EEF blog

From Luke Johnson - chairman of Channel 4 and manage of Risk Capital Partners, a private equity firm - in today's FT:

Something has been troubling me for a long, long time. I have a certain regret about the industries to which I have devoted my attention. I love fields like hospitality and the media, where I have spent much of my career. I understand how the economics work: restaurants and broadcasting can offer high margins and excellent cash flow, and providing diners and viewers with pleasure is hard to beat.

But a part of me would have loved to have been a genuine manufacturer. There is something authentic, something noble about making physical objects. It appears to me the essence of capitalism. Service and support sectors are all very well, but their output feels so much less tangible than a production business. Moreover, economies need balance: that way they are better equipped to ride out downturns.

Success in manufacturing needs at least four ingredients that are in short supply in countries like Britain. First, it needs patient capital - returns are rarely quick or indeed easy in many manufacturing spheres such as automotives, machinery or electronics. Second, it needs steady capital expenditure - unlike activities such as media, for example, which demands little. Third, it needs an army of sub-contractors and suppliers supporting the core fabrication. And finally, it needs engineering and technical skills in the workforce.

In truth, I have found service industries an easier and more certain path to profit than manufacturing. I served as a director and part-owner of a producer of large print presses, but the wild fluctuations in orders and work-in-progress were scary, and the quality of the global competitors was intimidating. Endless research and development expenses absorbed heavy amounts of cash flow. Low-cost foreign rivals can always undercut you. Meanwhile, regulation and taxation place an ever-greater burden on any factory owner. In this safety-first age, it often feels as if we have become almost too squeamish to cope with the grit and noise of manufacture.

But manufacturing matters not simply because of vaguely romantic notions about creating things. It provides well-paid blue-collar and professional jobs. It generates exports to help offset trade deficits generated elsewhere in the economy. It adds far more value pro rata than service industries. Every major plant fosters clusters of other businesses. And with R&D, patents, investment and original technology, it is possible to construct formidable barriers to entry for rivals.

And I think high-quality manufactured goods stimulate a pride and belief in industry and business that other outputs cannot match. Just look at how confident Germans are in their motor vehicles and machine tools.

Meanwhile, in the UK, our largest industry is financial services: what reputation does that profession have among the public? I would think it ranks alongside grave-robbing and arson in general esteem.

These days most manufacturing of scale needs to be global and best in class. That means great technology, a highly skilled workforce and solid leadership. And it probably requires investors and management to tolerate lower pay and returns than the rewards available in the City.

Government could do much to balance out these challenges - probably through favourable tax policies. I have never fully understood why lines of work such as property development, investment banking, hedge funds and private equity are so lucrative, and engineering much less so.

In almost any country, dealing in property, shares or companies will likely lead to riches far faster than running factories to produce the goods we all need. I would love an economist to explain to me the flaw in our system that leads to this far from ideal outcome.

Most intelligent entrepreneurs and executives desire to invest their work with meaning. They like the idea of improving the world while earning a living. And many of us who mostly shuffle paper secretly admire those in the Hard Industries, who manufacture things, in spite of all the obstacles.

Yesterday, EEF held a fringe meeting at the Labour Party conference with the Work Foundation and Pat McFadden, the Industry Minister, to debate the role that manufacturing should play in the economy and how best to achieve it.

(Given the dire state of the public finances, it seemed somehow appropriate that we were meeting in Brighton, the home of Fatboy Slim's Skint record label.) 

But despite this and the still fragile state of the economy, there was a sense of optimism in the room that the coming decade will see a resurgent manufacturing industry in the UK that is poised to repeat the wave of innovation that we saw in the 1930s after a similar period of economic crisis. 

Also encouraging was a shared understanding of the role that government should play, in particular setting a clear direction for the economy, mapping out the markets and technologies which will bring increased prosperity to the UK and ensuring that industry has access to the finance that will enable it to bring the new generation of products and service to market.

Such was the strength of feeling on the finance issue that the Prime Minister responded within hours by announcing the creation of a new National Investment Corporation.

