Viscount Montgomery of Alamein
To ask Her Majesty’s Government what is their assessment of the value of manufacturing to the United Kingdom economy.
Viscount Montgomery of Alamein
My Lords, there is a general perception in the press and the public mind that we no longer manufacture things but depend almost exclusively on financial services for our well-being. No one disputes that financial services, as exemplified by the City of London, are a very valuable and significant part of our economy, but so also is manufacturing—perhaps even more so.
In introducing this short debate, I am indebted to the Institution of Engineering and Technology and the Food and Drink Federation, which have sent me briefs, and most particularly to the Institute for Manufacturing, part of the engineering faculty at Cambridge University. Here I must declare a purely honorary interest in that I am a past president of the Cambridge University Engineers’ Association and, some 60 years ago, was a graduate of the engineering department.
Let us now consider what we mean by manufacturing today. Of course, we no longer have the old smokestack industries; we have a much wider concept of engineering and manufacturing. This comprises the full cycle from understanding markets and technology, through product and process design to operations, construction, contracting and on to distribution and related services. Of course, the food and drink industries play a very important part in that. When you view manufacturing in this light, you begin to realise how vast is its output and how valuable it is to the economy, particularly in its huge contribution to employment and exports.
A further factor is the speed of change. For example, the first iPod was designed and built in less than one year. Shelf life is short, and new models emerge with ever-increasing speed. Traditionally, manufacturing has been associated with manual skills, and these certainly remain important and need to be fostered through apprenticeships. Increasingly, however, the value chain is enhanced by transforming ideas and opportunities into products and services. In other words, engineering and manufacturing are part of the knowledge economy, where brains matter.
My amateurish analysis of the information that I have received indicates that we are talking about an area of economic activity that contributes around £500 billion to GDP, generating more than 50 per cent of exports and employing huge numbers of people. I should be interested to know what the Government make of this figure and what their figure is.
The Government can help further by taking note of the areas of difficulty identified by the organisations which provided briefs. An obvious area is the need for simplification of the tax structure, with reference particularly to research and development and the creation of a favourable climate for small and medium enterprises, where much of what we are discussing takes place. I noticed that this was mentioned in the previous debate in connection with public procurement.
I have tried to set the scene. As I have no right of reply, I express my thanks in advance to the Minister who will answer this debate. I thank most profusely the very knowledgeable Peers who are joining in. I very much look forward to hearing what they and the Minister will say.
Lord Brooke of Sutton Mandeville
My Lords, in a debate where, due to its popularity, Procrustes has reduced most of us to speeches of four minutes, I hope that I shall speak for everyone when I thank the noble Viscount, Lord Montgomery, for his choice of subject and his introduction of it. My only hesitation is that the wording of the Question carries a mild ambiguity as to whether the answer expected is to be quantitative or qualitative.
I am, however, taking it as a given that, in our present parlous circumstances, it is a case of all hands to the pumps and that any enhanced contribution to the economy by the manufacturing sector is profoundly to be welcomed. Although, after leaving Harvard Business School, I made my living across the whole face of the economy and, within that, across a wide range of manufacturing, it is easier if I confine these remarks to a particular part. I shall dwell on engineering, not least because it has had a notable role in Britain’s industrial past, but also because Germany, now the premier European exporter, is still so powerful a force within it.
It is awesome even in this Ashes week to be batting immediately before the noble Lord, Lord Bhattacharyya, who has a personal cricketing reputation as well, and I risk being told that I am wholly out of date, but I am genuinely impressed, diminished though our engineering sector is, at the health of those British engineering companies which have survived the industry’s decline. I put it down to survivors surviving because of the quality of their products in market niches where product quality and utility are at a premium.
When in the 1960s and 1970s in the private sector I was assisting companies such as Rolls-Royce, we were wont to be told that Rolls-Royce’s American competitors enjoyed the advantage of a component manufacturing sector which could produce to the most precise of specifications in an industry where such were required, often in new materials, whereas Rolls-Royce had to design and manufacture its components itself. If there is anything in this hypothesis, even in a global market, then the growth that we are seeking beyond exports will be assisted by an expansion in self-sufficiency in components at home and by entrepreneurs who create new leads for them. I am also assuming that there are still market opportunities similar to those experienced in the United States in the application of electronics to what I shall call the rust belt industries.
An encouraging example that applies to both my hypotheses is the recent decision of the Department for Transport to fund 1,200 new trains on the Thameslink line, specifically with up-to-date and innovative signalling instrumentation, taking us away from the historical poverty of obsessively British-built signalling technology. One sad characteristic of British industry, not only at the time of the original Brookings Institute inquiry of 1968 but lasting to revisiting the issues in the 1980s, was the charge that we were short of engineers to an extent whereby we were using scientists to do the jobs of engineers, thus robbing the science base. The Division Bell is ringing. Do you want me to finish the speech or stop? I think that I have one more minute.
The Deputy Speaker (Baroness Harris of Richmond)
One more minute, and then we will have 10 more minutes.
