uk manufacturing strategy

The Government’sManufacturing Strategy

CONTENTS

Page

Foreword by the Secretary of State 5

Chapter 1: Why manufacturing matters 6

Chapter 2: Short-term challenges and long-term trends 9

Chapter 3: Global competition – challenge and response 12

Chapter 4: Strategies for success 15

Pillar 1: Macroeconomic stability 19

Pillar 2: Investment 21

Pillar 3: Science and innovation 26

Pillar 4: Best practice 34

Pillar 5: Raising skills and education levels 40

Pillar 6: Modern infrastructure 46

Pillar 7: The right market framework 49

Conclusion 52

Annex 1 – Nations 55

• Wales 55

• Scotland 56

• Northern Ireland 57

Annex 2 – Government websites 59

Annex 3 – Bibliography 60

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The Government’s Manufacturing Strategy

Foreword by the Secretaryof StateManufacturing matters. It creates a fifth ofour national output, employs four millionpeople and produces the majority of ourexports. The success of United Kingdommanufacturing is therefore crucial to ourcountry’s prosperity, now and in the future.

The United Kingdom is part of the world’slargest single market as well as being one ofthe world’s most open trading nations. Ourmanufacturers face intense competition inevery market, compounded within the eurozone by the persistent weakness of thatcurrency. In recent times, manufacturersaround the world have also faced verydifficult trading conditions, the result ofthe collapse of the technology andtelecommunications sector in the US,the global downturn and the impact of11 September. As a result of these pressures,UK manufacturing output has been fallingsince December 2000.

Looking ahead, however, the opportunities arethere for British manufacturers to seize. TheUK’s many advantages include that of aworld-class science base. As our scientistsand engineers push forward the boundariesof their knowledge, the scope for ourmanufacturers to exploit these developmentsfor commercial gain is immense. We knowthat the best British manufacturers match thebest in the world in new product development,innovative production processes, marketingand services – all the elements of theincreasingly complex value chain ofmanufacturing. Now we need far morecompanies to match the success of the best.

There is much for government and industryto do if we are to take advantage of theopportunities of renewed world growth.Despite its many strengths, UKmanufacturing also suffers from long-standing weaknesses – lower levels of skill,investment, R&D and innovation – thatcontribute to lower levels of productivity thanin France, Germany and the US. If we could

raise the levels of productivity in UKmanufacturing to their levels, and other thingsremained the same, value added inmanufacturing would be more than £70billion higher. By improving productivity andcompetitiveness, we will create better paidjobs for our manufacturing workers andhigher returns for manufacturing investors.

This document sets out the governmentstrategy for helping manufacturing companiesfulfil their potential in the UK. On the basis ofevidence and analysis, we identify the sevenpillars for manufacturing success. Each pillarrequires government and industry to determinethe actions that must be taken to build on ourstrengths and remedy our weaknesses.

The aim of our strategy is to help moremanufacturers to move up the value chainand to reap the benefits of high-skilled,knowledge-intensive manufacturingoperations. This strategy is not designed to bethe last word on the subject. It is neither ahard and fast prescription, nor a formula forinstant initiatives. Instead, we offer it as thebasis for continuing to develop a robustpartnership with management, employees andtheir unions – a manufacturing partnershipbased on best practice that must be effectiveat the national, regional and sectoral level.Long-standing problems of investment,innovation and skills will not be curedovernight. They will require consistent anddetermined effort over a sustained period. Inorder to focus our activities more effectively,we will work with industry to develop firmerbenchmarks against which to measure andreport on progress.

This strategy has been developed on the basisof discussions with our industry partners,including the positive work of the CBI-TUCpartnership on productivity, and theManufacturing Summit that I chaired inBirmingham last December. I welcome furthercomments and contributions on the wayforward. Above all, I hope that this proposedstrategy will form the basis for an evenstronger partnership and more effective actionin support of UK manufacturing.

Chapter 1: Whymanufacturing matters

Manufacturing success is critical to theprosperity of Britain, both now and in thefuture. Manufacturing companies make up afifth of our economy and employ four millionpeople – one in seven of the workforce – andmany more indirectly. The sector supportswell-paid jobs in a number of the UK’s lessprosperous regions. Manufacturing accountsfor sixty per cent of our exports, makes asubstantial contribution to the balance ofpayments and supports a wide range ofservice sector jobs.

2 Though many UK manufacturers havefaced very difficult times recently, thepotential for the sector in the medium andlong-term is strong. That potential will berealised provided that companies are able toturn to their advantage the twin challenges oftechnological change and the increasingopenness of world markets.

3 A technological revolution is under waywhich offers opportunities for both new andestablished companies. It is simply wrong tosay that traditional manufacturing has nofuture, or that the UK should only depend onservices. New technology is transformingproducts and production processes in everysector of our economy. The experience of the1990s shows that intelligent use of newtechnology can lead to substantial competitiveadvantage for individual manufacturers. Bythe same token, companies that fail torecognise the opportunities for new processesand better products will lose market share.

4 The successful introduction of thesingle currency has given fresh impetus to thedevelopment of the EU single market, theworld’s largest. In this market more and morepurchasing decisions will be taken on a pan-


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European basis. Businesses in Britain willface more competition, but will also havemore opportunities.

5 Success in this new environment willrequire a sustained effort by those who work,manage and invest in manufacturing.Government has a responsibility to set aframework which supports that effort. Successis possible. And it will bring the prize ofprofitable opportunities for business, well-paid jobs and resources to invest in betterpublic services.

Prosperity for our country

6 In our first term our priority was toestablish a sound and credible platform ofmacroeconomic stability. That we haveachieved. We now need to build on thatplatform to improve our productivity andcompetitiveness.

7 Although productivity is 25 per centhigher in manufacturing than in the rest ofthe UK economy, it still has a substantialproductivity gap when compared to itsoverseas competitors. Analysis by theNational Institute of Economic and SocialResearch shows that manufacturingproductivity is 55 per cent higher in the USthan in the UK, 32 per cent higher in Franceand 29 per cent higher in Germany.1 As aresult, manufacturing contributesdisproportionately to the overall gap.Although the manufacturing sector comprisesonly 20 per cent of output, it accounts forbetween 30 per cent and 40 per cent of thetotal shortfall in productivity between the UKand our competitors.

8 This productivity gap exists across UKmanufacturing. Only in three sub-sectors doesUK performance exceed one of ourcompetitors (Table 1).

1 O’Mahony and De Boer (2002)

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9 This gap is a challenge. But it is also anopportunity. If we could reach the averagemanufacturing performance of these threecountries, and, other things remained equal,value added in manufacturing would be morethan £70 billion higher. So Government andindustry must look closely at the barriers toincreasing productivity and how to overcomethem. Assisted by new technology advances,the manufacturing sector is amongst thosewell placed for productivity growth. In fact,80 per cent of commercial R&D is carried outby the manufacturing sector. So if the UK isto raise its overall levels of productivity andits living standards, we must nurture this partof the economy; the gap is largest here andour opportunity is greatest.

Success for our firms

10 These are dry statistics. For businessesand those who work in them, narrowing theproductivity gap means working more smartlyin today’s more competitive economy andcontinuously seeking new ways of improvingquality, design, innovation and reliability.

11 For a business, earning a decent rate ofreturn on investment is key. But productivityand profitability go together. To improveproductivity, a manufacturing firm mustincrease the value of the goods it producesper employee – in other words, it mustimprove its competitiveness and succeed inthe market place. Success depends not just oncutting costs, but on continually creatinggoods and services that people want to buy,

Table 1: Relative output per hour worked by sector, 1999 (UK = 100)

Source: NIESR

US France Germany

Manufacturing 155 132 129

Electrical and Electronic Equipment 273 145 135

Wood products 218 169 240

Petroleum Products 210 218 92

Basic Metals 198 148 166

Chemicals 169 141 104

Mineral products 168 142 121

Textiles, Clothing and Footwear 159 196 129

Motor Vehicles 150 200 111

Machinery 146 107 123

Rubber & Plastics 140 119 111

Paper, Printing and Publishing 139 90 115

Miscellaneous Manufacturing 138 125 136

Food, Drink and Tobacco 136 108 92

Instruments 133 129 125

Metal Products 100 160 138

Other Transport Equipment 100 109 140

Office Equipment – – 161

Market Economy 139 122 119

using innovation, investment and goodbusiness practice. Achieving high productivityby these means enables a business to pay thewages required to attract and retain skilledworkers and to earn a good return oninvestment. Our value added scoreboardshows generally that those firms that achievehigh productivity also score well onprofitability.2 In the long run, the link wouldbe even stronger, for it is clear in a world ofglobal competition that achieving highproductivity and continual innovation is thekey to sustained profitability.


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12 This is what successful manufacturingbusinesses in Britain are doing. In pharmaceuticals, aerospace, biotech,electronics, automotive, the creative industriesand food production, the best in Britain isworld class. Other examples of world-beatingcompanies can be found in nearly everysector. The challenge for manufacturing inBritain is for more companies to match theperformance of the best.

2 DTI (2002)

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Chapter 2: Short-termchallenges and long-termtrends

13 Throughout the world, manufacturingcurrently faces a tough environment. Theglobal slowdown has had a significant impacton manufacturers in all major economies(Chart 1). In the UK, manufacturing outputdeclined 6.7 per cent over the 12 months fromit’s peak in December 2000, with the loss of150,000 jobs. The UK isn’t alone in facingsuch problems. US output fell 6 per cent,Japan slumped 14 per cent and Germany by 5 per cent. Fortunately recovery is nowgetting underway, led by the US.

14 Key factors in the slowdown of the USwere falls in corporate profitability and equityprices. Sharp falls in investment spendingfollowed the end of the boom in informationand communications technology (ICT). Theseproblems were keenly felt in the businesssector and led to sharp reductions ininventory levels and fixed investment, bothof which impacted heavily on demand formanufactured products.

15 When these problems in the US wereplaced alongside the continuing recession inJapan and weaker growth in Europe(especially in Germany), the result was anabrupt fall in global demand for manufacturedgoods. No country was able to escape the

Chart 1: Manufacturing output in major industrial economies (Jan 2000 = 100)

Source: National Authorities

85

90

95

100

105

110

Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 Oct-01 Jan-02

Japan

US

UKFrance

Germany

downturn in the world economy. The events ofSeptember 11 accentuated, for a period, theuncertainty for the global economy andmanufacturing in particular. On top of that,businesses in Britain have had to cope withthe relative weakness of the euro. As a result,it has been very tough for manufacturing inBritain. Jobs have been lost, factories closedand profits have fallen to only a little over a4 per cent return.

16 But the weakness of the euro and theglobal economic downturn are only part ofthe story. Manufacturing output growth wasanaemic in nearly every year during the1990s, and real levels of investment were lowfor much of the period. And, although theproductivity growth rate picked up sharplyin the late 1990s, (Chart 2), the middle part of the decade was marked by stagnation,contributing to a sharp rise in unit labourcosts relative to the UK’s main competitors.

17 In order for UK manufacturing to reapthe rewards of a global recovery it cannotafford to repeat the performance of the mid-


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1990s. Manufacturers must invest andinnovate to improve their competitiveness.The task is more important because of thelong-term trends that are drivingmanufacturing performance around the globe.

Long-term trends

18 Prosperity is a key driver of structuralchange. As prosperity grows, consumersspend more on labour-intensive services likehealthcare, entertainment, restaurant mealsand holidays. In step, the relative importanceof spending on goods, particularlyconsumable goods, tends to fall.

19 At the same time, the manufacturingsector as a whole is most open to technicalprogress and productivity growth. Bothincremental change and new technologiessuch as nanotechnology and high-speedcommunications will lead to new products,new processes and higher value addedmanufacturing. But increasing technical andprocess automation implies that demand canbe satisfied with fewer workers. Over the

Chart 2: Manufacturing productivity (1995 =100)

Source: ONS

80

85

90

95

100

105

110

115

120

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

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past twenty years the proportion of peopleemployed in manufacturing fell from 25 percent to 14 per cent of the total employed. Yet in the same time, the value in real termsof goods they produce rose 35 per cent.

20 Reflecting these factors, the share ofmanufacturing in total output has tended todecline across all the leading economies, andwith it the proportion of workers employed inthe manufacturing sector. UK manufacturingoutput as a proportion of GDP fell from 32 per cent in 1970 to 19 per cent in 1999. In the US, output fell from 25 per cent to 16 per cent in the same period, and 36 to 22 per cent in Germany, (Chart 3).

21 Although the relative decline inmanufacturing’s share of output is real, itsextent may have been overstated because of the trend towards specialisation andcontracting out. Some functions that used to be classified as manufacturing are now

classified as services. For example, ifsoftware design is outsourced it is classifiedas a service. If it is done in house, it isclassified as part of the manufacturing sector.For this reason, international statisticians areinvestigating whether statistical categoriesshould be redefined to capture moreaccurately the changes taking place withinmanufacturing industry.

22 A successful manufacturing industryhas benefits beyond the sector. It can helpunderpin the flourishing service sector, andvice versa. For every factory producingmachine tools, there is demand forcollaboration with designers, marketing,accountancy professionals, softwaredesigners, caterers and other serviceproviders. Similarly, software, projectmanagement and design services are essentialto many physical products manufactured here and abroad.

Chart 3: Manufacturing as percentage of GDP 1973–2000

Source: OECD, ONS, US BEA

10

15

20

25

30

35

40

1973 1977 1981 1985 1989 1993 1997

Per

cent

Germany

Japan

USA

Canada UK

France

Italy

Chapter 3: Globalcompetition – challengeand response

23 The increased intensity of globalcompetition in the last few decades haspresented challenges to UK manufacturing. Thereduction of tariff barriers and transport costs,easier communications and increased capitalflows has allowed low wage countries tocompete more effectively for low value-added,labour-intensive products, shifting productionout of the advanced industrialised nations.

24 Businesses in Britain that produce basicor commodity-like products using labour-intensive processes will find pressures theycannot resist from low-wage countries. Butinnovative companies, which adopt leadingedge technology and design, with advancedmanagement and production techniques, tocreate high value-added products thatconsumers want to buy, will benefit from theopportunities in the global marketplace.

Electronics

We lead the world in key areas such aselectronics design, photonics, mobilenetwork and broadcast technologies. Wehave a very high take up of digitaltelevision and will be one of the first toroll out 3G mobile.

As a result, Britain attracts global playersincluding Hewlett Packard, Philips, IBM,Sun Microsystems and Alcatel, whichcome to the UK to conduct research andmanufacture. When combined with home-grown successes such as ARM, BookhamTechnology, Pace and Invensys, thiscreates a world-class electronics sectorwith a turnover of £45 billion.


