For nearly 30 years statistics have told the same story: manufacturers in the US are more productive than their counterparts here in the UK. The big question is why this gap exists.
Knowing what makes the US so much more productive than the UK could provide a route map for British firms to boost their competitiveness — on the basis that what has worked in the US could also work here.
To this end, the Engineering Employers’ Federation set out last autumn to find out what is really happening in manufacturing companies on both sides of the Atlantic. It wanted to look beyond the raw figures that have shown up this phenomenon for over three decades.
Talking to 30 companies on both sides of the Atlantic, the EEF’s aim was to try to identify the driving forces behind productivity growth, as well as the constraints on improvement in the UK.
The findings make fascinating reading, as this summary shows. But whatever measure is used (and comparing labour productivity between countries is an economist’s can of worms) the gap between the two nations is clear.
A McKinsey report in 1998 put the US at 40% ahead in terms of output per hour. A year later, another report showed a narrower gap, but still measured it at between 40% and 21%.
Recent Organisation for Economic Co-operation and Development figures put the gap at 40%, although bearing in mind that Americans work longer hours and take fewer holidays, this figure comes down to 25%.
Within manufacturing, the productivity gap has been bigger than in the economy as a whole. Back in 1980, US labour productivity is thought to have been double that of the UK.
Since then, the gap has narrowed, but US productivity is still around 60% higher, and has been accelerating since the mid-1990s. By sector, it is most marked in engineering and in food, drink and tobacco.
Notably, the gap is also ‘over here’ in the form of higher productivity levels in US-owned firms compared with their UK-owned counterparts.
In terms of value added per employee, US-owned companies based in the UK are nearly twice as productive as ‘native’ UK companies. So is it a cultural thing or a question of economics?
By Helen Knight
When it comes to cutting costs and increasing productivity, big is definitely beautiful. The sheer size of the US market, and its greater protection from foreign competition, means US manufacturers are better able to boost productivity by exploiting economies of scale than firms in the UK.
The US manufacturing sector is more than six times the size of that in the UK, and in 1999 US manufacturers produced $1.5 trillion-worth of output (£925bn), compared with £148bn in the UK. The entire US economy is also much bigger, again more than six times the size of the UK’s, giving US manufacturers a much larger domestic market for their products, and making them less dependent on exports than their British counterparts.
Exports account for only 7% of GDP in the US, compared with 19% in the UK. Meanwhile, the more closed economy of the US also means manufacturers face less uncertainty over exchange rates or overseas developments.
The impact of economies of scale on improving productivity can be seen in research into multinational companies. These often suffer from large productivity gaps between their US and UK plants, despite sites on both sides of the Atlantic having similar operations. Those US plants with higher productivity tend to be much bigger, and as a result better able to exploit economies of scale. The gap is much smaller when the UK plant is the larger of the two.
Examples of economies of scale are longer production runs, the ability to spread costs over a larger number of units and buy raw materials and transport goods in bulk.
However, these savings account for only part of the productivity gap between the US and UK: they do not explain the entire problem. The US economy has always been larger and better able to exploit economies of scale than the UK, while the productivity gap between the two countries has varied over time, and has risen dramatically in recent years.
E-business and IT
By Andrew Lee
As home to many of powerhouses of the global information and communications technology industry, the US economy has basked in their success for a decade.A comparison of the growth in output from high-tech industries since 1990 shows the US racing away from the UK. Not only have US businesses and consumers bought more equipment, but the manufacturers in the sector are famously among the country’s most efficient. Despite the problems facing the industry now, computer hardware giant Dell, for example, has become a global byword for efficient, order-driven production.
The wider US manufacturing sector has shown a greater willingness to use the latest information technology as a way of making itself more productive. In this respect, one statistic stands out. In 1990 US investment in IT was 1.6% of GDP compared with 1.4% in the UK. By 1997 the figure for the US had risen to 2.4% of GDP, while UK investment, at 1.5%, had barely moved.
The best US companies have already taken steps to marry their IT infrastructure to lean manufacturing strategies, improve their forecasting and deliver information faster to employees.
The good news is that if IT has — as all the evidence suggests — made a significant contribution to US productivity, there is no reason why the same should not happen in the UK. E-business is one area where encouraging signs can be seen that UK manufacturers are waking up to the untapped potential they can release by embracing such technology.Several studies over the past few months suggest a negligible gap between UK and US manufacturers in their level of online commerce and their preparations for the future. In both countries the automotive and aerospace industries are viewed as the most advanced e-business users, with larger players gearing up to conduct significant amounts of their business with suppliers via the internet before too long.
