UK Manufacturing Industry

Baroness Garden of Frognal Excerpts

Thursday 8th December 2011 Lords Chamber

[Lord Haskel]

My Lords, it is not true that we do not make anything any more. We are the seventh largest manufacturing nation, and in high technology manufacturing, we stand proudly among the major economies. In cars, aircraft, pharmaceuticals, chemicals, food and space we perform well. Manufacturing is 11 per cent of our economy, but 46 per cent of our exports.

How do I know that? In recent months, the Government have been making a conscious effort to talk up manufacturing—talk it up because we are told that manufacturing is going to play a major role in rebalancing our economy. It will be a rebalancing away from financial services, away from the south-east towards the rest of the country, away from spending towards saving and away from consuming towards creating. Manufacturing is to be central to this.

Now, at the same time, the Office for Budget Responsibility tells us of difficult times ahead and the OECD tells us that our economy is likely to contract. In the face of this, initiatives such as the “Make it in Great Britain” campaign, launched last month by the Government to celebrate the country’s world-class manufacturers, are inadequate and perhaps counterproductive. Yes, it celebrates manufacturing and makes us feel good about it, but it does not tell us that too much actual manufacturing has gone abroad and continues to go overseas. This is what we need to address. This is why, to fulfil these expectations, manufacturing not only has to develop but has to survive. This is what this debate is all about.

This is a huge topic and I shall only be able to touch on a small number of aspects, so I am most grateful to all noble Lords who are speaking in this debate so that we can hear about their special concerns, learn from their specialist knowledge, benefit from their long experience and hear their suggestions. I hope the Government are listening.

The first point I will make is that, if you are going to retain and develop our manufacturing sector, there needs to be a better understanding of what manufacturing actually is in 2011. It is not separate from services—successful manufacturers provide services. One of our finest companies, Rolls-Royce, makes aeroplanes. Did any noble Lords see that absorbing programme on BBC2 on Sunday evening, about how the engines are made? The point is that the airlines do not buy an engine, they buy so many thousand hours of flying time, and each engine is continuously monitored form Derby to ensure that it is working properly. It is given the service it needs by Rolls-Royce wherever the plane lands. Service and manufacturing go together.

This is why the scope of manufacturing is far wider than the Government seem to imagine. It includes things like software, branding, languages, ICT skills and advanced business processes. These are all parts of manufacturing, as well as the metals, materials, products and engineering. Manufacturing, too, has become part of the digital economy. We have a fine car industry, which exports something like 80 per cent of its production. Is the Minister aware that electronics now account for between 15 and 30 per cent of the production costs and that the industry tells us that this is only going to increase? This is the way that many of our manufacturers are developing. Many expect that in 10 years’ time, the digital economy will be equal in size to the physical economy. This kind of manufacturing can only be built on the firm foundation of an existing manufacturing sector. You need an industrial base to build it on, and unless we retain this industrial base, all the fine work done by our science and technology sectors will benefit others. This is why retaining manufacturing in these hard times is so crucial.

Moving us towards this high-value, knowledge-intensive manufacturing combined with service is the task of the Technology Strategy Board. The TSB helps manufacturers by doing the strategic work. It identifies those areas or platforms of economic growth where their businesses can thrive and it provides finance through competitions. This is especially valuable for smaller businesses—companies, perhaps in the supply chain, without the resources to do this work themselves. By bringing together all the aspects of a new technology or a business-growth platform, plus the money, it helps them gain the competitive advantage by speeding up the transfer of knowledge. I declare an interest as the honorary president of the Materials Knowledge Transfer Network. It brings together 4,500 members to embrace all the communities involved in metals, materials and composites, to take advantage of our advanced materials technology and engineering.

There are two other communities that we have been particularly anxious to embrace: science and design. On design, I make no apology for repeating what I said on 24 November in a debate in your Lordships' House on government procurement. Imaginative, sensible and innovative design is one of the foundations of a modern manufacturing economy. It is not an expensive add-on to make something look good. It drives fitness for purpose and raises the quality of use. As Vicky Pryce said in her report the other day, design converts something mundane into something desirable, like the iPhone. This is why I was amazed that during a 20-minute wind-up speech in that debate the Minister spoke of how the Government were going to use procurement to help British industry, but the word “design” was not mentioned once—and this in a House which regularly debates the creative industries. The Government really must get their act together on this.

The Government talk a lot about science and innovation and their importance for manufacturing and economic growth, and they are right to do so. New and better products and new and better ways of making and servicing them raise productivity and profitability. But the point about manufacturing innovation is that you get a double effect. If you make an innovative aeroplane, this enables and facilitates innovation in the airline industry. If you make an innovative piece of medical equipment, the nation's health benefits through medical innovation enabled by the new machine. It turns out that, if you measure the total innovation in the economy, because of this double effect, manufacturing accounts for 42 per cent of the total, even though it is only 11 per cent of the economy.