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25 It’s not just a matter of technology.Economic evidence points to the benefits ofcultivating continual skill development toenable knowledge-intensive manufacturing toyield competitive high value-addedproduction. The opportunity to move up thevalue chain exists in all sectors of UKmanufacturing. The UK’s record forinnovation and exploitation of newtechnology, and product development, needsto be built up to match world-classperformance. By exploiting our world-classscience base, we can increase our wealthcreation. And companies need to be assistedby a positive business environment, ensuringthey can match the competition and makingthe UK an attractive location forinternationally mobile companies.

26 European Commission analysis ofmanufacturing industry between 1985 and1998 shows that technology-driven industrieswere growing at the fastest rate.3 Marketing-driven industries are growing fractionally lessquickly, with pronounced growth in themedia, publishing, printing and sports goodsindustries. In relation to output, labour andhighly capital-intensive industries have bothdeclined in relative importance, with largestdecreases recorded in the steel, petroleum andtextile fibre sectors.

27 EC evidence shows that cutting-edgecompanies can flourish in countries with highwage levels, while labour-intensivemanufacturing will shift to low wagecountries. This experience is common tomany industrialised companies.

28 For example, the Japanese car industrymaintained its market over Korean rivalsthroughout the 1990s despite wage levelsthree to five times higher. Superior levels ofcapital and knowledge intensity enable it todevelop ever more sophisticated models thatsell well globally.

3 EUROSTAT (2002)

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29 Switzerland, with its high wage levels,won 31 per cent of the global market fortextile manufacturing equipment in 1997. Thisfigure was double its global share ten yearspreviously. The explanation again lies incapital and knowledge-intensive productiontechniques. High and sustained levels ofspending in R&D, followed by levels ofinvestment necessary to turn these innovationsinto manufacturing success, led to productivityimprovements that easily supported the wagelevels set by the Swiss labour market.

30 In Britain, manufacturing firms thatrecognise the need to be at the forefront ofcreativity and technology are proving well-placed to take advantage of the opportunitiesoffered by the global marketplace. Successfulfirms have relatively high investment in R&D,designers and market researchers, and focuson building skilled labour. As a result theycompete more on quality and less on priceand are less vulnerable to competition fromlowcost producers, and from adversemovements in the exchange rate.

31 Over the last decade, the chemical(including pharmaceutical), electrical andoptical sectors – which include IT andcommunications – have all grown faster thanthe economy as a whole (Table 2, on page 14).Even within sectors that suffered decline in

Pharmaceuticals

The pharmaceutical industry is the biggestinvestor in R&D in the UK, accounting for25 per cent of the total. In world terms, theUK industry has 10 per cent ofpharmaceutical R&D expenditure. This levelof research in British laboratories has led tothe discovery and development of six of theworld’s 25 best selling medicines.Moreover, in the 1990s the UK was themost successful country in Europeattracting new R&D investment projectsin pharmaceuticals.

output in recent years, there are sub-sectorsthat have grown through focus on quality andinnovation. Table 2 shows that more rapidlygrowing sectors tend to have relatively highinputs of R&D and skilled labour.

32 There are significant UK successstories in all sectors, including those thatsome pundits talk down as being ‘metalbashing’ industries. The case studies in thissection show examples from steel, electronics,pharmaceuticals and textiles. But we have the potential to create many more suchcompanies.

Steel

Britain’s steel industry is a case study ofthe application of technology to transforma manufacturing industry. About 70 percent of steels used in cars today did notexist ten years ago. New grades of steelare lighter, stronger and more corrosion-resistant and have resulted in substantialimprovements in fuel efficiency. Newgeneration steel can also help us reachenvironmental targets. A new grade ofelectrical steel used in induction motorsis three per cent more efficient. Were thisinnovation applied across industry, UKcarbon emissions could be cut by3.5million tonnes a year.

UK high-tech expertise is exported to 170countries around the world. SheffieldForgemasters has built massive castingsfor export to the US, China and the MiddleEast. Bridon in Doncaster won the biggestworld order for steel rope, and is shippinglengths of steel 9km long to Australia.

Textiles

Even sectors that have gone into declinelike textiles, partly because of foreigncompetition and also due to decades ofunderinvestment in skills, technology anddesign, can be turned around by focus onproduction of sophisticated fabrics,advanced textiles and leading fashions.

Businesses like Web Dynamics in Bolton,undertake commercial production of high-performance fabrics for a variety of uses,including replacement of old tarmac onroofs. The firm now employs 50 peopleand is a world leader in the market. Moreestablished companies, like RamonKnitting Company in Leicester, have beenmanufacturing in Britain for 50 years andremain at the cutting edge of hygieneproducts and cleaning systems, making aprofit in each and every month for thelast 49 of those 50 years.


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Table 2: Output growth, R&D and skills inputs by manufacturing sector

Source: DTI calculations from ONS data

Percentage of Average R&D as Percentage ofwhole economy annual percent of employees

(1995) percentage value added with degreesgrowth (average

(1991–2001) 1991–2000)

Electrical and optical 2.78 5.5 6.6 18.8

– of which computers and office equipment 0.51 16.1 5.5 27.5

– communication equipment, TV, radio 0.79 6.4 12.9 20.9

Chemicals and man made fibres 2.39 3.1 18.5 26.4

– of which pharmaceuticals 0.68 6.6 44.2 n/a

Plastic and rubber products 1.06 1.4 0.8 7.5

Transport equipment 2.04 0.9 13.4 11.0

Publishing, printing, paper and pulp 2.75 0.6 0.3 <19.4

Food, drink and tobacco 2.85 0.4 1.1 8.1

Non-metallic minerals 0.81 -0.2 1.1 9.2

Machinery and equipment 1.92 -0.8 5.2 12.2

Basic and fabricated metals 2.52 -0.9 0.9 7.0

Textiles 1.07 -4.0 0.4 <8.5

Manufacturing total/average 21.85 1.0 7.0 12.9

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Chapter 4: Strategies forsuccess

33 Britain has real strengths that must beexploited to strengthen manufacturing:

• We have a strong science base and aculture that often produces newideas, from new domestic appliancesto microchip design, and mobilecommunications to Formula 1 cars.

• The right economic environment.Britain is enjoying the longestperiod of sustained low inflation,and the lowest long-term interestrates since the 1960s. Sustainingmacroeconomic stability is vital toensure ongoing success.

• We are part of the world’s largestsingle market and are committed toopen markets and trade.

34 The value of these strengths isdemonstrated by our position as the numberone destination for foreign direct investmentin Europe.

35 When foreign-owned companiesmanufacture in Britain it makes us moreprosperous: research by NIESR shows adirect link between inward investment and

the economy’s productivity.4 Everything wedo to improve the overall businessenvironment in the UK therefore has a directeffect on our overall levels of productivity bybringing more foreign investors to our shores,as well as improving the prospects fordomestic manufacturers. In a world wheremanufacturers are increasingly mobileinternationally, this is important.

36 But the UK also has significantweaknesses. UK manufacturers on averageinvest less than their competitors in capitalequipment. With some exceptions, theyundertake less R&D, and often fail to turngood ideas into commercial success. We donot produce as many new or improvedproducts as many of our EU competitors. The skill levels of the workforce also compareunfavourably. Of course, these factorsinterrelate, as lack of innovation and skillsinhibits high quality investment.

37 Research carried out by NIESR givesan insight into the scale of the challenge to betackled (Table 3). Across the economy as awhole, labour productivity measured by GDPper hour is about 30 per cent higher in the USand France and 17 per cent higher inGermany. In manufacturing, labourproductivity is 55 per cent higher in the US,32 per cent higher in France and 29 per centhigher in Germany.

Table 3: Analysis of the manufacturing productivity gap, 1999

Source: NIESR (# – Note, skills data unavailable for France)

US France Germany

Labour Productivity* 155 132 129

Percentage contribution

Total Capital 25 54

Physical capital 21 68 29

Skills 4 # 25

Total Factor Productivity 75 32 46

*UK=100

4 Ashworth et al. (2002)

38 Some of the manufacturing gap can beexplained by differences in the amount ofphysical capital (i.e. plant, equipment,buildings and structures) available to eachworker. As shown in table 3, NIESR estimatesthat such differences in capital provisionexplain about 21 per cent of the gap with theUS, about 68 per cent with France and 29 percent with Germany. Even allowing fordifferences in labour market conditions withFrance and Germany, these figures aresignificant. Differences in skill levels accountfor some of the remaining gap, especially inGermany, which has a strong record invocational skills. The remainder of theproductivity gap is attributable to differencesin the efficiency with which key factors ofproduction (including labour, physical capitaland skills) are combined, so reflectingorganisational issues in the workplace as wellas the relatively low UK innovation spend.Such differences are measured by ‘total factorproductivity’.

39 The productivity gap with our majorcompetitors offers a significant opportunity.If that gap can be narrowed, we will createfirms that are more competitive and able towithstand short-term difficulties. In addition,by raising overall levels of productivity, wewill increase our prosperity as a nation.

40 Our developing strategy is targeted atnarrowing this gap. In the face of low-costcompetition, firms must move up the value-added chain and embrace knowledge-intensive, high-skilled manufacturing.Economic analysis highlights the need forinvestment and improved innovation levels.It also points to the positive contribution ofeffective competition policy andmacroeconomic stability.

41 The strategy identifies seven pillars tohelp build a vibrant, knowledge-intensive,high-skilled manufacturing base. Theseinitiatives require close partnership betweenGovernment, industry management and the


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workforce. These key elements for success aremacroeconomic stability; investment; scienceand innovation; world-class best practices;skills development; strong infrastructure; andthe right market framework.

42 For each pillar, we describe the goals towhich we aspire, and the role that policies inthis area have to play in contributing to thesuccess of British firms. We then discuss theroles that government, industry and itsworkforce have to play in driving upperformance, and the efforts that we aremaking to help that happen.

43 There are also mistakes theGovernment must avoid. Any attempt tomanipulate the exchange rate would putmacroeconomic stability at risk. Whilst we understand that the strength of sterlingrelative to the euro makes life more difficult for our exporters, in practice we have to recognise that it is not possible for the monetary authorities to pursue anexchange rate target at the same time as an inflation target.

44 Likewise, we reject solutions based onattempts to shield the economy fromcompetitive pressures through restrictions oninternational trade or hand-outs to domesticcompanies. Such actions would detract fromthe market framework which brings majorproductivity improvements. They would alsorun counter to the international tradingsystem and the benefits it brings to ourexporters. As the opposite side of the coin, wetake robust action against others who seek todeny our companies fair access to theirmarkets. That’s why we opposed the USdecision to impose tariffs on steel imports andwhy we fought strongly for a new world traderound in Doha last year.

45 Industrial change is both inevitable anddesirable if we are to have more successfulmanufacturing businesses in Britain. Raisingproductivity and creating wealth requires

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management and workforce to work in newways. The challenge is to achieve change ina way that doesn’t foster resistance andresentment, and shares its benefits fairly.The Government needs to play a role inhelping people and their communities dealwith rationalisations and redundancies as the economy changes in response toglobalisation, shifts in consumer preferencesand new technologies.

46 Although our framework is nationwide,there is an important role for the initiative of the devolved administrations in Scotland,Wales and Northern Ireland. And withinEngland, we recognise that local leadership isessential in creating dynamic regionaleconomies and closing the gap between aswell as within regions. Hence the importancewe attach to the Regional DevelopmentAgencies, Learning and Skills Councils and(in future) elected Regional Assemblies.

47 This manufacturing strategy will bedeveloped in partnership with industry on asectoral and regional basis. It must deliverreal outcomes and outputs, and demonstratereal commitment. Manufacturing has asubstantial contribution to make to our aim ofnarrowing the productivity gap and achievinggreater prosperity for all.

Measuring our success

48 In each of the seven pillars we identifythe overall goals for which we are aiming, theUK’s current performance and those aspectswhere action to improve performance isimportant. While success in all the pillars isessential to raising our manufacturing gamewe consider in the concluding section whatthe priorities should be if we are to makerapid progress. It is, however, clear that thereare strong linkages between different pillars –for instance investment without innovationand without the skills to exploit it is unlikelyto be productive.

49 It will be important to monitorprogress. Our overall aim is to narrow theproductivity-gap, across the economy, withour major competitors. Manufacturing has avital role to play, given that it contributes sosignificantly to the productivity gap as awhole. We will be tracking the UK’sperformance in closing the productivity gapin manufacturing. But we recognise thatmovements in manufacturing productivity canonly be measured robustly over the long-term.We also need indicators which can pick upthe effectiveness of action by Government andother stakeholders over a near-term horizon.These are less sensitive to external factorssuch as the economic cycle.

50 The Department already has a range oftargets and measures in relation to its policiesand programmes. Currently these aresummarized in its PSA targets for the period2001–2004. Many of these are relevant to ouraims for manufacturing. Examples lie intargets aimed at narrowing the productivitygap with other industrialised countries; atincreasing the number of companies spun outby universities; and at improving support forexporters. At a more specific level below this,our targets include, for example:

• To increase the level of exploitationof technological knowledge derivedfrom the science and engineeringbase, as demonstrated by asignificant rise in the proportion of innovating businesses citing such sources;

• Of the firms assisted by TradePartners UK, at least 15% of thosenew to exporting, and 50% ofestablished exporters, should have improved their businessperformance;

• To use Regional SelectiveAssistance and Enterprise grants tolever in £3.75 billion of capitalinvestment and create/safeguardover 75,000 jobs by 2008;

• In the business best practice andknowledge transfer areas, targets areset rigorously at sub-programme andproject level. Each industry forumprogramme has targets tailored tothe sector concerned, for example,and each LINK programme hastargets tailored to the particulartechnology which is beingpromoted.

51 We want to develop a specific set ofsuccess measures for manufacturing. Incommon with other Departments, DTI iscurrently reviewing its PSA targets for thenext three years. In addition, it is developing abusiness plan which will reflect the outcomeof the Review of priorities and structures overthe last few months. Drawing on this workand the responses to this strategy document,we plan to draw up a set of measures ofsuccess for manufacturing. These will beindicators of performance, devised andtracked in consultation with otherstakeholders. The RDAs will also bereflecting the importance of manufacturing inrevising their corporate plans and developingtheir measures of success accordingly.


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Pillar 1: Macroeconomicstability

The Goal

1.1 The Government must maintain itssuccessful macroeconomic management. Our analysis recognises the difficulties causedto UK manufacturers by the weakness of theeuro, but attempting to manipulate theexchange rate would risk undermining hard-won gains in terms of low inflation andinterest rates.

Strategic importance

1.2 Maintaining macroeconomic stability isa key element of the Government’s policies.Between 1979 and 1997, the UK had one ofthe most volatile growth rates in the G7, andonly Italy had a more volatile inflation ratethan the UK.5 This volatility deterredinvestment, inhibited innovation and limitedenterprise. Elimination of boom and busthelps encourage an environment of steadygrowth and productivity improvement, givingmanufacturing companies conditions wherethey can invest with confidence. This is acornerstone of our strategy.