The Prime Minister announced a new National Investment Corporation to provide finance to manufacturers and other growing businesses.

This could be wonderful announcement if it helps manufacturers finance truly global growth. Or if it helps manufacturers finance investment in intangible innovations. Or if it helps them finance capital-intesive development of new technologies.

But it could be a bad thing if it simply replicates the plethora of ineffective government backed schemes to address the seemingly intractable finance gap. And how does the NIC fit with the Rowlands Growth Capital Review?  

We'll wait for the details to let you know our verdict.

Oh - and how much will the NIC cost? £1billion.

From the Independent's business diary:

"Who is the most influential man in British manufacturing? Steve Radley, director of policy at the manufacturing organisation EEF, must be in with a shout for the title. He launched a high-profile campaign yesterday morning for an extension of the car scrappage scheme – within hours, Lord Mandelson had granted his wish."

With the UK scrappage scheme to be extended, one obvious question is what would have happened if it hadn't been extended.

Of course now we'll never know, but we might get some insight from the US. The $3bn cash-for-clunkers scheme only lasted one month in the US. When the incentives were in full swing, over 14.1 million new cars were registered (at a seasonally annual adjusted rate). The figure, an industry benchmark, hadn’t exceeded 10 million in 2009 until the incentive program began in July. Between 2000-2007, annual average car sales were 16.8 million.

The September car sales numbers are due out on Thursday. What will happen to car sales then?

Well, if the 16.8 million figure reflects a bloated industry, then a leaner one would probably produce around 12-15 million cars per year.

I'm betting the numbers fall, but not by as much as people expect. The pessimists are looking for growth to be around 8-9 million. I'm guessing you'll get around 10 million this month, and maybe a 7-8 million rate in September.

But does that mean the US scrappage scheme should have been extended? No, but dealers and manufacturers will suffer a fairly sharp autumn hangover after the heady days of summer.

We’ve been saying quite a lot about the risk of policy errors at this point in the economic cycle recently.  There is still a wide range of views on whether the UK is or isn’t yet out of recession. But there does appear to be more agreement on a long and bumpy road to recovery and the need to ensure that stimulus measures remain in place until the economy can stand on its own two feet. 

So first up is the car scrappage scheme – announced in the Budget and came into effect in Mid-May.  At the current rate the cash should run out in the next month or so.  Over the summer new car registrations have picked up and manufacturing output in motor vehicles and other sectors supplying to car manufacturers has also turned a corner.  But can this trend continue in the rest of the year and into next without incentives provided jointly by government and industry. 

EEF and other manufacturing bodies reckon not.  So we’ve written to the Chancellor calling for the scheme to be extended until February next year.  Our argument – as outlined in the letter goes like this;

‘Although the current climate has stabilised, output levels are still below pre-recession levels. Wary about the prospect of a sustained recovery and ongoing concerns about access to credit and cashflow means investment intentions remain low.  Consequently any relapse in auto industry output, coupled with the expected deterioration of the UK aerospace and defence industry in 2010, could pull manufacturing and the economy back into recession in the New Year’  

Rumours suggest that we might have won this argument.

This is the questioned being asked in the UK and the EU about the Magna deal for Opel.

Lord Mandelson has been asking some difficult questions about the competitiveness and costs of Magna's plans for Opel. But now the EU competition chief Nellie Kroes has warned EU countries against bailouts and subsidies that:

"We cannot accept one government bribing companies in order to steal or end the jobs of another"

The problem stems from details of Magna's plan for job cuts. While German factories take the hit in absolute terms, the cuts hit the more efficient plants in Belgium, Spain and the UK relatively harder.

As the Economist puts it:

"Not even the German government’s two nominees to the Opel trust board, set up to run the company until it is sold, could bring themselves to support the plan. One of them, Manfred Wennemer, declared: 'We don’t have a solution that will eventually turn Opel into a competitive company.'"

The deal might be good short-term politics in the run up to the German general election, but the consensus view appears to be that over the long run it is bad business and bad economics.

