UK Manufacturing Sector

Wednesday 5th June 2013 Westminster Hall

11:00

[Caroline Dinenage (Gosport) (Con)]

It is a great pleasure to serve under your chairmanship, Mr Robertson.

I want to talk about strengthening the UK manufacturing sector through innovation. UK manufacturing is going from strength to strength. We have a rich heritage of advanced manufacturing, companies in a range of sectors that are competing with the very best internationally and a world-class reputation for quality innovation. There is certainly widespread recognition by business and Government that research and innovation are essential to global competitiveness and future economic growth. Despite the obvious global economic challenges, the Government stepped up to the plate and invested in science, research and development, infrastructure and skills—all the things that innovation needs to flourish. I also hope to expand on how the Government could use their enormous purchasing power to help draw the most economic benefit from such investment.

Most manufacturers understand that their future success depends on the ability to be innovative in their thinking, ways of working and approach to business, as well as in their new product development. It is all about changing, adapting and anticipating the demands of their marketplace and their customers. Huhtamaki is one of the biggest employers in my constituency. It has a dynamic attitude towards innovation—which it has to, because its industry makes paper and plastic cups, loads of them: a staggering 2 billion a year for many well-known coffee houses and fast-food establishments. Its business motto is to “lead change before you have to”, and the company is continually innovating to maintain its position as a market leader, which means embracing new print technology, experimenting with colours and textures and introducing products that are recyclable, renewable and even compostable. The managing director told me that that philosophy gives the company the edge in such a changing industry.

Innovation can be the key to a virtuous circle: investment leads to growth and efficiency, which generates revenue that can be used to achieve change and to support further innovation. The difficulty is that innovation not only requires long-term investment, but introduces a certain element of risk that some manufacturers find difficult to justify, particularly in a tough economic environment. In fact, forward-thinking innovators might even put themselves at a disadvantage in the short term compared with their competitors, who let others take the lead and then hang on to their coat tails.

For the UK to remain a world-class manufacturing hub, it is essential for the Government to do all they can to support the innovators. Where that works best is where Government and business work together in the development of and support for new technologies, and that has made a big difference in some sectors. Thus, since 2007 successive Governments have invested support in the space sector, helping British companies to become the world-leading innovators in the field. For example, Astrium, a major employer in the Portsmouth area, specialises in the mind-blowing satellite technology that has made it No. 1 in Europe and No. 3 in the world.

[Stephen McPartland (Stevenage) (Con)]

Astrium is a huge employer in my constituency, and Stevenage is now the capital of the UK space industry. Will my hon. Friend join me in celebrating Astrium’s success a couple of days ago, when it launched into space a satellite that in a few months will be responsible for beaming broadcast and communications signals back to the UK?

[Caroline Dinenage]

My hon. Friend makes an excellent point. Astrium does real James Bond stuff of the future, which is incredibly impressive. In fact, the UK space industry turns over £9 billion a year and is predicted to grow by 7.5% each year in an increasingly demanding global marketplace.

Another British success story is the aerospace sector, which is the largest in Europe and the second largest in the world, after the USA. It is worth more than £23 billion to the UK economy, and 70% of its output is exported worldwide. The sector employs directly nearly 100,000 people in the UK. Its biggest challenge is that the long-term returns from research and development make it an unattractive capital market investment.

[Chris White (Warwick and Leamington) (Con)]

I congratulate my hon. Friend on securing this debate. During the recess, I was pleased to be present at the opening of Bosch’s new technology centre at Warwick university’s science park. I am pleased to see the hon. Member for Coventry South (Mr Cunningham) present; he was also at that opening.

The centre will support around 30 engineers and is a perfect example of bringing together our universities and businesses to help spur innovation in our manufacturing sector. Does my hon. Friend agree that the Government must look closely at such centres, how they are formed and how we can put in place more incentives for business to commit to the long-term cost of supporting innovation?

[Caroline Dinenage]

My hon. Friend is absolutely right. It is imperative that the Government work to facilitate business development and innovation as much as is humanly possible.

[Mr Jim Cunningham (Coventry South) (Lab)]

I congratulate the hon. Lady on securing this debate. In addition to what the hon. Member for Warwick and Leamington (Chris White) said about Bosch, Jaguar Land Rover has been a success story, creating not only direct but indirect jobs in the west midlands. Anyone who knows anything about industry knows that for every direct job, there are probably two or three indirect jobs, so there is a multiplying factor. Does the hon. Lady agree that in the west midlands, and particularly in Coventry, slowly but surely, manufacturing is beginning to come back? The process under successive Governments has been slow, but it is encouraging to see companies such as Bosch and Jaguar Land Rover. Not so long ago, the Minister helped out with the London Taxi Company, and that maintained an anchorage for manufacturing in the midlands and nationally.