Where does this innovation come from? It comes from our science base. Fortunately, the Government accept this as part of the empirical evidence about the economic returns from science. Sadly, I do not think that the financial sector has bought this argument, except perhaps in the ICT sector, where time horizons can be shorter. It is due to short-term investment horizons that British manufacturers do not compare well with our competitor nations in research and development. As a result, we are no longer at the cutting edge of technologies where big projects are getting under way—in sustainable or nuclear energy, for instance. It is partly because of this that some of the foreign-owned, large manufacturing companies are becoming increasingly concerned about the health of their domestic suppliers. If they have to import components from abroad, the logical conclusion is that the final assembly can move offshore, too.

The recent financial crisis has thrown into sharp relief the financial management and corporate governance of our manufacturing companies. The absence of any serious policy to retain and develop our manufacturing companies has meant that they, too, are the victims of the same shareholder value philosophy which has pervaded much of British business for years. I congratulate the Government on getting John Kay to look into this—at long last.

The Government call on shareholders to be active in demanding a longer time horizon in business management—the call is for stewardship—but so many of our manufacturing companies are so-called “ownerless corporations”. The real problem is that the link between owners and boards is broken. That is what the Government should be trying to fix, not just excessive pay. That is a symptom, not the disease. Only an engaged and committed ownership will see through the development and retention of our manufacturing companies. The short-term focus of fund managers and their clients runs counter to this, but at least there is now talk of getting rid of quarterly reports. Manufacturing businesses require stewardship. They are not there for the quick buck.

There are several important issues on which I have not touched. Skills and training is perhaps the most important. Increasing the number of apprentices and training courses is of course welcome, but for manufacturing it is the quality and standard that is important. Most apprenticeships on offer are far from the three-year engineering course. Meanwhile, the Government are making life a lot more difficult for the 450 FE colleges where many manufacturers look for their recruits. It is not easy to match skills training with the rapid developments in manufacturing. The answer lies in starting early—at school, if possible. Yet which subjects are facing curriculum cuts? Why, design and technology are, of course.

Trade is important and, yes, the Government are right to encourage exports because those lift standards and enlarge markets, but the Government have to do a lot better. On 22 November, it was reported that the fund to encourage small and medium-sized enterprises to export had signed up just four companies since its launch eight months previously. Obviously, either something more is needed or the qualifications have to be changed. The encouragement that I would like to see coming loud and clear is that exporting is an investment, not a cost—especially exporting to the single market, where it has become easier since every member state now has a single point of contact telling exporters, in English, exactly how to do business in their country. It was your Lordships’ European Committee that helped fight for this. Incidentally, I have never seen this mentioned in any government guide to export. Has the Minister seen it? She will be impressed if she has a look.

Would that there were a single point of contact for British manufacturers dealing with the Government. Over the years, BIS has been constantly reshaped, rebranded and given different responsibilities. I think that its largest budget today is higher education. Manufacturing's big concern, energy, is in environment; employment is elsewhere. So is drawing the line between competition and free trade, which manufacturing needs, and economic warfare, which it does not need. The truth of the matter is that there is no coherent policy at government level for manufacturing. Some may think that nothing extra is needed other than to cut red tape, employment rights and taxes. Yet if you agree that government has a part to play in shaping the manufacturing sector and that government has a role in fulfilling the ambitions and expectations that we have for manufacturing, somehow all of these threads have to be drawn together.

They have to be drawn together because all these issues that I have tried to outline are crucial for the success of our manufacturing sector. The serious thinking has to be coherent if it is to be effective. On 29 November, in the Financial Times, a poll of manufacturers reported that most directors of companies participating in the survey cast doubt on the Government’s efforts to encourage a shift in investment and output towards manufacturing. I am sure they had their views confirmed yesterday, when they heard how the Prime Minister is going to the euro summit all fired up to defend the interests of the City. Would it be presumptuous to join the front page of this morning's Guardian and ask: what about the interests of manufacturing? I hope the Minister is going to tell us that the Government have a coherent and balanced policy, and a plan to use all the levers of active government to support, enable and empower manufacturing, from prime contractors down through the supply chains. I beg to move.

[Baroness Garden of Frognal]

If noble Lords will forgive me for just one moment, the timing for this debate is very tight. Back-Bench speeches should be no longer than six minutes, so when the “6” comes up noble Lords should please finish their contribution.