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The Rt. Hon. Patricia Hewitt

The Future for Manufacturing Industry

The Rt. Hon. Patricia Hewitt

Merrill Lynch, London


Wednesday, January 23, 2002


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Thank you for your warm welcome. I am delighted to be here and to have seen Merrill Lynch's new trading floor – as you know the largest in Europe.

Here in the heart of the City, it is particularly apt to recognise London's role as one of the world's most important financial centres.

And as a leading provider of financial services, Merrill Lynch is working in a sector that has helped make Britain one of the best places in the world in which to do business – a sector responsible for 5 per cent of the British economy.

But today I am not going to concentrate on financial services. Instead, I am going to discuss a sector that accounts for four times the output of the financial intermediation sector and employs three and a half times as many people – in other words, manufacturing industry.

Right now, it is very tough for manufacturing and for manufacturing workers. Output in manufacturing industries is down 5.5 per cent in the last 12 months. 153,000 jobs have gone from the sector in the same period.

This problem isn't unique to Britain. Last year, output fell 5 per cent in Germany, 6 per cent in the USA, and 14 per cent in Japan. No country can escape the downturn in the world economy, particularly after September 11th. There has never been a recession in the US that hasn't caused a contraction in Britain.

But with redundancies being announced almost daily, with new figures from the CBI today showing a continued decline and - as we learnt last week – manufacturing productivity down too, it is hardly surprising that some commentators are predicting the death of UK manufacturing.

So is it time to write the obituaries for manufacturing? I don't think so. I am here to praise British manufacturing, not to bury it.

Short term, the outlook for manufacturing is very difficult. But look ahead a year or so, medium and long term, the prospects are bright.

Today, I am going to argue for a viewpoint that has been seen by some as out of date, particularly in the City: that manufacturing matters; that modern manufacturing is central to our future as a leading knowledge-driven economy; that Britain is extraordinarily good at modern manufacturing – and, with the right policies, can be even better.

Myth 1: Manufacturing is out of date

There are three myths about manufacturing. Myths that damage our ability to get people and investment into the industries and businesses of the future. Myths that we need to dispose of.

The first is the idea that manufacturing is irredeemably old fashioned and out of date, the industry of the past.

Yes, we are in the middle of an extraordinary technological revolution. You are living it here in the City of London, where transactions worth five and a half trillion pounds are traded on the London Stock Exchange every year.

But the technological revolution goes way beyond information and communications technology. It stretches from products based on expert knowledge of chemistry and physics such as pharmaceuticals, materials science and miniaturisation, through to the advanced monitoring and control systems that make up an efficient transport system.

These new technologies aren't leaving manufacturing behind. They are transforming every product, every production process, every sector of our economy.

Ever since the industrial revolution, manufacturing has been about new ideas, new science and new technologies - applied to creating new products and processes. That's what is happening in Britain today.

Journalists – and dare I say it, some City analysts - talk scornfully of 'metal bashing'.

Steel

Take steel, for example. Too many people think of it as low tech, when the reality is that steel is a high technology industry – 70 per cent of steels used in cars today did not exist 10 years ago.

Our high-tech expertise in steel engineering is exported to 170 countries around the world. The expertise of engineers at Sheffield Forgemasters has built castings weighing a massive 285 tonnes and exported to the US, China and the Middle East. Bridon in Doncaster has won the biggest world order for steel rope, and is shipping lengths of steel 9 km long all the way to Australia.

New generation steel can help us reach our environmental targets. Because the new grade of electrical steel used in induction motors is three per cent more efficient, were it applied across industry this innovation alone could reduce UK carbon emissions by 3.5 million tones a year.

And we heard earlier this month about the driverless taxi activated by a smart card that is undergoing trials in Cardiff. The steel and related technology for this transport of the future is provided by Corus.

Automotive

One of the main customers for the new, lightweight metals is, of course, the automobile industry. I remember the days when motor manufacturing was a symbol of the 'British disease' – poor quality, low productivity, terrible industrial relations.

That is not the case today. Britain is now home to the two most productive car plants in Europe, not to mention the leanest, fittest truck plant. Over the last two years overseas companies have invested over £400 million in the automotive components sector and have created or safeguarded thousands of jobs. Car production is at historically high levels and over the last 5 years to 2001 we have exported, on average, over a million cars a year – a fivefold increase in real terms since 1986.

We're building great products in Britain like the new Mini, Peugeot's 206, the new Range Rover and the X-type Jag. Nissan is building the new Micra in Sunderland, General Motors has invested £200 million in Ellesmere Port and Honda's has recently opened a second car plant in Swindon, creating 1000 new jobs and bringing their total investment to £1.15 billion.