[Caroline Dinenage]

The hon. Gentleman makes a good point. Manufacturing is growing apace, and Government intervention is key to continuing that progress. That is why their recent funding commitments through the aerospace growth partnership have been so widely welcomed.

I have given some examples of how the Government have overseen initiatives to help what might be called the push or supply side of business innovation.

[Jim Sheridan (Paisley and Renfrewshire North) (Lab)]

Will the hon. Lady give way?

[John Robertson (in the Chair)]

Order. I point out that interventions should be short.

[Jim Sheridan]

I welcome this debate, which is long overdue. The hon. Lady may be aware of the National Audit Office report on the contract that Bombardier lost to Siemens and the resulting loss of jobs. There is still time to retrieve that contract, so can she do anything to convince her Government that it should stay in the UK?

[Caroline Dinenage]

The perfect Minister is in the Chamber, and I hope he will speak about that when he has the chance to respond.

Businesses I have spoken to are really positive about some of the incentives the Government are introducing to help with innovation, including R and D tax credits and the financial incentives to innovate. Will the Minister assure me that his Department will continue to push for such incentives to be high on the Government’s priority list?

[Mr Iain McKenzie (Inverclyde) (Lab)]

The hon. Lady is being most generous with her time. I congratulate her on securing this important debate, but I just wish it had been longer than half an hour. I am sure she will agree that innovation in British manufacturing is nothing new. An example is an illustrious son of Inverclyde, James Watt, who innovated and dominated the market for 10 years. He is a prime example showing that innovation is nothing new for British industry.

[Caroline Dinenage]

Absolutely. We have a proud history of innovation and manufacturing going back centuries, and it is important that it be allowed to continue.

[Jason McCartney (Colne Valley) (Con)]

Will my hon. Friend give way?

[Caroline Dinenage]

May I make a little progress? I will then be more than happy to give way.

The other catalyst for business innovation is the pull effect, and I want to say a little more about how public procurement could be used better to drive the demand side of the innovation equation. This is an area where the strategic spend of public money on goods and services has the potential to drive innovation and to create more efficient, cost-effective, high-quality public services, as well as to unleash economic benefits. The Associate Parliamentary Manufacturing Group recently held a seminar on this issue, where it listened to the manufacturing sector’s concerns about how the Government buy products, as well as hearing about current academic work on procurement as a tool to drive innovation. Many bodies, from the CBI to the foresight team at the Department for Business, Innovation and Skills, see public procurement as one of the most powerful policy levers at the Government’s disposal.

Globally, the UK is second only to the US in its scientific knowledge base, but both the US and Germany outstrip the UK in turning that knowledge into economic profit. Is that because the Americans and Germans have a greater desire to be cutting edge, or are they simply less risk averse? Either way, it seems highly inefficient to invest heavily in a knowledge base at the start of an innovation process and not capitalise on the potential economic benefits. With that in mind, will the Minister tell me what efforts we are making to learn from other nations about maximising the economic fruits of our innovation? That is something the US invests heavily in—the virtuous circle again. Demand for a product creates more jobs; more science, technology, engineering and maths-based graduates; more high-value-added companies; greater economic prosperity; and, in theory, more tax returns.

The Treasury clearly recognises that, which is why, in the 2013 Budget, the Chancellor of the Exchequer announced that all Departments must engage in the small business research initiative process and vastly increased the amount of money available through it. The Technology Strategy Board’s SBRI encourages the private sector to develop solutions to problems identified by the public sector. So far, it has had great success: 120 competitions have awarded 1,200 contracts to a value of £100 million. Those have involved 40 public sector bodies. SBRI therefore shows that in identifying new problems, the public sector has a mechanism through which it can procure innovative solutions.

However, despite its great success and even greater potential, the programme has not fully solved the procurement puzzle. It appears to be asking for solutions to new problems that are identified, but not looking for new and innovative solutions to age-old problems that cost the country so much money. Will the Minister say to what extent the SBRI encourages Departments to look again at problems that may already have a stove-pipe solution?

