Industrial Policy Uk

th

date: 19 December 2005

An Industrial Strategy for the United Kingdom

A TUC Discussion Paper

TUC Economic and Social Affairs Department

Contents

5

Introduction

5

6

Industrial Policies across Europe

8

7

A Sectoral Approach

20

8

Global Challenges and Industries of the Future

29

9

The Role of Government

34

10

Conclusions and Recommendations

39

11

Appendix One

41

12

References

44

3

Section one

Introduction Industrial strategy goes to the heart of the debate about the future of a modern Europe. The extent to which governments can, should or must intervene in the affairs of industry continues to take centre stage in discussions about the future of the European project. In the UK, government intervention was an accepted part of the post war economic consensus, which lasted until 1979. In that year, Margaret Thatcher adopted a laissez faire approach to industrial matters, arguing that the role of government should be kept to a minimum. Politicians, so the argument went, are not good at spotting which industries or businesses will be most successful, or most economically important, in the future. That argument has some resonance. Twenty-five years ago, who would have predicted that Google would one day be worth more than General Motors? It would have been a brave politician to make such a prediction. Companies and industries rise or fall on the basis of market forces, say the economic liberals. Industrial intervention is, therefore, doomed to failure. The New Labour Government, and Chancellor Gordon Brown in particular, takes a different view. Brown has stressed the importance of ‘horizontal’ measures to support business. Tax and other incentives to promote skills, innovation, research and development, and other activity designed to keep British industry at the forefront of competition, have been high on the Treasury agenda. A closer analysis of this approach will appear in the next section of this report. Yet horizontal measures amount to a passive, rather than an active, industrial strategy. So how do we counter the argument that policymakers cannot spot the industrial successes and failures of tomorrow? And why is an industrial strategy necessary? First, we may not be able to identify specifics, but we can see trends. We know, for example, that the share of manufacturing undertaken by advanced, western economies will fall (paradoxically, that strengthens the argument for an industrial strategy to manage where we can succeed within the manufacturing sector). We also know, and have known for some time, that services are growing, the information society is more important and consumers are becoming more sophisticated. We didn’t know that Google would outstrip GM, but we knew that companies like Google would do well. And whilst we may not have known that 25 years ago, we knew soon enough to make a policy intervention if that were necessary.

Trades Union Congress

An Industrial Strategy for the United Kingdom

5

Introduction

Second, industrial strategy is important, because industry does not exist in a vacuum. Industry is a source of economic growth. It is a source of employment. It helps prevent unemployment, thereby having social consequences. As a provider of jobs, it reduces poverty. In certain regions and sub-regions of the UK, it contributes to economic and social cohesion. People at work enjoy better physical and mental health. They are less likely to be involved in crime. They also pay the taxes that fund schools, hospitals and care for the elderly. Policymakers therefore have a huge interest in industrial success. It follows that if a company closes, that can have knock on effects throughout the local area. The run-down of Britain’s coal and steel industries contributed very clearly to levels of poverty, crime and ill health, because there were insufficient new industries to replace the jobs lost. In addition, the closure of a company, let alone an entire industry, can have massive political consequences. The temptation for policy makers to step in at times of political turmoil can be too great to resist. The argument can be made, therefore, that intervention in the economy is a fact of political life; supporters of industrial policy simply seek to have that intervention put on a stable footing and applied consistently. This paper argues for a modern industrial strategy that embraces intervention when it is strategically important to do so. It seeks recognition of those particular industrial sectors that will contribute to the long-term future of UK plc. For example, within manufacturing, where the traditional divisions between production of goods and services will be increasingly blurred, the UK’s future lies in high-value, high-skill production. Modern manufacturing embraces research, design, production, logistics, marketing and services. This paper takes as its premise the argument that the market is valuable in creating competition, delivering efficiency and keeping prices low. No return to state power, or large-scale nationalisation, is sought. Instead, it believes that intervention is occasionally necessary to steer industry in the direction where it can maximise success and fulfil all its potential as a social force as well as an economic one. This paper also takes it as read that manufacturing is important. Some commentators argue that, so long as people are working and inflation is low, the composition of industry does not matter. However, manufactured goods are more likely to be internationally tradable than services and manufacturing makes a greater contribution to research and development than do services. Notwithstanding their current situation, the economies that have enjoyed the most long-term post-war success – Germany, Japan and the United States – have strong manufacturing sectors. The fear of China that currently exists is also based on its potential manufacturing prowess.

