companies
or academics who can bring forward ideas under the programme and
put in place an auditing function which the TSB would manage,
which will oversee the scheme and ensure the departments are meeting
their commitments.
1 Note from the witness: "research, training
and Knowledge Training activities" Back
2
Note from the witness: "Gross Value Added, or the
difference between the value of a company's sales and the cost
of brought in materials and services, which is used as a measure
of the economic contribution of businesses. DIUS produces annual
Value Added Scoreboard comparing the top 800 UK and 750 European
Companies by Value Added." Back
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