Let me give an example: QinetiQ has a subsidiary company called OptaSense, which has developed a way to use fibre-sensing technology to deliver real-time information to monitor assets such as pipelines or railways. In layman’s terms, that means turning fibre-optic cables into thousands of highly sensitive microphone devices capable of distinguishing between human footsteps and animal tracks. They are capable, in fact, of hearing someone walking alongside a railway track and then sawing through the railway cable, enabling the transport police to catch them red-handed before the damage has been done. That seems a good solution to all those wasted commuter hours resulting from rail cable theft.

The German railways and the north American oil and gas industry seem to think so. The technology has secured significant export contracts, and the number of employees has grown from three to 160 in the past few years. In fact, 99% of the company’s revenue comes from overseas. The problem is that, given that those countries are spending the money that is effectively sponsoring most of the ongoing research and development, OptaSense is under increasing pressure to move both that and the manufacturing overseas. The UK’s competitive tax regime for R and D is one of the main things keeping it here. Despite that world-leading solution being developed and manufactured here, Britain is in danger of being left behind by its own technology. Other companies would be tempted to move their ideas and their most brilliant scientists to where the market was, meaning that if we decided to buy back the product at some point in the future, we would effectively be buying back our own ideas, without all the economic benefits to the UK economy.

Realising the power of procurement to effect change in industrial competitiveness is a big challenge. It represents a step change in the way public bodies and Departments think about their budgets, and I think it is fair to say that risk taking—and, as a result, innovation—is not encouraged in public procurement. Public procurement still has a tendency to opt for low-risk solutions and mature technology, and innovation is not routinely welcomed or rewarded. In part, that is due to the competing objectives and bureaucratic barriers that public procurers face, which discourage risk-taking.

As we have seen, the fear of failure from doing nothing drives innovation in the private sector. My next question for the Minister is, what lessons can be learned from business to try to encourage that mentality in public sector procurement?

[Mr McKenzie]

Will the hon. Lady give way?

[Caroline Dinenage]

I will make a little more progress first. Some Departments, such as the Ministry of Defence, are more culturally competitive, more innovative in their approach to innovation, happy to manage technological risk, and have a more open architectural approach to procurement.

We should not be surprised that the procurement system produces the results that it does. If the discussions around procurement remain too closely linked to buying, without being linked to interaction with the private sector and horizon-scanning, procurers will simply keep buying as they always have. That behaviour has been compounded by the positioning of austerity policies against procurement; in the mission to try to cut costs, procurers should include in their calculations how, through the pursuit of innovation, money may be saved long-term, taking whole-life costs into account. Will the Minister tell me what more he thinks the Department can do to encourage Government bodies to be early adopters of innovation?

[Jason McCartney]

I thank my hon. Friend for giving way and for securing this fantastic debate. The contributions so far show that we could have had a good hour and a half on the topic. Last night, Huddersfield and Colne Valley featured on the BBC 2 TV programme, “Town”, which showcased some of the innovative engineering and textile work going on in my historic part of the world. The Enterprise and Innovation Centre has opened at Huddersfield university. Does my hon. Friend agree that skills and education blending with innovative companies is a fantastic way forward for our innovative organisations in this country?

[Caroline Dinenage]

My hon. Friend makes an excellent point. One of the key issues seems to be communication between Government and business. The Manchester Institute of Innovation Research reported that, following a survey of 800 businesses, two thirds believe that engaging with the public procurement process had a positive effect on their innovation, with a quarter saying that an innovation had come about directly as a result of engaging with the public body.

With that in mind, a commissioning academy has been set up by the Cabinet Office that will bring commissioners from different parts of the public sector together to learn from best practice. In recognition of the fact that we need capable, confident and courageous people in the public sector to deliver more efficient and effective public services, it says that success will mean commissioners embracing new and innovative forms of delivery. It is interesting to note that, of the supporting Departments for the commissioning academy, the Department for Business, Innovation and Skills is not mentioned. Will the Minister tell me why, and to what extent BIS is liaising with the Cabinet Office work on procurement?

If we are to maximise the economic potential of the Government’s enormous purchasing power, there should be pressure on suppliers to come up with new ideas and innovative solutions to problems, while still meeting the requirement to show value for money.

[Mr McKenzie]

I thank the hon. Lady for again taking an intervention. Does she share my frustration that public procurement has not embraced, and moved as quickly as it should into, e-procurement, which the private sector has been using for 10 or 12 years?

[Caroline Dinenage]

That is an example of how we are a little slow to adapt to new technologies and innovative ideas, which is one of the problems we are trying to address today. There should be more opportunity for unsolicited, novel approaches to meeting public sector needs, particularly where new technology is involved.