Trades Union Congress

An Industrial Strategy for the United Kingdom

6

That is not to deny, of course, that other industries outside of manufacturing are extremely important to economic prosperity in the UK. Indeed, the UK now has many global companies in the service sector, as well as in manufacturing. Whilst the focus of this document is on UK manufacturing, its principles can be equally applied elsewhere in industry. The next section of this paper will put UK industrial policy into a historical context. It will then look at the role of industrial policy today, in the UK and elsewhere in the European Union. Horizontal measures form the bulk of industrial intervention in the Anglo Saxon model. More interventionist policies form a greater part of the traditions that exist in mainland Europe. The Scandinavian countries take a third perspective. That analysis will be followed by a section of the report looking at strategic sectors. It will consider how to create success and how to decide where to focus. It will make the case for ‘European champions’ to compete with the large US and Chinese manufacturers. The section after that will look closely at the global challenges we face and at the industries of the future that will meet those challenges. Finally, the role of government, nationally and regionally, will be considered, before conclusions and policy recommendations are discussed.

Trades Union Congress

An Industrial Strategy for the United Kingdom

7

Section two

Industrial Policies across Europe A UK Historical Perspective John Beath (‘UK Industrial Policy: Old Tunes on New Instruments?’, Oxford Review of Economic Policy, Vol. 18 No.2) argues that the priorities of UK industrial policy in the 1960s, based as they were on international competitiveness, innovation, competition and skills, are very similar to the major themes of today. Beath argues the case for industrial strategy: “In general terms, over the period since the 1950s, the best-performing countries in terms of growth and international trade shares have been those which implemented some kind of industrial policy. For example, the USA maintained its industrial leadership only in areas where there was a significant amount of state intervention and support (e.g. aerospace and defence, nuclear energy, and various fields of electronics).” Beath also argues that, historically, competition policy has been flexible: “European competition policy has always had the power to exempt restrictive practices where these would promote technical or economic progress, provided that consumers also have a share of the resulting benefits. A form that this has recently taken is the exemption of technological alliances such as research joint ventures.” The Industrial Strategy launched by Harold Wilson’s Government in 1975 was a form of indicative planning. A five-year prospective look at the most important sectors of industry allowed the Government to focus on those sectors that held most potential for economic progress. In fact, this strategy was never implemented properly, according to Beath, because the wide range of industries identified led to a more general strategy. Nevertheless, the acceptance of the importance to politics and economics of industrial strategy was not challenged at that time. Such a change came in the 1980s, most obviously with the Thatcher Government in London, but also elsewhere in Europe. In 1986, in France, a list of “privatisable” companies was identified and by 1994 the share of manufacturing employment accounted for by state-owned firms had fallen from 16 per cent in 1984 to seven per cent. The reunification of Germany led to intense efforts to privatise the state-owned enterprises of the former German Democratic Republic. By 1994, 17,000 firms or parts of firms had been sold. Privatisation also happened elsewhere in Europe, albeit on a smaller scale.

Trades Union Congress

An Industrial Strategy for the United Kingdom

8

The 1990s saw a return to a belief in activism, but this took the form of competition, rather than industrial, policy. In practice, this resulted in horizontal, sector neutral policies to avoid the unfashionable charge of ‘picking winners’.

‘A British Way to Success in the New Economy’ In the UK, the main problem to be overcome, in terms of industrial competitiveness, is the acknowledged productivity gap between the UK and its major competitors, those being France and the United States. This gap is attributed to lower levels of skills, investment, research and development, and innovation. The belief, central to the Chancellor’s economic strategy, is that through knowledge, skills, innovation, enterprise and effectively harnessing the science base, this gap can be closed. In Budget 2005, the challenge was summarised as ‘The Five Drivers of (1) Productivity’. These are: •

Improving competition, which is the lifeblood of strong and effective markets. Competition puts downward pressure on costs and prices, driving innovation and business efficiency, and delivering a better deal for consumers;

•

Promoting enterprise, by removing barriers to entrepreneurship, promoting an enterprise culture, and delivering a new and radical approach for delivering the way that regulations are made and enforced to deliver genuine reductions in the burdens on business;

