Oral statement to Parliament

EEF National Manufacturing Conference 2012

This speech was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

Good morning. I have just come back from the Geneva Motorshow, where another resounding win for British manufacturing was announced this morning…

Good morning. I have just come back from the Geneva Motorshow, where another resounding win for British manufacturing was announced this morning. I had the pleasure of joining Nissan as it unveiled its new “INVITATION” model and confirmed it is going to invest £125m in building the vehicle at its plant in Sunderland. The company says its investment will create and safeguard up to 2,000 jobs at the plant and along the supply chain.

The decision should be seen together with other investment commitments by major car producers JLR, Ford, BMW, Mini, Bentley, Toyota, Lotus and others - £4bn in 18 months, and is another clear vote of confidence in Britain’s manufacturing industry. And it vindicates putting support for manufacturing at the core of our economic strategy. In Nissan’s case, each £1 of public sector Regional Growth Fund money is leveraging in £13 of private money.

We reaffirmed our commitment to industry at the second Manufacturing Summit, which we held in Bristol two weeks ago, some of you were there. The underlying economic strategy is clear. The old economic model was flawed, resting on the illusion that growth would be driven by a bloated banking sector, a bubble in property values and ballooning household debt.

Long-term recovery from the financial crisis and subsequent recession depends on boosting rates of private investment, increasing exports to growing markets in Asia and beyond, and encouraging start-ups throughout the country. But we cannot just sit back and wait for it to happen.

The commitment to deficit reduction and financial discipline remains central, but it is not sufficient. We need, in my view, a properly articulated industrial strategy. This chimes rather neatly with the position set out by the EEF in its Budget submission, published today, which I will look at in detail.

In many people’s minds that immediately raises the spectre of the 1970s, with its discredited industrial interventionism and attempts to pick winners - which generally turned out to be inefficient losers, despite unaffordable subsidies and the assumption that Ministers knew better than markets.

But the world is very different now. Global competition is fiercer than ever, due to the BRIC countries and other emerging economies. The naive belief in the infallibility of markets has been exposed as myth, particularly financial markets.

And I keep hearing that UK manufacturers may risk missing big global opportunities unless this country adopts a proactive policy towards British industry.

What’s required is a sophisticated approach that recognises governments have an important role to play in the economy - but one that works with the grain of markets.

And manufacturing in particular has a crucial role. Manufacturing makes a disproportionately large contribution to productivity growth in the UK; it generates half our visible exports; and it is responsible for much of the business R&D in this country. So providing the right framework of incentives and support will have a material effect on future rates of economic growth.

A passive and short-term approach is not sufficient for creating long-term industrial capabilities. So it’s essential we develop a strategic vision for where our future industrial capabilities should lie.

Energy Intensive Industries

That partly means recognising when they face specific challenges and responding to them. That is why, despite my conviction that we must move to a low carbon economy, I have searched for an affordable way to offset the costs of the carbon price floor and the Emissions Trading Scheme for the most energy intensive industries.

A unilateral tax rise imposed upon these industries will likely drive them away from the UK. We lose the production and jobs; pollution continues unabated somewhere else. Decarbonisation does not mean deindustrialisation. On the contrary, mature industries such as steel, chemicals and cement will play an important role in the green economy, by boosting energy efficiency and taking their places in supply chains as activities such as offshore wind and nuclear grow.

The £250m energy intensive industries package, which we are introducing subject to state aid, will help ensure the necessary shift to low carbon does not come at their expense.

I can confirm we will be issuing a call for evidence next week, which we will use to develop the criteria for the scheme, and my department will be working closely with the EEF and other industry bodies to get the detail right.

Technologies

But a modern industrial policy must also focus on keeping Britain at the cutting edge of technological innovation. For this reason, despite the difficult spending decisions taken elsewhere, we have ring-fenced and maintained the science and research budget at £4.6bn, and boosted capital investment around £500m. Key competitors - the US; France; Germany; and China - have all prioritised science and innovation in response to the recession, and we can’t afford to be left behind.

