Written evidence from the Engineering
and Machinery Alliance
BACKGROUND TO
THE ALLIANCE
1. The Engineering and Machinery Alliance
(EAMA) represents the following trade associations:
— Agricultural Engineers Association;
— British Automation and Robot Association;
— British Paper Machinery Suppliers Association;
— British Plastics Federation;
— British Turned Part Manufacturers Association;
— Confederation of British Metalforming;
— Gauge and Toolmakers Association;
— Manufacturing Technologies Association;
— Printing, Papermaking and Converting
Suppliers Association;
— Processing and Packaging Machinery Association;
and
— UK Industrial Vision Association.
2. They represent 1,600 firms in the mechanical
engineering sector with sales of £8 billion.
— Based on the Office of National Statistics
(ONS) new criteria for the sector they represent a third of the
UK's mechanical engineering output.
— Using HM Customs' data, sector exports
account for about 70% of sector sales.
— And again according to ONS comparisons,
mechanical engineering is one of only two manufacturing sectors
to regularly contribute a positive trade balance to the UK economy—over
£3 billion in 2008.
3. Typically our companies supply "enabling
technologies" to other sectors (eg automotive, aerospace,
medical, power and food industries) in the form of machinery or
packages combining services and products.
4. This is the preserve of small and medium
sized niche or specialist companies (SMEs). Important, large companies
are also involved, as are many innovative entrepreneurial SMEs,
all pushing the boundaries of factory performance, extending the
envelope of the physically feasible to new levels in terms of
speed, precision and migration into novel technologies and materials.
SUMMARY
5. There is a danger that in assessing the
effectiveness of Government policy we might mistake the shape
and size of the policy need with what the most immediate and accessible
support activities provide.
6. The facts are that the UK has not suffered
the white collar recession that all feared in 2008-09.
7. But manufacturing has been hit again,
this time while actually helping to save the banks, paying more
for services and still providing banks with a source of good business.
After all it is in the nature of manufacturing to be capital intensive.
8. BIS policies and support have been instrumental
in any success achieved, even if quite a few manufacturers feel
they have been in an unequal battle with the banks.
9. But there may now be a real danger of
a double dip. Investment action take now can help to stave off
that threat and in doing so help prepare the UK for the future.
10. Based on what our EU competitors have
been doing for the last 10 years, the prize could be a substantial
addition to UK manufacturing GVA that would then flow through
the economy into other sectors.
11. This will not be achieved through BIS
support schemes alone. But it will not be achieved without BIS
acting in its crucial role as a champion for industry across Government,
particularly with HM Treasury, and with stakeholders across the
country.
THE ROLE
OF BIS IN
SUPPORTING INDUSTRY
12. Basically, UK (industrial) competitiveness
is what should matter to BIS. The Department's remit may be determined
by Government policy, but ultimately it's the UK's place in the
world economy that sets the challenges and the opportunities that
support can open up, because:
— the UK is deeply dependent on trade.
The World Trade Organisation says 58% of UK GDP is trade dependent
(compared with Japan 26%, USA 29%, France 55% and Germany 87%);
— UK domestic demand represents a fairly
small market, so manufacturing typically has to export to benefit
from the economies of scale to warrant further innovation and
investment; and
— industry faces constant competition both
in the UK and overseas.
13. BIS's core tasks supporting industry
therefore include:
— representing industry at Cabinet level
and across Whitehall where business is directly involved (eg on
competitiveness, exporting, investment), where it contributes
to the efficient workings of Government, (eg on the collection
of PAYE) and where it plays a key role in delivering on economic,
environmental, education and health matters as well as generating
the nation's wealth;
— stopping other departments promoting
policy positions that unwittingly undermine UK interests (so that
the investment, jobs, taxes and GDP do actually remain in and
therefore benefit the UK);
— UK representation on EU industrial matters;
— trade negotiations and export promotion;
and
— the ability to put over a strong vision
for the role and scope of the Department and the wealth creating
section of the economy (namely business in general and manufacturing
in particular) helps inject confidence and vigour into this important
area of Government policy.
14. This means that the more successful
BIS ministers from an industry perspective tend to be visible
and involved, visiting plants and talking up the sector and its
achievements and discussing future plans. Labour's last Business
Secretary was a particularly successful exponent of generating
publicity for industrial initiatives round the country.
EFFECTIVENESS OF
EXISTING GOVERNMENT
ASSISTANCE
Impact of previous policies
15. The Manufacturing Advisory Service (MAS),
the Enterprise Finance Guarantee, R&D Tax Credits and UKTI's
support for exhibitors overseas all have their place. The question
that arises is "do they go far enough?" In a financially
unconstrained world the answer would be "no". And manufacturers
would argue that even in these difficult times of financial constraint,
the answer is still no.
