EEF blog

On Monday the IPPR hosted an event where Vince Cable spoke about his thoughts on ‘an industrial strategy for the UK’.

This was very much in the mould of thoughts rather than an actual set of policies.

In essence, so far, industrial policy for Cable seems to mean:

• A selection of sectors with good future prospects or existing UK strength;
• ‘Technology Policy’;
• Better procurement practice.

But before hares are sent running, it’s worth peering underneath each of these to see what they actually mean in practice.

A selection of sectors may scare some people off with memories of failed policies in years gone by, most commonly grouped under the heading ‘picking winners’.

To be clear, I don’t think anyone talking about industrial policy means bureaucrats picking out individual companies to receive government funds.

At the most it means picking sectors that ‘go with the grain of the market’ and even then there seems to be relatively little implication for the allocation of government resources.

So on Monday for example Cable talked glowingly of the automotive sector with the Automotive Council as something he saw as a ‘good model’. The Council allows the sector to communicate to government its policy frustrations and priorities for reform e.g. improving the supply of skilled apprentices – but it’s not a receptacle for government slush.

‘Technology policy’ may mean coin for the TSB. Last time I checked this is circa £300 million per annum. A one off £125 million for ‘supply chains’ seems headed its way this year too. Compare that with total business investment of about £110 billion in 2011 and you can see the sums aren't staggering even if they were tripled for argument's sake.

And in financially straitened times tripling doesn't seem that likely.

But perhaps there is another aspect to technology policy that I think Cable favours. And that’s its ability to transcend the Parliamentary cycle and give certainty of support to entrepreneurs and investors looking to develop ideas and technology into marketable business returns.

It seems we may already be on safe ground here - the Coalition hasn't taken an axe to the TSB it inherited from Labour and indeed with the demise of the RDAs it seems to have picked up responsibility (although given its small scale we need to be careful not to ruin what the TSB does well by swamping it with extra activity).

The last area is procurement where recent controversies following large scale government purchases have got a lot of people asking whether we’re mugging ourselves a bit compared with other countries on the continent i.e. the French and Germans seem to give more/all their government contracts to nationally owned companies.

The idea here is that perhaps the UK government needs to be taking into account a fuller range of costs and benefits than it currently does it – for example the impact on UK industrial supply chains. Maybe not a bad idea you might think.

But almost immediately after saying this, Vince Cable qualified his statement by stressing there would be a tension with securing the best price on procurement for the UK taxpayer. That leaves it pretty open as to what the net effect of a new approach might be.

So in summary, I’m not sure we’re much clearer on what industrial policy means in the UK today or how much different it looks in practice from what already happens.

For Jaguar Land Rover, 2011 proved to be a landmark year. The company delivered strong profits, invested over £1.5 billion in innovation and new products, created 3,000 jobs and breakthrough products such as the Range Rover Evoque.

In terms of numbers, sales were up almost 18%, with 80% of our volume coming from 177 export markets. And we ended the year with a strong showing, with over £500 million in profits and 37% increase in volumes in the fourth quarter alone.

Yet this remarkable turnaround since 2008 isn't due to investment from our parent, Tata Motors. The reality is that it's down to JLR's own investment in R&D and new products. Tata Motors is a long-term, strategic owner determined for us to be financially independent and sustainable business.

We're going stand or fall on our own, and that's why simply keeping pace with the competition isn't good enough to guarantee continued success.

JLR need to keep moving faster. We need to invest more in design, innovation and engineering. We need to keep developing new products.

From concept to final production, each Jaguar and Land Rover is made in the UK. Consequently, we're investing in the UK because it provides a natural launching point for our future growth and expansion.

Our two state-of the art R&D facilities in the UK are designing and developing 40 new products and variants. We're investing in our three UK manufacturing plants to handle a significant ramp up in volumes. And economies of scale mean we can grow in the UK, while helping to keep our costs base under control.