Government has a legitimate role in making choices and addressing the market failures that hinder the development of core technologies, especially during the innovation phase. It is often too risky, or simply too expensive, for an individual company to undertake the necessary investment in R&D by itself.

If we are going to provide meaningful support to the industries of the future, we must be willing to step in at the ‘proof of concept’ stage, where high rates of failure mean the market is unlikely to support development, and where large scale demonstrators are required to prove a technology can function in a real-world environment.

This requires a willingness to be selective about the technologies and disciplines where the UK should build its capabilities. The network of Catapult Centres we are launching reflect these choices, and will smooth the path between original research and its commercial applications. The first Catapult, focusing on high value manufacturing, is receiving £140m public funding over six years.

Other centres have been announced in offshore renewables, which I launched in Glasgow last month; cell therapy, satellite applications; and what we call the connected digital economy. Two further specialisms will be announced in due course and the network will be fully operational by 2013.

Alongside this, we are ploughing £50m into a graphene research facility, laying the groundwork for the UK to be a world leader in the exploitation of this revolutionary material.

Measures such as these are needed to boost investor confidence, but they will not be sufficient on their own to bolster our future manufacturing capabilities.

Sectors

There is a good case for being more explicit about the choices we make, and for getting fully behind our most innovative and tradeable sectors. In the past we have tended to squeeze by, making choices by default and responding to crises as they arose. This will no longer do: manufacturing industries with long horizons for innovation and investment require a planned, proactive approach.

The automotive industry, which is fresh in my mind after being in Geneva this morning, is a model for the way forward.

The Automotive Council provides a forum for conducting an ongoing, high-level conversation among industry and government, and securing agreement on long-term strategy. It has worked on a number of issues of crucial importance to the industry - generating stronger and more competitive supply chains; higher level skills; and an attractive commercial environment. It is a genuine collaboration.

A generation ago the automotive sector appeared to be in irreversible decline - beset by strikes and poor management - but today it is a sector transformed.

Labour relations are constructive, even when tested during the recession. Companies and university research teams are working together on new technologies. The Government is helping the industry to address skills gaps by funding apprenticeship places, including higher apprenticeships at degree level.

Over 40 companies manufacture vehicles in the UK, ranging from global volume car and bus builders to specialist, niche marques. Over 3,000 companies, directly employing 135,000 people, operate in the sector. The clarity provided by the Automotive Council has helped create the confidence that underpins new investment.

It would be naive to suggest that everything is perfect - there is a way to go to reach production levels seen before the global slump. There is serious over-capacity in Europe, one of the main markets.

But we are heading in the right direction, car exports are almost at an all-time high and evidence suggests our cars are winning global market share from others.

I’ve been focusing on the automotive sector because the planned, considered approach I am advocating is well established and already yielding real results. But it is also being applied in other manufacturing industries - through sector bodies such as the Aerospace Business Leaders group, which I chair, or the Marine Industries Leadership Council, as well as outside manufacturing, in creative industries - though, in fact, creative industries like design and IT are inextricably bound up with modern manufacturing.

This strategic leadership is essential if we are to succeed in boosting investor confidence, tackling skills gaps and maximising the return on R&D investment. Countries such as Germany, Korea and Singapore are veterans of this approach and we have to learn from them if we want to stay in the game.

Supply chains

Underscoring efforts to support new technologies and successful sectors is the need for strategic, long-term thinking about supply chains, and the role played by public procurement in supporting them.

Sectors such as automotive and aerospace have said they want to nurture their UK supply chains - an appetite sharpened by the competitive exchange rate and the disruption to supplies following the Japanese earthquake and Tsunami, which illustrated the vulnerability of long-distance supply chains. Co-location, by contrast, can reduce risks and delays and boost quality control.

But in order to base operations in the UK, leading manufacturers need to know they will have a range of firms able to supply quality parts and services with complete reliability, as the Mittelstand offers firms such as Siemens, Bosch and BMW in Germany.

