Manufacturing Now: delivering the manufacturing strategy

Manufacturing Now

If some of the employer surveys published in recent months are to be believed, the manufacturing sector faces good prospects for next year.

This is of course welcome news - if it proves to be true. We are more cautious. The actual statistics available at the time of writing tell a different and more sobering story. We see a sector still struggling to shake off the near recession conditions of recent years, shedding jobs at a remorseless rate, and with investment at an historic low.

It would be surprising if we did not see manufacturing do better over the next six months as world trade strengthens and Europe’s economy grows. But we still expect the sector to shed jobs as productivity improvements outpace output growth.

Many commentators have been puzzled by why the employer surveys seem so optimistic compared with the actual position of manufacturing, as shown by the official statistics. Trade unions in the sector have found it impossible to reconcile what they hear in the media and what they see happening on the ground.

Of course, the statistics look at where the sector was three months ago and the employer surveys are looking forward. But the employer surveys themselves are being oversold to the media. Typically, they show the balance of employers who think things are getting better against the balance of employers who think things are getting worse. The samples are drawn from the membership of the employer organisation. So they can give an idea of what direction the sector is going in but are hardly a precise guide to the underlying trend. Nor are they always representative.

The manufacturing sector - latest figures

Output: The latest official figures relate to April and show that in that month the output of the sector as a whole grew strongly - by 0.8 per cent. The main reason for the recovery in April was very strong growth in the output of the chemicals sector.

The Office for National Statistics advise that monthly figures can be volatile and three month averages should be used instead when looking at trends. This shows that manufacturing output was flat (-0.1 per cent) comparing the latest three months with the previous three months.

The latest figures also show that the recovery is still unbalanced across the sectors. Taking the latest three month average (Feb-Apr), chemicals grew very strongly. Output grew in metals and metal products and food, drink and tobacco. There was a very slight gain in engineering (with a significant fall in high tech manufacturing offset by modest gains elsewhere). Output contracted in 'other manufacturing' (mainly because of a fall in the output of the print, paper and publishing sector) and in textiles.

Manufacturing output growth

Output growth (seasonally adjusted)	Latest quarter	Latest annual
Manufacturing	- 0.1%	+0.8%
Chemicals	+1.8%	+7.8%
Metals/metal products	+0.4%	- 0.6%
Engineering	+0.1%	+1.1%
Food, drink, tobacco	+0.2%	- 0.2%
Other manufacturing	- 1.3%	- 0.6%
Textiles and clothing	- 4.0%	- 6.3%

Notes: latest quarter is average of Feb-Apr compared with average of Nov-Jan. Latest annual is average of Feb-Apr 2004 compared with average of Feb-Apr 2003. 'Other manufacturing' is print, plastics, and ceramics manufacturing.

Source: Office for National Statistics

Employment: Latest figures relate to April. These show that manufacturing industry lost another 8,000 employee jobs in that month, taking job losses over the year to April to 106,000. The underlying three month average trend shows the rate of job loss has remained unchanged in 2004.

This takes total manufacturing job losses since April 1997 to just over 770,000, a fall of 18.6 per cent. On current trends, the sector will have lost nearly a fifth of its workforce by the end of this year.

Virtually all sectors of manufacturing recorded job losses, but over the past year about 40 per cent of all jobs were lost from just two industries - textiles and high tech electrical manufacturing. There were also significant job losses in transport equipment manufacturing, metals, and from chemicals.

Job losses by standard statistical classification are shown below in the year to March. In some cases the classification includes a diverse range of industries and so can understate job losses in particular areas - for example, within the paper, print and publishing sector.

The most alarming feature is how widespread the losses are across industries - job shedding is not restricted to traditional industries such as textiles or steel, but is taking place in high tech industries. Nor can it be blamed on low wage global competition - clearly, this must been responsible for some job losses, especially in areas such as textiles, but can hardly explain job losses in motors and chemicals.

EMPLOYMENT LOSS IN MANUFACTURING

Employees UK	March 2004	Change over year to March 2004
Manufacturing	3390	-99,000	- 2.8%
Electrical engineering	378	-20,000	- 5.0%
Textiles	169	-19,000	-10.1%
Ceramics, metals	560	-15,000	- 2.6%
Transport equipment	350	-13,000	- 3.6%
Chemicals	223	- 9,000	- 4.0%
Machinery	303	- 7,000	- 2.3%
Paper, print, publishing	429	- 5,000	- 1.1%
Plastics & rubber	211	- 4,000	- 1.9%
Food, drink, tobacco	458	- 4,000	- 0.9%
Other manufacturing	308	- 3,000	- 1.0%

Source: Office for National Statistics

Investment: Latest figures on manufacturing investment levels relate to the first quarter of 2004. These show that in real terms there was a decrease over the previous quarter of 1.2 per cent.