1.3 As to the exchange rate, experienceshows that changes in exchange rates don't bythemselves explain the medium- to long-termsuccess or failure of national manufacturingsectors. Nevertheless, the weakness of theeuro has been a real source of problems formany manufacturers.

Role of Government and keystakeholders

1.4 It is for Government to set themacroeconomic framework and createstructures that will ensure continuing stabilityand credibility. Government needs to

communicate well with other stakeholders tomaintain awareness of the impact of itsdecisions on the real economy. It is forindustry to take advantage of the greatercertainty which the Government’s frameworkoffers to plan and invest for the future.

Progress

1.5 The Government has reformed themacroeconomic framework to create theconditions for sustained and stable growth.The Government has committed itself tosustainable public finances through the Codefor Fiscal Stability. It has also given the Bankof England the independence to set interestrates to meet the Government’s inflationtarget. As a result, the UK has the lowestinflation for 30 years, long-term interest ratesare the lowest for 35 years and employmenthas risen by 1.5 million since 1997. Economicanalysis shows that there has been a reductionin the volatility of UK GDP growth since themid 1990s.6

1.6 There is evidence that greater stabilityis influencing manufacturers’ behaviour. TheCBI has noted that manufacturers havelowered the hurdle rate by which they judgeinvestment projects from an average real rateof return of 16 per cent to 11 per cent.7 Thisstimulates investment – including, crucially,investment in knowledge-intensive andinnovative products and processes which willsecure the future of the UK economy.

Future Prospects

1.7 US output, whose setback led the worldinto the industrial downturn, has started torecover.

1.8 The recent Budget locks in our successin achieving macroeconomic stability.8

The Government’s forecasts expect the

5 DTI (1999)6 Blanchard and Simon (2001)7 Godden (2001)8 HM Treasury (2002)

Government’s fiscal rules to be met, inflationto be on target and output to recover in boththe whole economy and manufacturing.

1.9 Our policy on the euro must supportthis macroeconomic success. The potentialbenefits of euro membership in terms oftrade, transparency, costs and currencystability, lead us to support it in principle. But in practice, the economic conditions mustbe right. Accordingly, the Government iscommitted to a rigorous and comprehensiveassessment of the five economic tests, whichinclude careful assessment of the impact ofmembership on investment and jobs. Thisassessment will take place by June 2003.


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Pillar 2: Investment

The Goal

2.1 Across manufacturing, all sectors havean opportunity to narrow the productivity gapwith their competitors by increasinginvestment in new technology, new productsand advanced processes. And the economy asa whole benefits when UK companies investand foreign-owned companies decide to buildmanufacturing facilities in the UK.


2.2 Investment in capital equipment,leading edge technology, and the developmentof skills, creates a virtuous circle, whichdrives up performance. The UK record oninvestment performance, including publicinvestment, is poor. The stock of capitalavailable for each UK manufacturing workeris lower than in Germany and the US. Asshown earlier in Table 3, there is a relativedeficit in capital per worker that accounts for29 per cent of the labour productivity gapwith Germany and 21 per cent of the gap with the US.

2.3 Moreover, a substantial capitalinvestment gap has opened up between theUK and US for information andcommunications technology (ICT), animportant driver of productivity growth.9 ICTcapital per hour worked is more than twice ashigh in the US manufacturing sector as in theUK. Thus, firms in the US have been farmore successful in utilising the latesttechnology to drive up their performance.

2.4 One firm’s investment can also producespillover benefits for other firms as they learnof new ways to improve production. Forexample, inward investment makes animportant contribution to strengthening theUK manufacturing sector in terms of the

transfer of skills and new processes, and thespread of best practice and newtechnologies.10 The UK has a strong record inattracting foreign direct investment. The stockof foreign direct investment as a proportion ofGDP for the UK was the highest of the G7countries in 1999.11 22 per cent of thisinvestment was in the manufacturing sector.

Role of Government and otherstakeholders

2.5 In the private sector, it is for business,together with their financial investors, todecide when and where to invest. In somecases there is a need for a greaterunderstanding on the part of companies of thebenefits of investing in new products andprocesses in order to ensure a firm’s sustainedcompetitiveness in the future.

2.6 However, when, for whatever reason,the market does not function properly inproviding the necessary capital forinvestment, there is a role for government towork with the grain of the market to help itfunction more effectively. Manufacturingindustry is becoming increasinglyinternationally mobile, reinforcing thegovernment’s important role to provide anoverall business climate that is conducive tofirms deciding to invest.

2.7 Capital is also globally mobile, and UKmanufacturers need to continue to make aneffective case that that their investmentsrepresent good value. This requires an evercloser dialogue between the City and UKmanufacturing and a need for business tobenchmark its investment performanceagainst its international competitors.

2.8 For major public investment projects,the private sector can plan more effectivelywhen the government makes its long-termintentions clear.

9 O Mahony and de Boer (2002)10 Ashworth et al (2001)11 Griffith and Simpson (2002)

Progress

2.9 The government has a range of targetedoptions to encourage markets to allocatecapital to manufacturing investment projectsmore effectively. There are particularincentive schemes for smaller companies, forfirms in poorer regions, and to encourageforeign-owned and domestic companies toinvest in the UK. In addition, the governmenthas laid out its future public investment plansclearly, enabling the private sector to planaccordingly.

Support for SMEs

2.10 The Government is improving access tofinance for small and medium sizedenterprises, both through the tax system andthrough direct support. The tax systemprovides Enhanced Capital Allowances, whichoffer 40 per cent allowances for SMEsavailable in the first year. 100 per centallowances for investment in ICT for smallcompanies are available until March 2003.There is also tax relief for investment insmaller, higher-risk companies via theCorporate Venturing Scheme, and forindividual entrepreneurs through theEnterprise Investment Scheme. In addition,the Government has substantially reduced therate of Capital Gains Tax (CGT) on businessassets. The most recent changes mean thatfrom April 2002, the effective rate of CGT forhigher rate tax payers will be 20 per cent afterone year, and 10 per cent after 2 years.

2.11 The Government also provides moretargeted direct support to help small firmsaccess finance through the Small Firms LoanGuarantee Scheme (SLGS). The SLGS helpswith viable business proposals whereconventional finance is unavailable because ofa lack of collateral, and the inevitableuncertainty arising from investment in high-risk new product development. Under theSmall Firms Loan Guarantee Scheme, theGovernment offers guarantees of 70 per cent


22

or 85 per cent on commercial bank loans ofup to £250,000. In 2001, manufacturersaccounted for 1,491 loans valued at £98.27million (approximately 35% of the loans and39% of the total value).

Regions

2.12 We need to ensure that market failuresdo not reduce investment in poorer parts ofthe country. Regional Selective Assistance(RSA) is a discretionary scheme providingdirect financial support to companies forinvestment in projects, which will create orsafeguard employment in the Assisted Areas,and which would not otherwise go ahead. TheRSA scheme is delivered in the regions by theRegional Development Agencies (RDAs) andby the devolved administrations in Scotlandand Wales. Northern Ireland has a similarscheme known as Selective FinancialAssistance (SFA). RDAs are responsible forall offers of grants up to £2 million.

2.13 £408 million of RSA offers were madein Britain in 2000/2001, for £3.4 billion ofbusiness investment, which will help to create40,000 new jobs and safeguard a further20,000 in the Assisted Areas. About 90 per

Rolls Royce: new engineering centreof excellence

In its biggest offer of RSA sincedevolution, the Scottish Executiveannounced in April 2002 a £15m grantoffer made to Rolls Royce to support an£80m investment in a new engineeringcentre of excellence. The project was wonagainst stiff competition from abroad, andis aimed at safeguarding 900 high qualityjobs. The close and collaborative workingbetween the Executive's RSA team,Scottish Development International, andthe Scottish Enterprise network is anexcellent demonstration of the type ofjoined up working which was a keyoutcome of the RSA Review.

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cent of all RSA offers accepted go tomanufacturing industry.

2.14 The most recent evaluation in 2000concluded that the scheme created orsafeguarded 84,000 jobs over a five-yearperiod at a net cost per job of £17,500 andplayed an important role in attracting inwardinvestment. Around three-quarters of thefirms supported had gained a competitiveadvantage as a result of the projects.

World-class molecular biologyresearch in Billingham

The UK is in the forefront of developingnew medicines based on biologicalmolecules (e.g. proteins). These newdrugs, which offer improved ways to treatdiseases such as cancer, diabetes,Alzheimer’s and heart conditions, alreadyrepresent 20% of all new drug approvals.The UK’s particular strength is its world-class bioscience R&D. However to reapthe benefit of this R&D the UK alsoneeds to establish world-class facilities tomanufacture these new biopharmaceuticaldrugs often called biologics.

An example of how this is happening inthe UK is the recently announced £70minvestment by UK biologics contractmanufacturer, Avecia. Over the next threeyears Avecia will build one of the world’smost advanced manufacturing facilitiesfor biologics medicines at Billingham inCleveland. The project, which Governmentis supporting with a £6.5m RegionalSelective Assistance (RSA) grant, willcreate up to 300 high value science-based jobs.

The first stage is due on stream in 2003and, on completion in 2005, it will bethe largest purpose-built facility of itskind in the world. The new large-scalefacility will establish Avecia as a globalleader in biologics contractmanufacturing.

Inward investment

2.15 Inward investment brings significantspillover benefits to UK firms in terms ofnew jobs, skills transfer, R&D, and theintroduction of new processes, newtechnologies and advanced manufacturingfacilities. The UK was the world’s secondmost popular destination for inwardinvestment last year, and number one inEurope. Foreign-owned companies accountfor 17 per cent of manufacturing employmentand 26 per cent of manufacturing net output.

2.16 Foreign investors employ more capitaland more skilled workers, and their plantshave higher productivity than the average ofall UK firms. These productivity gains spillover to other companies along the supplychain as the higher-productivity firm demandsbetter performance from its suppliers. Thus,inward investment makes an importantcontribution to strengthening both themanufacturing base and the quality of UK

Recent inward investment successstories

• £382 million expansion of the Nissancar plant at Sunderland for productionof the new Primera and Micra ranges,was supported by a £45 million RSAgrant, safeguarding over 2,000 jobs;

• A new float glass manufacturingfacility in Goole being built byGuardian Glass, supported by a £4.9 million RSA grant, creating over 300 jobs;

• Development of a new ATMELsemiconductor wafer fabrication facilityin North Tyneside is supported by£27.8 million RSA grant, creating over1,500 jobs;

• BMW’s new £400 million enginefacility at Hams Hall, West Midlands issupported by a £22.5 million RSAgrant, safeguarding over 1,500 jobs.

industry and services. It assists in regionalregeneration by providing jobs and bringingsupply chain benefits.

2.17 InvestUK, with its development agencyand specialist partners, plays a vital rolehelping secure inward investment projects. In2002/2003, InvestUK will provide £12.93million towards the inward investmentactivities of RDAs. In 2001/2002, InvestUKwere notified of 884 inward investment‘successes’, of which 25 per cent were in themanufacturing sector, creating 71,512 jobs.InvestUK had significant involvement with245, and indirectly with others throughcoordination of the UK effort.

Future prospects

2.18 In pursuing these policies, thegovernment has announced some changesaimed at encouraging greater investment thathave yet to feed through.

• The reduction in the starting rate ofCorporation Tax from 10 per cent tozero in the 2002 Budget, means that150,000 companies will no longerpay any corporation tax from


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1 April 2002. Reduction of the smallcompanies’ rate of Corporation Taxby 1 per cent, will also reduce theCorporation Tax bills of a further335,000 companies. This willincrease the resources available for investment.

• Regional Venture Capital Funds arebeing established in English regionsto improve access to finance forsmall and medium-sized firms. The Government is investing up to £80 million and the EuropeanInvestment Fund up to £53.5million. Taking account of privatesector funding, the Governmentexpects the fund will provide up to £235 million extra finance forsmall firms.

• Venture Capital Trusts (VCTs) willcontinue to deliver growth capitalfunding to companies that aregenerally too small to attract largercommercial venture capital finance.VCTs have already raised over £1 billion from investors, and theGovernment is now developing the

AstraZeneca

Anglo-Swedish AstraZeneca is the world’s third largest pharmaceutical company by sales. It has discovered some of the world’s best-selling innovative drugs, including Losec/Prilosecfor gastro-intestinal complaints, Zestril for hypertension, Nexium for gastro-intestinal, andSeroquel for schizophrenia.

AstraZeneca has significant operations in the UK; approximately 10,000 staff are employedin manufacturing, R&D, and sales & administration. Though fierce international competitionhas grown up for internationally mobile investment projects, the company has consistentlyre-invested in the UK, as well as its global activities. Its principal pharmaceuticalmanufacturing activity in the UK is at Macclesfield in Cheshire.

In 2001, two new investments were announced for the Charterway plant in Macclesfield,and about £41 million manufacturing expansion at Macclesfield for increased production of Seroquel and £75 million R&D expansion at the Alderley Park site. In addition, a new£45 million science facility was inaugurated at the Charnwood, Leicestershire R&D complexin September 2001.

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scheme by introducing provision toallow VCTs to merge and be woundup while preserving the benefits toinvestors.

• The £50 million Early GrowthFunding initiative will help at least1,000 small businesses over the nextthree years, and will be closelymonitored in a move to encourageenterprise by new players. This willcomplement the Regional VentureCapital Funds.

• The Government will also continueto help enable companies to investin new ways of working includingthe effective use of InformationCommunication Technologies (ICT).The UK online for businessprogramme, working with keysectors, is helping business embede-business technologies andprocesses in their business plans.

2.19 In addition we have set out our futureplans for public investment in, for example,health and transport. Investment in healthshould reduce risk for private sectorcompanies. Transport is covered under pillar 6 on page 46.

2.20 Following the Myners review ofinstitutional investment in March 2001, theGovernment set out a set of principlescovering pension funds’ approach toinvestment.12

2.21 In February 2002, the Governmentpublished three consultation documentscovering proposed legislation for:

• greater expertise of pension schemetrustees,

• increasing shareholder activism,

• and whether there should be arequirement for funds to have an independent custodian.

2.22 The Government plans to conduct anassessment of the effectiveness of theprinciples proposed by the Myners review in delivering change in March 2003.

12 Myners (2001)

Pillar 3: Science andinnovation

The Goal

3.1 Innovation is a key catalyst for growth,but levels of innovation in the UK havehistorically been low by internationalstandards. The aim is to raise UKmanufacturing innovation performance, bymaking the best use of the excellent UKscience base, by utilising technology from arange of sources, and by demonstrating thebenefits which accrue to innovativecompanies. Both technological and non-technological aspects of innovation are key tosuccess. In particular, investment, skills andbest practice, and close attention to customerneeds, are essential if companies are toinnovate successfully.


