The need for a real manufacturing strategy is a cyclical subject that gets regular exercise, but despite a raft of initiatives very little has strategically changed in Britain. The least we can do for proper economic rebalancing is to set targets, says BDO’s Tom Lawton, but that’s not all.
Scan the literature on the need for a UK manufacturing strategy and there is a strong sense of déjà vu .
It is sad and perhaps trite to say that for five years, 10-years – who knows how long – the same shopping list of needs for industrial growth get reeled out every year by the trade associations, business lobbyists, tax advisors and the businessmen who have a voice:
– Better access to finance
– Education that is more engineering-centric
– Tax that is more sympathetic to investment
– Investment in apprentices
– Targeted state support for manufacturing projects
– Give the public a more positive perception of manufacturing
Has anything fundamentally changed in all this time, bar a lot of tinkering with tax?
“I get frustrated because I see a lot of work, a lot of government schemes and lip service paid to manufacturing, yet still no signs of a cast iron, long-term manufacturing strategy that will effect real growth – by several per cent – in manufacturing GDP,” says Tom Lawton, the Birmingham-based head of manufacturing at business advisers BDO.
Give credit where it is due. No question, the government has paid more attention to manufacturing than pre-Lehman Brothers’ collapse (although how could it not?). Six years ago there was no Manufacturing Advisory Service, nor Technology Strategy Board; whatever your personal experience of working with these organisations, they now exist and they distribute money and services to grow manufacturing.
We have Funding for Lending, a scheme to provide small firms with cheaper borrowing, the equity-capital Business Growth Fund, sector skills councils, the Heseltine review to devolve power to the regions, a flexible employment law. The government has hardly sat on its hands in four years.
Despite the progress that has been achieved, however, what this great endeavour to grow manufacturing is missing is a true strategy, says Lawton. What does this mean though?
It means targets.
“I like to cut to the heart of the matter – we need a target,” says Lawton. “The government needs to set a fixed target – say 15 per cent – for manufacturing within GDP. A target gradually pulls all the things needed to achieve that target into line behind it; it nurtures strategy.”
He is drawing on some of his firm’s Manufacturing New Year’s Resolutions, BDO’s own wishlist for helping the sector. Hard targets is one resolution that differentiates the document from the usual round of ‘business needs more of’ appeals.
“At the moment we all say we want to grow manufacturing because it is important to rebalance. But you cannot point at any measures that the government has set out that say ‘That is how we will measure the success of our plan’. It doesn’t matter where they set it, as long as they set it.”
OK, but first of all, why does manufacturing need to grow?
Britain’s G8 peers have a relatively low manufacturing base, circa. 10% like us (with the exception of Germany and Japan). And the OECD in January said Britain was best placed in its recession recovery targets compared with its peers. Isn’t a smaller manufacturing base a normal function of a developed economy, so why artificially groom it?
“I fundamentally disagree that manufacturing is no more important than finance, retail, construction etc. It is so. Manufacturing enhances productivity and makes us all better off. It employs many of people, about 2.5 million, a big share of the total. It is also a driver of innovation like no other sector. No other sector pushes the boundaries of science and technology the way that manufacturing and engineering does.”
“Every year, at current rates, you have less of a sector to do the innovation, the R&D, and employ people. This is wrong. At some point you have to reverse it and say the UK economy should have a manufacturing sector that is 15% share of GDP. Why? Our paper says 20% but I don’t mind – it is more than we have now.”
Money where it is needed – now
Access to capital is still a big problem for manufacturers – this is five years after the crisis, when the Labour government and Lord Mandelson realised that we’d need to make and trade our way out of the mire.
Banks are either not granting smaller companies loans, due to tighter lending terms imposed by post-bailout risk models and capital adequacy ratios, or the terms they can lend at are not suitable for a small, growing business that are exposed to risk. We have Funding for Lending, a scheme where borrowing from the Bank of England is designed to permit cheaper bank lending to businesses. Early evidence says it is not working, that it has merely fuelled a mortgage boom, although commentators such as EEF say it is too early to judge because loans to companies take longer to approve than residential mortgages.
BDO’s New Year Resolution says that the small firms it surveyed were in support of an industrial bank. Business Secretary Vince Cable listed a Business Bank in his industrial strategy launched last September; in either case, the idea is a state capitalised bank with no shareholders that works on a different repayment model and provides cheaper, longer term lending.
“Everything I’ve seen about it thus far says it won’t work,” says Lawton, rarely a sit-on-the-fence man. “They are designing it like a normal commercial bank. Why don’t banks want to lend their pots of money to SMEs? Because they find it difficult to overcome the risk parameters of that lending. If you establish an industrial bank staffed effectively by the same people, working to the same parameters, it will struggle to lend.”
The Business Growth Fund, which “looks like a small private equity house”, is little different he says. It comes down to the attitude to risk. “Why is [BGF’s] investment level so low? Because they don’t want to take real risk, but are looking for a return.”
The theory of an industrial bank is great but where is the detail and the delivery? “[Vince] Cable says we’ll capitalise it with £1 billion and get private sector leverage of £10 billion. Well where is it? It is not funded with £10 billion.”
So what is the solution? “Whether the industrial bank should be fully state-funded, or if it uses different measures for weighing risk and return, these differentiators would drive borrowing. The other way is to copy the Germans and have far more lending institutions to create competition, but this cannot happen quickly.”