There is considerable ground to make up to get back to investment levels before the current downturn. Investment has fallen significantly in every year since 2000, and is now 28 per cent lower in real terms comparing the first quarter of 2004 with the first quarter of 2000.

Exports: latest figures relate to April and show exports flat. The best figures to show the underlying trend are manufacturing exports excluding 'erratic items' such a precious metals, aircraft and ships. Manufacturing exports by this measure went up by 0.2 per cent in cash terms comparing the three months to April with the previous three months.

Manufactured imports also fell, so the trade deficit on manufactured goods fell somewhat. In the three months to April 2004 we imported nearly £10 billion more than we exported. The trade deficit on manufactured goods for the whole of 2003 was just under £40 billion, and we are on course to at least match that deficit.

Manufacturing Employer forecasts

The British Chambers of Commerce has published a survey covering the first quarter of 2004 which was being interpreted in the media as showing manufacturing employment was going up. This was clearly nonsense. In the first quarter actual employment fell by nearly 25,000 (Dec 2003 to March 2004).

This was partly overselling of the survey and sloppy drafting. The survey talks about manufacturing employment 'surging' in the first quarter of 2004. What it meant was that the balance between the number of employers who said their employment was going up and the number of employers who said it was going down was positive and had increased since the last survey.

The latest employer survey comes from the EEF. This covers a sample of about 1,500 engineering companies and was carried out between the 7^th and 27^th of May. This records a similar positive message to the BCC survey but has a more realistic interpretation of the results.

Even so, the survey still talks about 'companies signalling an end to job cuts' when they mean the balance of responses to the survey has become more positive. The message from the survey and the EEF’s own economic forecasts on jobs are not consistent. The EEF’s forecasts for the manufacturing sector show the sector still shedding jobs.

The EEF is forecasting manufacturing output growth this year of just under 1 per cent, picking up to nearly 3 per cent in 2005. Engineering is expected to do better, with forecast growth in 2004 of nearly 2 per cent, and then more than doubling to nearly 4.5 per cent in 2005.

However, the EEF still expects 75,000 jobs to go comparing 2005 with 2004 across the whole of manufacturing. Engineering is expected to lose around 25,000. So even if big headline redundancies may be less common, job shedding through other means such as 'natural wastage' will clearly continue. Even with full order books many firms are responding to competitive pressures by trying to produce more with fewer workers.

The EEF survey results also flag up some regional and sectoral differences - with many of the job gains in high tech industry in the South and job losses in regions more dependent on traditional manufacturing sectors. Employment is also expected to be depressed in motors, at least in the short term.

OUTLOOK FOR MANUFACTURING

Output growth	2003 (actual)	2004 (forecast)	2005 (forecast)
Engineering	+0.9%	+1.8%	+4.4%
Manufacturing	+0.2%	+0.9%	+2.7%
Employment (000s)
Engineering	1472	1426	1401
Manufacturing	3363	3263	3188

Source: EEF, June 2004.

How we compare

Of course, the world downturn has hit manufacturing industry across the world. OECD estimates show that German manufacturing lost 73,000 jobs and France 88,000 comparing 2003 with the previous year. However, these are on a much smaller scale than in Britain where 121,000 jobs went. These losses in Europe are however overshadowed by the huge loss of jobs in US manufacturing, down 800,000 in 2003 (all figures OECD Economic Indicators, April 2004).

The more active European approach to industrial policy and collective bargaining together with stronger employment protection appears to have more successful in sustaining employment in the manufacturing downturn than the Anglo-Saxon model.

Moreover, smaller losses in European manufacturing follow a period when manufacturing employment was growing. In our Submission to the DTI we pointed out that according to the EU Commission employment in manufacturing went up by over 500,000 in Spain between 1997 and 2002, by over 400,000 in Italy, by nearly 120,000 in Germany, and by nearly 150,000 in France. Over the same period the UK lost nearly 580,0000 manufacturing jobs.

Moreover, the same story of job gains in Europe and job losses in Britain was equally true for high tech industries - so the bigger job losses in Britain were not the result of accelerated industrial restructuring. That was truer of Germany, with all the job gains in high tech manufacturing offsetting job losses elsewhere in the German manufacturing sector.