3.2 Innovation lies at the heart of economicgrowth.13 Evidence shows that even if the UK


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had levels of capital and skills comparable toour major competitors, a labour productivitygap would remain.14 This gap is partly theresult of differences in innovation. At thelevel of the whole economy, differences ininnovation performance (including innovationin management practices) account for muchof the UK’s labour productivity gap with theUS.15 Within manufacturing, the turnover perhead of firms that have made innovations inthe last three years is around 5 per cent higherthan the rest of manufacturing; similarly themost rapidly growing manufacturing sectorstend to have high levels of innovative activity.

3.3 Though UK manufacturing investsmore in R&D than the rest of the economy –around 80 per cent of commercial R&D in theUK is undertaken by manufacturing – it stillspends less on developing new products thanmanufacturers in competitor countries (seeChart 4). As a result, the percentage ofmanufacturing turnover accounted for by newand improved products in the UK is lowerthan the EU average.

13 Aghion and Howitt (1998)14 O’Mahony and de Boer (2002)15 Crafts and O’Mahony (2001)

Chart 4: R&D stocks as a percentage of output, UK = 100 (1996)

Source: Crafts and O’Mahony Fiscal Studies September 2001 (Note: The R&D stock is the cummulative total of R&D spending over time, less the depreciation).

US France Germany

whole economy

manufacturing

0

20

40

60

80

100

120

140

160

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3.4 The Community Innovation Survey(CIS) shows that 3.2 per cent of UKmanufacturing turnover was devoted toinnovation activities in 1996, against aEuropean average of 3.8 per cent.16

3.5 This relatively poor performance arisesfrom a lack of recognition of the value ofinnovation rather than a weakness in the UKscience base, which is generally regarded asexcellent on a range of internationalperformance measures. Foreign companiesconsistently cite the strength of the UK’sscience base as a reason why they choose toinvest in the UK.

3.6 Companies with high R&D investment,like pharmaceuticals, biotech, oil and gas, andthe food processing sector, are the mostsuccessful all-round performers. The mostrapidly growing manufacturing sectors tend tohave the highest levels of innovation, asproxied by R&D (see Table 2 on page 14).

Pharmaceuticals

The UK-based pharmaceutical industry isone of our most dynamic sectors. It hasbenefited from considerable investmentfrom overseas, as major pharmaceuticalcompanies have long recognised the UK'sattractions as a base for bothmanufacturing and R&D. All the world'stop companies have facilities here, andthe largest – including GlaxoSmithKline,AstraZeneca, Pfizer, Merck, Novartis andLilly – have important UK sites in bothmanufacturing and research.GlaxoSmithKline and AstraZeneca areincorporated in the UK, and are theworld’s number 1 and number 3respectively by sales.

16 EUROSTAT


3.7 The Government recognises that themarket will not invest sufficiently in blue-skyresearch and therefore assumes aresponsibility for sustaining and enhancing agood quality science and research base.

3.8 Government also has a key role inensuring that business is able to exploitresults of our science base effectively.Knowledge transfer activities can overcomeinformation failures between business and thescience base. The Government also has animportant role in fostering innovation forexample in encouraging R&D collaborationand knowledge sharing thus enablingindividual companies to capture knowledgespin-off from each other’s research, andcollectively to enjoy the benefits ofeconomies of scale and scope in innovation.

Pharmaceuticals (continued)

High investment in research has led tothe UK industry being a world leader indiscovering and developing newmedicines. At present six of the world's25 best-sellers come from Britishlaboratories. In the 1990s the UK wasthe most successful country in Europe inattracting new R&D investment projectsin pharmaceuticals.

With such a strong research base, the UKis well placed to seize the opportunitiesfrom rapid developments in genomics,proteomics and stem cell research, whichoffer new ways of treating diseases andbenefiting patients the world over.

The UK pharmaceuticals sector has anenviable export performance: almost halfof pharmaceutical production is destinedfor overseas markets and the tradebalance stands at £2.3 billion.

Similar benefits can arise from policies toreinforce the development of clusters. Bylocating near each other, innovative companiesengaged in related activities can gain spilloverbenefits whereby the innovation activity ofone company benefits others in the cluster.

Motorsport Cluster

The UK Motorsport Cluster comprises alarge number of small but highlyinnovative motorsport engineering andservices businesses. It is recognised asthe leading global cluster in the hi-tech,high-added value, auto sector ofperformance engineering, and commandsnearly 80% of the world market, withannual sales of around £5 billion ofwhich half are exports. The clusteremploys 40,000 people of whom 25,000are qualified engineers.

UK Motorsport includes many examplesof world-class technology developmentand market exploitation. For instance, toname but a few, Xtrac of Wokinghamdominates the high performance gearboxmarket, particularly in Formula 1, whileRicardo leads in power transmission, andCosworth and Ilmor Engineering areleading designers and manufacturers ofhigh-tech and fuel-efficient engines formotorsports and for the vehiclemanufacturers.

As an example ‘Motorsport Valley’, NorthOxfordshire, boasts over 700 specialistmotorsport companies and componentsuppliers, including Formula 1 teamsJaguar, Jordan Honda, Renault, BAR,Arrows/Tom Walkinshaw Racing. BothOxford University and Oxford BrookesUniversity are closely involved in thiscluster, and are members of theOxfordshire Motorsports Forum, aninformal network that promotes university-industry interaction in the region.


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3.9 Universities have a vital role to play inthe innovation process. The cornerstone ofthis is the role of universities in educatinghighly qualified manpower. This not onlyprovides business with the manpower toundertake R&D and innovation (in its widestsense) but it is also the basis of the networkswhich exist between universities and industry.International comparisons suggest that theUK does relatively well at industry/sciencerelations but there remains significant scopefor improvement. For example, universitiesneed to develop a greater awareness of thebenefits to them and to the wider economyfrom protecting, and exploiting, theirintellectual property in an appropriatefashion.

3.10 The converse is also true:manufacturing industry needs to work moreclosely with academia to spot the commercialopportunities from scientific research andensure that our outstanding record ofscientific discovery can be turned into newproducts, services and processes. UK firmsneed also to take full advantage of theopportunities to participate in collaborativeR&D offered by the European FrameworkProgramme of support for technologicalresearch and development. According to theThird Community Innovation Survey in theyear 2000, some 38% of innovatingbusinesses cite universities or other researchinstitutes as a source of new technological oruseful scientific knowledge.

Progress

Science and Research Base

3.11 The Government has a significantprogramme of investment in the science baseunderway. As part of the 2000 SpendingReview, the Government announced a ScienceResearch Fund in partnership with theWellcome Trust which will provide £1.75billion for investment in science infrastructure

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over two years. Recent evidence suggests thatefforts must continue to address the balancebetween different funding streams, ascharities and industry work alongsidegovernment to fund increasing volumes ofresearch.

3.12 Universities are increasingly able tocommercialise the benefits of this research.There has been an increase in the number ofnew spin-out businesses created byuniversities. In the year 1999-2000, 199 firmswere spun out from UK Higher Educationestablishments, compared with 338 in theprevious five years – a trebling of the spin-outrate. The move towards spin-offs is likely toincrease, as more and more universityresearchers and industrial partners recognisethe benefits of commercialising intellectualproperty generated from these establishments.

3.13 The Government is helping universitiesdevelop the skills and networks needed toenable manufacturing industry to exploit thatknowledge better. Key initiatives include theHigher Education Innovation Fund whichprovides a stream of funding for universitiesto reach out to their local businesscommunities, backed up with specific supportto help new spin-out firms and the teachingand promotion of entrepreneurship withintaught courses.

3.14 The Government is equally concernedto build the capacity of staff in our publicsector research establishments to engage inentrepreneurial activities, and so has createdthe Public Sector Research EstablishmentFund as a special source of funding to enablethe establishments to generate spin-outs andother business opportunities.

Manufacturing and sustainabledevelopment

3.15 Sustainable development is aboutintegrating economic, environmental and

social objectives “to improve quality for lifefor everyone now and for generations tocome”.17 Raising productivity also meansimproving resource productivity – in otherwords, using less energy and other naturalresources, and producing less waste, per unitof output. Business, and manufacturingindustry in particular, has a pivotal role toplay in delivering that better quality of life.Some of our leading companies, both largeand small, recognise the benefits and theopportunities of resource-productiveinnovation, helping them to improve theircompetitiveness, enhance their reputation andsafeguard profits and jobs. But unfortunatelynot enough businesses are making thisinvestment.

3.16 On its own, the traditional regulation-based environmental agenda will not deliverthe scale of change needed. It is throughinnovation, both in technology and inorganisation, that we can best tackleenvironmental problems in ways that areconsistent with continued economic growthand social progress. New technologies, betterdesign, new processes, new ways of doingthings, will mean major increases ineconomic output per unit of energy, materialsor land.

3.17 The goal of DTI’s SustainableDevelopment Strategy is to help enableindustry to improve its resource productivity.We can help by supporting key technologyand resource productivity programmes suchas BIO-WISE, established to realize thebenefits biotechnology can provide andEnvirowise, the main programme that theDepartment has to help companies meet theincreasing environmental challenges. Thisprogramme aims, by 2015, to save UKbusiness £600 million per annum.

17 DETR (1999)

Lowering the costs of innovation

3.18 To encourage innovation thegovernment has introduced an R&D tax creditfor small and medium-sized firms worth £150million a year, and more recently a new R&Dtax credit for large companies in the 2002Budget.

3.19 The development of clusters cangenerate wider spillover benefits through thegeographic concentrations of expertise andinnovation. The government has analysed thepotential for clusters across the UK helpingbusinesses decide where to locate withreduced costs. We have also empowered theRDAs to support the development of clustersby giving them greater discretion in the waytheir budgets are spent.


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Airbus Wings

The UK is the centre of excellence forwing design and manufacture for the four-nation Airbus company, which is now oneof only two world producers of largecommercial passenger aircraft. Airbus UK(and its predecessors) have designed andmanufactured the wings for every Airbusaircraft flying today. This activity supportsabout 9,000 jobs in Airbus UK and up toa further 13,000 jobs in the UK supplychain. Airbus UK products account for1.5 per cent of the UK’s manufacturingexports with a net trade surplus of £1billion per year.

Airbus UK is committing at least £1.1billion, and Government £530 million inLaunch investment, to design anddevelop wings for the new A380“superjumbo” airliner. The wings, whichare being designed at Filton in Bristoland manufactured at Broughton, NorthWales, will be the largest ever producedfor a commercial jet airliner.

The Envirowise programme

Waste of resources probably costs UK business as much as £20 billion per annum. Byaddressing this in a systematic and positive manner, companies can reduce this waste andincrease profits by as much as £1,000 per employee. As the CBI says, it is the win-winroute for businesses to minimise their impact on the environment as well as maximise theirbusiness efficiency.

Jointly funded with DEFRA, Envirowise provides free advice and information for companieson how to reduce their impacts on the environment through making more efficient use ofraw materials and cutting down on the amount of waste that they produce. Since theprogramme started in 1994:

• it has produced over 300 tools such as case studies and best practice guides to helpbusiness;

• has produced targeted material for more than 10 sectors of manufacturing, such aschemicals, foundries, metal finishing, and textiles;

• it has provided information and advice to over 200,000 callers to the Helpline; and

• in total is now saving companies in excess of £170 million per annum.

For more information, either contact the Helpline 0800 585794 or the website athttp://www.envirowise.gov.uk/.

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Knowledge transfer

3.20 Faraday Partnerships help createstrategic technology transfer networks thatwill spur innovations and bring new productsto market more quickly.

3.21 The LINK Research Programme isdesigned to being academia and companiestogether to carry out pre-competitive butmarket-focused collaborative research. Forexample, the LINK Structural Compositesprogramme evaluation shows that incomedirectly attributable to the programme will berunning at £100 million per year by 2003.

3.22 The TCS (formerly the TeachingCompany Scheme) is designed to raise thecompetitiveness of firms through theplacement of graduates for two-yearsecondments.

3.23 The Smart scheme is specifically aimedat helping smaller companies develop newideas into innovative products and processes.Since the 1980s, Smart has provided £200million to 3,000 companies. Each £1 millionspent on Smart has increased turnover in theeconomy by £2.4 million and current exportsby £1.3 million.

Smart support for space age components

Polyflex Aerospace, a small manufacturer of high performance pneumatic products for thedefence sector, took a major leap of diversification to meet the needs of the space industry.With the support of a Smart Award of £100,000 towards a £330,000 investmentprogramme, Polyflex Aerospace developed miniature components that are now used by theEuropean Space Agency and other satellite operators, including the new International SpaceStation.

‘The Smart Award helped us become established in the space market,’ remarks ManagingDirector James Bradbury. ‘There was a small window of opportunity for a range of Europeanspacecraft propulsion products to reduce dependency on American supply. The DTI alsogave a valuable independent perspective on our developments and were very supportivethroughout the programme.’ Since winning the Smart Award, Polyflex has moved away fromdependence on the defence market, and is now firmly rooted in the space industry. Thecompany anticipates turnover of £3 million this year.

3.24 As part of the International TechnologyService, the Government has verysubstantially expanded the team ofInternational Technology Promoters, whoserole is to facilitate the access of UK firms toforeign source of technology. In addition, thenumber of overseas missions to identifyleading developments in manufacturingoverseas has been expanded by almost 50%to an annual rate of 35. As a result ofMission activity, over 60% of participatingfirms brought forward the adoption of newtechnology and 40% introduced newproducts.

Future prospects

3.25 The Government recognises that moreneeds to be done to stimulate innovation andclose the productivity gap. Action iscontinuing to support basic science, encouragespillovers and foster knowledge transfer.

Science and Research base

3.26 The UK is investing more in basicscience than ever before and by 2004,spending on basic research will have doubledin real terms since 1986. To encourage moreuniversities to reach out to business,

Government has also recently set up 12Innovative Manufacturing Research Centres(IMRC) based in academic institutions acrossthe UK, backed by £60 million ofGovernment support through the Engineeringand Physical Sciences Research Council(EPSRC). Academics and research specialistswill seek to support all sectors of manufacturing.

Lowering the costs of innovation

3.27 The new R&D tax credit for largecompanies is worth £400 million, for R&Dexpenditure incurred after 1 April 2002. Thisis a significant incentive for companies toundertake additional R&D and should have amajor impact on manufacturing. This willgive UK business one of the most generousR&D tax credits in the G7, and will lower thecost of undertaking R&D by an average of 7%.

Liverpool’s Innovative ManufacturingResearch Centres

Two of the twelve Innovative ManufacturingResearch Centres are based in theUniversity of Liverpool, making significantcontribution to the global competitivenessof UK manufacturing.