Lord Brooke of Sutton Mandeville
Thus we are robbing the science base of the scientists that it could otherwise have used in research. The institute attributed it to the low value that our economy put on the utility of engineers in the 1970s. It always disturbed me that the financial incentives of industry were so comparatively low. Although in those days, the accountants were more of a salary competitor than the totality of the financial sector, the explosive effect of the big bang compounded the problem thereafter, taking engineers straight into the City. In this respect, globalism has helped by introducing international salary arrangements into our marketplace.
Finally, in the four-year period when I was a Treasury Minister, I was the only one of the eight of us in that overall period who had never worked in the City. Shortly after I went there, Douglas Wass asked me what I was responsible for and categorised my answer as the housekeeping end of the Treasury. Of course, I understood then my colleagues’ views that the decline of manufacturing did not matter if the financial sector was growing as fast as it was, but happily—in some ways—we now know different, and the terms of economic trade are moving back to what we were always once good at.
Lord Bhattacharyya
I would like to thank the noble Viscount, Lord Montgomery, for securing this debate. Whenever the economy is in trouble, we turn to manufacturing for the answers. I remember Ministers talking about sunrise industries, the knowledge economy and high value-added manufacturing. Last year the soundbite was “industrial activism” and now the phrase is “the balanced economy”.
I am not sure that any of these phrases has made a blind bit of difference to our economy. It all sounds a little like gobbledegook to our industrial friends. For example, when the car industry was in trouble we had headlines about 3 billion in support. Most of us thought the 3 billion would be in sterling but it ended up being in peanuts. Most manufacturers got very little, but despite this, manufacturing is playing a big part in our economic recovery. Today, the manufacturing share of British GDP is 12 per cent. That is a touch less than France and within striking distance of the Americans. Not bad.
Much of our recent growth is due to exports in goods, which rose by 15 per cent in the last year, predominantly due to the fall in exchange rates. But any long-term success requires innovation, not devaluation. A car company that was in trouble two years ago because of not getting credit, Jaguar Land Rover is now one of the largest exporters in the country with £7 billion exports this year. It regards developing markets as a major growth area. Exports to China are up 70 per cent. How can we help companies like this to succeed? At the moment our share of exports to emerging markets is tiny. We have a 1 per cent share of Chinese imports. Businesses based in China, Brazil and India are developing the highest technology products—from the C919 aeroplane to domestic designed automobiles and the Embraer corporate jets of Brazil. If they do not have the technology they can get it at the click of a button, or they can just buy another company such as the recent purchase of Volvo by Geely.
We often talk in the UK about low-carbon, high value-added exports, but how many politicians know that China is the world's leader in solar cell technology? We have no privilege in the global economy; we have to earn our place. The major opportunity for our exporters is not merely competing with the emerging economy manufacturers but being partners with them in the global economy. I focus on two areas. First, we must encourage inward investment. We should not be concerned about who owns the companies. The latest figures from the ONS show that the British economy still suffers from low rates of capital investment, as it has for the past 50 years.
If small manufacturing enterprises are to be the seedbed of innovation, full exploitation of their ideas requires long-term investment from larger firms and banks. Today, we have too many barriers to inward investment. The corporate tax system is confusing. Measures such as tax credits are hard to access. Regional support is baffling, and immigration rules send the wrong signals to the inward investor.
Next, we need to understand that trade barriers will exist for a long time. For example, China's tariff on imports of upmarket saloon cars is more than 40 per cent. At the higher end, it is 90 per cent. That is an extremely high barrier to get over. Therefore, most companies will end up manufacturing in growing markets just to get a level playing field, and the countries will make sure that there is technology transfer. We must help them to find partners to get access. Today, we are a gateway to Europe—that is where our major exports are—but we need to be a partner to the world.
The Government have announced innovation centres, a regional growth fund and a green bank. I do not want to talk today about how many engineers are produced, the quality of engineers, how much they are paid, or of technicians or of what the Government have to do in this or that area. We must make whatever the Government have announced simple. Most important, we must make those initiatives happen, not just talk about them. We must not have another saga where we tell the world that we are ready to act but very little happens. I wish the Government good luck in that task.
Lord Cotter
My Lords, I, too, thank the noble Viscount, Lord Montgomery of Alamein, for initiating this debate at this time. It is at a time of cutbacks. Emphasis is on the private sector to help our country to grow and to provide new jobs. How better than through manufacture? I was a managing director of a small manufacturing company before I got into Parliament. Not only does the UK remain the sixth largest global manufacturer, but the manufacturing sector produces 74 per cent of R&D in this country, which is praiseworthy. However, there is often misunderstanding of manufacturing in this country. It is still a very significant sector, but the perception that manufacturing is the poor relation of the financial sector and others—neat and tidy occupations, if you like—has to be corrected.
It is welcome that just this week, through the autumn forecast Statement, we heard the Government speak of increasing the incentives to innovate and develop new products in this country and to encourage high-tech businesses to invest in the UK. They will introduce a lower 10 per cent corporation tax to that effect on profits for newly commercialised patents, hopefully to be manufactured in this country.