Manufacturing Advisory Service
16. MAS has undoubtedly been helpful in
implementing "lean" manufacturing concepts, but its
regional structure made introducing new national schemes very
complicated and time-consuming, especially for organisations themselves
run on lean lines.
17. For example, it took us 18 months to
complete a series of presentations to MAS consultants in every
region.
RDAs and supply chains
18. The RDA focus created other problems
too. Their limited regional remit has unnecessarily complicated
industry initiatives such as the Manufacturing Resource Centre
(www.manufacturingresourcecentre.co.uk) where OEMs and supply
chain firms work together to strengthen sector supply chain competitiveness
which nearly always extends beyond one region. OEMs like JCB and
Boeing report the same difficulties in their own right. We need
a simpler framework.
Enterprise Finance Guarantee
19. The Enterprise Finance Guarantee is
a well designed scheme. As of April 2010 it had helped nearly
10,000 firms through the recession. But it is also the refuge
of last resort. A company is only eligible if all personal guarantees
are used up in the loan process. So it's not going to stimulate
investment. Nor will it help firms take advantage of opportunities
as they arise.
20. One of the reasons why the EFG works
in this way is because of the way the "sliding scale"
is applied to the 75% Government-backed guarantee to make sure
that the banks don't provide loans to "failing" companies.
If it turns out to that a bank's portfolio of loans includes some
that turn sour, that bank will find its 75% guarantee from public
funds reduced so that the bank takes some of the knock for its
poor analysis and decision-making. As a result banks ask firms
for a personal guarantee that "occasionally" extends
beyond the 25% that is not covered by Government.
Research and Development
21. According to the Government's latest
R&D Scorecard (March 2010) the UK's top 1000 R&D companies
invested an extra 9.2% in 2008 compared with a 7% increase amongst
the world's top 1000 corporate R&D investors.
22. Just 100 companies accounted for 81%
of the £27 billion spent in the UK on R&D. The three
leading UK sectors were pharmaceuticals, aerospace and banking
(£12.9 billion).
23. Many UK mechanical engineering SMEs
supply "one-off" products tailored to resolve problems
in a unique manner. The sale may even be dependent on the firm
coming up with a novel solution, which itself has to be tested.
24. To grow its manufacturing base, the
UK needs to improve its ability to test and commercialise innovation,
not only from the larger companies but also for SMEs. Policy and
support should:
— Make it easier (less expensive) for SMEs
to take part in leading innovation-focused organisations such
as the Technology Strategy Board (TSB) and the Manufacturing Technologies
Centre.
— Extend TSB funded projects to cover the
pre-production phase so that a proportion of the customers' costs
associated with testing and evaluating prototypes or demonstrators
supplied by SMEs can be covered (eg agricultural machinery for
a low carbon future).
THE PERFORMANCE
AND ROLE
OF UKTI AND
THE EXPORT
CREDIT GUARANTEE
DEPARTMENT
Exporting—finding and developing new customers
25. Budgetary pressure on UKTI has reduced
its capability just as global competition is increasing and the
UK is more dependent on trade (see 12 above).
26. There's plenty of good work going on
at UKTI and elsewhere to help exporters, but unfortunately companies
often say that the paring back makes the UK presence look smaller,
less professional and therefore less competitive when compared
to the likes of Germany, France and Italy.
27. These and other countries also want
to increase their exports as world trade picks up. They are not
relying on a weak currency to underpin their efforts. Their governments
are investing heavily in support at trade shows and on missions.
Their ambassadors attend the shows and extol the strengths of
the countries' manufacturing capabilities. In short they sell
themselves very well.
28. For example, the Obama administration's
National Export Initiative (NEI) aims to double US exports in
five years. According to the Commerce Department the main effort
will:
— educate US companies about opportunities
overseas;
— connect companies directly with new customers;
— improve access to credit for SMEs that
want to export;
— create an Export Cabinet, reporting directly
to the president; and
— increase the Ex-Im Bank's budget for
SMEs by 50% to $6 billion.
The UK experience
29. There is a view that the UK lags both
in its promotion of the UK brand and in the range of different
services to involve companies of different sizes in exporting
across the world as a positive benefit to the economy as a whole.
Work is progressing, but:
— The UK needs a national agency that champions
UK exports and exporters. To match the best in the world this
agency should be totally separate from inward investment activities
and staff.
— The regime should be simpler, run with
a national focus, not subservient to regional priorities.