The Manufacturing Science andEngineering Research Centre (MSERC)is located within the Department ofEngineering. Research is focused onleading edge manufacturing processes,such as rapid manufacturing, micro-manufacturing, laser material processing,advanced materials and bio-manufacturing.

The Centre for e-Business Researchfocuses on the application of leadingedge Internet technologies forimprovement of manufacturing andbusiness competitiveness. The Centrealso develops new Internet-enabledsupply networks and business models formass customisation, enhancedmanufacturing responsiveness and otherareas of operational effectiveness.


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Knowledge transfer

3.28 The newly-launched BasicTechnologies Programme has received about£25 million of Government funding, and aimsto encourage manufacturers to exploit newleading edge technologies, deriving from thescience base and from industrial research, formore widespread application. The programmeaims to engage directly around 400companies and 70 universities in newresearch projects, with further benefits foraround 5,000 companies.

3.29 The International Technology Service isjust bringing on stream its new website whichbrings personalised up-to-date news onmanufacturing technologies from around 600sources, and provides ‘one click’ access tosupport and advice.

3.30 Following the 2000 Spending Review,£50 million per year is allocated to theRegional Development Agencies to encourageinnovation in the regions through theRegional Innovation Fund (RIF) which nowforms part of the Agencies’ single fundingstream.

Regional Innovation Fund (RIF)

The RIF is administered by the RDAs.

In the North East, the Regional InnovationFund helped establish private-sector ledcluster teams to develop and implementcluster action programmes in bulk/basechemicals, offshore and marineengineering, biosciences, environmentalindustries, automotive, electronics, andclothing and textiles.

In Yorkshire and the Humber the RIFhelped establish a network of 25 textileand clothing companies to developinnovative processes and systems, marketand product diversification strategies ande-business capability and to forge linkswith the Higher Education Institutions inthe region.

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3.31 Within the DTI, the Government isimproving the focus of its support forinnovation. As a key part of this commitmentthe DTI is currently recruiting by opencompetition a new Director General forInnovation, who will be responsible forpromoting technology and engineeringexcellence in UK industry – including inparticular the manufacturing sector. A keyelement will be to link the research comingout of organisations under the umbrella of theOffice of Science and Technology to thebusinesses that can exploit it.

3.32 The new Innovation Group in DTI willbe leading a much more strategic andforward-looking Government approach toencouraging and facilitating innovation inmanufacturing, and in business moregenerally. A key element of this will beworking much more intensively withbusinesses and the research community toidentify on a global basis new or emergingtechnologies which, individually or incombination, have the potential to transformproducts, processes and services and thereby:radically improve productivity andperformance; create major new markets; ordestroy the competitive advantage of existingbusinesses or sectors. This new capability willguide Government policy and support andpriorities for investment in science.

Pillar 4: Best practice

The Goal

4.1 Adoption of best practice implies aculture of continuous improvement. Taken asa whole, UK manufacturers can increase theircompetitiveness considerably by adoption ofworld-class practices.


4.2 The evidence suggests that the UK hasconsiderable scope for learning from globalbest practice. Differences in the adoption ofbest practice are likely to account for a part of the UK's total factor productivity gap withour major competitors. As an indication of thepotential gains from learning from others, theCBI`s National Manufacturing Councilestimates that if UK firms adopted the bestpractice levels achieved by their internationalcompetitors, the UK could increase GDP byabout £60 billion.

4.3 Even within the UK there is substantialdifference in performance of individualmanufacturing plants. On average, productivityis five and a half times higher in the bestplants than in the worst.18 This variation inperformance is common across manufacturing,indicating that there is substantial scope forcatch-up across all sub-sectors.

4.4 Best practice embraces a range oftechniques, relating to the production process,to products and their design, and toemployment practice. Lean manufacturingtechniques, for example, cuts out waste; masscustomisation tailors products to the consumer;good supplier relations improve quality andefficiency; workplace partnership increasesthe contribution employees can make.


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4.5 Despite the potential gains on offer, the UK appears to be less able to absorb thelessons of best practice. For example, theEngineering Employers Federation (EEF)found that US-owned firms use leanmanufacturing techniques more widely andintensively than UK-owned firms, and thatdespite the clear productivity benefits, 42 percent of UK firms had no plans to implementthese techniques.19 The firms cited resistanceto change, lack of understanding andinadequate workforce skills for their non-adoption. Similarly, the recent joint CBI/TUCgroup study of innovation emphasised theimportance of adopting new workingpractices in order for the potential oftechnological innovation to be realized fully.20


4.6 It is clearly for business to recogniseand adopt best practice. But the Governmentcan play an important role in coordinating theflow of information on best practice, workingclosely with business networks and industryforums. Evidence shows that relatively smallinvestment on these activities yields highreturns to individual companies and to theeconomy as a whole.

4.7 For companies to reach their fullpotential there is a need for effectiveinteraction between industry and Governmentin the UK, in Europe and overseas, learningbest practice, adopting new processes andstimulating new investment opportunities. The ability to identify and seize new businessopportunities is critical to successfulexploitation of global markets.

4.8 Trade Unions and employers can workin partnership to ensure best practice inmanagement and workplace practices.

18 Haskell and Barnes (2000)19 EEF (2001)20 TUC and CBI (2001)

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Progress

4.9 The first major joint Government-Industry best practice initiative took place inthe automotive sector some eight years ago.The resulting lean manufacturing andassociated process-improved techniques havehad a major impact on the vehicle sector, asindicated in the accompanying case study.

SMMT Industry Forum

The UK’s major vehicle manufacturersand first tier suppliers have been workingtogether for eight years through the SMMTIndustry Forum to improve the domesticsupplier base. This is a world-uniqueindustry-led collaboration amongstcompetitors, working in close partnershipwith the DTI. Outcomes to date include:

• Companies undertaking IF activitieshave achieved staggering improvementsin the seven measures of Quality, Costand Delivery identified as key tosustainable competitiveness. Onaverage, the improvements have beenas follows:

Not right first time 25%Delivery schedule achievement 40%People productivity 30%Stock turns 135%Overall equipment effectiveness 20%Value Added per Person 40%Space utilisation 40%

• Over 385 companies in the automotivesector have completed Industry Forumactivities, and the combined impact ofthese improvements in a typicalcompany has resulted in savings of£250k per annum.

• More than 3,750 people have beentrained by Industry Forum engineersand are actively carrying out processimprovements in industry. IndustryForum itself is continuing to grow itsability to transfer its skills andtechniques to industry.

4.10 Building on the Society of MotorManufacturers and Traders Industry Forumconcept pioneered by the automotive sector,the DTI is supporting significant projects inaerospace, oil and gas, chemical processing,ceramics, textiles, metals and clothing, andred meat processing, which will significantlyraise the performance and productivity ofmanufacturing firms and the supply chain.For example, the Society of British AerospaceCompanies (SBAC) was awarded a DTI grantof £2.45 million in 2000 to train a team ofLean Master Engineers and to deliver over300 Lean Engineering Master Classes for theUK Aerospace Industry.

4.11 A healthy supply chain is of keyimportance to the first tier manufacturers.Manufacturing SMEs have an important role to play in this and the economy moregenerally.

4.12 Small manufacturing companies haveparticular needs that are being met throughthe provision of key services supplied throughthe Small Business Service. The SBS also has responsibility for a number of nationalsupport schemes to enable the spread of bestpractice and to encourage investment andchange. These include the Benchmark Index,Connect for Better Business CD Rom seriesand Inside UK Enterprise (IUKE), a companyvisit programme where 70 per cent of thepeople who have used it say they intend toimplement change within their own businessas a result of a visit.

4.13 Manufacturing industry is also animportant driver for regional economicdevelopment, with numerous initiatives by the RDA and devolved administrations toencourage local enterprise.

• The sustained and measurable successof this initiative has resulted inIndustry Forum now being replicated infour other leading manufacturingsectors.

Fit for the Future

4.14 The Government works closely with theCBI, TUC and key stakeholders promotingthe adoption of best practice through the Fit for the Future campaign, and with businesses,sector trade associations and the IndustryForums. Its objective is improving themotivation and performance of individualswithin the workplace as a key to improvingbusiness performance.

4.15 The role of the campaign is to helpdevelop both the demand and supply, byestablishing a network of active keystakeholders. The former, through raisingoverall understanding of what is meant bybest practice, raising awareness of the valueof adopting best practice and raisingawareness of the proven support, services andtools available to make an impact on business.The latter, through providing the means forsharing knowledge and experience, and toencourage co-operation, collaboration andconsistency.


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4.16 A number of special initiatives areoperated across the Business Link Networkaimed specifically to assist small andmedium-sized companies. These include theWorld Class Manufacturing Programme, runjointly by Business Link Devon & Cornwallwith Cranfield University, and Business LinkBerkshire & Wiltshire in collaboration withUnipart, to deliver a series of workshopsaimed at increasing the manufacturingcompetitiveness of companies in the region.

The Partnership Fund

4.17 By expanding the Partnership Fund, theGovernment is promoting better workplaces,which lead to improved performance andenhanced employee involvement. ThePartnership Fund complements the work of theTUC Partnership Institute, which is working topromote better relationships betweenemployers and unions with the objective ofestablishing a mutually beneficial approach,and the TUC’s Learning Services projects,which promote joint action on trainingbetween the workforce and employers.

Impact of Partnership Fund on BNFL

BNFL was a first round winner of the Partnership Fund, undertaking a culture changeproject whose key aspect was behavioural/interpersonal skills training. The project led to productivity improvements resulting in:

• Grievances reduced from 20+ per year to none;

• Ability to implement major changes in terms and conditions e.g. move from overtime to annualised hours;

• Health and Safety improvements – 56 Lost Time Accidents recorded in 1990 to NONEin 2000;

• Management and unions (AEEU) now being involved at all stages during implementationof redundancies at BNFL.

Andrew Donovan, Head of Human Resources, says ‘When we have had issues in the past,we tended to avoid communicating early with the Unions for fear of their reaction.Nowadays, because of the level of trust that has been established, I will involve them as early as possible in the knowledge that they will help us resolve the issue earlier and in the best way possible.’

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Exploiting the global market place

4.18 Participating fully in the global marketplace improves companies’ business practiceand productivity; companies which tradeoverseas are markedly more productive thanthose that do not.21 Trade Partners UK helpsbusiness to prepare for the challenges ofinternational trade and provides, through itsworldwide network, the information, contactsand support which UK companies andpotential inward investors need to find newmarkets, new customers and new orders.Trade Partners UK spends some £67 million ayear in supporting UK business to engage ininternational trade and investment, throughfor example attendance at international tradefairs, participation in overseas missions andprovision of market and sectoral information,much of which is focused on manufacturingindustry. Trade services in Scotland aredelivered by Scottish DevelopmentInternational.

Future prospects

4.19 Best practice initiatives have a proventrack record of success and we are determinedto maintain and expand them. In order to helpcompanies adopt best manufacturingpractices, they require an easily accessibleand affordable source of information andadvice on a wide range of manufacturingtechnologies, processes and methods.Complementing the nationally and sectorally-based industry forums, regionally-basedservices are being set up to answer this need,backed by national networking facilities toprovide access to sources of in-depth advice.

4.20 The CBI/TUC work on productivity hashelped to create an agreed agenda for actionby government and industry. In response tothis work, the Government announced, at theManufacturing Summit held in December2001, an additional £20 million for bestpractice activity. The Government is settingclear targets and proposes to spend:

Sweet industrial relations helps win Best Process Factory award

Nestlé Rowntree, Fawdon Factory – winner of the Management Today Best Factory Awards2001 Best Process Factory – employs 700 people producing 35,000 tonnes ofconfectionery each year.

Yet its performance wasn’t always so impressive. In 1997, the Rowntree factory failed aninternal audit by new owners Nestlé. The symptoms, bad industrial relations, low machinereliability, poor inventory management, dismayed customers.

Following an entire re-think, the factory decided it would no longer disappoint customerswith poor inventory management and low levels of reliability, for example. Industrialrelations were slowly transformed to an honest and open trade union relationship, based ontraditional values.

The factory’s internal organisation structure was also shaken up. Out went the department-based structure, with all its scope for buck-passing. In came a series of zones: mini-factories tasked with producing a given product, with most (but not all) of the resourcesneeded to fulfil their mission. A continuous improvement programme, based on a Japanese-style ‘5-S’ workplace housekeeping initiative and aimed at enabling the factory to makethings ‘faster, better, safer, easier and cheaper’ has clocked up savings of £250,000 a year. From being a failing factory, the Fawdon plant is recognised within Nestlé assomething of a role model.

21 Several studies, notably Bernard and Jensen (1995) and (1997) and Bernard and Wagner (1997) andGirma, Greenaway and Kneller (2002)

• A further £9 million to expand thePartnership Fund to establish up to150 projects promoting innovationin workplace partnership. And tosupport a more strategic approachsupporting at least eight sector-based projects aiming to improvebusiness performance by focusingon people at work.

• £9 million to extend the reach of theIndustry Forum Adaptationinitiative. Following discussionswith industry, the Government plansa further six sector projects, linkingthem when appropriate to thePartnership projects. Targets includehealthcare equipment, constructionand the food processing sectors.Industry Forums are business-led,focused on introducing leanproduction management and supplychain improvement aimed at drivingup productivity.

• A further £2 million will supportcontinuous improvement of thedelivery of best practice advice,using tools and techniques workingin partnership with the TUC, CBIand key stakeholders to enhance theFit for the Future campaign.

4.21 A central element in the best practicestrategy is the national ManufacturingAdvisory Service (MAS), now coming on-stream. Working in close co-operation withthe Business Links, the new service is basedon the establishment of a Regional Centre forManufacturing Excellence (RCMEs) in eachEnglish region and in Wales, in partnershipwith the RDAs and the WDA. Teams ofexperts in each centre will provide face-to-face contact with manufacturers in theirregion. They will provide free initial advice tomanufacturing SMEs to diagnose problemsand identify opportunities, with possible


38

further consultancy at an affordable price todevelop tailor-made solutions.

4.22 In addition, a National Network ofCentres of Expertise in manufacturing isbeing set up to provide sources of in-depthadvice. Manufacturers of all sizes will be ableto access these centres via internet-basedfacilities, via their RCME, or via establishedBusiness Link contacts.

4.23 The first three centres and the nationalnetworking facility were launched in April2002, and the remaining centres will opentheir doors in the next few months. DTI willprovide £15 million over three years tocomplement funding from RDAs and theWDA.

4.24 Targets will be set that bring togetherthe work of all the RCMEs. Subject toconsultation with RDAs, we expect theservice to provide information and advice to15,000 manufacturers per year; to undertake2,500 diagnostic visits to small and medium-sized manufacturing companies a yearthrough the RCMEs; to undertake 500 follow-on consultancy projects per year, through theRCMEs; to inform through the MAS websites25,000 manufacturers/users per year onvarious aspects of manufacturing. Specificmeasures of success will be put in place.Business Link Operators are also co-operatingwith regional partners to help deliver theMAS.