Looking at specific investments, this year we will begin construction on a £350 million state-of-the-art engine facility near Wolverhampton. We're also investing £100 million in an advanced research facility at Warwick Manufacturing Group to accelerate innovation. And since we can't innovate in isolation we've got TSB-backed projects on hybrid and plug-in hybrid technology.

As a large, profitable company we realise we're in a unique position to invest heavily in R&D and new products. We also successfully raised a £1 billion corporate bond last year and were fortunate to receive some government support - including through Regional Growth Funds - for our expansion.

But our investment in the UK poses a critical challenge: can our UK supply chain expand fast enough? About 50% of our materials budget goes to UK suppliers. But the UK auto supply chain is already at capacity, meaning further growth must come from new investment. OEMs like being near supplies that with high logistics costs or a critical business impact. So improving supply chain finance is vital to our continued success in the UK.

We know the world has changed. Our competition doesn't just come from Stuttgart, Sindelfingen and Inglestadt, but from Singapore, Shanghai and Sao Paolo as well.

And, while a key element of our global growth plan will be overseas expansion, we want this expansion to build off our investments in a bigger and stronger UK presence.

-- Jeegar Kakkad is UK Government Affairs Manager at Jaguar Land Rover

The decision:

The bank rate was held at 0.5% and the asset purchase programme was extended by £50bn to £325bn.

All nine members voted to extend the asset purchase programme. Two members voted for a £75bn increase.

Recent developments:

Financial markets

• European financial markets fared better since the the ECB’s additional long-term refinancing options (LTROs) in December.
• Short-term bank funding markets had also improved.
• Spanish and Italian bond yields had come down, though remained elevated.
• UK short-term interest rates had changed little over the month.
• Equity indices had started to improve.

The international economy

• Upside news on near-term prospects for global economy including positive PMIs.
• US growth looking stronger: 0.7% in 2011 q4.
• Even Euro area PMIs picked up in January, suggesting growth had not continued to weaken.

Money, credit, demand and output

• UK GDP fell 0.2% in the last quarter of 2011, broadly in line with expectations.
• Since then PMIs have improved sharply, though other surveys were weaker.
• First quarter of 2012 may be a little stronger than previously expected.
• Credit conditions for businesses and households remained tight, but bank funding markets improved since the end of the year which could lead to improvement.

Supply, costs and prices

• CPI fell to 3.6% in January, as expected.
• Employment rate broadly flat since November.
• Pay growth remained subdued and expected to remain modest.
• Little significant movement in medium-term inflation expectations.

GDP and inflation projections

• Slight contraction in the final quarter of 2011 followed a period of sluggish growth.
• Monthly indicators pointed to a pickup in output in January.
• There are continued substantial uncertainties surrounding the outlook for growth, most significantly due to developments in the euro area.
• Growth will be dependent on whether households start spending again (as real income squeeze abates); cost and availability of credit; impact of asset purchases on demand.
• Likely path for inflation also highly uncertain, with several unknown factors such as the path of energy prices.

Key risks to inflation

• On the upside:
  - companies’ input costs rising further
  - disruptions to gas and oil supply
  - earnings growth outstripping slow productivity growth
• On the downside:
  - growth too weak to absorb the pool of spare capacity
  - Euro area crisis increasing banks’ funding costs and feeding through into the availability and cost of credit
  - Slower than expected growth in household spending

JJ Churchill is a high-precision engineering SME business in the aerospace, powergen, defence and high-horsepower diesel engine sectors.  Products include the development and production of advanced gas-turbine blades and complex diesel engines assemblies.

During the last recession JJ Churchill decided that it was imperative to continue to re-invest. This stood us in good stead at a time when many of our competitors were freezing investment decisions. These investments have meant that we achieved profitable growth of 25% in 2011 and we are now looking ahead to the next step in our 7-year business plan, that of overseas expansion.

Setting up a manufacturing facility in a foreign country is a daunting step for any business, especially an SME. But our customers – such as Rolls Royce and Siemens – expect their first-tier suppliers to offer them a local service in Europe the Americas and Asia.