— Companies should be supported for their
commitment and professionalism to exporting, not for their exporting
"virginity".
— The Export Credit Guarantee Department's
cover needs to be remodelled to be competitive across a far wider
range of business.
Trade Credit Insurance
30. UK exporters, particularly SMEs need
a far more flexible system of cover, particularly if they are
to penetrate new, dynamic markets as well as the traditional ones.
Following Treasury pressure, ECGD's offer has been so scaled back
as to be ineffective for most of our members needs. Indeed for
many SMEs the Trade Credit Insurance Top Up scheme stopped at
the frontier and so excluded exports.
Bank guarantees for customer deposits paid on
orders placed with UK companies
31. In mechanical engineering it is standard
practice for a customer to pay a 30% deposit to confirm their
order. It happens all over Europe and in the USA. In return for
the deposit, the customer expects to receive a guarantee, normally
from a bank, that they will receive the machine they have ordered
or their money back.
32. Whereas French, German and US banks
provide the guarantee for a small charge, UK banks also charge
and also often deduct the deposit from the company's facility
with the bank, so that the manufacturer is no better off for having
received the deposit. There's no benefit to company cash flow.
33. Apparently such difficulties do not
arise in other countries, because they run a "Bond Support
Scheme" with government backing, so that any orders where
the deposit may be too big to be handled by the usual channels,
can be covered competitively.
Following Treasury pressure UKTI is charging SMEs
unreasonably for certain services
34. Trade associations supporting exporters
do the same sort of thing as UKTI but get charged for the privilege
if they use in-country services provided by staff who are paid
out of the public purse. The quality and cost of services are
not consistent across posts. Some have completely priced themselves
out of the market and seek to exploit exporters because of HMT
pressure.
35. The real need is to help SME manufacturers
to make and maintain contacts with prospects.
Trade association export offices
36. Several trade associations have their
own offices overseas to support their members' export activities.
These offices are sector specialists and could be harnessed as
part of the professional UK export network.
Enterprise Finance Guarantee
37. Currently this scheme excludes exporters.
However, the Business Committee observed in its recent inquiry
that other Member States such as Holland were able to negotiate
a way round the EU restrictions while the UK preferred to leave
their exporters without cover and therefore uncompetitive.
THE RELATIONSHIP
BETWEEN GOVERNMENT,
INDUSTRY AND
THE BANKS
UK manufacturing investment performance
38. If we step back for a moment and compare
UK performance with some of our near neighbours we can get a glimpse
of what the UK could achieve with a more robust and consistent
framework encouraging manufacturing investment.
39. According to the Office of National
Statistics, UK manufacturing investment declined 40% while gross
value added (GVA) increased by 5.3% and numbers employed in the
sector fell by nearly over 30% in the 10 years 1998 to 2007.
Table 1
UK MANUFACTURING PERFORMANCE 1998-2007
| Year | GVA basic prices £ billions
| Average numbers employed (millions)
| Net investment £ billions |
No of companies |
| 1998 | 150 | 4.4
| 20.4 | 169,376 |
| 1999 | 150 | 4.3
| 18.1 | 170,196 |
| 2000 | 149 | 4.1
| 17.0 | 167,289 |
| 2001 | 145 | 4.0
| 16.3 | 164,718 |
| 2002 | 144 | 3.8
| 13.2 | 162,212 |
| 2003 | 142 | 3.5
| 12.7 | 157,894 |
| 2004 | 149 | 3.4
| 11.7 | 154,967 |
| 2005 | 147 | 3.3
| 11.3 | 153,262 |
| 2006 | 152 | 3.2
| 11.4 | 151,365 |
| 2007 | 158 | 3.1
| 12.0 | 149,101 |
Annual Business Inquiry June 2009.
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40. Using the EU's AMECO ECFIN database we can compare
French, German and Spanish performance on a similar basis.[8]
41. Thus, over the same 1998 to 2007 period, French,
German and Spanish manufacturers grew their manufacturing GVA
in "constant" 2000 Euros by three to five times the
UK rate and in doing so kept their manufacturing employment levels
significantly higher than the UK.
42. As a result France, Germany and Spain have all benefitted
from an additional 15-25% rise in national wealth which has flowed
through their economies, creating extra demand for other sectors
as well as of course making an extra contribution to Government
coffers.