Despite this, Lawton and others would like to see more local financial decisions being made to support companies in towns and cities regionally, based on the much deeper understanding of these companies by local relationship managers, unfettered by hard rules dictated by the global bank’s HQ in London. “Something has to empower support for local economies and create an understanding that is not all about short term bank return.”
Aldermore Bank in January reached £2 billion of lending and other challenger banks are coming through. Still, though, the British banking sector trend has been counter-effective for improving local finance – banking consolidation not proliferation.
Perhaps the solution is a joint approach, Lawton suggests, where the industrial bank tops up the gap that is not accessible from the commercial bank model. “The industrial bank should be able to provide the additional level of funding required outside the retail banks’ model, almost like private equity funding or a loan guarantee.”
Consistency is essential, so that companies can feel confident that the scheme they sign up to will be here next year. Successive governments have changed lending schemes all too often, which breeds distrust.
“It goes back to the targets. If you were measured on a clear target, then while there would be some ‘drift’ at least we can say this objective has or hasn’t worked. Successive governments are allowed to launch small initiatives at will, get all the sound bite press coverage that politicians need, which then don’t work – so they launch another one. What is absent is a single, properly designed scheme that is passed on, and they work very hard to make it successful. We need to stop the Monday morning latest good idea. Without a target for accountability, all the money spent on these is counter-austerity and they are not doing it wisely.”
The forgotten larger SME and lobbying simplification
What of the mid-caps that are hoarding cash? Is it not the case that a raft of companies are cash rich and don’t need to borrow?
“For BDO, the ‘M’ is the neglected sector. The ‘S’ in SME is well supported by many initiatives such as government grant programmes. The larger corporate can access capital in many ways and have size. Medium-sized companies are the key sector for targeting growth. If we could improve our mid-corporate companies especially in manufacturing it would leverage a lot of economic growth.”
This sector – from £10m to £500m turnover – accounts for about 30% of the manufacturing base, he estimates.
BDO’s manufacturing resolution also suggests there should be a more simplified landscape for business support. Messages to effect change come from a million voices and this is not efficient. “There are hundreds of manufacturing support groups that say different things at different times,” he says.
“In my mind a body such as EEF, the CBI or IMechE should take a lead and produce an overarching manufacturing forum or lobbying group, when they would actually meet from time to time and messages are not duplicated. One coordinated voice for manufacturing, with several smaller groups underneath, would help government understand the baseline needs better, and it would align more with how politics works – politicians need for short, sharp clear messages and connections. Even accountancy and financial reporting over the years has managed to consolidate and coordinate the industry talks. It has worked very well.”
Behind closed doors, several business organizations have suggested they should be more joined-up with their lobbying. “It is up to these bodies themselves to create something with more power and more resonance. Perhaps there are too many vested interests in lobbying.”
Coordination, Lawton says, might discourage so many stop-start schemes and deliver more long term consistency in explaining the headline needs of manufacturing.
Skills and apprenticeships – is the new movement what employers actually need?
On the perennial issue of a skilled workforce, a wealth of good work has poured forth in recent years, culminating with Semta’s apprenticeship deal with government this week. However one needs to look closely at how an apprentice is defined – not all of these starts are three or four-year, higher apprentices.
Tom Lawton says an effective manufacturing strategy must take care not to be blinded by the apprenticeship obsession. “Some large manufacturing clients I speak to ask ‘what is all this about?’ Perhaps they feel that more analysis is needed on employers’ specific needs. The employee of a high quality manufacturing business today will have serious capabilities around innovation, research, data analysis. Manufacturing is also about services today.
“The government seems to be more interested in headline numbers, “we have 100,000 more apprentices than we had last year”. This is good, but the missing measurable is the number of people from any schooling route being delivered with all the abilities that employers need.”
Recently, some manufacturing apprentice schemes have launched that are designed to produce the ‘executive apprentice’, who are trained in management, law and languages in concert with the hard engineering skills required. The Manufacturing Technologies Association and the AMRC with Boeing in Rotherham will launch their exec programme on February 8th.
BDO’s Resolutions document also calls for “an education system that supports industry”. Here there has been real progress.
Many pundits tend to condemn Britain’s education system for falling short of that of Germany in how well it prepares children for a career in a craft or skilled trade, and decry the passing of the technical colleges.
Well, the Thatcher and Blair policies that neglected the technician class were then, and this is now. Take a close look at the evidence today before we bleat. Eight University Technical Colleges will join two others this year – the JCB Academy (with 99% GCSE grades A-C in year one) and the Black Country UTC – when they open in September. Kids from 14 to 18 learn ‘hard’ GCSE subjects, including languages, but alongside real industry training on lathes, milling and metrology machines. These UTCs are Britain’s proxy to the German Berufsschule that is missing – and they are about to be fully integrated into the national education system. It is late and it should never have been forgotten, but make the best of it. Everybody can always do more.
Lawton acknowledges that there have been many good things. “But, again, what is called for is something for today but that is expected to last 20-years.”
“Our firm employs a lot of graduates, and we like to think we are selecting the very best. But some of their skill sets, it is perhaps best to say, need developing. After 11-years of an education system and three to four years in university, some of it is really basic stuff that they have not got. If we are taking the cream, what does that mean for other employers? Education needs to be far more focused on fit for purpose: can you write a letter, operate a computer, understand ratios? The education has lost some of these basic four Rs that really make a difference.”
Whether better access to finance, more of the right kind of apprentices, simplified business lobbying or top line ambition for sector growth, Lawton’s common message is stick to a well-designed plan and set targets to measure them by.
Surely is it not so much to ask?