That leads me to the future, and skills and training. In that connection, it is encouraging that both in the country as a whole and in the Government the need for hands-on training, vocational training, is being emphasised time and again. At a recent seminar promoted by the Edge Foundation, which is an education foundation dedicated to raising the stature of practical, vocational learning, it was said:
“Both George Osborne and Vince Cable make the case with force, coherence and intelligence that our economic recovery depends on a manufacturing renaissance … Given the devastation wrought on our economy by the events of the last three years, the need to drive private sector growth is urgent and overwhelming … And that depends on a reform of our education system which addresses our long term weakness in practical learning”—
from which we have suffered for many years.
It is good that there is to be an increase in apprenticeships of 75,000 by 2014-15 and that around £605 million will be invested in apprenticeships in 2011-12. It is also intended that hands-on training will be given increased status. So often, people have been encouraged—at school or wherever—to go to university, which is very praiseworthy. However, the intention of the Government is to give a qualification giving technician status when you do an apprenticeship, to give people status and represent the importance of that particular form of education.
It is good that the Government are aware of the need to improve careers advice as well, because for many years it has been said—truthfully, I think—that careers advice, in particular in schools, has not been good. For example, many instances have been put forward where careers advice at schools level has not included talk about apprenticeships at all, so the new initiative to raise the importance and efficiency of careers advice is very welcome. It must incorporate the important sectors of manufacturing that we are talking about today, but many other sectors have been neglected in the past. For a vibrant and effective manufacturing industry, we need the skills and the importance of trading to be given a top-level need. On that line, I close my remarks.
Lord Bilimoria
My Lords, there seems to be a widely held perception that Britain is now purely a services and financial sector-driven economy with agriculture, for example, amounting to just 1 per cent of GDP. The perception is very much that manufacturing in this country is dead. I thank the noble Viscount, Lord Montgomery of Alamein, for introducing this crucial debate at a crucial time. The reality is, as we have heard, that manufacturing remains at the heart of Britain’s economy, accounting for 13 per cent of GDP and over £150 billion—again, I would be interested to see what the exact figure is, according to the Government. It is 50 per cent of exports, 10 per cent of total employment and 75 per cent of all research and development.
We are not only the sixth largest economy in the world but the sixth largest manufacturer by output. Of course, manufacturing directly and indirectly creates jobs in the service, financial and education sectors. However, how much of a priority is manufacturing to the Government? The sad realities are that in 1977 manufacturing was 26 per cent of GDP, double the proportion that it is today, and that the share of people in the economy working in manufacturing has gone from 30 per cent 30 years ago to 10 per cent today.
We all know that we cannot just cut our way out of the deficit and debt problem that we are in today. As an economy, we have to grow. But what has happened to the Government’s proposed growth White Paper? It has supposedly been postponed—why? Because,
“the government did not have enough serious content to warrant”,
one. In my two remaining minutes, I will try to give some serious content; in the one hour that we have together, I am sure that we can all come up with some. Is that some sort of a joke? Right on our doorstep Germany, a major manufacturer, is roaring ahead. China is roaring ahead. Even in India—from where I have just returned this morning—as president of the UK India Business Council, supported by UKTI, I see manufacturing in India roaring ahead. It is over 25 per cent of GDP over there.
In Britain, we are so lucky. We are fortunate to have the cutting-edge, world-class manufacturing that the noble Lord, Lord Bhattacharya, spoke about in every sector, producing products that are global. I see them everywhere on the road in India, for example: Smith’s security equipment at every airport and JCBs at every roadside. Jaguar Land Rover is now owned by an Indian company, Tata. Yet while we have spent hundreds of billions supporting our banks over the previous years, when the Tatas approached the noble Lord, Lord Mandelson, for help he lent them not one penny. It was so determined that it raised the money itself and now, from everything that I have heard, including from the noble Lord, Lord Bhattacharyya, Jaguar Land Rover is flying again—a shining example of cutting-edge, world-class and world-beating British manufacturing, design and innovation.
In my own industry, as the founder and chairman of Cobra Beer, it gives me great pride to visit Burton on Trent, where Molson Coors, our joint venture partners, own the largest brewery in Britain and one of the three largest breweries in Europe. Whenever I go there, I see British manufacturing at its best.
When it comes to education and skills, we have the finest available in this country. I remember with pride showcasing Cambridge University’s manufacturing and science capability to the top team of Tata, who were seriously impressed. I attended the business growth programme at the Cranfield School of Management. I maintain that if every SME in this country had the opportunity to attend that sort of programme, the GDP of this country would go up substantially. Why do the Government not think of having a competition and sponsoring 1,000 places for SMEs every year on courses such as that? It would encourage lifelong learning and management and leadership skills.
One area where we fall down badly in Britain is that we have very few large manufacturers compared with our competitors. For example, firms employing more than 500 people account for 0.6 per cent of our manufacturing firms in the UK. In the United States, the figure is 2.9 per cent, which is five times the number that we have. We need growth and we need scale in manufacturing. Of course, there is too much red tape and our taxes are too high; there is a madcap immigration cap and of course we have the problem of a lack of bank finance. However, unless the Government consciously and visibly make manufacturing a priority, we will be left behind. Like the noble Lord, Lord Bhattacharyya, I despair that our companies do not go out and sell more, participating more in growing markets such as those in India, where there is so much opportunity for our manufacturers. As I have said before, we export more to Ireland than we do to the BRICS countries combined.
