Attack the problem on four fronts

The problems faced by UK manufacturing industry are severe, and are in part dictated by the weakness of the world economy.

Margins are falling, and cash is tight. Engineering is set to contract by 2.5% this year, and will grow little in 2002. But at the same time, industry desperately needs to invest in new, more productive equipment and systems, and to explore new processes and techniques to boost quality and reliability and reduce costs.

Obviously, all this has to be driven from within businesses themselves, and the performance improvements that many companies have already recorded over the past three years suggest that industry is willing and able to generate huge improvements.

However, the rate of improvement needs to be faster if the UK is to remain competitive with overseas rivals. This is where government needs to step in.Here’s how.

Strengthen the DTI

There are thousands of talented people working within the DTI, many of whom have a real feel for the grass-roots needs of manufacturing industry. However, much of their good work is held back by lack of funding. A typical DTI project for industry is about influencing ‘hearts and minds’ to spread best practice or assist with networking. This creates plenty of projects and doesn’t cost too much, but is generally about long-term plans.

Much of the lobbying from industry tends to be addressed directly to Treasury economists, because it is going to take single initiatives costing hundreds of millions (rather than lots of little projects costing tens of millions of pounds) to make a difference.

But we are not convinced that all that DTI expertise is really getting a chance to influence the Treasury’s thinking. This is not an issue of lines of communication. It is about a failure of will on the part of the government to make industry issues a priority.

Generate new investment

The idea of extending first-year capital allowances for plant and machinery to 100% has been put forward almost every year by industry, and rejected every year by the Treasury. It is hard to see why. It would allow exporters to limit the damage caused by depreciation of the euro against the pound. This would help to improve long-term productivity and competitiveness.

What’s more, the Treasury has already shown that it thinks capital allowances are effective: it granted them to allow small businesses to buy PCs and get on line. Notably, though, it found itself unable to grant them to firms that had bought, say, a new computer control system for a machine.

As well as boosting plants and equipment, competitiveness and productivity are also dependent on R&D spending. Most observers are expecting a move to extend R&D tax credits to large firms, probably on a ‘volume’ basis, where the level of overall spending determines the tax credit (rather than additional sums invested). This won’t suit everyone (critics say the funds will be swallowed up by those who spend vast sums already). But it’s a start.

Reduce tax burdens

The gulf between the grass-roots intelligence that is to hand within the DTI on the one hand, and the policy imperatives in the Treasury on the other, is nowhere so evident than in the Climate Change Levy. During its development, the government had every opportunity to turn back, or rethink this tax, but failed to.

Millions of pounds were spent negotiating with industry trade groups in a bid to make the tax halfway palatable. In the event, it still imposes an unacceptable and disproportionate burden on manufacturers. Analysis by Oxford Economic Forecasting has shown what’s needed: a scaling-down of the levy, and a diversion of its revenues into financing energy- efficiency technology.

Improve skills

It’s a problem all the way from school leavers who start an apprenticeship to the supply of engineers with PhDs embarking on state-of-the-art research. The demographics are scary. The current cohorts of engineers in their late 40s and 50s will be retiring. Since they entered the profession, the intake of new engineers has declined. Each time 10 engineers retire, only two or three youngsters enter the profession.

It’s now time for some big, effective actions. Funding anomalies that are holding back intake into Modern Apprenticeships need to be ironed out. Within higher education the fees charged to engineering students should be reassessed. And greater incentives should be created to attract talented and inspirational maths, science and technology teachers.