Table 2
MANUFACTURING GROSS VALUE ADDED COMPARISON CONSTANT 2000
EUROS 1998 TO 2007
| 1998 |
| 2007 |
| % change 1998-2007 |
| Country | Sector
billion
| Nos employed millions | Per employee
`000
| Sector
billion | Nos employed millionPer employee
`000
Sector GVA
Nos employed
GVA per employee
|
| Germany | 395 | 7.7
| 52.3 | 494 | 6.7
| 72.8 | 25 | -13
| 39 |
| Spain | 98.5 | 2.6
| 36.1 | 115.1 | 2.9
| 39.8 | 17 | +12
| 10 |
| France | 188 | 3.7
| 51.3 | 216.8 | 3.2
| 66.7 | 15 | -14
| 30 |
Sources: AMECO ECFIN.
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Productivity versus value added
43. For historic reasons, and as a comparatively open
economy, UK policy mainly focused on productivity and competitiveness.
GVA has only come into focus more recently.
44. And the policy had some success. Government initiatives
such as the Manufacturing Advisory Service pushing lean manufacturing
techniques have vastly improved UK productivity growth and at
over 50% (GVA per employee) outperformed increases in France,
Germany and Spain (10-39%) over the period in question.
45. But basically this improvement has been achieved
by paring back and cutting employment numbers, whereas Spain actually
increased manufacturing employment and France and Germany reduced
their proportions (13-14%) by under half the UK drop (-30%) and
invested for the future.
Table 3
UK GVA AND INVESTMENT PERFORMANCE 1998-2007 PER EMPLOYEE
AND PER COMPANY
| Year | GVA per employee £000
| Investment per company £000 |
Investment per employee £000 | Ratio £GVA to £investment
|
| 1998 | 34
| 120.4 | 4.6 | 7.35
|
| 2007 | 51 | 80.5
| 3.9 | 13.17 |
| Change % | +50 | -33
| -15% | +79 |
Source: workings based on Table 1.
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46. The nub of the issue here therefore is the tax framework
and what BIS can do to ensure that this recognises and rewards
the type of long term investment that characterises manufacturing.
Taxation, capital allowances and investment
47. Manufacturers working on improving their performance
know that improvement usually means having to do something that
they have never done before. Often that means investing in new
skills, new procedures and new equipment and of course risk.
48. In the UK, businesses' Corporation Tax liability
is assessed before they write down any machinery unless there
is a special allowance for the type of investment they make. Other
countries treat this depreciation differently.
49. The UK's capital allowances have varied quite considerably
over the last 13 years making investment planning more complex
and in essence encouraging a short-term approach. (For a description
of the myriad of changes in UK capital allowances please see HMRC
website http://www.hmrc.gov.uk/manuals/camanual/CA10040.htmIDAVKIKI
)
50. In an interesting paper Tax Reform—A manifesto
for a balanced economy EEF shows UK manufacturers using the
20% capital allowance will take 30 years to fully depreciate their
investment against tax on the reducing balance basis that applies
in the UK. This 30 year tax depreciation period for manufacturing
machinery in the UK compares with radically shorter periods in
competitor countries eg USA three to 10 years; France 10-20 years,
Germany 10-16 years. Note: if the capital allowance is reduced
to 12½%, the tax related write down extends out to 53 years.
CONCLUSIONS
51. Bounded on the one hand by a relatively unfavourable
and oft-changing investment tax regime and on the other by banks
that require entrepreneurs to put their own homes up as security,
SME manufacturers in particular have preferred in part to manage
improvement through their ability to change the size and configuration
of their workforce, training for specific workshop needs or, where
that's not been possible, by taking on foreign workers.
52. Meanwhile the challenge to increase the UK's productive
capacity grows.
53. The typical replacement cycle for modern manufacturing
machinery has now shrunk to five to eight years. But the UK tax
system is still working as if it were on 30 years.
54. UK factories are underinvested compared with the
high value adding producers in Europe, USA and Japan.
55. Increasingly they face a threat from newly industrialising
countries such as India and China.
56. In the current economic environment the step change
in approach requires Government leadership to ensure awareness
and a coherent pan-Whitehall longer term manufacturing investment
friendly policy framework. The battle for lean manufacturing must
continue but now it must be yoked to strategies for manufacturing
growth and expansion, as well as competitive survival.
57. In line with the benefits that will flow from such
an improvement, this step change will need to involve all manufacturing
stakeholders from finance and customers to future employees and
local government, all of whom will find their own challenges in
the new technologies involved.
SME MANUFACTURERS AND
THE BANKS
58. Our experience is that SME owners/MDs are often experts
or "technicians" in the products and processes they
use. They may not be experts in finance. For that they rely on
third parties (eg accountants) whom they may see only three or
four times a year (having to pay for the privilege) and that these
advisers/consultants may not know the business that well.