4.25 Trade Partners UK launched a newtrade development package for inexperiencedexporters, Your Passport to Export Success, inNovember 2001. “Passport” has alreadyhelped some 600 businesses and is growingrapidly. It brings together in one simple,responsive process all the tools needed forbusinesses to develop their export potential.

4.26 Innovation and Growth teams are alsobeing established to bring together a widerange of stakeholders, to help formulate and

39


deliver policy. The first of these is theAutomotive Innovation and Growth Team,which has produced a report setting out anagenda for action. Key recommendationsinclude:

• The establishment of an AutomotiveAcademy to take the lead in processimprovement activities across theautomotive sector;

• Increased funding for Supply ChainGroups allowing them to workacross regional boundaries. SupplyChain Groups provide expertsupport for firms involved in theproduction of a particularcomponent, to help them worktogether to improve efficiency;

• Setting up a pilot mobility servicesproject in London, and another city,with the aims of accelerating theadoption of low pollution vehicles,and demonstrating new approachesto providing mobility;

• The establishment of centres ofexcellence to take forward work inkey areas of Low Carbon and FuelCell technologies and TransportTelematics and Technologies forsustainable mobility.

Pillar 5: Raising Skills andEducation Levels

Goal

5.1 Improved skills across the workforceand the creation of a system that reflects theneeds of individuals and employers areessential for the fulfilment of theGovernment’s productivity and socialinclusion agendas.

Strategic Importance

5.2 The quality of labour input is a keydriver of productivity growth, both inmanufacturing and in the wider economy.Higher-skilled workers are better able both to


40

exploit the potential of physical investment,and to adopt new ideas and inventions. Skillimprovements complement other investmentssuch as physical capital or R&D. If firms areunable to hire workers because of skillsshortages, or if they cannot re-organiseproduction, then their inability to undertakecomplementary investments may constraintheir ability to invest in new plant and ormore sophisticated machinery.

5.3 Overall, UK manufacturing is relativelylower-skilled in comparison withmanufacturing in both US and Germany(Chart 5). The stock of skills employed byUK manufacturers accounts for 4 per cent ofthe manufacturing productivity gap with theUS and 25 per cent of the gap with Germany.

Chart 5: Whole economy and manufacturing skill proportions by country

Source: NIESR (Note: Workforce skills are divided into three categories: high level qualifications (degree or above); intermediate

(vocational qualifications above high school but below degree); and those with low or no skills).

UK UKmanufacturing

US USmanufacturing

Germany Germanymanufacturing

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5.4 Manufacturing within the UK has lowerskills on average than the rest of the economy.Within this average it contains some of thehighest skilled sub-sectors, such ascomputers. It also has some of the lowest-skilled sectors in the economy; almost 40 percent of workers in the clothing sub-sector donot possess any educational qualifications(chart 6). Even in the more favourablesectors, there is evidence suggesting thatmany staff have basic literacy and numeracyskills needs.

5.5 These skills deficiencies extend tomanagement. There is evidence that UKmanagers are generally less well-skilled whencompared to their European counterparts,especially in terms of their adaptability,entrepreneurial and technical skills and on theability to look to the future.22 Poormanagement and leadership can also hinderthe introduction of high performance workingpractices that have a positive effect onproductivity and workplace performance.

Chart 6: Qualifications by manufacturing sub-sector

Source: DTI calculations using ONS Labour Force Survey data

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5.6 Manufacturers also appear tounderinvest in training when compared withthe rest of the economy.23 They provide fewerdays training, devote less management time,are less likely to have a training plan andprovide less new technology training thanemployers as a whole.

5.7 The recent PIU workforce developmentreport “In Demand: Adult Skills for the 21stCentury” highlighted the need for a muchgreater focus on stimulating demand fortraining and learning opportunities frombusinesses and individuals.24 “Skills for Life”,the Government’s National Strategy for AdultLiteracy and Numeracy skills, called forbusinesses and employers to produce literacyand numeracy policies to address the needs ofthe estimated 3.5 million people inemployment with low levels of basic skills.


5.8 The Government and key stakeholdersmust address the root causes of ourunderperformance. The underperformance ispartly the result of the relative weakness ofthe UK educational system over a number ofdecades. 7 million adults in England haveliteracy and numeracy skills needs lower thanthose expected of an 11-year-old.25

5.9 Our underperformance is also the resultof market failures leading to inadequateincentives to acquire skills. Such marketfailures occur as a result of:

externalities – for example where anemployer invests in training but the worker ispoached by another firm (a ‘free-rider’), thetraining employer will not get the full returnfor their investment in skills. As a result ofthis perceived risk, the firm is less likely toprovide training in the first place.


42

imperfect information – where employersand employees cannot identify the fullbenefits of training.

5.10 Government and stakeholders must alsorecognise that small firms face additionalproblems in raising finance and fundinginvestment and are unlikely to be able to gainfrom economies of scale in training provision.As a result, they typically face higher averagecosts when training their staff. They may alsoface constraints on the amount of time theycan give workers in order to train.

5.11 Government recognises the importanceof promoting enterprise and creativity toensure a climate conducive toentrepreneurship. Government must also workclosely with stakeholders to maximise thecontribution of both Higher and FurtherEducation to the productivity agenda.

5.12 Business has a major responsibility fordeveloping its own workforce to meet bothimmediate needs and the demands ofindustrial change. Employer investment inworkforce development is many times that ofGovernment. Employers reported spending£23 billion (including trainee wages) ontraining during a 12-month period 1999-2000.

Progress

5.13 The Government has set out aframework to raise adult skills and encouragelifelong learning, with the improvement ofbasic literacy and numeracy skills as a keycomponent. The core to this approach is tocreate a demand-led system, by raisingdemand from business and individuals andmaking the supply side more responsive. This approach aims to improve informationthrough raising awareness of the benefits ofhigher skills and making sure that educationproviders are aware of business needs.

23 DfES (2002)24 PIU (2001)25 Moser (1999)

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5.14 On the supply side, the longer-termbasis for raising skill levels in manufacturinghas to begin at school, whilst in the shortterm, we also need to focus on the skills ofthose already in employment. TheGovernment has already put in place thebasics, by taking action to raise standards ofliteracy and numeracy both within schoolsand amongst adults. The “Skills for Life”strategy will improve the supply and qualityof literacy and numeracy provision for adults.The strategy has delivered a new learninginfrastructure and is setting in place measuresto reduce barriers to learning as well aspioneering cross-Government approaches totackling basic skills needs.

5.15 The Science Engineering Technologyand Mathematics Network (SETNET) seeksto bring about collaboration between the 58member organisations to influence theteaching of engineering related subjects andensure a more effective communicationsystem for schools and industry. SETNET co-ordinates a network of 53 SETPoints, each ofwhich has produced a Business Plan showinghow they will ensure that every child under16 in their area should have the opportunity atleast once in each Key Stage to participate inan appropriate science, technology,engineering and maths activity.

5.16 The Government is also driving up thequality in supply of training and developmentin Further Education colleges by moresharply focusing on meeting the skills needsof employers, particularly for Level 3 (craftand technical) qualifications.

5.17 The number of ModernApprenticeships, which enable employees toimprove their skills at work, is beingincreased. There were 223,000 ModernApprenticeships in 2001. The Government isalso seeking to close the ICT skills gap andboost regional economies through theintroduction of New Technology Institutes(NTIs), led by Higher Education Institutions

in partnership with Further EducationColleges and business. NTIs will offeradvanced technology and ICT skills fromNVQ level 3 to foundation degrees withpathways to honours degrees.

5.18 To enable individuals to have aninformed choice about local learning andwork opportunities, local Information, Adviceand Guidance partnerships which aremanaged by the LSC, offer adults in Englanda free, impartial, high quality service.

5.19 On the demand side, the Governmentis stimulating demand for learning through apromotional campaign and by engaging allpartners across government and employers inidentifying and addressing the literacy andnumeracy needs of their clients andemployees. The Adult Basic Skills StrategyUnit has published a ‘toolkit’ for largerorganisations, containing tips and contactdetails to help organisations develop theiremployees’ basic skills, with further helpavailable online. Similar resources for SMEsto follow.

5.20 Good working practice: There are clearproductivity benefits to companies thatencourage work/life balance for theiremployees and work in partnership with themto achieve success. The Government is puttingthrough legislation designed to keep mothersand other working parents in their currentjobs, thus retaining employers' investment inskills. Government will be:

• marketing the benefits to employersof encouraging diversity in theworkplace alongside implementingEU legislation in this area in a waythat works with the needs ofbusiness;

• spreading good practice oninnovative ways of tackling the longhours culture while maintainingproductivity.

• working on best practice on humancapital reporting to demonstrate, theresult to shareholders for companiesthat invest resources in this area.

• legislating to help the resolution ofdisputes in the workplace ratherthan at employment tribunal.

5.21 Managing Change: there is also a rolefor Government, working in partnership withemployers and employees, to help companiesin transition. The government’s Frameworkfor Regional Employment and Skills Action(FRESA) identifies the need for cohesion ofboth intelligence and response. A partnershipapproach is the best way forward to achieveless frustration for those delivering andreceiving a service and less duplication ofavailable effort. The aim is to pool local andsectoral knowledge and expertise, leading toboth a higher skilled workforce, and betterquality jobs, meeting the needs of bothemployers, employees and unions.

5.22 Of particular importance is The RapidResponse Service (RRS), managed byJobcentre Plus. This is a clear example ofcollaborative working, and is a demand-ledinitiative. By acting promptly, offeringassistance appropriate to the local labourmarket conditions, the blight of large-scaleredundancies is reduced. Tailored guidance tothe individual and close liaison withrecruiting employers is able to bring togetherboth sides of the employment equation, jobswithout people and people without jobs.

Future prospects

5.23 On the demand side, the Governmentis strengthening the sector network byestablishing the new Sector Skills Councilswhich will enable business sectors to provideleadership for strategic targeted action to meettheir sector’s skills and business needs. Bygiving responsibility for planning and funding


44

post-16 learning to the Learning and SkillsCouncils (LSC) it is strengthening the linksbetween learning and employment. TheBusiness Link network is providinginformation, advice and guidance to helpemployers identify and meet their workforceneeds. And at the regional level this work isbeing better co-ordinated through theFrameworks for Regional Employment andSkills Action, being led by the RegionalDevelopment Agencies and drawing togetherthe work of such key partners as the SSCs,local LSCs and Jobcentre Plus.

5.24 The Government is preparinglegislation to give Union LearningRepresentatives (ULRs) statutory recognitionand rights to time off to carry out their work.Union Learning Representatives, nowcommon in workplaces all over Britain, aretrained to advise their members on learningopportunities, to negotiate courses and othertraining opportunities for them, and to helpengage employers in the development of theworkforce. There are now about 3,500nationwide, most of whom have been trainedthrough the Government’s Union LearningFund. Workplace learning centres are animportant element in a number of unionlearning projects.

5.25 On the supply side, the Governmenthas also welcomed the recent review by SirGareth Roberts of the factors affecting thesupply of people with science, technology,engineering and mathematics skills, and thatby Howard Davies on how to promote a betterunderstanding of business, the economy andenterprise amongst young people.26, 27 Theseinitiatives, taken with other steps aimed atproviding further science, technology,engineering and mathematics opportunitiesand building a stronger basis for developingvocational skills through providing vocationalopportunities for 14 to 19 year olds, will havea major effect on raising the pool of skillsavailable to manufacturing.

26 Roberts (2002)27 Davies (2002)

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5.26 Learndirect is helping to raiseworkforce skills levels, productivity andcompetitiveness. It offers flexible, relevanton-line learning materials allowing employersto fill urgent skills gaps quickly, andemployees to put new skills to immediate use.Learning can take place at a learndirectcentre, at home or at work to fit in withbusiness pressures and employee lifestyles.The learndirect information and advicehelpline (0800 100 900) offers free, impartialadvice on all UK learning opportunities.

5.27 The DfES will be providing £1m over2002-04 to put in place arrangements with theHigher Education Funding Council forEngland and the Learning and TeachingSupport Network for the embedding of work-related skills more widely in HE provision.

5.28 The 2002 Budget announced a series ofWorkforce Development Pilots which will testa package of measures to engage business inraising the low basic levels of skills in theworkplace. The new approach focuses onbasic literacy and numeracy skills and level 2qualifications. The pilots have four elements:

• Free learning provision for eligibleemployees whose employers takepart in the scheme,

• Some form of arrangement forindividuals to take up training.Three of the schemes require that alllow-skilled employees inparticipating firms be offered 35hours of paid leave each year totrain; the other three require 70hours,

• Financial support for employerswhose staff take time off to train,and

• Improved information, guidance andsupport for employers andindividuals taking part in the pilots.

5.29 In addition, the Government has beguna dialogue with employers, employer bodiesand the Higher Education sector on creating aworkforce development strategy to increaseparticipation in HE by working adults.

5.30 The PIU, in close collaboration withDfES, DTI, DWP and HM Treasury willpublish a policy statement in the summer of2002 alongside the Spending Review. Thiswill inform the strategies of the keystakeholders including the LSC.

Pillar 6: Moderninfrastructure

The Goal

6.1 The UK needs a modern, efficientpublic infrastructure to enable business toreduce costs, increase efficiency and improveits competitiveness. This is a major challengegiven decades of under-investment. Thetransport system is of central importance,together with a thriving broadband marketdue to the growing importance of e-businessin all sectors.


6.2 Efficient public infrastructureunderpins business competitiveness. Firmsuse public infrastructure, such as the roadnetwork and communication systems, to bringtheir products to the market. More efficientinfrastructure lowers transport costs andfacilitates more efficient distribution systems.For example, new roads allow existing lorriesto run faster, and deliver more goods to morelocations. This lowers production costs andincreases the level of output that can bedelivered by the existing investment.

6.3 Improved transport infrastructure alsopermits a more efficient use of resources as itallows markets to become larger and betterintegrated, raising the returns to innovationand permitting greater specialisation andthereby economies of scale. Public investmentcan also generate dynamic benefits throughwider knowledge spillovers. An infrastructureproject may attract a firm to a location, andthat firm may bring with it knowledge of newways of organising production or skilledworkers, both of which eventually benefit theother firms in the locality.

6.4 Rapid rollout and adoption ofbroadband across the UK is important to both


46

its social and economic objectives. Broadbandallows new value-added services to bedelivered to the consumer and businesses.

6.5 The broadband technologies whichhave become available in the past year offersmaller companies the fast Internet accesswhich has only been affordable to largercompanies in the past. High-speed, always-onInternet means that they can restructure theirbusiness processes joining integrated supplychains, exchanging large design files andusing business to business e-commerce sitesto find new suppliers and markets.


