Brexit transition deal: Why is it so important?

Posted on 8 Feb 2018 by Jonny Williamson

The new CEO of EEF warns the government to negotiate a post-Brexit transition deal with the EU by the end of Q1 2018 or risk further destabilising business confidence.

Stephen Phipson is expected to take up his role at EEF on 1 December, 2017.
Stephen Phipson CBE, chief executive, EEF.

Stephen Phipson is no stranger to Whitehall. After a successful career in industry, highlighted by 15 years with the defence contractor Smiths, he moved to a new career in government at the Defence and Security Organisation (DSO), which is the export-promotion element of the Ministry of Defence, before becoming Head of Defence and Security Exports at the newly-formed Department for International Trade (DIT).

It is a CV that opens doors to ministers and their advisers, and Phipson says he intends to make good use of it, to plead the cause of manufacturing at this time of Brexit-inspired uncertainty.

As The Manufacturer’s Annual Manufacturing Report 2018, published this month, makes clear, doubt over the government’s ability to deliver a deal that allows the continuation of seamless and frictionless trade between the UK and the EU runs deep among manufacturers.

Brexit is obviously a cloud of uncertainty over the future. That has an impact on investment, just at a time when a lot of firms are actually reaching capacity because the world economy is doing quite well.

Stephen Phipson: Completely agree. It’s a very, very important point. As you know, we’ve had a very good run for the past few quarters in terms of growth in manufacturing. About 40% of our latest EEF survey of executives in manufacturing sees that continuing into 2018.

European demand is up as it accesses more global markets, and that’s pulling through on the supply chain side from the UK. So that’s very good. And we’re also seeing increases in other exports, and that’s looking very positive going forwards.

This article first appeared in the February issue of The Manufacturer magazine. To subscribe, please click here.

So yes, we’re reaching capacity. And the reason why people are not investing is because the conditions of transition as we go through Brexit have not been finalised and have not been clear.

EEF, together with other business groups, have been pressing government very hard to make sure that we get to a transition deal as quickly as possible, and one that largely maintains the conditions we have now for the next couple of years.

Brexit Transition Deal - Stock Image
EEF, together with other business groups, have been pressing government very hard to ensure a transition deal is agreed as quickly as possible.

We need this certainly no later than the end of the first quarter of 2018, and earlier if possible. That will give businesses certainty in the short-to-medium term to invest in capacity to cope with growth in demand.

If they don’t see that, the only fall back that business has is to assume the worst, and that will limit their investment. It is therefore really, really, really important that we get to a point where we can have clarity on a transition deal as early as possible.

And that will be a signal that business can invest in manufacturing capacity with a bit more certainty for the next year or two for the growth that’s obviously there.

That’s step one. Then of course we must get into the long debate about what the end state looks like with Brexit, but I think the first stage of this is to get this transition point in place quickly.

And that means no more bureaucracy, no additional things that we have to do now, everything as it is, and that gives some certainty to invest in the shorter term.

In the November budget, no money was set aside for the Made Smarter sector deal that the Industrial Digitalisation Review team are calling for, and there seems to be an ominous silence from government about what’s going to happen to the manufacturing element of the industrial strategy in 2018. Are you concerned by that?

Total UK manufacturing orders were, by a small margin, the strongest since August 1988.
A lot of the manufacturing that happens in the UK, certainly among larger companies, is on pan-European platforms.

Well, we are concerned. We are very engaged with government on the implementation phase of the industrial strategy, particularly around digitalisation. So that’s important. And we must make sure our manufacturing sector is ready to adopt those new technologies, so adoption is a key issue.

Government is looking to us to get that message back to manufacturers, particularly the smaller companies where this is going to be extremely important. A number of the larger companies that we represent are well on track in terms of the digitalisation of manufacturing, but we don’t see that among smaller companies.

Government also believes an industrial strategy needs to be a local strategy, so local funds are important as well. Being able to work closely with the newly-devolved mayoral administrations, and using some of that funding to support this is going to be vital.

So, although we haven’t yet seen central budgets allocated, it doesn’t mean it’s a lost cause. I’m still hopeful that we’ll be able to attract more central money when it comes down to making the case for a sector deal for the manufacturing sector and digitalisation.