Honda also provides a good example of the modern industrial relations climate that we in Government have worked hard to shape through our Fairness at Work legislation. I am sure that the recent union recognition deal will benefit the company and I look forward to seeing more examples of industrial partnership. It can play such a key role in building successful manufacturing companies and in driving up productivity.

As Honda's President, Hiroyuki Yoshino, said when opening this facility 'We believe the UK is a great place to build cars'.

Britain is also the world leader in Formula 1 racing, with nine out of ten Formula One racing teams based or designed in the UK. Even Ferrari have a British designer. Motorsports aren't just a great day out - they're at the heart of a group of world-beating engineering companies, creating new products for the automotive and aerospace industries, and employing 40,000 people. Today, autosport engineering in the UK is a £3 billion a year industry, of which 60% is exported.

It isn't just cars and trucks where Britain is a world leader, we also lead in aerospace.

Defence and aerospace

Our defence and aerospace industry generates an annual turnover of £23 billion a year and employs over a quarter of a million people. We know very well the difficulties facing the airline sector as a result of September 11th - which is why we acted quickly to provide insurance guarantees after the terrorist attacks – and my department continues to monitor the situation closely.

Since its formation 30 years ago, Airbus has risen to be one of the only two large civil aircraft manufacturers in the world and it recorded 53% of total orders in 2001. In Britain we design and manufacture the wings for the whole range of Airbus aircraft – indeed Airbus programmes provide over 25,000 quality jobs for British workers in over 300 companies.

Airbus's chief American competitor – Boeing – also recognizes the strengths of British engineering and technology.

They spend around £1 billion annually with British companies and have recently established a partnership with Sheffield University's world-class engineering faculty. I recently heard Boeing's UK chief executive, Tom Bell explains the investment: 'If we want to be the best in the world, we have to partner with the best in the world, which means being in the UK.'

Our continuing success in defence is demonstrated by the fact that the UK is the United States' only full partner in the Joint Strike Fighter programme, the biggest fighter aircraft programme in history, worth up to £28bn to UK industry.

I am delighted that Lockheed Martin, which recently won the contract to take the programme forward, chose UK partners such as BAE SYSTEMS, Rolls-Royce, Smiths and others. These UK firms all won their place on the team on their own merits in a tough international environment.

Electronics

We lead the world in key areas such as electronics design, photonics, mobile network and broadcast technologies. We are the first nation to offer digital television over cable, satellite and terrestrial platforms, and we will be one of the first to roll out 3G mobile. And we're a world leader in new ways of working with technology to find new ways of doing business.

As a result Britain attracts global players – Hewlett Packard, Philips, IBM, Sun Microsystems, Nortel, Alcatel for example – that come to Britain to both to conduct research and to manufacture. When combined with our home-grown successes such as ARM, Bookham Technology, Pace, Invensys, Oxford Instruments, this creates a world-class electronics sector with a turnover of £45 billion.

Pharmaceuticals

Of course, our biggest world leading industry is pharmaceuticals. That sector alone contributes over £2.5bn annually to British GDP and directly employs around 60,000 people, over half of them in research. GlaxoSmithKline is the largest pharmaceutical company in the world with a market share of around 7.5%. AstraZeneca is fourth-largest on the same measure.

The sector is the biggest investor in R&D in the UK - 25% of the overall total. In world terms, the UK industry has 10% of pharmaceutical R&D expenditure: only the USA (37%) and Japan (23%) are ahead.

No-one ever suggested that pharmaceuticals was old-fashioned. But even this sector is being transformed by new science – genomics and, the increasingly important science of proteomics which looks at the proteins coded for by our genes.

Biotech

The UK has been at the forefront of research to unravel the mysteries of the genome since Crick, Watson and Franklin discovered the structure of DNA nearly fifty years ago. Today, the Sanger Centre is continuing to work on the sequencing of a third of the human genome. Ten years ago, few outside the industry had heard of biotechnology. Now the latest advances regularly feature on the nightly news programmes and we're the one of the world leaders, along with the US and Germany. In Britain the biotech sector already employs 18,500 people in 285 companies – that number is expected to increase four-fold in the next ten years.

Creative industries

Of course biotechnology and life sciences are not the only sectors to draw on the deep well of British innovation and creativity. The UK has a global reputation in areas such as design, computer games, music, publishing and other industries that rely for their competitive edge on the creativity of talented individuals.