•

Supporting science and innovation to promote the development of new technologies and more efficient ways of working. Increasing rewards to innovation mean that the UK will increasingly depend on its ability to create new knowledge and translate it into innovative goods and services;

•

Raising skill levels to create a more flexible and productive workforce, which can adopt innovative technologies and enable individuals to move into new areas of work; and

•

Encourage investment to increase the stock of physical capital, including through stronger, more efficient, capital markets.

th

(2)

In his Budget Speech on 16 March 2005, the Chancellor clearly set out his philosophy and his belief, based on international comparisons, of its success: “… For decades, the neglect of investment damaged growth and prosperity. And today like every advanced nation Britain faces a stark economic choice: we could repeat the mistakes of the past, once again failing to invest long term in our science, infrastructure and skills, or, just as together we forged a British

Trades Union Congress

An Industrial Strategy for the United Kingdom

9

Industrial Policies across Europe

way to stability in the global economy, together we forge a British way to success in the new economy. “… Britain has one of the most open competition policies in the world. We are the most active advocate of free trade. And today the enterprise challenge is to enhance the flexibility needed for a successful economy and tackle the regulatory concerns all industrial economies face while securing the standards required for a successful society. “… But meeting the global challenge demands we match reforms improving the competitive environment with the sustained investments business is calling for in infrastructure, science and education; investments that our competitors are now making; investments which if not made would put the future prosperity and stability of our economy at risk.” A similar perspective is taken by the Department of Trade and Industry. (3) Writing in the DTI review of the government’s manufacturing strategy , former Secretary of State Patricia Hewitt says: “Future success for UK manufacturers lies in moving up the value chain. My vision is of a UK manufacturing sector made up of highly skilled, knowledge intensive, highly productive, innovative manufacturing businesses. Businesses delivering high quality goods and services into the global marketplace, introducing new products and processes, creating new markets. “… Ultimately, of course, Britain’s manufacturing success depends largely on the creativity and dynamism of individual businesses and their employees. All manufacturing companies need to invest, innovate and upskill in order to compete successfully. They need to attract good quality people.” More recently, in his speech to the TUC’s 2005 Congress in Brighton, the current Secretary of State, Alan Johnson, said: “Our industrial strategy has to be to rise to the challenge of globalisation and compete by supporting companies and their workers while they improve skills, diversify into higher value added products, and invest in new technology to drive up productivity. “… manufacturing continues to be crucial to this country… The number of young people participating in apprenticeships has risen by more than 200 per cent since 1997. We are establishing the Manufacturing Skills Academy, linking FE with higher education through vocational two year Foundation Degrees, and, through radical reform to secondary education, ending the prejudice against vocational in favour of academic qualifications. “The announcement … pledging £180 million of support to Bombardier Aerospace in Belfast, is a tangible demonstration of our commitment to manufacturing.

Trades Union Congress

An Industrial Strategy for the United Kingdom

10

“And, of course, we understand completely the importance of the new Airbus A350 project which will require investment in the latest composite technologies and advanced manufacturing techniques so that Britain can maintain its lead in wing construction and design.”

The Perspective from Mainland Europe Gordon Brown’s robust position has many supporters throughout mainland Europe. Indeed, it is fair to say that the Anglo Saxon focus of liberalisation and deregulation, supported by minimum standards, is in the ascendancy in the European Commission and among some of the New Member States (NMS). In its latest industrial policy document, the European Commission states: “The health of manufacturing industry is essential for Europe’s ability to grow. Whilst it is currently undergoing important changes and facing major challenges, it needs a favourable business environment to continue to develop (4) and prosper.” The Commission adds: “The main role of industrial policy is to provide the right framework conditions for enterprise development and innovation in order to make the EU an attractive place for industrial investment and job creation.” It goes on: “From an industrial policy perspective, the role of public authorities is to act only where needed, i.e. when some types of market failures justify government intervention or in order to foster structural change … For these purposes the public authorities can make use of policy instruments such as better regulation, single market, innovation and research policy, employment and social policies etc that apply generally across the economy without distinction between sectors or firms, together with other accompanying measures to facilitate social and economic cohesion.” “The Commission is committed to the horizontal nature of industrial policy and to avoid a return to selective interventionist policies. Nevertheless … for industrial policy to be effective, account needs to be taken of the specific context of individual sectors … This inevitably has as a consequence that whilst all policies are important, some policies have greater importance in the EU today for some sectors than others.” This last statement recognises that different challenges faced by different sectors will require specific solutions, even if it only seeks to use horizontal policy measures which apply across industry regardless of the sector. However, trade unions in continental Europe find themselves having to argue the case for specific industrial intervention, just as we do in the UK. Nevertheless, differences of style and, sometimes, of substance certainly exist among the different players.