I thought the Industrial Strategy was a good central document; so, I supported it. Now we need to convert it into action. I wouldn’t give up yet in terms of funding. Our job is to press constantly to make sure we have access to those funding pots as they become available, and then to signpost and point industry to the right place.

Last year’s EEF survey on the Apprenticeship Levy was absolutely scathing about the impact that it has had on apprenticeship take-up – a decline of 59%. It was clear this was something to do with the way it was implemented by a government that doesn’t understand the way businesses work.

Nearly a quarter (23%) of levy-paying firms have no understanding of the Apprenticeship Levy or don’t know how their company will respond to it.
A big part of that problem around the Apprenticeship Levy has been communication.

A big part of that problem around the Levy has been communication. A lot of businesses I’ve spoken to are just confused about what it means and how it’s applied. It looks like a tax to them. And when they’re confused, businesses tend to do nothing, viewing confusion as a risk. So, we’ve seen a drop off in apprenticeships.

Yes, I don’t think the Apprentice Levy’s gone particularly well, but most of the problem is around communication.

Staying with the skills and training theme, there are a number of issues coming up as a result of Brexit leading to EU citizens leaving Britain – the weaker pound and general uncertainty.

Furthermore, the ones who are staying don’t have the same level of skills as the ones who are leaving. Plus, it is clear some British workers are just not prepared to pick up the slack. What can you do to head off the storm coming our way on skills?

There are around 335,000 EU citizens in UK manufacturing, largely at technician and engineering level, so quite skilled people.

A lot of the manufacturing that happens in the UK, certainly among larger companies, is on pan-European platforms, which means their supply chains are completely integrated across Europe and the UK.

It means that there is free movement of engineers and manufacturing staff between plants on the continent and the UK. And so, in some plants you end up with a 50/50 skills base.

Europe European continent marked with flags - image courtesy of Depositphotos.
There are around 335,000 EU citizens currently working in UK manufacturing, largely at technician and engineering level.

The biggest concern I picked up from many manufacturers was that a lot of these EU citizens based in the UK were going home for Christmas and would they return afterwards? And would we face a short-term skills shortage?

Making sure there is certainty around their future has been a key issue, certainly one I got involved in very quickly at the beginning of my tenure here. The outcome of that was reassurances from the government, and the prime minister personally, about the rights of EU citizens in the UK.

So, we’ve probably stemmed the short-term issue there. But long term we need to ensure that that transition across borders can be facilitated for these larger manufacturers.

A final point about manufacturing in the UK. It is a vibrant sector offering a wonderful opportunity for young people to pursue fabulous careers, but it has an image problem in the wider community. It doesn’t get the respect, and hasn’t fought for the respect, that it deserves. What can you do in the coming year to help spread the word about manufacturing?

I’m keen that we work on a very public campaign next year that’s not just about what EEF does, but about why manufacturing is an attractive place to start your career as a youngster – coming in as an apprentice or training in any of the manufacturing sectors.

Innovation Manufacturing Skills Engineering Design Digital - Stock
We need to dispel the old image and transmit the new 21st century image of manufacturing.

As you might expect, over the past few years the traditional image of manufacturing as metal bashing has not really played well with youngsters who are more interested in digital or cyber-related activities.

Manufacturing is of course going digital, which will attract a completely different class of people, and we need to make sure that message is relayed. We need to dispel the old image and transmit the new 21st century image of manufacturing.

The other thing that’s really interesting to me is the SME community, which is where most of the innovation happens. These are exciting organisations, and the government is very determined – as demonstrated by the number of recent policy changes – to support SMEs.

There is no doubt that the skills shortage is one of the biggest impediments we’ve got to being even more successful than we are in manufacturing at the moment.

Therefore, attracting new skills into SMEs, into 3D printing or working in the virtual world with design, and promoting an Industrial Strategy around growing and nurturing these types of businesses, should bring in a whole new generation of people that perhaps didn’t consider manufacturing in the past.

It’s going to be a key theme of what we do over the next 12 months.