Key sectoral trends in Value Added – a comparison of UK and European performance

Introduction

This section analyses the composition of Value Added by sector. It considers:

• the change in Value Added over the last year and the last five years;
• the efficiency with which companies generate Value Added by relating their Value Added to various measures of business inputs;
• the relationship between the intensity of companies' R&D activities and their use of high level skills and their Value Added; and
• companies' use of Value Added.

In discussing sector differences, it is important to recognise that different sub-sectors have distinctive characteristics. For example, in support services, professional services firms (such as law and accountancy) have very different business models to other companies in the sector such as companies supplying waste & disposal services. This is reflected in differences in their efficiency of wealth creation and their average employee costs.

Summary

• The Value Added by the UK800 increased by 8.2% over the last year, and 48.7% over the last four years.
• The Value Added by the UK153 – the UK-owned companies which form part of the E750 – has increased faster: 8.6% in the last year and 50.5% over the four year period from 2004 to 2008. Key sectoral trends in Value Added – a comparison of UK and European performance
• The Value Added by the UK153 has increased more quickly in the last year than the other companies in the E750 (8.6% compared to 5.3%). This is also the case over the four year period from 2004 to 2008.
• The average Value Added per employee across the UK was £68,782, and was over 25% higher amongst the UK153 than the remaining 647 smaller companies in the UK800. The 153 UK firms in the E750, however, generated Value Added per person employed which was nearly 13% lower than that of their other European counterparts;
• Overall, the UK153 companies are more efficient at creating Value Added than the UK800 as measured by the ratio of Value Added to the costs of employment and depreciation (P₂). They are also more efficient than their peers in the E750.
• The major countries show significant differences in performance: companies from the UK show lower growth of Value Added but higher wealth creation efficiency than those from Germany or France. These performance differences are largely driven by differences in sector mix between the largest European countries but company performance within sectors is also important.

The change in Value Added

Table 5 shows the average percentage change in Value Added by the companies in each sector over the last year and over a longer four year period for the UK800 as a whole. It also shows the change for the UK153 (i.e. the largest UK companies in terms of Value Added which are also in the E750) and the UK647, the other, smaller UK companies in the UK800. The table only includes those firms for which Value Added data are available throughout the period⁷. As in previous years, some care is needed in interpreting the longer term growth rates because they have been affected by the introduction of new financial reporting standards (see Appendix A for further details).

Overall, the Value Added by the UK 800 has increased by 8.2% in the last year and by 48.7% over the last four years. The UK153 companies have increased their Value Added slightly faster over both periods than the UK647. In the last year, the firms in the UK153 in the chemicals, gas, water & multiutilities, non-life insurance and software & computer services sectors have increased their Value Added significantly faster than their smaller rivals in the UK800.

Table 6 shows the percentage change in Value Added across the E750, again over the last year and over a longer, four year period. In addition, it contrasts the performance of the UK153 companies and that of the remaining 597 European companies. Overall, the UK153 companies have increased their Value Added faster than their European rivals in the last year (8.6% compared to 5.3%). Some sectors have increased their Value Added consistently faster in both the UK and other parts of Europe, notably mining (helped by rising commodity prices), oil equipment, financial services (which excludes banks) and construction materials. In contrast, there have been some significant variations: the UK153 companies increased their Value Added more quickly in the chemicals, non-life insurance and gas, water & multiutilities sectors. Other European firms raised their Value Added faster in the electricity and mobile telecommunications sectors.

Efficiency of Value Added creation

The Scoreboard considers three different measures of the efficiency with which companies created Value Added:

• the amount of Value Added created per person employed (P 1);
• the ratio of Value Added to the costs of employment and depreciation used to create it (P₂); and
• the ratio of Value Added to indicators of the (the use of) assets employed to create it.

Value Added per person employed (P₁)

One measure of companies' efficiency in creating Value Added is the average Value Added per person employed. Such a measure of labour productivity is similar to that used when assessing the competitiveness of economies and sectors.

Table 7 shows the average Value Added per person employed (P₁) for each sector for the UK800. It also shows the comparable figures for the UK153 and UK647 companies. The key points are that:

• the average Value Added per employee across the UK was £68,782, and was over 25% higher amongst the UK153 than the smaller companies in the UK647;
• the sectors with the highest Value Added per employee were the most capital intensive, notably oil & gas producers, mobile telecommunications and financial services; and
• food & drug and general retailers generated the lowest Value Added per employee.

Table 8 shows the comparable figures for the E750 companies as a whole as well as for the 153 UK companies in the list and the other 597 European companies. The table highlights some key points:

• the average Value Added per person employed across the E750 is £82,440, some 20% above the average of the UK800;
• the 153 UK firms in the E750 generated Value Added per person employed which was nearly 13% lower than that of their other European counterparts;
• UK companies generated a significantly higher Value Added per person employed in four large sectors: oil & gas producers, mining, mobile telecommunications and gas, water & multiutilities; and
• UK companies generated a significantly lower Value Added per person employed in five large sectors: travel & leisure, food producers, life insurance and food & drug and general retailers.

Wealth creation efficiency (P₂)

The second measure of the efficiency of Value Added creation is defined as the ratio of Value Added to the costs of employees and depreciation. This measure of wealth creation efficiency is referred to as P₂ and is similar to total factor productivity which is used to assess economic performance. In principle, the definition of P₂ should include a measure of the opportunity costs of the capital used by companies.