In conclusion, most importantly we as a nation need to have pride in our manufacturing sector—pride that when a product is stamped “Made in Britain” it means that it is made with world-beating, world-class quality, excellence in design and non-stop innovation. Who says that British manufacturing is dead? It is a beacon of our economy, but the Government must help to keep that beacon shining.
Lord Wade of Chorlton
My Lords, I also thank the noble Viscount for introducing this debate and for drawing our attention to the manufacturing industry, which is possibly the most important thing in this country. I come from the north-west of England and shall draw your Lordships’ attention to some of the issues relating to the manufacturing industry in that part of the country. In the 18th and 19th centuries, the north-west drove the manufacturing industry of the world, not just the UK. I should like to see a return to those times when the innovation, ideas and enthusiasm of individuals could flourish.
Most of the information that I shall give comes from the North West Manufacturing Institute, which represents, or shows the interests of, the north-west manufacturing industry. We have some 18,200 production- driven manufacturing companies in the north-west of England and they make a major contribution to our economy. Output grew by 4.8 per cent from September 2009 to September 2010. In the mechanical and equipment manufacturing industries, it increased by 21 per cent. Therefore, there has been an enormous increase in activity and growth in our manufacturing industries in the north-west. The food and drink industries in the north-west have seen an increase of 6.6 per cent. The noble Lord referred to the importance of the food and drink industry. It is an industry in which I was involved for most of my life. I refer not to the drink side—I shall leave that to the noble Lord, Lord Bilimoria—but the food side. It has been a very important part of the north-west’s economy for a long time and it is still growing at a considerable rate. Some of our most innovative companies are in the food industry. They have contributed to a considerable increase in exports and development in other countries, and I am very proud of some of our major food industry companies in the north-west of England.
I am patron of the Society of Dairy Technology and should declare an interest in that regard. We are trying to improve innovation, particularly in the dairy industry. Our membership covers the whole of Europe and is part of a European structure that enables many companies now to be driven by new investments and new developments. I shall make the point now while I have the opportunity that I favour the large dairy units that are now being considered in this country. I would encourage the whole of Europe to accept new technologies in farming, agriculture and growth. They will be essential if we are going to compete with the rest of the world. We must stop burying our heads in the sand and thinking that we can continue to farm and grow and manufacture food in the way that we did in the previous century.
One of the issues in the north-west to which I would like to draw the Committee’s attention is that, as I understand it from the information I receive from the institute, we will need to replace 550,000 employees over the next five to six years in the north-west alone. That gives some indication of how the manufacturing industry is going to provide extra employment in the coming years. The Government’s policy of encouraging that and of moving people from the state sector into manufacturing industry will be one way of generating much more wealth. In the engineering sub-sector alone, it is hard to fill vacancies. We will require around 18,000 jobs per year, and the estimated lost GVA through lack of recruitment comes to approximately £823 million per annum. That is an important aspect that we have to be aware of.
I draw the Minister’s attention to some of the issues that concern people most. One is the shortage of skills. There is a north-west factory that is trying to recruit 800 specialist engineers and finds it impossible to do so. Another company has had a 170 per cent increase in its exports to China and is looking for 100 new managers and quality people, but it cannot find them. A company that I chair, Rocktron Limited, is a specialist engineering company and is finding it extremely difficult to get the right quality of electrical and processing engineers and craftsmen—welders and the like. There is an enormous shortage, which is handicapping the growth of these industries.
Finally, if I ask businessmen what they want, they say that they want government to leave them alone, to say yes when they want to do something and to encourage officials, particularly at local government level, to stop making hold-up decisions rather than saying “Get on with it and do it”. There is a great hold-up between what the Government at the top are saying about what they want to encourage local officials to do and what is happening at ground level. There is an awful lot of inertia in the system at the moment that needs stirring from the top. I look to the Minister to be the one who might carry out that action and stir people up. When business wants something, it is not money, but someone to say, “Yes, get that built, get that planning passed, get that decision made, get that done”. If that is done by government, business and manufacturing industry will always respond.
Lord Haskel
My Lords, I add to what the noble Lord, Lord Wade, said about the north-west that it is also a leading area in technical textiles, a business that I was in for 30 years. Noble Lords are right that manufacturing is an important part of our economy and will play an important part in our future, if we are competitive. To secure this future, there is an important political argument that the Minister and her department have to win. It is about debt. Her Government are giving debt a bad name because they say it is an unreasonable burden on our children, but that is a damaging generalisation. We should certainly avoid burdening our children with unproductive debt, but productive debt is not a burden but a blessing. As Martin Woolf pointed out, Professor Helm's paper for the Social Market Foundation is very convincing on this. Now that interest rates are so low, it is the time to build up productive assets. What could be more productive than manufacturing assets and the infrastructure that supports them? I am talking not just about the physical infrastructure but the infrastructure that bridges manufacturing and skills and bridges the gap between research and technology and commercialisation. It is the task of the Technology Strategy Board to provide the infrastructure to bridge that gap. It is the task of our training organisations and colleges to provide the infrastructure to bridge the skills gap. It is the task of the financial services industry to bridge the financial gap. So I hope the Minister and her department will argue that getting into debt to bridge those gaps is productive debt which is a public good and not a burden on future generations.