The economic importance of these "creative industries" should not be under-estimated. In the UK they generate revenues of around £112 billion and employ some 1.3 million people. They are also sectors where we tend to punch way above our weight. The British talent that went into Harry Potter – the books, the film, the animatronics, graphic design and computer game - is remarkable. The work of someone like Nick Park at Aardman Animation is not only valuable from an economic perspective, but flies the flag for British creativity and skill across the world. And new players, like Brighton-based Victoria Real are now creating a new sector of interactive television.

Food

Finally, I must mention our food industries – Britain is now a leader in food production. The industry contributes over £56 billion – or 7.6% of GDP - to the UK economy and generates some 3.23 million jobs. Exports of processed food and drink goods alone are worth £8billion. The food manufacturing industry is a mature sector with a very strong domestic base – the import penetration for the food and drink manufacturing sector, although growing is still low in comparison to other manufacturers.

And there's Unilever - a company you know well at Merrill Lynch. Unilever are now one of the world's largest food manufacturers with over 500 subsidiary companies operating in 90 countries worldwide including the UK, and product sales in a further 70. This Anglo-Dutch success story is now the world's No.1 ice cream manufacturer and is known around the globe by brands such as: Birds Eye, Magnum, Lipton Tea and Dove.

The UK also provides a good base for future domestic growth – for example S&A Foods grew from a one-woman operation, making samosas in her kitchen in 1986, to one of the UK's most successful food companies, with a turnover of £78 million, employing more than 1100 people. S&A Foods operates in a rapidly expanding ethnic minority ready meals market (which includes hugely popular Indian food) that was valued at £300 million in 1999, and had grown by 58% from 1995 to 1999.

So let's forget the idea that manufacturing is out of date. And let's stop bringing up our kids to believe that factories are the places where you have to work if you don't pass your exams. Modern manufacturing is high tech, highly creative – and more likely to look like a science lab than Blake's 'dark, satanic mills'.

Myth 2: Manufacturing must go to low-wage countries

The second myth is that manufacturing can't be done in the UK - it's all shifting to low-wage countries like China, Morocco and Poland.

My answer is that, of course, labour-intensive manufacturing will go on shifting to low-wage countries.

But high-tech manufacturing using the best tools and technology –is best done in Britain and other leading industrial countries like Germany and Japan.

The car industry remains a crucial source of prosperity for all industrialised countries. Even the Japanese car industry has maintained its market over its Korean rivals throughout the 1990s despite having wage levels three to five times higher. The reason is its superior levels of capital and knowledge intensity, enabling it to come up with ever more sophisticated models that are highly desirable in other advanced economies.

Consider Switzerland, not noted for its low wage levels, but had 31 per cent of the global market in textile manufacturing equipment in 1997. And that was double its global share of ten years previously. Again the explanation lies in the capital intensity of its production techniques. High and sustained levels of spending in R&D followed by the necessary levels of investment to turn these innovations into manufacturing success led to productivity improvements that easily supported the wage levels set by the Swiss labour market.

The same story can be told in the steel industry. It makes up a quarter of Luxembourg's total exports even though they have the highest per capita income in the EU.

Textiles

I see the story playing out in my own city of Leicester. Textiles has gone into decline partly because of foreign competition but also because of decades of under-investment in skills and technology and design. The result, too often, of old-fashioned and complacent managers who thought they could go on making a living in low-margin, low-value added goods, who didn't look at what was happening in other parts of the world and, if they did, thought the answer was for the British government to protect them from foreign imports.

Of course, we're not going to make a living in Britain producing basic cotton t-shirts.

But we can and do make a very good living producing highly sophisticated fabrics, innovative technical textiles, and leading fashions.

Look at Ramon Knitting Company in Leicester – winners of a Leicestershire business award last year – who have been manufacturing in Britain for 50 years and remain at the cutting edge of hygiene products and cleaning systems. And for the last 49 of those 50 years they have made a profit in each and every month.

And look at businesses like Web Dynamics which I visited in Bolton in July. They manufacture high-performance fabrics for a variety of uses including replacing the old tarmac on roofs. Environmentally friendly, high performance fabrics which are world leaders in their sector. They only started commercial production 3 years ago - now they're employing 50 people and are world leaders in their market. The staff are also owners, with 25% of the company's ordinary shares held in a trust for all employees.

Shipbuilding

Take shipbuilding. We are so used to hearing about job losses that we don't realize that our shipbuilding industry is still a world-leader. Except that these days it makes powerboats and yachts as well traditional ships. Look at Sunseeker International, a British firm based in Poole with a turnover of £103 million and employing nearly 900 people making powerboats. Or Princess Yachts in Plymouth that employs over a thousand people making power boats and sailing yachts.