[Andrew Bingham (High Peak) (Con)]

I thank my hon. Friend for giving way; she is being characteristically generous. Does she agree that many innovators and entrepreneurs, including in my constituency, lament the level of paperwork and bureaucracy in public sector performance, and that that is what prevents them from offering fantastic products to the public sector that can save money and increase the quality of services?

[Caroline Dinenage]

The Government are doing excellent work on addressing the problem. Some of the pre-qualifying questionnaires that companies used to have to undertake were horrific. The Cabinet Office now has a mystery shopper service to which small and medium-sized enterprises can feed examples of bad practice in Government commissioning.

It is important to conclude by saying that if central and local government encourage innovation through their procurement processes, more UK suppliers will invest in innovation, which will help the British economy and open up UK export opportunities, so that we can play our full part in this global race.

11:17

[The Minister of State, Department for Business, Innovation and Skills (Michael Fallon)]

On behalf of us all, I welcome you to the Chair this morning, Mr Robertson, and I congratulate my hon. Friend the Member for Gosport (Caroline Dinenage) on securing this brief debate on an extremely important subject.

It was good to hear my hon. Friend’s support for manufacturing and her recognition that the Government are doing what we can to support it. I know that a number of my colleagues are doing so in their constituencies. She might like to know that QinetiQ is based in my constituency, too, as well as down on the Solent, and I was very privileged to promote the OptaSense technology that she referred to on a recent ministerial visit to Kazakhstan. We are backing that technology and ensuring that our posts overseas are doing what they can to support QinetiQ.

Innovation is a key driver of economic growth. It improves business competitiveness, GDP growth and wider welfare. We are fully committed to improving our innovation performance as an essential component of our growth plan. We encourage research and development in businesses across the country to enable that growth to happen.

At a local level, my hon. Friend’s constituency is home to the Solent local enterprise partnership, which is a dynamic, well-led, business-involved organisation that has already secured three successful regional growth fund bids and is fully involved in the Daedalus enterprise zone and in the round 2 Southampton and Portsmouth city deal. I had the pleasure of talking to Doug Morrison again on my most recent visit to the Solent.

What else are we doing? We are working with manufacturers and their supply chains and taking the steps that we can in government to strengthen and grow modern manufacturing by encouraging innovation, business investment, technology, more commercialisation, skills and exports.

Manufacturing now generates more than half the UK’s export of goods and almost three quarters of our business R and D and thus the innovation that drives growth. It also, of course, benefits other sectors through demand for raw materials, energy and services such as research, design and finance.

We have implemented the 2011 advanced manufacturing growth review and announced further measures to support the sector, including the advanced manufacturing supply chain initiative—two more rounds were announced for this year—the talent retention solution, the See Inside Manufacturing programme, a package of support for energy-intensive industries and a further £2.6 billion of investment in the regional growth fund to spend on projects such as capital investment, R and D or training.

We obviously want to keep as many jobs as we can in the UK and we do that by maintaining the science base, by providing support for technology commercialisation through the Technology Strategy Board—my hon. Friend referred to that—through investment in skills and through action to reform credit markets and to get bank lending moving again, as well as through very specific support through the industrial strategy for some of the sectors that she mentioned, such as the aerospace and automotive sectors, where we can do more to strengthen UK supply chains.

The Technology Strategy Board is the Government’s prime channel for supporting business-led technology innovation. It provides opportunities for innovative businesses through the growing network of Catapult centres. The High Value Manufacturing Catapult opened for business in October 2011. It will receive £155 million for the period up to 2016-17. It supports businesses to bridge the gap between early innovation, where the UK has traditionally been quite strong, and industrial-scale manufacturing to take the projects forward. Building on the capacity of its seven partner centres, that Catapult can cut across sectors, giving its customers access to world-class expertise, equipment and processes invested in and supported by the UK Government. I was also privileged to break ground at the expansion of the National Composites Centre in Bristol recently. My hon. Friend might like to know that since April 2010 the Technology Strategy Board has provided almost £1 billion in support for businesses across the UK, ranging from pre-start-up businesses to large multinationals.

My hon. Friend posed at least three specific questions; there may have been more than three. I hope that if I do not cover them all, she will allow me to write to her with a fuller reply.

[Jim Sheridan]

Will the Minister clarify whether he will indeed refer to the National Audit Office report regarding Bombardier versus Siemens?

[Michael Fallon]

I have not yet seen that report, which I think has only just emerged. What I can do is undertake to look at it immediately this debate concludes, but I cannot refer to it today, for the very basic reason that I have not yet read it. I hope that the hon. Gentleman will forgive me for that.

