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1. The 2003 Value Added Scoreboard includes twice as many European companies (600) as in 2002 and fully 800 UK companies. It also has new data on cost of funds and on investment (R&D, Capex) so that investment can be related to wealth created. The Scoreboard is of interest to companies (for benchmarking), investors and business organisations.

2. Value added (VA) is sales less the cost of bought-in goods and services and represents the wealth created by the activities of the company (the size of the ‘cake’). It is distributed to employees (salaries, wages, pensions), to the providers of capital (loans, equity), to governments (as taxes) and used for investment in the future (R&D, Capex, new markets etc.).

3. The overall comparison of the 2003 VA Scoreboard results with the previous year indicates that 2001/02 was a difficult year for companies with total value added reducing by 1% for the European 600 and operating profits dropping 35%. One quarter of FTSE 100 companies did not make enough operating profit to cover their cost of funds. Manufacturing sectors show more reductions in VA than most others.

4. Comparisons between the UK, France, Germany and Switzerland show that the UK is different in having higher amortisation (related to acquisitions) and a higher cost of funds (mainly due to dividends being a 2-3 x larger % of VA). However, the UK, France and Germany all have similar operating profits less cost of funds of around 2% of value added.

5. Sector mix is very different for the UK and Europe with the top 10 sectors in the UK including food processing, general retail and pharmaceuticals whereas these are replaced by automotive, electricity and engineering for Europe. Sectors differ in their requirements for skill intensity and capital intensity and in the amounts and balance of R&D and capital equipment needed.

6. Many sectors allocate a significant proportion of value added to investment such as R&D and depreciation. Eleven of the 18 largest European sectors need significant investments and, for these sectors, R&D plus depreciation ranges from 15% to 40% of value added.

7. Value adding efficiency is expressed as the ratio of value added to the major inputs of employee costs and depreciation (a ratio called P2). The labour productivity, value added per employee is called P1. It is shown how sectors vary greatly in their values of P2 and P1 and how companies within a sector also have a wide spread of values. The position of a company depends on its strategic choices, operational excellence and investment profile.

8. For a group of 10 large investment-based sectors, 70% of companies having above sector average values of P2 also have above average R&D intensity or capital equipment backing up each employee or both. Labour productivity, P1, also tends to rise with investment per employee.

9. The overall labour productivity of a country is influenced by its mix of sectors. There are high productivity sectors (above £65k per employee) such as pharmaceuticals, oil & gas and finance, low (below £33k per employee) such as consumer services and with most manufacturing and media in between. The larger the proportions of the former, the higher the P1. However, high labour productivity can be found in businesses that are unprofitable or unsustainable.

10. Most companies wish to achieve a high value adding efficiency (P2) and then sustain or improve it so that their employees and equipment produce enough value added to enable sector-leading investments in the future. However a high P2 could, in the short term, be achieved by reducing investment. An assessment of prospects is therefore made using investment-adjusted values of P2 for a sector assuming equivalent investment for all companies. This identifies companies that do simultaneously achieve high P2 and high levels of investment. Examples are given for three sectors.

11. The ratio of market capitalisation to value added tends to increase with the value adding efficiency (P2) for both sectors and companies within a sector. This classification allows the investor to judge how optimistic or pessimistic the market is about sectors and companies. It allows companies to understand where they may need to provide investors with more information about their performance, investment in the future and prospects.
Key Points Highlights Rt Hon Patricia Hewitt MP John Sunderland Analysis Online Database