Director-General of the CBI, Richard Lambert, spoke to The Manufacturer before the CBI's annual manufacturing dinner in February about the recession, a weak pound, credit and government schemes, protectionism and the importance of manufacturing in a reshaping British economy
TM: What proportion of the CBI’s members are manufacturers, or are involved in the sector?
We roughly align with the UK economy (approx 13%-16% gross valued added output). We probably have a slightly higher proportion of our membership in the manufacturing sector than the UK economy.
TM: A lot of attention has been placed on manufacturing in the wake of the financial crisis, in the context of rebalancing the UK economy. Do you see the proportion of manufacturing in Britain’s GDP and employment rising?
If you look at the big picture you see that in all the developed economies over time the share of the manufacturing sector tends to fall and the share of the service sector tends to rise; that happens for the US, for Germany etc as well as the UK.
I think that its likely in the years ahead we will see a greater emphasis on manufacturing as a driver of economic growth, partly because the past engine of growth which have been household consumption and public spending driven by borrowing have ground to a halt. And partly because the financial sector is likely to contract in the next few years. My sense is that if you look at where growth is going to come from in the years ahead it will be from business investment and from trade and manufacturing is a key component of that and what’s rather helpful is that obviously with the weakness of sterling over the last few month will make our manufacturing exports more competitive in the future.
TM: Sterling is very low and yet exports are, if not falling, staying flat. The UK is in that transition from a low value currency manifesting itself into more exports. Is this a function purely of the global recession and less demand, or is there more to it?
It is clearly that [global demand]. We are seeing a synchronised downturn in demand across the world and what’s amazing is the speed and the uniformity of that – in the last two or three months we’ve seen car sales in Brazil drop by 25%, we’ve seen consumption of electricity in China fall by 7%, the German economy has slammed on the brakes. This is happening all over the world simultaneously. Part of that is to do with companies all over the world hoarding themselves with excess stock, so there is massive stock liquidation globally and that is having an effect on industrial demand from the UK.
I’m confident that when that stock runs out and stability comes, the UK will become a more competitive manufacturing base in the world than it has been. My own view is that sterling has been overvalued for most of the last 12 years and that has cost our manufacturing sector dearly in terms of jobs in particular.
TM: On exports, there is an argument that some manufacturers and service exporters are not benefiting from a weak pound because they are not passing on the weaker currency in the cost of their products – they expect or want to get higher margins now sterling is low. Do you think that is fair?
The starting assumption to make is that manufacturers are sensible rational human beings, and not nuts. So in the face of collapsing demand it is more likely that they would be seeking to maximize their revenues and not the opposite, so I think that is most unlikely.
TM – Credit: (As at February 5) state support approval by the European Commission has not been applied for yet for some of the Government’s loan guarantee schemes and support packages for industry. Do you agree that is worrying for many companies?
Applications to Brussels are technical and I don’t know all the details of that. The concern that I voiced (to the Financial Times) is that the Government has come up with a whole series of important innovations over the last few weeks and it is terribly important that it drives ahead with those and actually starts implementing them. With the important ones there’s concern that we don’t know when these initiatives will start kicking in.
We understand that it’s very complicated to develop credit guarantee schemes of a broad nature, its complicated to do insurance to mange the toxic loans in the financial system – but the longer we delay on all this the greater the lack of confidence and the problem now is about confidence.
TM – Risk to jobs: The real risk for companies is delays to accessing credit now means that, particularly for SMEs that are dependant on that money being available now or by the March 1 launch date, that will lead to cost cutting which means job losses.
Yes. What we’re calling for is a greater sense of urgency, that’s one thing. The second point is I don’t think it’s necessarily right to say that the small and medium sized enterprises are the most vulnerable. Some are clearly, but a lot of them are rather conservatively financed and have pretty solid relationships with their banks. The companies one should be equally concerned about are large companies who don’t have investment grade rating and need to refinance their debt, who are finding it increasingly difficult to do so because of the withdrawal of overseas bankers and other recent lenders.
TM: That’s because none of the three main government capital schemes apply to the very large companies?
No, that’s why we thought the most important announcement came on January 19, when the Government promised credit guarantee schemes, it promised that the Bank of England would start buying corporate bonds and syndicated loans, it advised – the Financial Services Authority gave clearer guidance on capital adequacy for the banking system to allow it to free up capital to lend more, and the outlines were announced for this insurance scheme that were intended to free up capital to lend more broadly. That’s the most important package and they need to emphasise that and they need to drive that forward, the implementation of that forward.
TM: Many British companies, and multinational companies operating in Britain, have production in low cost economies. Do you see any evidence that some of this production is coming home, as economies rebalance globally and the pound falls? If not, can you see any of this happening soon?
I can see the potential for this. We went to see a large company yesterday which had closed its last factory in the UK at the end of last year and has shifted the last part of production to China, and was regretting that it had done that. I would say the cost base has changed considerably, or rather the cost calculations because of what’s happened to sterling. In addition I’ve come across companies which have become a little uneasy about the security of supply. For example another manufacturer I met in the last few days told me that a crucial component that went into their equipment was made in China, and they’d had a call from China saying sorry we’ve closed our factory because we haven’t got enough demand and we’re not going to be making your components.
There’s also a concern about the security of supply from central and eastern Europe in countries like Hungary, Latvia, Bulgaria and Romania, where one can see I’m afraid the risks of political and social strains building up as a result of the combination of the credit crunch, recession and the need to restructure their economies. We’ve seen already in countries like Latvia for example serious social disorder.
TM: On this point there is some social unrest building here with the protectionist movement; the Lindsey oil refinery and protecting British jobs. Energy will help shape the global manufacturing landscape in the future: is there a real promise or expectation that UK manufacturing will benefit from the construction of nuclear and renewable energy here? Do you see there being problems with protecting British jobs in this context?
It should be a very high priority public policy that the UK reaps economic and intellectual benefit, that the fact over the next 20 years it’s going to have to replace a third of its power generating capacity including the whole of its nuclear fleet. If all is well, the UK will be one of the few places in the world in the next couple of decades where major nuclear is under way. We need to do everything possible to capture as much of the intellectual and economic benefits of that onshore in the UK and I hope we will do that.
Protectionism is a growing risk. The problems recently in Lincolnshire and elsewhere are more to do with the recession – there are clear, understandable concerns about job availability but I wouldn’t put that (Lindsey) in the same bracket as full-blown protectionism.
TM: But there is a connection here, in that if Areva and EDF, along with British Energy, build nuclear plants in the UK they might employ a French workforce?
They will be employing the most skilled workforce they can get. We need to make sure that Britain has the skills that will make it possible to do that. No bright kid in the UK would have done nuclear engineering at university in the past 30 years because there haven’t been any jobs there. There are now going to be lots of jobs so we need to make sure that our universities are offering the qualifications and skills that will enable young people to come through in this country.