Getting lean By Paul Carslake
Depending on what research you look at, UK manufacturers can appear to be ‘leaner’ than their US rivals, in terms of the kinds of techniques they claim to have adopted within their plants. A survey by the University of Plymouth and Auburn University, for example, comparing the take-up of ‘lean’ techniques (such as manufacturing cells and just-in-time) showed UK manufacturers to be ahead on 12 out of 17 techniques.
But although we claim to be familiar with techniques such as total quality management and just-in-time operation, we don’t implement such strategies as vigorously as many rival countries. A survey carried out by Sheffield University puts the UK bottom in terms of serious implementation of such techniques.
Within the UK, the leanest operations are owned by Japanese, US or mainland European parent companies. Native British firms come last — although this result could have something to do with predominantly overseas ownership of the automotive industry in the UK, which is ahead of most other sectors in terms of lean production and quality systems.
When US companies take on lean techniques such as just-in-time, total quality management, or Six Sigma, it appears that for many, this becomes a crusade, as they drive these techniques into the company culture. In the UK, meanwhile, there is evidence to suggest that while managers often make a start on the techniques that make up lean manufacturing, the process is not complete or followed through with the same kind of vigour.
A recurring theme in the interviews with US manufacturers is that their companies are serious about applying the latest thinking on manufacturing across the whole of their organisations. The push for change is being driven by senior managers, imposing their own style and beliefs that implementation would achieve outstanding results.This drive matters. In its own annual survey last year, US magazine Industry Week notes that what gives some world-class US manufacturers better results than others is not so much the lean initiatives they employ, ‘but the vigour with which they pursue them’.
Motivation By Helen Knight
US managers and employees appear to be better at working as part of a team than in the UK, where poor communication has led to badly motivated staff.
The culture of teamwork within US firms means managers and staff work more closely together to implement changes and see productivity increases as a benefit to everyone. This makes continuous improvement and techniques such as lean manufacturing easier to introduce, while in the UK there is more scepticism about change.
This is partly down to poor communication between UK managers and their staff. Managers in the US give employees regular briefings to update them on workplace changes and how they are being introduced, but this style of management has not been widely adopted in the UK.
UK employees are also less willing to offer help and advice to the management team than workers across the Atlantic. Instead, companies in the UK rely on supervisors to pass information between management and staff, but skilled supervisors are often in short supply.
A survey by Deloitte & Touche into employee attitudes to e-business (see graph) is one indication of how far behind most UK companies are in working as a team. Of the UK companies questioned, the proportion that say their employees are enthusiastic and energised is around half the percentage of companies in the US, while nearly a third say their employees are unaware of the firm’s e-business plans.
Motivation among manufacturing employees in the US has also been improved by higher pay levels than in the UK, and a greater use of performance- related pay. The pay gap between US and UK employees rose during the 1990s to between 25% and 30%, when the purchasing power parity (what their pay is actually worth in goods and services) is taken into account.
Meanwhile, UK manufacturing employees are often more reluctant to accept offers of profit-related pay, which can lead to productivity gains by increasing motivation, as they are more risk averse than their US counterparts.
Investment By Paul Carslake
US manufacturing firms are generally seen as having benefited from greater investment in IT and capital equipment over the long term — a factor linked to different economic conditions and corporate culture.
The experience of sustained growth in the US (and expectations that it will continue to grow) has given firms more confidence, leading to an element of the self-fulfilling prophesy: they expect growth, so they invest, so growth happens. However, while US growth has been faster than in the UK, it has been subject to the vagaries of the business cycle. In the past five years, UK GDP growth has looked smoother.
Exchange rate fluctuations, however, have been more marked in the UK, particularly over the past decade. This matters more to UK manufacturers, which are more dependent on exports than their US counterparts. This has meant greater volatility in investment patterns too.
As an example, UK investment in machine tools has been slower than that of the US, and the decline can be traced to the rise in the value of sterling against the euro. The investment slow-down is a side effect of the currency issue.
Other factors are involved. As already mentioned, US bosses seem to be less risk averse. And when money is tight, UK firms have used depreciation as a way of cutting costs, instead of setting a minimum level of investment to replace ageing equipment.