The first question that my hon. Friend the Member for Gosport asked was about tax credits. Research and development tax credits are providing the single biggest Government financial incentive for business investment in R and D, and take-up has increased steadily during the 12 years of the scheme. In the last financial year for which I have figures—2010-11—tax relief claims of £1.1 billion supported approximately 72% or £10.9 billion of all R and D revenue expenditure by business. Additionally, the patent box allows companies to claim a reduced corporation tax rate of 10% on profits from qualifying patents and certain other innovations.

My hon. Friend’s precise question, as I recall it, was whether we will guarantee to go on doing that. Nothing in this life is certain, but I am determined to go on supporting research and development tax credits. We have made some of the qualifying rules easier. What I think is more important now about R and D, in addition to committing to the funding, is ensuring that those credits work further down the company sizes, so that small businesses realise that they are just as eligible for them as much larger businesses. I do not think that tax reliefs naturally are things that Her Majesty’s Revenue and Customs would market, but certainly we need to spread the word that all kinds of business can qualify for help with research and development.

My hon. Friend’s second question was a really good one: how much are we learning from other countries about translating some of the innovation into commercially applicable projects? We do learn from other countries. For example, the German Fraunhofer centres provided much of the model for the Catapult centres that we have now established. We are not too proud to learn from or to pick up on what is happening in other countries, particularly Germany, which has always had a much higher proportion of its GDP in manufacturing. There are things that we can learn from other countries, and I assure my hon. Friend that we continue to do so. Ministers continue to visit other countries and to pick up on ideas, although of course those other countries have picked up on some of our more imaginative ways of funding as well.

The third question posed by my hon. Friend was on the small business research initiative. I am glad that she asked about that. It provides 100% R and D funding for technology-based companies that develop potential solutions to specific problems faced by the public sector where there is no readily available solution on the market. That is done on a much larger scale in the United States; it is fully supported through federal funds. That is another good example of where we can learn from the success of a scheme in another country and apply the lessons here.

My hon. Friend will recall that in the most recent Budget—Budget 2013—we announced that we will substantially expand the SBRI among key Departments, so that the value of contracts through this route increases from £40 million in 2012-13 to more than £100 million in the current year and more than £200 million by 2014-15. I hope that she will welcome that, but I fully accept that we have more to do to spread knowledge and use of the SBRI right across the Whitehall landscape to ensure that those Departments that have not yet thought of it as a potential route to solving some of the problems that they face do so. A number of Departments are already making good use of the SBRI, but I would like all Departments to consider it automatically as a source of particular strength.

I hope that my hon. Friend will forgive me if I have not answered all the other questions that she posed, but I want to conclude by saying a word or two about what is happening on skills. She suggests that we should learn from other countries. There is no doubt that countries such as Germany have been able to draw on a much wider pool of school leavers, apprentices and college leavers with the engineering, mathematical and technical skills that we still lack in this country.

[Mr McKenzie]

On skills and innovation not only in products but into new markets, Promedics in my constituency has taken the existing skills of sewing machine technicians and moved them into a totally new market, supplying the NHS and others across Europe with surgical supports. It has taken that skill and applied it to a new market. What recognition or support can the Minister give such businesses?

[Michael Fallon]

I am delighted to hear that and would certainly like to hear more details and to see whether there are ways in which Government can recognise that kind of development more officially.

A skilled work force is the key to providing the innovation that business needs. Apprenticeship starts in engineering and manufacturing have increased from 26,000 10 years ago to more than 49,000 last year. There were more than 2,000 apprenticeship starts in the constituency of my hon. Friend the Member for Gosport last year. The number was up by 18% on 2010-11. She will be interested to know that nearly 900 of those apprenticeship starts were in the engineering and manufacturing sector—an increase of 32% on 2010-11, so we are making changes.

The Daedalus enterprise zone members group, which I think my hon. Friend chairs, includes the provision of a new skills training centre that is due to be built on the site from 2013. The first students are due through the doors in September 2015. That is a major achievement in my hon. Friend’s area and shows that the enterprise zone there is open for business.

I thank all hon. Members who have attended the debate and those who have contributed to it through their questions. I thank again my hon. Friend for raising this subject for debate. Let me assure her and you, Mr Robertson, that this Government are fully committed to realising the growth of manufacturing through innovation, which we see as essential to building a better balanced, more resilient economy for the future.

11:30

Sitting suspended.