Table 9 shows the average P₂ across the companies in each sector in the UK800 as a whole, the UK153 companies (the largest UK-owned creators of Value Added which also form part of the E750) and the UK647 companies (the remaining companies). Overall, at 192.8%, the value of P₂ across the UK153 is higher than that of the UK800 (178.2%). This picture masks important differences between sectors, within some sub-sectors and between companies.

In most sectors, the average P₂ of the UK153 companies is greater than that of the other UK companies in the UK800. The most significant positive differences are real estate and mining whilst in the life insurance sector, the UK153 companies have a significantly smaller P₂ than the other UK companies in the sector, in part the result of introducing IFRS.

Table 10 shows the average P₂ across the companies in each sector in the E750. For comparison, the figures for the UK153 and E597 companies are also shown. Overall, at 169.2%, the value of P₂ across the E750 is significantly less than that of the UK153 (192.8%). This masks a complex pattern of differences across sectors. For example, in three sectors, the average value of P₂ across the UK firms in the E750 is significantly higher than that of other European companies: financial services, household goods and beverages. In four other sectors, the average value of P₂ across the UK firms in the E750 is significantly less than that of other European companies: fixed line telecommunications, industrial metals, non-life insurance and oil equipment, services & distribution.

Investment efficiency

The third measure of the efficiency of Value Added creation focuses on the relationship between Value Added and companies' use of capital. Although the nature of companies' accounting data limits the analysis, the Scoreboard considers two measures:

• the ratio of Value Added to the cost of depreciation and R&D • expenditure (a measure of the cost of capital used in production recognising that a significant share of R&D expenditure will be labour costs); and
• the ratio of Value Added to gross tangible fixed assets (GTFA) (a measure of the assets employed in production).

Table 11 summarises the performance of the ten largest UK sectors in terms of Value Added on both measures. It also shows P₁ and P₂. The table highlights the variations between sectors: it reveals the extent to which assets are leveraged in the financial services sectors – banks and general financial – and the support services sector. It also reflects the R&D intensity of pharmaceuticals & biotechnology. The differences between sectors mask considerable variations within some sub-sectors.

R&D intensity

The Value Added Scoreboard was developed to complement the R&D Scoreboard which analyses trends in companies' expenditure on R&D activities. One of the original purposes of the Value Added Scoreboard was to understand the link between companies' investments in R&D and their Value Added.

Figure 3 illustrates the relationship between companies' R&D intensity (as measured by their R&D spend as a proportion of sales) and their wealth creation efficiency (P₂) for the UK800. Given the recognised lags that exist between companies' investments in R&D and the realisation of (any) returns, it is not surprising to find that there is no clear relationship between R&D intensity and wealth creation efficiency. Similarly, aggregate analysis at the sector level does not suggest a stronger relationship, although there are some sectors, notably pharmaceuticals & biotechnology, where both R&D intensity and wealth creation efficiency are high.

Skill intensity

It is also useful to understand the relationship between companies' use of (highly) skilled employees and their ability to generate Value Added. A potential measure of skill intensity is the average cost of employment of each person employed. All things being equal, companies which incur high employment costs per person employed will tend to be more skill intensive than those where the average cost is lower.

Figure 4 illustrates the relationship between companies' skill intensity (as measured by the average cost of each employee) and labour productivity as measured by the average Value Added per person employed (P₁) for the UK800. It shows the expected positive relationship between the two indicators, although there are several outliers.

Another way of examining the link between skill intensity and Value Added is to group companies in each sector into five categories:

• 'high skill' sectors, where the average employment cost per head is over £80,000;
• 'higher medium skill' sectors, where the average employment cost per head is between £60,000 and £80,000;
• 'medium skill' intensity sectors where the average employment cost per head is between £40,000 and £60,0000;
• 'lower medium skill' intensity sectors where the average employment cost per head is between £20,000 and £40,0000; and
• 'low skill' sectors, where the average employment cost per employee is less than £20,000 per head.

Figure 5 uses this classification to analyse the companies in each of the ten largest sectors in terms of Value Added within the UK800. It highlights a concentration of high skill companies in the financial services and oil & gas production sectors. The support services sector also contains a significant proportion of high skill companies. In contrast, Figure 5 highlights the concentration of low skill companies in the travel & leisure and general retailing sectors.

The uses of Value Added

The final part of this section examines the different ways in which companies use of allocate the Value Added that they create. It distinguishes between:

• the compensation for operating employees who provide the skills which is derived as total employee costs less R&D (including the cost of R&D employees);
• the investment to sustain and develop the business which takes the form of R&D (for new products, processes and services) plus depreciation (the equipment used during the year and replaced by capital expenditure); and
• a residual item which includes the cost of funds, amortisation & impairment and retained Value Added.

Figure 6 provides an analysis of the uses of Value Added for each of the ten largest sectors in the UK800 based on their Value Added.

The key points which emerge from the analysis are:

• employment costs (less R&D) are nearly three quarters of Value Added in the support services and travel & leisure sectors and slightly less than two thirds in both the media and general retailing sectors;
• R&D and depreciation are one third of Value Added in pharmaceuticals (mainly R&D) and around 29% in both the mobile telecommunications and oil & gas production (mainly capital expenditure) sectors; and
• the residual items are a relative proportion of Value Added in mining (69%), oil & gas production (66%) and mobile telecommunications (61%) sectors.

⁷This is based on those 712; companies for which data on Value Added were available for the relevant period.

⁸The average change has been calculated only for those companies where data are available for all the period from 2004 to 2008.

⁹The average change has been calculated only for those companies where data are available for all the period from 2004 to 2008.

¹⁰P₁ has been calculated only for those companies where data on employees are also available.

¹¹P₁ has been calculated only for those companies where data on employees are also available.