Trades Union Congress

An Industrial Strategy for the United Kingdom

11

Industrial Policies across Europe

France If British politicians are shy about active industrial policy, the French suffer no such reticence. Across the political spectrum, industrial policy in general, and French champions in particular, are an accepted concept. In April 2004, French Prime Minister Jean Pierre Raffarin said he was (5) committed to a “truly European industrial policy” . He added that France must play a strong role in a number of specific industries and had chosen not only aerospace and nuclear energy but also health as a strategic sector. The following month, Finance Minister and, according to many, would-be President Nicolas Sarkozy effectively vetoed a merger between French pharmaceutical company Aventis and Novartis, the Swiss company. Sarkozy said the Government would intervene decisively when French jobs were at risk, either from production being moved outside the country or when French (6) companies built up “over decades” were at risk of foreign takeover. In September 2004, Sarkozy announced plans to offer tax breaks to encourage (7) companies to stay in or return to France. In December 2004, Sarkozy’s successor as Finance Minister, Herve Gaymard, said: “We must have, and not only in France but also at the European level, an extremely ambitious industrial policy. We must nurture or create European champions in the industrial sector. We strongly believe that in the face of globalisation we cannot be naïve because … the law of the jungle is always to allow the strong to gobble up the weak, and there is no reason that Europe (8) should drop its guard in this global competition.” In January 2005, Jean-Louis Beffa, Chief Executive Officer of Saint Gobain, submitted a report to Jacques Chirac, President of France, on the setting up of a new agency for development and innovation, to tackle French weakness in high technology areas. The aim was to promote French or European industrial champions, which can conquer new markets with technical products designed to become best sellers in 10-15 years, focusing on a few major programmes. The report was produced by a high level group including economists, business CEOs and union leaders. The Beffa report was welcomed by trade unions. The CFDT said, however, that the report’s recommendations were such that they could only be achieved on a European scale. The CGT said that the ability to create long-term jobs must be built into the criteria used to select projects. France has recently held a competition designed to identify the areas where it has the greatest potential to innovate and compete on the global stage – in other words, the country’s competitive clusters. Even those competitors who are not chosen expect to see benefits. The competitiveness clusters policy seeks: •

Trades Union Congress

To anchor high value added industry on French soil;

An Industrial Strategy for the United Kingdom

12

•

To project a modern image of France and attract foreign direct investment;

•

To create new jobs or preserve existing jobs;

•

To strengthen France’s competitiveness.

French manufacturing industry is stronger than that in the UK. The share of manufacturing within the UK economy is about 19 per cent, with 80 per cent in services and one per cent in agriculture. In France, those figures are 22 per (9) cent, 74 per cent and 4 per cent respectively. We might expect the conservative press to have fundamental disagreements th with the French approach. However, writing in the Daily Mail, 14 June 2004, Stewart Fleming argues: “But before dismissing the emerging debate over how to support corporate champions, remember that France has a much better record than Britain at retaining its industrial technological base. “The French have also shown themselves adept at helping to turn nationalised industries or near basket cases into world beaters. Renault is just one example. Europe’s leading semiconductor company ST Microelectronics and Airbus are others. Today’s foreign investors own more than 40 per cent of the shares in the CAC40 – France’s equivalent to the Footsie.” Professor Elie Cohen, France’s leading expert on industrial policy, is quoted as saying: “The French Government’s main goal today is not directly to protect jobs, but to support the nation’s scientific and technological resources, its seed corn.” Fleming adds: “Given the global competitive challenge, this is what Europe’s government should be doing.” Germany If the UK has led the way on deregulatory measures and France has continued its preference for government intervention, Germany finds itself somewhere between the two. Gerhard Schroeder’s Agenda 2010 programme was a reform package in the style of Gordon Brown. It included intensive case-based support and reintegration benefits to help the young and long-term unemployed into work. It also involved tax cuts, at the top and bottom. However, it retained the German co-decision making system and existing collective bargaining machinery. According to Schroeder: “The responsible attitude of the social partners is to help safeguard jobs. Our enterprises have lived up to their (10) responsibilities in providing training.” If Agenda 2010 leans towards the UK philosophy, a contrasting approach led to a Franco-German declaration in May 2004 of an intention “to formulate a joint industrial policy aimed at creating a framework for mergers and joint (11) ventures between major German and French corporations.” Together, France