59. If the bank that the firm has been with for many
years turns a request down or imposes somewhat stiffer charges,
the SME tends to take it for granted that since this is the bank
that knows the business best, this is the best offer that's going
to be available and that other banks will only offer tougher conditions.
60. A local or mutual provider or bank may overcome this,
but so might "nudges" through business groups and trade
associations highlighting the more competitive deals achieved
by peer businesses.
Banking Sector Environment
61. EAMA members believe that banks have forgotten how
to do business with manufacturers. Manufacturers are good sources
of business for banks because they typically have longer term
requirements across a wide variety of services (eg deposits, overdraft,
transmission and investment).
62. In the past OEMs used to show their (SME) suppliers
what they needed to do to develop a successful relationship with
them. If the banks' approach is one of relationship building (rather
than management) then they should offer guidance in a similar
vein.
Personal guarantees
63. UK banks have a strong preference for personal guarantees
(see also under Question 15 EFG below). Their view is that statistically
they get a much better outcome on loans where the main protagonist
has put up some personal guarantees as collateral. This is a fact
of life for most SME owners. But of course putting your family's
home on the line may simply be too much for many, particularly
in uncertain times and so goes to undermine confidence and increase
wariness and caution, particularly when the banks can so easily
change your arrangements overnight as they did on 2008-09.
ADDRESSING FUTURE
RISKS
64. The banks hold the whip hand when it comes to their
dealings with SMEs.
65. From the SMEs point of view, in 2008-09 the banks
imposed new, arbitrary, one-sided conditions. Finance dried up
over night. The risk of that happening again is very real to SMEs.
They want a sustainable banking relationship, but are doubtful
whether it's achievable.
UK—EU comparisons on access to finance and associated
costs
66. Eurobarometer's Access to Finance Report (published
in September 2009) covers many industries (60%), such as manufacturing,
construction, distributive trades and logistics, as well as services
(40%) with a particular focus on SMEs (92% of all responses).
67. The report indicates that banks play a more central
role as supportive business partners in Germany, France and Italy
(countries all with a similar or higher level of dependence on
trade) than they do in the UK, where firms use a greater variety
of sources placing perhaps a greater demand on cash flow.
68. To summarise this study shows:
— UK suppliers may have had more pressure on their cash
flow than their competitors in France Germany and Italy. Standard
payment terms are much shorter for example in Germany.
— Banks are much more closely involved with their business
clients, with bank loans far more prevalent in the other three
countries than in the UK.
— French and German companies are more likely to be
benefiting from financing terms that have been maintained at pre-crisis
levels. Terms for UK and Italian firms are much more likely to
have got tougher.
— One of the key changes for UK companies was the cut
in the amount they could borrow. German, French and Italian firms
were not hit to the same degree.
— Loans in Germany, France and Italy are more likely
to go on fixed investment, where the plant can be used to pay
off the loan. UK companies are more likely to spend it on running
the business, with more than two in 10 using it for R&D and
training.
INVESTMENT
69. Companies supplying into innovative or high value
added markets have to keep investing to innovate and upgrade performance
in plant and skills. If they don't they fail. And where they fail
they threaten the supply chain that depends on them all the way
up to the original equipment manufacturer (OEM).
70. So banks must be encouraged to step up as partners
to facilitate investment not just with the OEMs but with these
crucial supply chain link SMEs. Without that investment UK firms
and the supply chains that depend on them will be lagging competitors
who are installing the latest equipment now.
TECHNOLOGY
71. Looking forward, manufacturing faces a period of
considerable change, including rapid technological innovation
in production processes and associated machinery.
72. Technology life cycles are shortening. Machines that
have a fully functional life of 25 years may only be fully competitive
for a much shorter period, so technological advance is actually
eroding machinery's residual value. As a result:
— Leasing is becoming more important.
— Ownership is not such an issue.
— Business models are changing/need to change.
73. It's important to understand how banks are going
to go about this changing model when Government policy will provide
less favourable terms for manufacturing investment (ie withdrawal
of investment allowances)—what criteria will the banks use
in the assessment platform on which sound judgment will be made.
74. If the UK is to promote high-tech industry and exports
then it's crucial that the financing framework is able to tackle
these changes on an internationally competitive basis.
75. A recent four-country EAMA automation survey found
that the other countries (Germany, Spain and Sweden) all offered
a wider menu of financial support for example.
24 September 2010
8
Unfortunately UK data on this database is only available up to
2005, hence the need to use data sets from two different sources.
Although it's not ideal this approach does provide useful indicators
as we observe changes in performance within the data sets. Back
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