The company’s need to grow, alongside this pressure to regionalise, meant we needed to enter the market for high volume gas-turbine blades (rather than just the development and spares market). Without the move into the high volume market, our strategic plan to become a £50m business by 2019 risked stalling.

But here’s the ‘rub’. When it comes to the manufacture of high volume gas-turbine blades there are two principle costs: the cost of constantly re-investing in advanced capital equipment; and the cost of skilled labour.

JJ Churchill has been able to use technology to balance the cost of labour and drive consumer value in the relatively competitively un-constrained developments and spares market. But this model breaks down when it comes to high volume gas-turbine production. The UK has the ideal skills present for this work, but the UK's investment environment is not competitive.

Advanced machine tools now cost ten-fold what they did 15 years a go. At the same time their competitive life (not to be confused with their productive life) has come down from around 10 to five years.

The UK government’s approach to capital allowances has simply failed to stay synchronised with manufacturing reality. At the same time other economies have gone out of their way to attract inward manufacturing investment.

Without a much more attractive investment environment, high technology, high-value added manufacturing will not be sourced in the UK.

JJ Churchill’s decision to expand overseas is exciting and will ultimately secure our growth plan and consequently jobs in the UK. The UK will remain the source of our approach towards gas-turbine blade manufacturing process innovation and spares supply. So in one sense our move to manufacture overseas is no loss to the UK and therefore ‘invisible’ to the government.

But the pity is that if the rhetoric of ‘re-balancing the UK economy towards manufacturing’ (oft heard from both the previous and current governments) had more substance – including a full overhaul of the tax treatment of capital to better reflect the life-span of modern machinery – then this ‘invisible’ story of overseas investment could very easily have been a good news story for the UK.

Roy Taylor is the Managing Director of Malthouse Engineering, a Sandwell-based steel profiling company. Roy has been MD for the last 28 years and has lead the firm from a one site, £1 million turnover firm to a £19 million turnover, 5 site organisation employing over 150 across the country. He is a former President of the National Association of Steel Stockholders and has recently been appointed as an Ambassador for the Sandwell area.

A government campaign during the second world war said that careless talk could costs lives. Fast forward 60 years and perhaps we are now in a situation where careless talk could be costing our economy.

My company, Malthouse Engineering, is the UK’s largest steel profiler. Trade in the last twelve months was very positive for us. Figures are substantially better than they were two years ago. Interest from customers in new orders is positive, and we have now been able to pay back our employees who took a 10% wage cut at the start of the recession to reduce costs and prevent redundancies. Our bank and our credit agencies are happy.

But looking ahead, things are more uncertain.  

It is often said that financial markets trade on confidence. Small and medium sized enterprises are no different. Innovation, investment and development have been key to Malthouse Engineering’s success over the last 28 years and they will be in the future too. But making investments requires confidence, and the increasingly negative stories we hear about the economic outlook mean we cannot be confident about 2012. This uncertainty is stifling the investment we need to make to grow. This kind of uncertainty could hinder the growth our economy needs to avoid another recession.

We hear and read continually that the collapse of the Eurozone is imminent, the UK could be downgraded and our financial system as we know it is on the verge of destruction. This does nothing to build confidence and only fuels uncertainty.

Uncertainty is causing us to hold back investment in new projects which could result in missed opportunities, lack of expansion and reduced efficiencies. We have put on hold projects to improve our capabilities and increase our output. Experienced, unemployed engineers that could be employed have not been hired

We are not alone in this and that is concerning. When small and medium enterprises do not have the confidence to invest in developing and innovating the effects can be wide-reaching: suppliers won’t receive orders; Banks won’t be able to lend; the unemployed won’t be employed. People wont or cant buy houses and therefore wont need as many washing machines , vacuum cleavers etc or indeed cars.

2011 was a strong year for us, yet we only read about doom and gloom.