The noble Lord, Lord Bilimoria, told us that last week there was a headline in the Financial Times that said, “Growth Master Plan Dropped for Lack of Content. Long Awaited White Paper Abandoned”. That gave the impression that the Minister’s department had little idea on how to get growth back into the economy. I am afraid that the paper published yesterday by her department confirms this headline. Perhaps the noble Lord noticed that directly below that article in the Financial Times was an article about a report from McKinsey entitled From Austerity to Prosperity. I am no particular friend of consultants, but the report identifies seven priorities, priorities which are practical and achievable and many of which have been mentioned by noble Lords in this debate. They are in fact common-sense actions dealing with raising productivity sector by sector instead of the general aspiration to raise productivity that is in the Government’s paper. On how to release new money to invest in the infrastructure, the Government's paper speaks only of existing sources. On concentrating innovation in large clusters to make it more effective, the Government's paper speaks only of being “innovation friendly”. The report refers to how to capitalise on the huge potential for economic growth in education and health, and generally on how to make Britain a better place for business, in ways that the Government’s paper ignores but other noble Lords have mentioned.
The Minister and her department have to start to do better and to start being serious and more radical about our future prosperity, even if some of the ideas come from outside government. Otherwise, there will be a vacuum in government thinking and the manufacturing sector will suffer most.
Lord Willis of Knaresborough
My Lords, I, too, thank the noble Viscount for introducing this debate. In the true style of the noble Lord, Lord Brooke, this is my first innings in one of these debates. I have to say to the noble Lord, Lord Haskel, that for 13 years the previous Government did not have any manufacturing strategy whatever, so it is a bit rich to say in the first six months of this Government that they have failed to produce one, but I shall return to that later.
We are without doubt successful as a manufacturing nation. The noble Lord, Lord Bilimoria, is absolutely right. To pretend that somehow manufacturing is dead and that it went out when Mrs Thatcher left Downing Street is quite frankly ridiculous. As noble Lords have said, we are the sixth-largest manufacturer in the world; 53 per cent of our exports are accounted for in manufacturing, and 2.3 million jobs. It is very striking, too, that in high-tech areas we outstrip Germany, France and Japan in the amount of high-tech goods we not only produce but export. Those are things that we should celebrate. Manufacturing is not dead.
When the Prime Minister made his rallying call to create, innovate, invest and grow a few weeks ago, he was describing what UK manufacturing was all about. He was recognising that in every major economic recession in the past two centuries, the one sector that leads a drive out of recession is manufacturing. The noble Lord referred to that. The industrial revolution was built on the backs of great engineers and scientists, but it was making things that the UK and the rest of the world wanted that made the industrial revolution successful. Inventions on their own were of little consequence.
It was the same in the 1930s and the 1950s after a second great war, and it will be the same in the second decade of the 21st century. In the past three quarters, manufacturing has averaged 3.5 per cent growth, which is a remarkable record beaten only by construction, and there were particular reasons for that. We produced 124,000 more cars last month than we did a year ago. We should be celebrating that as part of this debate. Real barriers need to be overcome if the UK is to achieve its economic recovery on the back of manufacturing. The first is ambition. We have been content over the years to see manufacturing as a small or medium-sized operation. That is the problem. There is a belief that manufacturing, by definition, has to be somewhere else and it should not be here. That assumption is fundamentally wrong.
I applaud many initiatives that this Government are making to encourage small companies, as did the previous one. I put that on the record. The chief executive of the EEF, Terry Scuoler, said that while the current attention on young business and start-ups was helpful, we must not ignore the wider benefits to the economy that larger companies bring. He is absolutely right, as was the noble Lord, Lord Bilimoria. If we are serious about growing our economy on the back of manufacturing, to pretend that we can do it by growing a number of small start-up businesses is absolutely wrong. Of course, they are vital but it is growing live businesses out of SMEs that is so important. Germany has twice as many manufacturing companies with more than 250 employees than the UK. The noble Lord made it clear that in the United States, 2.9 per cent of manufacturing companies have more than 500 employees, compared with 0.6 per cent here in the UK.
The excuse in the past was that America is a big country, but Europe is a huge market for us. Indeed, so are the new emerging markets of China, India, Brazil and Africa, where large numbers of exports can be made. Not only do we have large-scale manufacturing companies, which make significant investments in research and development—pharmaceuticals is a classic example, and aerospace is another—we also have, at the Institute for Manufacturing in Cambridge, the global leader in manufacturing research and Mike Gregory, who I regard as the leading academic in the whole world, at our disposal. We need those people to get on board.
I was hugely disappointed that the new manufacturing framework has been pulled. Will the Minister explain what is coming in its place? We do not want another collection of small initiatives. We want a big initiative that says to the largest manufacturers that we want them here in the United Kingdom because that is where our future lies.
Lord Broers
My Lords, I, too, congratulate and thank the noble Viscount, Lord Montgomery, on this debate. I agree with all noble Lords. How could I disagree with the noble Lord, Lord Willis, about Mike Gregory—and others—who I put into professorship?