MANUFACTURING JOBS 1997-2002

All in work 000s	All manufacturing	High tech manufacturing
Spain	+509	+152
Italy	+417	+147
France	+146	+ 71
Germany	+116	+298
UK	- 575	-154

Source: EU Commission

The Government’s Manufacturing Strategy

In its manufacturing strategy of 2002, the Government noted that manufacturing accounted for a fifth of the economy, employed around 4 million people, was responsible for 60 per cent of our exports and 80 per cent of our research and development. The Government said that the UK has many world class companies.

However, significant weaknesses include that we invest less in capital equipment and R & D, and our average skill levels are lower, than our competitors. The Government said that more innovative and knowledge-intensive products, processes and management are vital.

Government strategy sought to narrow the productivity gap and assist companies to move up the value added chain. Promoting investment, skills, innovation and best practice were essential. There were seven pillars to the Government’s approach:

• Macroeconomic stability

• Investment

• Science and innovation

• Best practice

• Raising skills and education levels

• Modern infrastructure

• The right market framework

The TUC submission

In its submission to the review, the TUC called for a reinvigorated manufacturing strategy to provide a clear strategic focus for the sector. As a sign of Government commitment, we recommended a Public Service Agreement target, agreed between the DTI and the Treasury, explicitly for manufacturing.

We demonstrated that comprehensive collective bargaining coverage, strong employment rights, and a strong welfare state can help to drive productivity. Nine of the top ten world productivity leaders are European, with collective bargaining coverage ranging from 70 to 90 per cent of the workforce, employment protections much stronger than in Britain, and an institutional structure that encourages and supports genuine workplace partnership.

We called for action in areas such as innovation and public procurement. We also addressed the need for higher skills at the basic, intermediate and management level. We highlighted the need for a trade union role in negotiating for training, in order to minimise non-training workplaces.

Delivering the Manufacturing Strategy

The review of the Strategy will be launched by the Secretary of State at the TUC on July 15 at a conference called Manufacturing Now. The conference will bring together trade unions, employers, Ministers and others to look at what has been done and what more needs to be done in key areas such as public procurement, regional development, innovation and skills.

Whatever is agreed, it is essential that the strategy is supported by sufficient funding to deliver the key programmes. The Government has made significant investments in the science base and support for R&D, in the regions and in skills and training.

But with the Spending Review outcome to be published in the next two weeks, we are concerned that vital business support programmes and the Manufacturing Strategy itself will be under-funded just at the time when the sector needs to turn a cyclical recovery into a step-change upwards in performance. The DTI’s budgets are under pressure from the need to fund British Energy’s restructuring at a cost of £200 million a year within a tight overall settlement that may give the Department no increase in real terms resources.

Many of the initiatives undertaken as part of the Manufacturing Strategy can be justified in their own right, for example, the Manufacturing Industry Advisory Service. But as the TUC has repeatedly pointed out, the manufacturing sector in the UK receives less in business support than in the rest of Europe.

Business support for Manufacturing

The European Commission publishes a regular State Aid Scoreboard, designed to show trends in the levels and direction of state aid. This has, until now, covered the EU15. The autumn 2004 update of the scoreboard will include detailed information on the state aid situation in each of the 10 accession states, which joined the European Union on 1 May 2004.

As shown below, figures for state aid in manufacturing show the UK trailing in last place, when measured as a proportion of value-added. In other words, when the value of the aid is measured as a proportion of the value of the output produced by the industry, the UK is bottom of the league.

On this measurement, France gives more than twice as much, Germany nearly three times as much, Italy more than three times as much and Spain nearly four times as much.

If, as we fear, the Spending Review settlement limits business support even further in the UK, then the gap between Britain and the rest of Europe is likely to widen rather than narrow.

The Commission keeps a close watch on what states can and cannot give to their industries to prevent unfair competition. But in reality member states stay within the agreed limits and relatively few cases are turned down by the Commission. Between 2001 and 2003 the Commission blocked only 5 per cent of the cases investigated across the EU.

So the idea that state aids today are the same as huge subsidies for industrial lame ducks of the past is completely outdated. Moreover, the differences in support are not because some states breach the rules and others do not. The fact is either that other governments provide more support within the rules or have developed a more imaginative approach than in the UK. The Danish government provides high levels of state aid and has used them to help build a world-class environmental industry that today supplies many of the wind turbines being imported into Britain to deliver the Government’s energy policy.

The Commission and the British Government are committed to reducing state aids over time. In an ideal world, spending less on state aids across Europe might indeed be a good thing. But until we see progress being made, the UK will be placed at a disadvantage compared with manufacturing elsewhere. Moreover, the huge gap in performance comparing UK and European manufacturing productivity levels is a further reason why we need to increase business support in Britain.