We are busy in the areas of agricultural machinery, earth moving machinery, tool making, energy and machine tools. Negative stories – which are often unrepresentative of the situation in the real economy – could become a self fulfilling prophecy where our uncertainties become realities. In 1812 we did not have such a prevalent media so our society and economy was not surrounded by the negative atmosphere we see now, if the same were true today then I am certain we would be investing as our forefathers did in the first industrial revolution. But there is good news to be found, and we should make that clear.

I believe, and so do colleagues in the manufacturing industry, that if enough of us got together to talk about the positive performances of our firms then perhaps we could start turning the tide of negativity and give the UK economy a boost.

-- Roy Taylor, MD Malthouse Engineering

On Friday, ONS will publish figures for Business Investment in the final quarter of 2011. Ahead of this, three UK manufacturers will be talking about their investment decisions on our blog:

1. Today: why, for Malthouse Engineering, gloomy headlines are hitting confidence and discouraging investment;
2. On Wednesday: why the UK’s relatively uncompetitive investment environment has encouraged JJ Churchill to invest overseas;
3. On Thursday: why Jaguar Land Rover is investing in the UK
   

The financial crisis and recession hit the UK hard. The recovery in output for the overall economy has been painfully slow. UK manufacturing has seen a stronger rebound but a lasting scar from the financial crisis is the fractious relationship between the manufacturing and the financial services sectors.

EEF’s quarterly Credit Conditions Survey has consistently recorded a balance of companies reporting an increase in the cost of credit since the onset of the financial crisis, particularly in terms of costs outside of the headline interest rate. The Bank of England has slashed Bank Rate but margins to SMEs have widened considerably i.e. the full benefit of this reduction is not being passed through.

Business-bank acrimony is a discussion topic that doesn’t seem to be going away. This week we had the final release for the Project Merlin agreement where the UK banks made available £215 billion in lending to UK private corporations (excluding other banks) in 2011. However, critics have pointed out the flow of net lending (gross lending extended by the banks less repayments made) to private non-financial corporations actually contracted by £9.6 billion in 2011.

And today the OFT appears set to turn up the heat on the UK banks.

Clearly there are both demand and supply factors at play. Companies are cautious about borrowing because of the economic climate. Many are understandably keen to pay down debt rather than take more on. But supply side factors, including cost and availability of finance, are not helping.

It seems like every second manufacturing SME around the country has a horror story to tell about how the financial sector – and banks in particular – was not supportive when their company needed them most. The result appears to be distrust.

Worryingly this distrust seems to be extending to the point that some SMEs are now choosing to opt out entirely of using external finance to support either their investment or their working capital. The proportion of EEF’s member companies identifying no borrowing needs has steadily drifted up from the low 40s in 2009 to nearer to 50% in 2011q4.

We asked in 2010 how many of our members used only their own retained earnings to fund their expansion; at that time the proportion was 18%. I fear that this has now increased and cannot be positive for growth for the sector or the wider economy.

UK manufacturing needs a strong and supportive financial sector. At a time when the economy is in desperate need of strong business investment growth, the government and the financial sector need to be doing all that they can to relieve credit constraints on businesses looking to grow.

Remember that the government is relying on OBR forecasts of 7.7% growth in business investment this year to drive overall growth. In March 2011 they forecast 6.7% growth in business investment in 2011; that forecast has now been cut to -0.8%. We don't want a similar story in 12 months.

One of the avenues being pushed hard by the government and by the big banks through their Business Finance Taskforce is increasing the supply of alternative sources of finance outside of traditional bank products like overdrafts and term loans.

That’s why at next month’s National Manufacturing Conference there will be a workshop specifically looking at alternative sources of finance. The workshop will be an opportunity to showcase some of those alternative sources of finance that are gaining greater prominence with presentations on asset finance from Lombard, growth capital from the Business Growth Fund, and the suite of government-backed funds managed under Capital for Enterprise.

It will also present an opportunity for delegates to press a panel of experts on how they find out about sources of finance outside of traditional bank lending as well as putting out some challenges as to where the gaps remain. For more information about the workshop and our conference in general visit http://www.manufacturingconference.co.uk/