6.6 Left to itself, the market would beunable to provide the right amount ofinfrastructure for UK business andconsumers. This is because infrastructuredevelopment often requires large up-frontcosts and long lead times. As a result,transport infrastructure is often a ‘naturalmonopoly’, which – if unregulated – couldharm the interests of consumers and otherbusinesses. There are also social benefits,such as the access provided by rural railwaynetworks, which would not be taken intoaccount by a private sector provider. However,Governments can also fail to providesufficient infrastructure. Uncertainty aboutplanning horizons and volatile spendingdecisions can delay project implementation,and the historic reluctance to cut currentspending has meant that public investment hastended to be cut once the public finances raninto trouble during economic downturns. As aresult Government is a key player in drivingsustained improvements in infrastructure.

6.7 The Government recognises its centralrole in the delivery of infrastructure, both interms of providing the right regulatory andfinancial framework to encourage investmentand in delivering the right level of financial

47


support. A significant proportion of UKinfrastructure investment is now deliveredthrough public private partnerships. Theseusually involve the private sector in contractsto deliver new infrastructure investment, suchas hospitals, roads and schools. The use ofpublic private partnerships, such as the PrivateFinance Initiative, has enabled Government toquantify the risks properly, and therefore thecosts associated with the delivery of newinfrastructure, and maximise the benefits ofprivate sector involvement.

Progress

6.8 Infrastructure improvements have hadmodest positive effects on growth in both thewider economy and in manufacturingindustry. Yet the UK has tended to underinvest in infrastructure when compared to ourcompetitors. Between 1985 and 1994, the UKinvested between one third and three quartersof the EU-15 average in infrastructure. Andduring the 1990s the UK did little to catch up:until the publication of the 10-year plan inJuly 2000, total transport investment had beenfalling in real terms and as a percentage ofGDP since the early 1990s.

Chart 7 – Transport Investment as percentage of GDP

Source: Eurostat

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6.9 There is therefore much to be done,particularly on transport. Reforms to thefiscal and monetary framework have enabledthe Government plan for long-term growth inthe level of public investment for transport.The Government has set out a 10-year plan to modernise Britain’s transport system basedon public and the private sector working inpartnership, levering in new sources ofinvestment. The plan sets out the

Government’s vision of a modern, integratedtransport system. Total private and publicspending on all aspects of the system willtotal over £181 billion pounds. £124 billionof this will be public money and theremainder will be funded by private sectorinvestments. Of particular importance tomanufacturing are the new investments in rail (£64 billion) and strategic roads (£21 billion).

6.10 With the assistance of a BroadbandStakeholder Group, made up of both publicand private sector representatives, theGovernment set out a strategy in 2001 to helpdevelop the broadband market in four areas:competition, demand, supply and content.This can be found at www.e-envoy.gov.ukalong with an action plan. Recentdevelopments are encouraging, withbroadband prices falling and take-up risingrapidly.

Future prospects

6.11 Under the transport plan theGovernment has built in the provision forregular reviews. The first report on the 10Year Plan will be published in July 2002following the Government Spending Review.It will show progress towards meeting ourtargets and may suggest further actions byGovernment and business.

The Prime Minister launched UK online forbusiness in September 2001. Theprogramme helps to get firms online, andsucceed in e-business by providing apackage of support for small businessesto improve their use of Information andCommunication Technologies (ICTs). The“Opportunity for All” White Paperannounced a significant £30m expansion ofUK online for business to help businessesmove beyond having a website or tradingonline to transform themselves throughthe effective use of ICTs.28 Theprogramme has funded a series ofsectoral impact studies that have helpedidentify particular opportunities andthreats for key manufacturing sectorsincluding aerospace, steel and ceramics.These studies are also now leading to co-funded sectoral programmes designed tohelp business adopt new ways of workingthrough e-business technologies andprocesses.


48

6.12 The Broadband market is developing,with coverage and take-up rising and pricesfalling. The Government remains committedto making the market more extensive andcompetitive and reports quarterly on thebroadband action plan.

6.13 The Government has provided a £30mfund to help the English RegionalDevelopment Agencies and the DevolvedAdministrations to develop innovativeschemes to extend broadband networks. Aseries of local schemes are underway. TheOffice of Government Commerce has alsobeen tasked with examining how theGovernment can use its expenditure on ITmore effectively as part of the SpendingReview process.

28 DTI and DfEE (2001)

49


Pillar 7: The right marketframework

The Goal

7.1 The Government wants the UK to bethe best place in the world to do business, a place where manufacturing innovates andthrives. This requires competitive anddynamic markets and motivated, well-informed and confident participants –business, consumers, employees andinvestors.


7.2 The market framework coverscompetition, within the UK and from abroad,company, consumer and employment law andthe burden and scope of regulation.

7.3 A recent OECD review showed that“the link between product market competitionand productivity growth is positive androbust”.29 Fair competition encouragesexisting firms to innovate and allowsnew companies to exploit opportunities. If incumbent firms can abuse their marketpower they will stifle enterprise and depressproductivity growth.

7.4 Manufacturers, particularly thoseexposed to international trade, face anincreasingly competitive environment. In part,this results from globalisation and thegrowing integration of the European singlemarket. Government can play its part bychampioning product, labour and capitalmarket reform in the EU.

7.5 Looking globally, in addition to thesupport Government gives to help ourcompanies trade internationally, furtheropening up markets and cutting duties aroundthe world creates new opportunities inmanufacturing and other industries. Progressin all these areas helps promote competition

and enables manufacturing companies rapidlyto increase productivity and make thetransition to knowledge-intensive production.

7.6 The Government believes thatminimum standards in the workplace are notonly fair, but are fully consistent with thehigh wage, high skill economy Britain needs.The key for the UK, and for manufacturing inparticular, is to use this opportunity to movetowards innovative and knowledge-intensive,high productivity workplaces. Together,skilled managers and staff can achieve newproducts, higher productivity and profit.

7.7 Some regulatory regimes, and the waythey are enforced, cause particular difficultyfor manufacturers and can have an impact on our international competitiveness. Theplanning system, in particular, has asignificant impact. UK businesses are entitledto expect a planning system which is fast,predictable and fair to allow them to exploitopportunities and plan their future.


7.8 The Government’s role is to set themarket framework. The Government has fivekey priorities:

• An effective competition regime; itsets the UK competition regime andbuilds open and efficient marketsthrough rooting out all forms ofanti-competitive behaviour.

• Economic reform in the EuropeanUnion; the Government fosters openand dynamic markets as part ofeconomic reform of the EU, to makeit the most competitive area in theworld, with more and better jobsand greater social cohesion. TheGovernment seeks to influence boththe direction and detail of European

29 OECD (2002)

policy, working with industry andunions to achieve real outcomes.

• Free and fair world trade; creating afree and fair trading system is at theheart of the Government’sinternational trade policy and willopen new export markets andpartnership opportunities for UKmanufacturers.

• Better regulation; the Governmentregulates only when it is necessaryto achieve important objectives –promoting best practice andcompetition as alternative means ofraising standards and ensuringeffective stakeholder involvement inconsultation on policy development.

• A modern planning system; theGovernment aims to implement afast, certain procedure with clearzones for consent and discipline forstatutory consultation.

Progress

7.9 The UK competition regime is alreadyperceived, by peer review, as the third best inthe world, behind only the US and Germany.

7.10 We have already influenced significanteconomic reform in Europe. For example,five million jobs have been created across theEU since 1997, a regulatory framework hasbeen agreed for telecommunications and abreakthrough has been achieved on energyliberalisation. The economic reform agendafor Europe, as agreed by Heads ofGovernment at Lisbon, is designed to makethe EU the most dynamic and competitiveeconomy in the world by 2010, characterisedby high living standards and full employment.This is vital for manufacturing. More thanhalf our manufacturing exports go to the EU(three times as much as to the US) and the


50

European Single Market represents over 25%of global GDP and 35% of world trade. Areformed EU will offer manufacturingcompanies a large and healthy market inwhich to compete.

7.11 The UK is the fifth largest trader in theworld and we have played a major role inrecent world trade negotiations to continue toopen up markets to UK businesses.

7.12 In broad terms the UK is perceived bybusiness as one of the most effectivelyregulated economies in the OECD. Forinstance, a survey in the International Institutefor Management Development’s (IMD) WorldCompetitiveness Yearbook 2001 suggests thatthe UK labour market has a regulatoryenvironment perceived by business executivesas significantly better than other majorEuropean countries, and only slightly behindthe US.30

7.13 The Government recognises that theburden of regulation needs to be furtherreduced, particularly on small companies. Wehave structures in place to challenge poorlyjustified regulatory proposals – the RegulatoryImpact Assessment system – and to simplifyor repeal existing regulation. The recentlypublished Regulatory Reform Action Planbrings together over 250 proposals for change.

7.14 We have also just concludedconsultation on proposals for reform of theplanning system to meet the very realconcerns of business, includingmanufacturing.

Future prospects

7.15 We will continue to build on the strongfoundations described above. The recentlyintroduced Enterprise Bill builds on theCompetition Act 1998 by reinforcing the roleand independence of the competitionauthorities. The Bill:

30 IMD (2001)

51


• introduces a new merger regimewith decisions made by independentcompetition authorities;

• replaces existing monopolyprovisions with new powers for thecompetition authorities toinvestigate markets; and

• imposes criminal sanctions againstindividuals who engage in hard-corecartels.

7.16 These steps will improve thecompetition regime in the UK for new andexisting manufacturers.

7.17 Within the UK, DTI is strengthening itsfocus on better regulation. It is stepping upaction to:

• identify systematically keyregulatory concerns ofmanufacturers, and seek suggestionsfor reform;

• promote involvement of businessand other stakeholders at an earlystage in examining how best toachieve policy objectives so as tomaximize flexibility, innovation andcompetition and minimizeunnecessary burdens. This includeschampioning better regulation inEurope;

• enhance the guidance provided tobusiness in key areas such asemployment rights; and

• improve the way specific regulationsare enforced to address businessconcerns about unfair orinconsistent enforcement.

7.18 Government proposals for reform ofthe planning system meet real business

concerns. The measures described seek tobring about a faster, more certain, plan-making procedure in which business canparticipate more freely.

7.19 There will be clearer local plans.Realistic performance targets will be set forlocal authorities which separate outhouseholder from business applications (65per cent of minor commercial in 8 weeks, 60per cent of major in 13 weeks, 80 per cent in6 weeks for householders) with deliverycontracts or agreements with local authoritiesto manage the biggest applications. There willbe much clearer application procedures usingthe planning checklist, and new businessplanning zones where no planning consent isrequired for high quality, lower impactdevelopments. There will also be newdisciplines on statutory consultees, such asEnglish Heritage and The EnvironmentAgency, to comment promptly onapplications. The Scottish Executive isresponsible for the modernisation planningagenda in Scotland.

7.20 Much remains to be done in Europe.For example, we are continuing to press forthe full integration of Europe’s gas andelectricity markets, agreement on aCommunity Patent to encourage innovation inEurope’s SMEs, and the conclusion of theFinancial Services Action Plan which shouldmake access to capital for companies easierand cheaper across Europe.

7.21 Globally, negotiations will open on arange of service, tariff and non-tariff barriers.After two years’ preparatory study, weenvisage these widening to investment andcompetition rules, unclear public procurementprocedures as well as trade facilitation – todeal with cumbersome procedures that get inthe way of trading across borders.International trade, so vital to manufacturing,will improve.

CONCLUSION

8.1 We are quite clear that UK prosperity,now and in the future, depends on asuccessful and dynamic manufacturing sector.We are also clear that manufacturing can havea strong future in Britain. In this documentwe have laid out the seven pillars of activitywhich government and industry must pursuejointly to help manufacturing firms succeed.These are: macroeconomic stability,investment, science and innovation, bestpractice, skills and education, infrastructureand policies to ensure the right marketframework.

8.2 It is clear that the seven pillars areclosely interrelated. For instance,macroeconomic stability will encourageinvestment and innovation, which in turnneeds high levels of workforce (andmanagement) skills to make a success of newideas and state-of-the-art techniques.

8.3 In the case of each pillar we haveidentified our goals, the strategic importanceof policies we are pursuing, the role ofgovernment and other stakeholders, and ourfuture prospects and milestones. The task isnow to work with partners to achieve agreedgoals, making the most effective use ofavailable resources.

8.4 The policies required to encouragemanufacturing’s competitiveness range acrossGovernment. Close liaison takes placebetween DTI and the Department forEducation and Skills, Department for Workand Pensions and the Treasury on policies toencourage workforce development andtraining, lifelong learning and apprenticeship.Similarly, DTI works closely with theDepartment for Transport, Local Governmentand the Regions over transport infrastructureand land planning. Skills and training,transport infrastructure and land planning allcritically affect the development of

manufacturing companies. These policiesmust take account of the need to promotemanufacturing productivity. This fosters thejoined up Government within which DTI’sremit to champion industry concerns findsexpression.

8.5 Many of our policies will have a continuing effect on the businessenvironment. Examples are givingindependence to the Bank of England,creating, with our EU partners, the framework for the European single market,and passing the legislation to provide R&Dtax credits for large companies (the FinanceBill 2002) or strengthening the competitiveenvironment in which firms operate (theEnterprise Bill 2002).

8.6 Macroeconomic stability, and afavourable business environment, are a basis.But it is not enough. The analysis in our sevenpillars shows that areas of particular UKweakness – compared with the foreigncompetition – lie in innovation, application of technology, best practice, and skills. Theseare priorities for the manufacturing strategy.Within DTI, our initiatives will be rigorouslytargeted; the box on page 53, for example,sets out the targets proposed for themanufacturing advisory service and formeasures announced at the ManufacturingSummit. But in these policy areas,particularly, success will require jointcommitment by employers, employees andgovernment alike, working together to ensuresuccess. Only industry can provide and learnfrom best practice; Government can facilitatebut it cannot legislate. Equally, investment intechnology and skills must primarily be forbusiness, but Government can contribute,where that adds value.


52

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8.7 We believe that improvements in theseareas will lead to a virtuous circle in whichthe constant search for innovative productsand processes, coupled with a high skillworkforce and a high degree of employeeinvolvement, will raise levels of productiveinvestment, building a high value added, hightechnology manufacturing sector in the UK. Itis in all our interests for UK companies to beas successful as the best in the world. Wehave many success stories. Our aim is tocreate many more.

8.8 As a government, we recognise that toachieve our goals we need to change the waywe work. That’s why we initiated a review ofthe DTI’s priorities and structure last year sothat we could focus on our strategic prioritiesand work better with business and unions.Our Innovation Group will focus on betterexploitation of the science base, andidentification of those cross cuttingtechnologies which have the capacity to“disrupt” business models and methods,creating entirely new opportunities that did

KEY INITIATIVES AIM

Partnership Fund (an additional Establish up to 150 projects promoting innovation in£9m announced at Summit) the workplace.