Furthermore, profitability of UK manufacturing companies has been consistently lower than that of US firms through much of the 1990s. This has meant that investment projects compare less favourably against the rates of return and payback periods set by investors. This leads to an inability to boost productivity, which in turn undermines profitability in the future: a dangerous downward spiral of low investment, productivity and profitability that eats away at competitiveness.
The US does benefit from the size of its market, and its relatively stable currency, compared with the track record of the pound during recent decades (and the greater exposure of UK manufacturers to export markets).
However, there are other factors connected to companies themselves rather than the wider economy. Both US and UK firms are using lean and other manufacturing techniques, but US companies seem to be getting more out of this. Why? The EEF cites a number of possibilities: lack of awareness, cultural resistance, shortage of funds, skill deficiencies, poor teamwork — and is planning more research in this area.
The vicious circle of poor profitability constraining investment has to be broken. Treasury officials have opposed capital allowances for capital equipment (other than on IT investment from small companies, as announced last year) because they do not believe it leads to investment for the right reasons. But capital allowances could provide that vital kick-start in investment that will be required if this productivity gap is ever to be closed.
Opinionws from the industry
Bill Kelleher is the eneral manager of manufacturing for British Timken, UK subsidiary of the US bearings giant. He has managed its plants in both the UK and US.
‘I think there are some differences in capability between the people here and in the US, but not at shop-floor level, where I would put my workforce up against anyone in the world.
The US has some very good engineers, very good supervisors and very good middle managers. So does the UK, but perhaps not as many as we need. I also think the status of engineering is higher in the US.
Economies of scale are a key issue. The sheer volume they produce is colossal compared to here in the UK. That helps them to extract far more value from their operation. We recently compared a specific product line made both here and in the US, and we ran that part just as efficiently as they did in terms of pieces per hour. It was the higher volume that allowed them to use the overheads associated with production more efficiently.Generally, the evolution of manufacturing in the UK has been very difficult since the Second World War, with a lot of legacy issues to resolve. The US has been more focused.’
Graham Cartwright is the UK managing director of Dana Spicer, part of the US first-tier automotive components supplier Dana Corporation.
‘As a frustrated UK managing director, the red tape here is killing me. It constrains what we can do through employment legislation, planning regulations, directives here, there and everywhere. In the US managers are far more free to take decisions for the good of the business, even if they are tough ones like laying off staff because the work just isn’t there.
There are certainly also cultural differences, and some UK industries have a tendency to cling to the past. I think 20 years ago the Japanese taught the US some salutary lessons which it took to heart in a way the UK hasn’t.
That isn’t because the managers and the workforce here can’t do it. Look at Nissan in Sunderland and Sony at Bridgend, which are world-class operations.
What US and Japanese firms are good at is getting everyone behind the goal of making the operation a success, and then letting them share the rewards of success when they achieve it. It’s a cultural thing.’
Tony Sweeten is the Group chief executive of the 600 Group, UK-based machine tool manufacturer .
‘It’s up to the government to recognise the importance of manufacturing because productivity has a lot to do with a determination to succeed and the confidence to get on with manufacturing.
The calibre of management in the UK is certainly as good, if not better, than US management. The UK managers who have survived and prospered are pretty tough and experienced at dealing with an economy that’s going up and down, whereas US managers have had an opportunity to manage in an economy gradually improving, and where there is a better understanding of the importance of manufacturing.
Having said that, there is a cultural problem in the UK in the reluctance to use things like performance-related pay. It is a good management tool that Americans use more effectively than we do. We worry too much about sharing out the cake rather than creating it and then sharing it out, whereas the Americans are better at planning ahead and can say: ‘This is almost certainly what the cake will look like’. We are more pessimistic by nature.’
Mike Braunton is the President of Perkins Engines, a US manufacturer of small and medium-sized industrial engines.
‘The economies of scale the US can achieve allow more rapid implementation of modern practices and higher levels of investment. There is a much greater appetite for investing in the US, and a more forgiving financial environment for long-term investment geared to growing businesses.
The US is far more gung-ho in terms of embracing new ideas, changing things, and focusing on teamwork. I lived and worked outside the UK for 10 years because I got very frustrated with it — the backward-looking approach of UK managers was very much apparent 15 years ago. The American style of management is much more focused on trying to make things happen and much less focused on status and who you know, and I think that definitely has an impact.
We still don’t have the calibre of managers in the UK who are prepared to take the sort of risks US managers take, nor equally do we have the rewards for taking those risks, because the personal rewards are certainly more generous in the US than they are here.’