In fact last year, revenues from the UK marine industry grew by 10 per cent, exports rose by 17 per cent and the sector now employs 26,000 people.

So success in manufacturing – like success in any other sector – doesn't come from standing still. It comes from constantly innovating, investing in new products, new designs, new materials – whether they're metal or textiles – and new production technologies.

And neither does it come from low wages – it comes from raising people's skills, improving the way you manage people and processes, creating high-margin, high-value goods from skilled and well-paid workers.

When we play to our strengths, the best of British manufacturing is the best in the world.

Myth 3: We don't need manufacturing; we can all live on services

The third myth is that we don't need manufacturing because the service sector is sufficient.

Good jobs

That is simply not the case. We need successful manufacturers. Manufacturing provides well-paid jobs - and if Japan, the highest wage economy in the world, can manufacture successfully, so can we. The smarter we get at producing better products, the better paid jobs in manufacturing will be. And that's good news for families up and down the country.

But if you look at the long-term trend of employment in manufacturing, the sector is in many ways a victim of its own success. As productivity improves each individual firm needs fewer people to produce the same amount of goods.

In the last twenty years the proportion of people employed in manufacturing as a share of the total employed fell from 23 per cent to 13 per cent. Yet in the same time the value – in real terms – of the goods they produce rose by a huge 36 per cent.

It's the manufacturing paradox: the better we are, the fewer people we need.

That's why we need to keep producing new products and new companies – to create a self-renewing process. Our aim is to have many highly-skilled, highly paid people working in manufacturing. Not many low-value jobs.

Exports

It is also true today, and will be for the foreseeable future, that Britain pays its way in the world by exporting manufactured goods. Around 60 per cent of our exports are manufactures. And whilst it is true that the balance of payments doesn't constrain economic policy in the immediate way it did 30 or 40 years ago, nonetheless ultimately a country must pay its way or face severe financial consequences. For Britain that means our manufacturing industry must be competitive.

Prosperity

It is precisely because we get the biggest increases in productivity in manufacturing that we need it to raise our standard of living and make Britain wealthier.

And as our prosperity increases – much of it driven by these improvements in manufacturing productivity – as consumers we can afford to buy more services.

Services

But success in manufacturing doesn't only give us the money to consume more services, it also boosts the service industry directly through the supply chain. For every factory producing machine tools there is a demand for designers, marketing and accountancy professionals, caterers, software designers and so on. Indeed in the industries where Britain does well, much of the value in the end product comes from software and design, not physical goods. Each job in manufacturing supports at least one in services; some estimates as many as three or four jobs. Some of these are outsourced, some may be within the firm.

So to write off manufacturing in favour of services would be to fundamentally misunderstand the dynamics of the British economy today. In fact services and manufacturing are inextricably linked.

Take the example of the UK company I recently met in Japan – Cadcentre plc – that produces world-leading software that allows a 3D walk-through of oil rigs and other complex engineering installations. The software itself is useless without the computing and communications devices it runs on – but it is also inextricable from the real, physical constructions that it mimics.

The interlinkages between manufacturing and services are such that it creates problems of measurement. For example if software design is outsourced, it can be classed as a service; if it is done in –house it can be classed as part of a manufacturing company.

That's why I am asking the National Statistician to investigate whether today's statistical categories are adequate to capture accurately the changes taking place within manufacturing industry. Perhaps, for instance, we need a new category of 'industrial services'.

Banging the drum for Britain

What is clear from this discussion is that our national debate does not reflect the realities of British manufacturing success.

It is important that we explain that the changes that are taking place in our economy are not the death-knell for manufacturing industry but opportunities for businesses that understand the need for continual innovation, forward planning and investment in skills and capital.

Figures released by UNCTAD on Monday showed that Britain was the world's second-most popular destination for inward investment last year, and No 1 in Europe. But we must not be complacent. So today I say to the CEOs and chief execs out there: come to Britain. I said it when I was in Japan and Korea earlier this month, and I'll be saying it when I go to Davos, the World Economic Forum, being held next week in New York. Britain is a very good place to do business.

Role of government

I have deliberately stressed today the performance of many of our best industrial companies – and the potential we have to create many more great manufacturing businesses.

But I also began with the reminder that it is very difficult in manufacturing right now. And if we are to fulfil our potential in the medium and longer term, then there is much more that government, working in partnership with industry and unions, needs to do.