In Britain, such firms are often widely dispersed and serve a number of different larger companies, so it seldom makes sense for any one of these ‘primes’ to make the investments needed. This is a classic example of the sort of market failure that a proper industrial policy should address.

The £125 million Advanced Manufacturing Supply Chain Initiative is being set up to expand those we already have so they become globally competitive, and encourage new suppliers to grow here, for example around emerging manufacturing industries such as low carbon technologies. But there are potential good supply chain initiatives in railways, nuclear power, chemicals, oil and gas, as well as automotive and aerospace.

The fund will be flexible enough to respond to what is required, whether that is capital investment, R&D, or skills and training support. Successful bids will need to demonstrate they are responding to real demand, whether actual or potential. And they will need to have buy-in from prime manufacturers, so projects will have a realistic prospect of attracting new business and new jobs to the UK.

Procurement

Reinvigorating UK supply chains will help reverse the process of deindustrialisation and the withering away of capacity which we have seen in recent decades in parts of manufacturing industry. Successive governments have contributed to this process by failing to use their considerable buying power effectively.

Public sector spending shapes markets and influences supply chains, whether we like it to or not. In the past, we haven’t fully considered this. We have been too transactional, short-termist, risk averse and costly in implementing European Union procurement rules. By contrast, there is evidence that our key competitors in Europe, to varying degrees, view procurement as an integral part of their industrial strategy.

This government will change this unnecessary emphasis on formalism and legalism. We believe Government should be a responsible customer, developing a collaborative and considered long-term relationship with our supply chain. We will work with industry to identify future areas of need and align our various levers to address these gaps to ensure future growth.

For example, the National Infrastructure Plan identified 40 priority projects for government. Looking across the range of projects, it is clear that there will be demand for tunnelling capability to deliver these costs effectively. Crossrail has already launched a tunnelling academy to improve workforce skills and this approach is one we could look to replicate in other sectors.

There are some substantial opportunities on the horizon, including High Speed Rail and other innovations in the transport sector. The Transport Secretary’s new approach to tendering reflects this more strategic mindset.

Other priorities include greater transparency of procurement pipelines for the country’s future energy needs. I for one welcome the Prime Minister’s statement that he wants the majority of the content of new nuclear builds to be manufactured, supplied and engineered by British companies.

I do not pretend that this is easy. As we currently see in defence procurement, there are conflicting pressures to buy strategically from UK firms, but also to save money by buying the cheapest equipment off-the-shelf from overseas.

Nevertheless, a more considered approach, which gives due weight to the consequences for manufacturing industry of the choices we make, has to be the right way forward, supported by the so-called horizontal policies we are pursuing to support all businesses.

Regulation

These include a tax regime which encourages business investment and hard work; investment in physical infrastructure; soft infrastructure such as knowledge and education; and financing arrangements that deliver capital to viable businesses.

It also includes a proportionate, business-friendly approach to regulation. I spoke to the EEF about this issue just before Christmas, so I am keen to give an update on progress.

We have a good story to tell on regulation. The One in, One out regime is stemming the flow of new regulations, and through the Red Tape Challenge we are identifying a substantial number of regulations for repeal or consolidation. We have also taken steps to end the gold-plating of EU directives, and to apply sunset clauses to new rules.

BIS is completely committed to a concerted attack on the regulations that are genuinely damaging to growth. Many of the most intrusive and unnecessary burdens come from the EU, and we are seeking to keep these at bay, working with likeminded governments at the upstream stage.

I am quite willing, as is Norman Lamb the Minister for employment relations, to take a more confrontational approach by taking every possible opportunity to delay, consult further, and water down directives that we agree are damaging to Britain, with the working time directive as an obvious example.

Conclusion

By using the various levers at government’s disposal, we will ensure that a co-ordinated industrial strategy is reinforced by a supportive business environment.

There is substantial room to develop the scope and scale of our industrial policy in future, but it is one of the central pillars of our strategy for achieving economic recovery. A strategy that places world-class manufacturing at the heart of a healthy and balanced economy in the UK.