The UK remains, according to my numbers, in seventh not sixth place but these numbers seem to be somewhat confused. The important point is that we slipped from fourth in about 20 years. As pointed out by Sir Alan Rudge in an article based on Pink Book data and published by the ERA Foundation recently, present trends suggest that we will fall out of the top 10 within a decade. If that dire prediction is fulfilled, which I hope it is not, it is unlikely that we will ever be able to restore our economy to pre-recession levels.
According to Cambridge economists Coutts and Rowthorn in their recent paper, Prospects for the UK Balance of Payments, our persistent current account deficit could grow from 2 per cent to an unacceptable 5 per cent of GDP by 2020. They point out that, in 2008, our deficit in the trade of finished manufactured goods was £58 billion, far outweighing the surplus of £46 billion generated by the financial and insurance sector, and that it remained at £50 billion in 2009. The most striking point that they make, however, is that an increase of only 10 per cent in manufactured exports, combined with a 10 per cent fall in manufactured imports, would generate a £45 billion improvement in the current account balance, which is equal to total UK net earnings from financial services and insurance and more than one and a half times that contributed by all other services, so manufacturing is hugely important to the UK. It may in fact provide the only way out of our financial difficulties.
Ironically, what manufacturers need is more support from the financial sector, but this is seldom forthcoming, presumably because the timescales for returns from manufacturing are longer than those for the simple trading and exchange of finance. The gains in many cases are smaller. In the long run, however, as the excesses of the financial sector are reined in, the gains in the financial sector will probably fall way below those of the manufacturing sector. To help resolve this difficulty, the coalition should once and for all abandon the strategy of leaving manufacturing industry to fend for itself while it does everything possible to prop up the financial and knowledge-based services in the false belief that they alone can provide all that is needed. Instead, it should do everything it can to support manufacturing.
One key area where manufacturing needs assistance is in breaking down the barrier that persists between product design, at which we are strong, and scientific and technological advances—we endlessly talk about the excellence of our science and engineering base—and their implementation in profitable products. This difficulty has been discussed ad nauseam, but today we have the opportunity to do something about it. We can implement the recommendations of the Hauser review, to establish centres in which industry and universities work together in a focused manner to bring advances in product design and technological capability closer to the market. Such centres are used successfully in many of our competitor nations, most notably perhaps in the Fraunhofer centres in Germany, but they exist in this country in many places, one sparkling example being the centre linked with the noble Lord, Lord Bhattacharyya. Industry should be encouraged to concentrate its R&D resources into these centres and play a leading role in overcoming the barrier between university research and its effective application. It is crucial that we concentrate our efforts and not, as we have in the past, spread them thinly and ineffectively across a large number of small and uncompetitive centres.
Incentives to get the financial sector to invest in manufacturing and to concentrate our research and development efforts in large, critical-mass R&D centres would greatly benefit our economy.
Lord Young of Norwood Green
My Lords, I, too, congratulate the noble Viscount, Lord Montgomery, on initiating this debate on an issue as vital as the value of manufacturing. We have had some illustrious contributions; I worry about trying to follow their quality.
A number of noble Lords, including the noble Lord, Lord Bilimoria, have said that manufacturing is not dead. My noble friend Lord Bhattacharrya made the same point in putting the state of our manufacturing in an international context. If the numbers have declined over here, so have they in other countries. That context is important, otherwise we make the task seem almost impossible.
Our concern is about manufacturing succeeding in the context of growth. We are concerned that the Government have the wrong policy on deficit reduction—it is too rapid and too deep and risks a fragile recovery. We would characterise it as an almost ideological stance on cuts to the public sector which they say will be obviated by growth in the private sector. I hope that they are right in that prediction, but that fails to acknowledge that many private sector manufacturing firms rely on contracts from the public sector. It fails to distinguish between investing for growth and infrastructure and general investment. My noble friend Lord Haskel got it right on the question of debt. There is debt which arises from investing in infrastructure and areas such as the Sheffield Forgemaster's loan. We thought it was an appalling decision by the Government not to carry on with that investment, which we believe would have proved to be not only a necessary but a profitable investment. There is still time for them to reconsider that.
We need a favourable climate. I turn to the question of skills and the skills deficit. I note that the Government's policies, which are now in a number of documents, whether the strategy for sustainable growth or the more recent document, The Path to Strong, Sustainable and Balanced Growth. I noticed that the Government stated in the latter that they are abandoning the targets set by Leitch. That is unfortunate. How will we measure progress on reducing the skills deficit?
I notice that we are not totally abandoning targets, because the Government have set themselves a target of 75,000 more adult apprenticeships. I am puzzled at that, because it is not just adult apprenticeships that we need; we need apprenticeships for the 16 to 18s. I have always described them as little beacons of hope to every young person. If we want to encourage young people into manufacturing, we need those apprenticeships, not just adult apprenticeships. I am puzzled that that is where the Government see the growth in apprenticeships.