Support a more strategic approach supporting at leasteight sector based projects aiming to improve businessperformance by focussing on people at work, leading toa step change in relationships.

Industry Forum (an additional The Government plans a further 6 sector projects,£9m announced at Summit) linking where appropriate to the Partnership projects

by 2004, with an anticipated take up of 3000companies. Potential sectors include healthcareequipment, construction and food processing. Basedon results from previous IF programmes we will belooking for the new IFs to achieve the following averageQuality, Cost, Delivery (QCD) improvements (or similar,using agreed sector measures);

• Non-right first time: 35%

• Delivery schedule achievement: 40%

• People productivity: 30%

• Stock turns: 50%

• Overall equipment effectiveness: 20%

• Value added per person: 40%

• Floor space utilisation: 40%

Manufacturing Advisory Service Subject to consultation with RDAs, we expect the(DTI funding of £15m over service to aim providing information and advice to3 years to complement funding 15,000 manufacturers per year; to proactivelyfrom RDAs and the WDA) undertake 2,500 diagnostic visits to small and

medium-sized companies a year through the RegionalCentres of Manufacturing Excellences; to undertake500 follow-on consultancy projects per year, throughthe RCMEs; to inform, through the MAS website,25,000 manufacturers/users per year on all aspects ofmanufacturing. Specific measures of success will beput in place.

not previously exist. It will also take forwardthe DTI’s contribution to skills policy. OurBusiness Group will work to promote bestpractice among DTI sectors and will haveoverall responsibility for DTI’s financialsupport to business. The review of DTI’sbusiness support schemes will lead to a betterfocussing of the resources we have available,and make it easier for business to get the helpit needs. And our Fair Markets Group willmaintain a pro-competitive regulatoryframework which also encourages partnershipin the workplace.

8.9 In all this work, DTI will be workingclosely with other key departments inGovernment and with the RDAs and otherregional and local bodies. OutsideGovernment, DTI will continue to workclosely with representatives of employers andemployees; and will build even strongerrelations with individual companies that arewilling and able to help us transform theproductivity of the UK economy.

Next steps

8.10 This document follows on from theManufacturing Summit of December 2001that brought together business, trade unionsand the regional and devolved administrationsto develop a shared view on the issues facingthe manufacturing sector.

8.11 We invite comment on the themes setout in this document to help us develop ourthinking. In particular, we invite comments onour methods for evaluating our success in thepolicy areas we have identified. We intend tocarry out further work on developing themeasures of success that we should monitorfor manufacturing, as we draw up the DTI’soverall strategy and business plan. We willconsult workforce and companyrepresentatives in doing so.

8.12 The policies discussed in this documentare necessarily broad due to the complexityand variety found in a sector that makes up a


54

fifth of our economy. Different sectors, withinthe broad definition of manufacturing, facedifferent challenges and opportunities. Wetherefore plan further documents focusing onparticular issues in more detail in, forexample, individual sectors, and drawing onexamples from different regions. The sectoralmanufacturing papers will contain theconclusions of the Innovation and GrowthTeams that bring together senior businesspeople, leading academics, civil servants andthe supply chain to decide on priorities forstrategic development. The first IGT report tobe published is from the AutomotiveInnovation and Growth Team, together with agovernment response. Other IGT’s include theChemicals, Software and Digital Content andEnvironmental Technologies teams. Reportsfrom the Chemicals and EnvironmentalTechnologies teams will follow in the Autumn.

8.13 We will also publish competitivenessstudies on a sectoral basis, which willhighlight the strengths and weaknesses ofsectors and, we hope, provide a basis fordebate within industry as well as betweenGovernment and industry on action that canbest be taken to improve competitiveness. Weaim to raise general public awareness of whatmodern higher value added manufacturingmeans, and how we collectively address thechallenges it poses for the UK.

8.14 In taking forward this agenda theRegional Development Agencies in Englandwill be key partners. They have been asked toreflect the importance of manufacturing whenrefreshing their regional economic strategiesand corporate plans, and to revise their targetsappropriately in the context of the nextversion of their plans. Progress will beregularly tracked, for example, through theRDA Chairs meetings with the Secretary ofState for Trade and Industry.

8.15 Our aim is to deepen and broaden theconsensus around the actions required toachieve manufacturing success in the UK.That way, we can move forward together.

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ANNEX 1

Nations

Introduction

Devolution has changed the way in which theUK is governed, with Scotland, Wales andNorthern Ireland each having their ownParliament or Assembly with devolvedpowers. Within their powers, the DevolvedAdministrations are responsible for promotingeconomic development, business efficiencyand competitiveness and skills andemployment within their respective areas.

Direct responsibility for regulation of tradeand industry policy, including competitionand customer protection, is retained by theUK Government at Westminster. However,matters concerning economic developmentand financial assistance to industry aredevolved to the National Administrations,along with implementation of some UKnational policies. Given the sharedresponsibility for industry, DTI has bilateralconcordats with each of the DevolvedAdministrations to ensure that effectivecommunication, co-operation and workingarrangements exist.

Manufacturing in Wales

Manufacturing forms an important part of theWelsh economy, which has gone throughsignificant transition in recent years, frombeing reliant on heavy industries such as coaland steel to a broader base of modernmanufacturing and services.

A Winning Wales is the Welsh AssemblyGovernment’s strategy for transforming theeconomy of Wales, and a large part of thisstrategy points to the need to build on itsconsiderable strengths in manufacturing.31

It will be the cornerstone of the WelshAssembly Government’s economic policies

and programmes, as well as those of otherpublic bodies such as the Welsh DevelopmentAgency, Education and Learning Wales andthe Wales Tourist Board, and the widercommunity.

Wales has had particular problems with its topentrepreneurs moving to other parts of the UKor the world, and will implement theEntrepreneurship Action Plan, includingprogrammes to reduce the barriers toenterprise in schools and further and highereducation institutions, to encourageentrepreneurship in the social economy, andto implement programmes with priorities forbetter survival rates and higher growth ratesamong small and medium-sized firms.

The Skills and Employment Action Planrelates closely to and underpins the vision setout in “A Winning Wales”, and in the WelshAssembly Government’s comprehensivelifelong learning programme to 2010 “The

One of the aims of A Winning Wales is toimprove competitiveness by working withsupply chains and networks. An exampleof this is Accelerate Wales, which is aninitiative developed in consultation withand for the Welsh Automotive Industry,focusing on the improvement of SupplyChain performance. It also encouragesfirms to take advantage of the supportthat can be provided to them bygovernment sponsored programmes. Theapproach is novel in that it allows ‘LeadCompanies’ to encourage supplierparticipation for the benefit of their ownperformance but simultaneously achievepositive results throughout their SupplyChain/Value Stream. The programme hasbeen running since March 2001 andresponse from the Automotive ComponentManufacturers in Wales has beenenthusiastic. So far two thirds of Wales’Tier 1 Firms/supply chains have signed upto participate.

31 Welsh Assembly Government (2002)

Learning Country”, of creating a moreprosperous and better skilled Wales. The planwill provide an improved structure to itspolicies for skills development, lifelonglearning and employment.

Manufacturing in Scotland

In Scotland, manufacturing contributes a fifthof GDP. There are almost 290,000 employees(13% of the workforce), with an estimatedfurther 150,000 indirect employee jobs inmanufacturing.

The importance of manufacturing wasrecognised with the publication of Created inScotland: the way forward for ScottishManufacturing in the 21st Century.32

Prepared in close consultation withmanufacturers, business organisations, tradeunions and representatives from the highereducation sector, it lists over 50 initiativescovering: business environment; knowledgeand technology; science base and itscommercialisation; skills and people; andimages and attitudes.

Scotland’s Economic Future: doing itdifferently, the Scottish Executive’s strategyfor enterprise, sets out three key themes ofHelping every Scot to be ready fortomorrow’s jobs, Creating a climate forgrowth, and Investing in new sources ofsuccess. At the core of the strategy arescience and skills.

Key initiatives include:

• A comprehensive Science Strategyfor Scotland (August 2001).Implementation is ongoing,including the establishment of aScottish Science AdvisoryCommittee.

• Regional Selective Assistance(RSA) has been modernised tostrengthen the focus on higher value


56

investments, local and high-growthcompanies and we will establish anew funding package to free up thesmall-scale early stage venturecapital market.

• Scottish Enterprise will introduce anew investor readinessprogramme to support companiesin preparing and presenting robustinvestment proposals.

• Improving existing performance onbusiness start-up, survival andgrowth is critical. The SmallBusiness Gateway is now in place.In January 2002, Scottish Enterpriselaunched a new approach toentrepreneurship: encouragingentrepreneurial dynamism; focus onrealistic targets; improvedperformance in supporting bothvolume and high growth starts;increasing the involvement of theprivate sector; and enterpriseeducation.

• Promoting strong industryclusters: Smart Successful Scotland– the Executive’s strategic steer toScottish Enterprise and Highlandsand Islands Enterprise – strengthensthe focus of the local enterprisecompany networks in aiming forglobal success in key sectors. LocalEconomic Forums are bringinggreater co-operation in the deliveryof local business services at thelocal level.

• The Proof of Concept Fund(launched in October 1999) to fillan identified gap between scientificdiscovery and commercial viability.

• Developing the Alba Centre as afocus of Scotland’s future researchand development in

32 Scottish Executive (2002)

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microelectronics and electronicsdesign. We are also early in theplanning stage for new specialisttechnology institutes to deepenScotland’s R&D capability.

• Creating over 20,000 ModernApprentices. This target has beenachieved a year early.Approximately 20,500 ModernApprenticeships are now in training,including over 5,000 inmanufacturing and engineering.A pilot campaign Make it inScotland to promote the image ofmanufacturing has been completedand the campaign will be rolled outacross Scotland in 2002-03.

• Future Skills Scotland has been setup within the enterprise networks tocollate and disseminate labourmarket information, intelligence andtrends and Careers Scotland(launched March 2002) is Britain’sfirst “all age” careers guidanceservice. An adult literacy strategyhas been developed to help 80,000people.

• We are investing in our electronicinfrastructure to roll out broadbandthroughout Scotland.

• Overseas, we have created a singleintegrated sales force (ScottishDevelopment International) forScottish ideas and products,expanding our traditional activitiesin inward investment and tradewhile seeking greater involvementin areas such as technology transfer,skills and knowledge transfer andthe international networking ofpeople.

Manufacturing In Northern Ireland

The Northern Ireland economy has performedremarkably well with manufacturing outputgrowth outstripping the rest of the UnitedKingdom as a whole over the past five years.Sectoral strengths include telecoms/electronics,life & health technologies, textiles & clothing,food processing and software. The locallabour market has also performed strongly,private services being the main driver ofemployment growth. Unemployment is athistorically low levels and the number oflong-term unemployed continues to fall.However, Northern Ireland faces a number ofkey challenges:

• The small number of knowledge-based businesses compared withother UK regions.

• A preference for employment asopposed to self-employment and apersistently low level of businessstart-ups. Whilst recording one ofthe highest survival rates for newbusinesses after three years,Northern Ireland has one of thelowest start-up rates of any UKregion.

The Northern Ireland Executive has set out,within its Programme for Government,priorities for stimulating greater economicdevelopment. Focus is being maintained onInnovation and Research & Development(R&D) and a Northern Ireland R&D andInnovation Strategy is being developed; anew, strategic approach is being taken tosmall business development, to increasebusiness start-ups and businesscompetitiveness. Local councils, through theBusiness Start Programme, play a key role,particularly in encouraging potential highgrowth businesses while universities andcentres of excellence play their part increating a framework of support to helpbusinesses innovate and succeed.

A further initiative has been to consolidateNorthern Ireland’s economic developmentagencies into one service delivery vehicle, anon-departmental public body to be known asInvest Northern Ireland. The latter will betaking action in four areas of developmentneed: Innovation, Existing Businesses,Business Birth Rates and Inward Investment.


58

59


ANNEX 2

Government Websites

You can download copies of this publicationfrom the DTI’s Manufacturing website,www.dti.gov.uk/manufacturing/index.htm

Government

Department of Trade and Industrywww.dti.gov.uk

Department for Education and Skillswww.dfes.gov.uk

Department for Work and Pensionswww.dwp.gov.uk

Department of Transport, Local Governmentand the Regionswww.dtlr.gov.uk

HM Treasurywww.hmt.gov.uk

Invest.UKwww.invest.uk.com

Small Business Servicewww.sbs.gov.uk

Trade Partners UKwww.tradepartners.gov.uk

Regional Development Agencies

One North Eastwww.onenortheast.co.uk

North West Development Agencywww.nwda.co.uk

Yorkshire Forwardwww.yorkshire-forward.com

Advantage West Midlandswww.advantage-westmidlands.co.uk

East Midlands Development Agencywww.emda.org.uk

East of England Development Agencywww.eeda.org.uk

South West of England Development Agencywww.southwestengland.co.uk

South East England Development Agencywww.seeda.co.uk

London Development Agencywww.lda.gov.uk

Devolved AdministrationsNational Assembly for Waleswww.wales.gov.uk

Northern Ireland Executive Committeewww.northernireland.gov.uk

Scottish Executivewww.scotland.gov.uk

Other WebsitesBenchmark Indexwww.dti.gov.uk/mbp/nbis/bmark.html

Best Practicewww.dti.gov.uk/mbp

Business Linkwww.businesslink.org

Enterprise Billwww.dti.gov.uk/enterprisebill

Fit for the Futurewww.dti.gov.uk/mbp/fit.html

Innovationwww.innovation.gov.uk

Inside UK Enterprisewww.dti.gov.uk/mbp/nbis/iuke.html

Learndirectwww.learndirect.co.uk

Learning and Skills Councilwww.lsc.gov.uk

LINKwww.dti.gov.uk/ost/link

Partnership Fundwww.dti.gov.uk/partnershipfund/

UK online for Businesswww.ukonlineforbusiness.gov.uk

Automotive Industrywww.autoindustry.co.uk

Manufacturing Advisory Servicewww.dti.gov.uk/manufacturing/

ANNEX 3

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Bernard, A., and Jensen, J., (1997),‘Exceptional Exporters Performance: Cause,Effect or Both?’, Journal of InternationalEconomics

Bernard, A., and Wagner, J., (1997),‘Exports and Success in GermanManufacturing’, Weltwirtschaftliches Archiv

Blanchard, O., and Simon, J., (2001), ‘TheLong and Large Decline in U.S. OutputVolatility’, Brookings Papers on EconomicActivity

Bosworth, D., (2000), Empirical Evidence ofManagement in the UK, Skills Task ForceResearch Paper No. 18, DFEE

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