The EU competition commission will consider the case against the deal. Don't be surprised if Magna gets cut out of the picture in favour of a restructured GM in the US.  

EEF hasn't run any events at the political party conferences for a while, but in the last set of conferences before the general election, and at a time when it is particularly vital to make the case for manufacturing, we are co-sponsoring events at both Labour and the Conservative conferences.   Both are outside the so-called 'secure zones' - i.e. you don't have to run the gaunlet of the tight security down there, so anyone can attend - and further details are below.

Joint EEF and Work Foundation event, labour Party Conference:

Do the British make anything anymore? Why the UK needs to nurture its manufacturing sector.

Panellists:

Rt Hon Pat McFadden MP, Minister of State for Business, Innovation and Skills
Stefan Stern, Financial Times
Stephen Radley, EEF
Ian Brinkley, Work Foundation.  

Tuesday 29 September, 12.45-2pm, The Old Ship Hotel, 31-38 Kings Road, Brighton, BN1 1NR.   


Joint EEF and Enterprise Forum event, Conservative Party Conference 

Looking to the future: the role of manufacturing in the UK economy. 

Panellists:

David Gauke MP, Shadow Treasury Minister
Patrick Minford, Professor of Applied Economics, Cardiff Business School
Stephen Radley, EEF

Monday 5 October, 12-1.30pm, Barbirolli Room, Radisson Edwardian Hotel Manchester, "Free Trade Hall" Peter Street, Manchester, M2 5GP.

The brothers and sisters at the TUC have been getting themselves exercised this week about when and how the government intends to implement the forthcoming Agency Workers Directive. 

Many in the trade union movement are desperate to get the proposal introduced, and in effect, before next year's general election in order to make it impossible for any future Conservative government to water down or even repeal it.

However, if they were hoping for some clarity on the matter when the Prime Minister stood up to address the TUC congress today, they may have been disappointed. 

Instead, he merely pledged to get the proposal onto the statute book before the end of the current parliament, with no mention of when it would actually come into force. 

This may sound like a matter of semantics, but it is an important point. 

The legislation will make it harder and costlier for employers to use agency workers to respond to increased demand at the very time when a recovery could be taking place.  Instead EEF has argued that the government should use the full implementation period (up to October 2011) before bringing these measures into force.  This would then allow the upturn to take hold, as well as giving companies the maximum time to adjust to the new requirements.

Of course, regardless of what the Prime Minister did, or didn't, say today it doesn't mean that the government wont go for early implementation - but this was hardly the definitive statement that the trade unions might have been looking for.   (Nor, in truth, has it provided the certainty that, for better or worse, would help business prepare for these changes.) 

For that we will probably have to wait till early next year, and after the results of a formal consultation this Autumn, when hopefully the government’s intentions will become a little clearer. 

While the inflation numbers get the flashy headline, the Governor of the Bank of England has been speaking about banks hoarding all his QE cash.

What he's saying is pretty important because it signals the Governor's desire to push rates below zero:

“Of course people have talked about whether it would be sensible to reduce the rate at which those reserves are remunerated and it is something which we are looking at.

“I think we certainly would not want to reduce the rate of remuneration on a certain level of reserves, that is part of the framework, but above some normal level we could have a lower rate at which they are remunerated.

“That would not change the overall level of reserves in the banking sector, that is determined by our asset purchases. What it would do is perhaps make the banks work a little bit harder to try individually to convert some of those reserves into other assets.”

“If you just reduce the rate at which you remunerate reserves that won’t convert it into lending to businesses but it might mean that they would purchase more short term gilts for example which would be adding to the effective size of the asset purchase scheme.”

Remember, the Governor voted to increase QE by £75bn, but was out voted. He's clearly still worried about the output gap and inflation in the medium-term.

Will we see negative interest rates on certain bank deposits at the BoE? That depends on how MPC members revise their views on inflation in the light of today's numbers and the broader prospects for recovery.

For a variety of reasons, the deflationary threat has remained dormant.

But the MPC is now walking a fine line between wanting to get banks to lend and needing to reign in QE if and when the economy recovers.