The noble Lord, Lord Cotter, referred to the perception of manufacturing. We need a couple of programmes, “Strictly Manufacturing” and an “X-Factor” for manufacturing, to enhance the view that manufacturing is a great career choice for young people. We need to mean that and get the careers advice right. I agree with the noble Lord, Lord Cotter, on that, as well: schools still do not seem to understand the value and importance of apprenticeships. Recently, I went to a school for a prize-giving. I asked people about apprenticeships and they said, “Oh yes, well there might be one or two”, but they are seen as an add-on. It is unfortunate that in our correct drive to increase the number of young people wanting to go to university, a vocational career was seen as a second-class option. It is certainly not. I looked at the latest figures on apprenticeships. We have a remarkable 270,000 starts on apprenticeships by the end of 2009-10. If the Government can match the progress that we made from 1997 until then from 65,000 to 270,000, I promise that I will applaud their success.
We are in a short time trying to cover a very complex subject. Another question was the decision to abolish the regional development agencies—something which attracted quite a bit of criticism by business. The Government have taken that decision and decided that local employment partnerships will be a success in future in encouraging manufacture. My question for the Minister is: there seem to be areas of the country that are not covered by local employment partnerships; what are you going to do about that? Secondly, the papers that the Government have produced to date define a number of key activities that they expect the LEPs to undertake. If that is serious, what about the funding for those organisations?
I have to say to the noble Lord, Lord Willis, that he is wrong when he said that we had no manufacturing strategy. We did have a number of manufacturing strategies; the last one was “New industry, new jobs”, when we tried to look at the emerging jobs that would come from a new, greener economy. He himself talked about the manufacturing framework. I would not say that we had everything right—I do not think that any Government have got everything right on manufacturing —but to say that we did not have any manufacturing strategies is a bit of hyperbole.
I conclude by endorsing many of the points that the noble Lord, Lord Broers, made when he talked about the importance of manufacturing. He got the value bit right when he talked about the effect of a 10 per cent increase in exports, if we could achieve that. That is the target of this Government to build on some of the things that we did in trying to ensure that we had the skills base that manufacturing needs and the strategies for us to ensure that in this key period of our recovery, manufacturing can make the contribution that it needs to make.
Baroness Wilcox
My Lords, I begin by thanking the noble Viscount, Lord Montgomery, for securing this debate on the value of manufacturing to the United Kingdom. As he said, he set the scene; as far as we are concerned, it could not have been more timely given some of the announcements that we have made. The noble Lord, Lord Willis of Knaresborough, is to be thanked for giving up his birthday to be here and for his thundering good speech, on which we will reflect carefully. Of course, we welcome his celebration of UK manufacturing, which was very heartening to hear. Contrary to something that he said about the manufacturing framework, it has not been pulled; we are planning to announce it shortly and it will be set up with the necessary conditions.
The principal aim of the coalition Government is to return the United Kingdom economy to growth, but it needs to be a different sort of growth from what we have seen in the past, as the Chancellor and the Business Secretary reiterated yesterday. We must achieve growth that is more evenly balanced across the country, in the north as well as in the south, and growth across the range of business sectors, because we can no longer rely on just a handful of industries. We need growth that is sustainable and not so heavily based upon household consumption that is driven by personal debt or ever-increasing government spending. The alternative is an economy founded on greater levels of business investment, more export sales and a strong manufacturing base. Indeed, manufacturing already accounts for more than 50 per cent of United Kingdom exports, and contributes £140 billion annually to our economy. To respond to the question from the noble Viscount, yes, £140 billion is directly generated by manufacturing, but it also generates a lot of additional revenue. For every factory producing goods, there are accountants, designers and other service providers employed as well. Manufacturing accounts for 75 per cent of all industrial research and development investment and, with about 2.5 million jobs, accounts for roughly 8 per cent of total UK employment.
In the spending review, we took a number of tough decisions in order to tackle the deficit bequeathed to us by the previous Government, but we have also announced the areas in which we intend to invest what are, inevitably, limited financial resources at the moment, all with a view to growth. That investment will be in such things as in transport links and digital infrastructure, as well as £250 million in an additional 75,000 adult apprenticeship places, along with the apprenticeships that we already look to.
I have a question here about apprenticeships from the former Minister himself: are we ignoring the 16 to 18 apprenticeships? No, we are not. We are just trying to expand it and allow people the opportunity to retrain in adult life, and we are looking at the sort of apprenticeships that girls take up; they take up 50 per cent of the apprenticeships in this country but they tend to be in the caring, hairdressing or beauty professions, and we would like to see our girls encouraged at school with, as the noble Lord, Lord Cotter, mentioned, much better careers advice than we have seen so far—careers advice that goes right through from schools to further and higher education, so that that advice can be at all ages, at all times in life, to get those changes through.
We are creating a green investment bank with an initial budget of £1 billion so that the UK gains a technical and competitive edge in clean technologies and, perhaps more directly relevant to this debate, we are investing about £200 million to support the small and medium-sized enterprises in manufacturing. However, I take on board what the noble Lord, Lord Willis, said; we will reflect on the fact that we must remember that our big industries are very important.
All these measures, however, will benefit the manufacturing base, as will our reforms aimed at simplifying the tax system. Three or four of your Lordships talked about the tax system and simplification. We are well aware of trying to pull the Government off people who are trying to get their businesses going and instead simplify the tax system so that people know exactly where they are. We are reducing the main rate of corporation tax from 28 per cent to 24 per cent over the four years from April 2011, and the small-profits rate from 21 per cent to 20 per cent. The same goes for our assault on unnecessary red tape. New regulations are permitted now only a “one in, one out” basis.
