“The problem many businesses have got is they would like to invest more and they know how to spend the money productively, but either the banks won't lend or the Government is taking it away from them in tax.“The Government wants to make the UK the most competitive place for manufacturing in the world. But when you look at the tax system and how it treats capital investment, we're one of the least competitive in the world.”- Midlands-based EEF member
For UK manufacturers, there's no such thing as a sustainable competitive advantage. Continual reinvestment in new technologies marks the difference between success and failure. Tax changes that curb cash flow or add costs only place a cap on growth.
So while EEF's latest Business Trends Survey shows manufacturing investment intentions are strong and rising, there are three intertwining stories behind the numbers that should give the Chancellor cause for concern in the run-up to his ‘Growth Budget'.
The overall number masks a clear small-large split. Over half of larger companies (with over 200 employees) said they planned to raise investment in the next 12 months, with only 8% planning to cut back in the next year. But smaller companies were less likely to be planning investments in the next 12 months, with only a third of companies with less than 100 employees planning to increase investment and close to 20% planning a cut.
When we talk to companies about their investment intentions, many smaller firms still perceive too many undue risks around making longer-term investments in the UK. Although they say they're busy, many are opting for smaller, ‘make-do-and-mend' investments to keep existing equipment ticking along.
Many firms also say that their planned investments aren't necessarily going to be made in the UK. The larger OEMs have always been mobile and are consequently weighing up the benefits of making their next big investments in the UK if their fastest growing markets are in the US, Latin America or Asia. But smaller manufacturers are mobile too: innovative firms further down the supply chain are feeling the pressure to follow their customers abroad.
Consequently investment doesn't have to happen in the UK, and if it does, it isn't necessarily going to be the type of investment that drives long-term, balanced growth.
The twin dynamics that could drive long-term growth in manufacturing are large companies creating markets for a dynamic, diverse supply chain and innovative, agile suppliers attracting large, mobile multinationals to the UK.
The danger for manufacturing and the economy is that the lack of larger companies would potentially slow this dynamic, leading to a hollowing out of supply chains and placing a cap on future growth.
Consider the case of a small, Midlands-based firm that supplies to Rolls Royce (which is expanding in the US and Singapore). The machines the supplier uses to produce engine parts cost the same the world over, and the differences in labour costs are negligible. Why should the company invest and grow in the UK when it receives greater benefits from more modern tax systems elsewhere?
An important part of encouraging firms of all sizes to invest in the UK is a modern tax system that matches rising cost and shorter investment cycles for advanced technologies and recognises the fact that other countries are using tax breaks to win away our investment.
UK manufacturers replace their machines every 7-8 years. The cost of capital investment is rising and investment cycles are shortening as new technologies render existing equipment obsolete. The faster the rate of this depreciation, the earlier manufacturers are forced to reinvest in new, more productive equipment.
The UK's tax system only recognises that cost of investing in new technologies only after 30 years. This year in the US, manufacturers will get to write down their capital expenditure immediately. The German tax system only takes 13 years to reflect the full cost of investments in new machinery and equipment.
Antiquated tax system raises costs of investing in UKAverage number of years for tax system to recognise cost of capital equipment, 2011Source: US Congressional Research Service, PWC & EEF
Rather than closing this costly and uncompetitive gap, the government's plans will add to the cost of investing in technology and growth in the UK.
UK manufacturers are growing fast coming out of the recession. The government, however, can no longer take it for granted that manufacturers of all sizes will always want to invest and grow here in the UK.