And despite the welcome efforts of Industry Ministers in recent years, the Government as a whole is still not perceived as publicly supportive of manufacturing in the way that the governments of Germany or France are. A cut-back in support now would send completely the wrong message.

We welcomed the Wood Review of public procurement practices in Europe and look forward to its publication. But we said at the time and in our Budget Submission that it’s remit was far too narrow. Rather than just trying to pin down unfair practices in other European states, it could also have provided a golden opportunity to find out what positive lessons could be learnt so we can ensure UK public procurement supports UK based manufacturing. The Manufacturing Strategy cannot be delivered by the DTI alone.

MANUFACTURING SUPPORT ACROSS EUROPE

State aid to manufacturing in 2002	% value added	Index EU=100
Denmark	4.7%	313
Greece	2.7%	180
Luxembourg	2.3%	153
Spain	2.2%	147
Belgium	2.0%	133
Italy	1.9%	127
Germany	1.7%	113
France	1.4%	93
Portugal	1.3%	87
Netherlands	1.2%	80
Ireland	1.1%	73
Austria	0.9%	60
Finland	0.7%	47
Sweden	0.7%	47
UK	0.6%	40
EU average	1.5%	100

Source :, State Aid Scoreboard COM (2004) 256 final table 6, p14, EU Commission, April 2004.

What are State Aids?

It is important to understand what do and what do not constitute state aids. State aids apply to certain industries, companies or sections of the economy.

Measures benefiting individuals only or measures which do not give an advantage to certain undertakings, e.g. measures to provide guidance and counselling, general assistance and training for the unemployed, or training programmes that apply without distinction to all employers in a particular member state, or a general reduction in the taxation of labour and social costs, are all often known as ‘general measures’ and are not classified as state aids.

Measures which are designed for a specific region, type of company (e.g. SME) or sector are deemed to be selective in that they affect some firms but not others. Even if a measure is open to all sectors, it may be selective if there is an element of discretion by the awarding authorities. By granting employment or training aid to certain firms, national authorities are deemed to be taking over part of those firms’ labour or training costs and conferring a financial advantage that improves their competitive position. Insofar as the products or services concerned are in competition with those of firms from other member states, such aid is likely to distort competition and affect trade. Consequently it is, in principle, incompatible with the common market.

Institutional features and traditions differ widely between member states in this area. It is, therefore, not a straightforward task to compare government support in different countries, since some might use instruments such as tax incentives, which are not quantified. Furthermore, some member states, such as Germany and Spain, have federal structures, so aid could be delivered by the Lander or the regions. Even statistically countries classify aid differently. For example, if a scheme to promote R & D is introduced in a region it is partly a question of terminology whether that is called regional aid or aid for R & D.

The New Deal, introduced by the UK Labour Government after the 1997 General Election, is a case in point. As the New Deal applies to all economic sectors, all regions and all enterprises taking on young or long-term unemployed, the European Commission concluded that the scheme contained no specificity. Furthermore, the United Kingdom authorities have no discretionary power concerning the level of the subsidy as this varies only according to the number of weekly working hours or training costs. As a result, the European Commission concluded that New Deal measures do not constitute state aid.

Similar thinking also means almost all support for training is exempted from the state aid rules. The Government has argued that this means the actual amount of support given to manufacturing is greater than the 'state aid' definition implies. This is true. But the same logic applies to all other EU member states. And the UK also comes close to the bottom of the European league table when it comes to spending on 'active labour market' measures.

The Government is on stronger ground in pointing to support for venture capital, where we appear to compare well against the rest of Europe. However, European industry has traditionally secured a much higher proportion of long term finance from sources other than the capital markets and venture capital markets are generally smaller across the rest of Europe.

Conclusions

The UK manufacturing sector is starting to recover in terms of output, but we can see no early end to job shedding.

Manufacturing in Britain has lost more jobs than other major European economies as employment has been squeezed between low output growth and rising productivity. But in addition, employers are less constrained than in Europe in going for job cuts as quick fix solutions to short term pressures, because it is easier and cheaper to close factories and shed labour.

We strongly welcome the Government’s re-launched Manufacturing Strategy. But to make it a reality and translate the fine words into a better performance, in terms of output, jobs and investment, means shared commitment from Government, trade unions, and employers. We identify four key areas for action.

• Public procurement

• Innovation

• Regions

• Skills

Britain already provides less support to our manufacturing sector than any other EU economy. It is essential we do not widen the support gap any further by cutting back business support as part of Spending Review 2004.