Yesterday’s growth review announcement is the next stage in the process. Each government department must now identify and remove further barriers to economic growth. The review will also include a detailed look at advanced manufacturing, for which we will publish an action plan to coincide with next year’s Budget.
I know that we are time-limited, so I will briefly address some of the points that were made. The noble Lord, Lord Wade, made a blizzard of a speech on behalf of the north-west that picked up on so many things: inertia, lack of urgency, the fact that business wants “Yes” so let’s get it done, and so on. I hope that pulling the Government back off and some of the other things that I have talked about so far will help with that. He talked about local government not really getting to grips with the task.
We have also talked about LEPs, and we are certainly going to be moving on that. We have invited 25 local enterprise partnerships to form the local boards. The department has already held a workshop with the first 24 successful LEPs to discuss a wide range of policy issues, and that dialogue will continue. To answer the noble Lord, obviously we know that there are a lot more of these LEPs to come, but some of the contributions that they put forward were not going to work in the form in which they were submitted the first time around, so we are working with them right across the country to get the LEPs through. We have used them to replace a system that was using an enormous amount of money, the sort of money that we do not have left any more, and was not bringing the north and south together at all.
Lord Young of Norwood Green
Before the Minister sits down, the question that I would like answered, perhaps in writing if she cannot answer it today, is on funding for LEPs.
Baroness Wilcox
Unless I get this terribly wrong and they make me sit down—no, I had best not answer. Shall we write? It would be easier. We shall make a minute now, and I shall get through my brief. I will come back to the noble Lord, although I think that we have explained this fairly well.
Where is the growth White Paper? Our priority is to secure the economic recovery. Our growth paper and review, launched yesterday, set out how we will create the conditions for private sector growth. The decisions of business leaders, entrepreneurs and individual workers will build our future economy, which is why we are launching a growth review where the Government are inviting business to take part in a review of how each part of Government can address the barriers that are facing industry. It will include a detailed look at advanced manufacturing, producing an action plan at Budget 2011.
The noble Lord, Lord Bhattacharyya, is one of the great gurus of this country and it is always a great delight to listen to him speak. It does not matter to me which side of the political spectrum he stands on to speak; it is wonderful to hear him. On foreign direct investment, the UK has the third-largest stock of inward foreign direct investment in manufacturing in the OECD, for what that is worth. About one-third of the 1,600 new inward foreign direct investment projects in 2009 were in the areas of advanced manufacturing, life sciences, ICT and environmental technology. However, I will reflect on the noble Lord’s words today. I can always learn something whenever he speaks.
The noble Lords, Lord Brooke of Sutton Mandeville and Lord Cotter, talked, rightly, about the shortage of engineers. We recognise that it is still a problem for us. We welcome the comment by the noble Lord, Lord Cotter, and we support the move towards vocational training. He spoke in particular about apprenticeships. I think that is about all I can manage at the moment. Two minutes left—okay.
There is no question that manufacturing has a central role to play in the growth agenda. The UK has strengths in a diverse range of sectors from well established industries, such as aerospace and chemicals, to fledgling ones such as plastic electronics and composite technologies. We also know that major opportunities exist in new materials and new markets, especially in low carbon. Britain is the largest single market for offshore wind in the world and is already an attractive place for inward investment. Gamesa, a Spanish wind turbine manufacturer, is just the latest company to announce its intention to move here. It intends to invest £130 million by 2014 and expects to create more than 1,000 jobs, stimulating about 800 more jobs in the supply chain. There are further signs that manufacturing is beginning to move in the right direction after weathering what was, we hope, the worst of the global recession. For example, in 2009-10, inward investment in manufacturing generated 94,000 jobs, which was a 20 per cent rise on the previous year. Last week, a survey of 300 companies conducted by the Engineering Employers Federation found that UK manufacturing is growing at its fastest rate since 1994.
Let me see how quickly I can go. Both government and industry want to see UK manufacturing grow further. We cannot leave this to chance. We will shortly be launching a new manufacturing framework setting out the necessary conditions for a resurgence in UK manufacturing. The opportunities are there in overseas markets characterised by rising incomes and burgeoning demand, in the availability of new technologies and materials from our own science base and in the new business models that combine manufacturing and services to maximise revenue. Indeed, the framework will lay the foundations for a more co-ordinated approach that will complement the review of advanced manufacturing that I referred to previously.
Although it is the conviction of this Government that growth will best be achieved through a combination of private investment and a propitious business environment, we are under no illusions that the latter is yet within reach. Indeed, the former is heavily predicated upon the latter, and investors expect much more than warm words. Nevertheless, we are confident that our approach is the right one, and we will pursue it with vigour in order that Britain once again becomes synonymous with manufacturing. It only remains for me to thank the noble Viscount, Lord Montgomery of Alamein, for raising this issue of such national importance today.
The Deputy Speaker
My Lords, that completes the business before the Grand Committee. The Committee stands adjourned.