No laughs and no surprises: UK lacks investment

Lack of investment has led to a sharp fall in the profitability of UK manufacturers, a survey published this week reveals.

The report, by the Office for National Statistics, shows UK companies dropped from second to fifth place in the world profitability rankings last year.

The average rate of return in manufacturing fell from 11% in 1997 to 6% in the Q2 of 2000, and companies are 11th in the rankings. This was significantly behind US firms, which top the manufacturing league table, the report says.

Richard Walton, statistician at the ONS, singled out a failure to invest in IT as a key reason why UK manufacturers were trailing their US counterparts. Investment in IT by manufacturing firms represented 2% of the UK’s GDP in 1998, compared with 5% in the US.

‘In the government’s paper on productivity, there are lots of details on what companies should be doing to improve labour productivity, but very little on increasing investment,’ he said.

Walton said British manufacturers face a Catch-22 situation. Low profits brought on by rising raw material costs and the strength of sterling were discouraging firms from investing. But this meant they were not benefiting from long-term profitability.

What’s more, according to the Department of Trade and Industry’s latest Capex Scoreboard of industrial capital expenditure, UK manufacturing invests a third less in new equipment and machinery than its international competitors, and the gap is widening,

The third annual scoreboard, published by the DTI Future and Innovation Unit, carries much the same message as previous years. The UK invests strongly in the aerospace, pharmaceutical, retail and offshore sectors, but general manufacturing investment, especially in the automotive, IT hardware, electronic and chemical sectors, is weak.

Measured as a proportion of sales, UK capital spending over the last year was less than two-thirds of the international average. Analysis of individual firms in the telecommunications, electronics, oil and gas and chemicals sectors shows a strong correlation between a high level of capital assets and high productivity.

In pharmaceuticals and aerospace, both R&D and capital spending in the UK exceed the international average. But the automotive, chemicals, electronic and electrical, and IT hardware sectors lag behind the international competition on both measures.

Norman Price, an industrial secondee to the Future and Innovation Unit, said that although companies could argue that R&D funding was in short supply, the same was not true of capital. ‘Ten years ago finance was a barrier. Now it is available from a variety of sources. The UK is good at asset-based finance.’

He pointed out that even in the underperforming sectors there were examples of firms investing effectively and improving performance — for example Jaguar in the automotive sector, and ARM and Filtronic in electronics.

Price also called on companies to lower their ‘hurdle rates’ — the level of return a project has to achieve to get board approval — to reflect the current lower level of interest rates.

The full report is available at www.innovation.gov.uk