The economic environment

First, creating the right economic environment. The UK is enjoying the longest period of sustained low inflation, and the lowest long-term interest rates since the 1960s. But there is no doubt that the weakness of the euro is causing difficulties for British manufacturers as they are forced at home and abroad to compete with Eurozone companies.

At the same time, we must place these difficulties in context. The experience of the last 50 years tells us that changes in exchange rates don't by themselves explain the medium- to long-term success or failure of national manufacturing sectors. It is abundantly clear that you can't devalue your way to manufacturing success.

And the potential benefits of euro membership in terms of trade, transparency, costs and currency stability, lead us to support it in principle. But in practice the economic conditions must be right, which is why the Government is committed to a rigorous and comprehensive assessment of the five economic tests, which include the impact of membership on investment and jobs.

But the role of government goes far beyond getting the macroeconomics right, important though that is.

Education and skills

We have to go on improving education and skills so that industry can get the people it needs. Reforming the 14-plus curriculum to provide a technical and vocational career path is vital, along with the new further education Technical Institutes that we are now creating.

Infrastructure

We have to build the infrastructure that business and people depend upon – railways, roads and broadband networks. We work with the Regional Development Agencies to take forward our manufacturing agenda in the English regions. And we promote investment and employment in the weaker areas of the country by offering Regional Selective Assistance.

Competitive frameworks

We have to create the right market and legal frameworks – strengthening our competition policy and simplifying regulation in Britain; promoting economic reform in the European Union; and negotiating rules for free and fair trade across the world.

Spread of best practice

We must keep on raising the quality of business support and spreading best practice in firms, for instance through our work with the CBI on the Fit for the Future campaign, and with employees through the Partnership Fund.

Science base

And perhaps most important of all for the future of modern manufacturing, we must go on strengthening our science base – and raise our game in turning new science and technology into businesses, products and jobs.

Science for manufacturing success

That's why this government is investing more in basic science than has ever happened before. The government's investment in the science base will have risen by over a billion pounds between 1996-97 and 2003-04.

By 2004 spending on basic research will be almost double – in real terms – what it was in 1986.

On top of that, as part of our spending review in 2000 we announced a Science Research Investment Fund which, in partnership with the Wellcome Trust, will provide £1 billion for science infrastructure over two years.

We also protect intellectual property to provide the incentives that individuals and companies need to exploit their inventions with confidence. And we've introduced a tax credits for Research and Development for smaller companies, and will announce our proposals for larger companies later this year. Business expenditure on R&D in the UK increased by 12.3 per cent in real terms between 1997 and 2000.

Government must also do more to ensure the latest science and technology is turned into new businesses, jobs and products in the UK. The review I have undertaken of the DTI is aimed at boosting the capability of government to engage in technology transfer. We are about to advertise for a new Director General for science, technology and innovation who will be recruited by open competition. I intend this person to be responsible for technology transfer particularly into manufacturing.

To promote new technology and new skills we are setting up 12 Innovative Manufacturing Research Centres based in academic institutions across the UK and backed by £60 million of government cash. They will be led by a team of academics and research specialists and will support all aspects of manufacturing, be it aerospace, construction and bio-pharmaceutics. And to ensure that businesses use the best technologies we are creating Centres of Manufacturing Excellence in every region.

We have already increased the rate of new businesses created by universities. In the year 1999-2000 alone 199 firms were spun out from UK Higher Education establishments, compared to 338 in the whole of the previous five years.

The number of spin-off firms per pound of research expenditure is comparable to the performance of the US and Canada: in 1999-2000, UK universities identified one spin-off firm for every £8.6m of research expenditure while Canadian universities had one spin-off firm for every £13.9m, and in the US the ratio was one for every £53.1m

And last year, I announced the allocation of an extra £120 million to over 200 universities, colleges and hospitals across the UK to enable them to further exploit their research and development and forge even stronger links with industry.

Conclusion

We can't hold back new technology and we can't stop business changing to meet competition. If we try to, we'll damage our economy and reduce our standard of living.

We recognise that manufacturing is facing a tough time at the moment.

But it is in nobody's interest to talk the sector down.

That road will only deter investment and discourage our bright young people from a career in science, technology or engineering.

So when a young person in this country decides to take a qualification in engineering

When a scientist decides to take their idea to market and turn it into something tangible

When a manufacturer in Britain sends their exports around the globe

It's good for Britain and its something to be proud of.

So I believe there is still much for us to be confident about.

We can help firms change and move into new markets. And we can be world leaders in traditional and new areas, many of which I've highlighted today.

So my message is that we should focus all our energies on turning "invented in Britain" into "made in Britain". And let's be proud of the smart men and women working in British manufacturing.


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