Trades Union Congress

An Industrial Strategy for the United Kingdom

13

Industrial Policies across Europe

and Germany could create a number of champions based on the aerospace company EADS. (12)

Manufacturing forms about 28 per cent of German employment. Consequently, compared to the UK’s trade deficit of 76.2 billion euros, the largest in the EU25, Germany has a surplus of 129.6 billion euros, nearly four (13) times as high as the surplus in the Republic of Ireland, its closest competitor. It is too early to identify the changes that will take place in German industrial policy following the departure of Schroeder and the advent of the ‘grand coalition’ led by Angela Merkel. However, given the number of sceptics, from both her own party and the SPD in Merkel’s Cabinet, those changes are likely to be minimal. Sweden The powerful industrial sector accounts for 75 per cent of all Swedish exports and has traditionally afforded the Swedes one of the highest living standards in the world. The state is gradually decreasing its ownership of firms, although it still owns 25 per cent of the domestic corporate sector and is considered important. The government is committed to ending state subsidies for inefficient industries. As a result of this policy, traditional sectors, such as textiles and the shipyards, have virtually ceased to exist. Sweden’s industrial structure has tended to be centred on large, capital intensive companies, due to the nature of tax, social security and labour market regulations, which do not favour smaller firms. Engineering is Sweden’s main industrial sector, with companies including Ericsson, Electrolux, Volvo, SKF, Saab, Scania and Sandvik. Manufacturing contributes some 30 per cent to GDP and employs approximately 30 per cent of the workforce. Since the mid 1990s, the Swedish economy has experienced a strong economic boom, with rising employment. SMEs are considered to be more important now, because large enterprises no longer create the same number of jobs, due to globalisation and the rationalisation of operations. Views have shifted on the role of the state, with the main opinion being that a balance must be struck between the forces of government and the matters best left to the ‘market’. However, given the tradition of a strong state in Sweden, reducing the role of the state should not be confused with the Anglo Saxon approach. It is merely about balancing. The Swedish government is keen to stimulate new industries and products that can compete in global markets. As much as two billion Swedish krona of public money is being allocated by the state over the next ten years to encourage the formation of new firms ‘in the borderland between ideas and products’. A new innovation company, Innovationsbron AB, has been (14) established by the state to carry out that purpose.

Trades Union Congress

An Industrial Strategy for the United Kingdom

14

Austria In the 1970s and 1980s, Keynesian demand management gave way to monetarism throughout most of the western world. The exception was Austria. However, so-called Austro-Keynesianism differed from the traditional economic theory associated with John Maynard Keynes and developed over time. Apart from the demand management practice that is central to Keynesian philosophy, the Austrian version included supply side policies, such as relatively high nominal tax rates and high tax incentives for private investment. It welcomed foreign direct investment and offered direct subsidies, mostly in the form of subsidised interest rates. Austro-Keynesianism also featured productivity oriented wage policies developed by the social partners, who played a strong role in overall economic policy-making. EU membership in 1995 required large structural reforms, as sheltered sectors of the Austrian economy were opened to the single market. The budget deficit had to be reduced from 5.3% of GDP in 1995 to below 3% in 1997, in order to fulfil the convergence criteria and qualify for EMU. This affected economic growth, which fell, and unemployment, which increased. In response, the Austrian government shifted public investment to the private sector. Private entities, wholly owned by the state, were created. In 1999, Austria enjoyed low unemployment, a high employment rate and high GDP per capita, with a budget deficit of 2.4% of GDP. However, in 2000, the Social Democrats lost power and the Conservatives formed a coalition with the right-wing Jorg Haider. Austro-Keynesianism was abandoned and replaced with neo liberalism. In the five years since, Austrian unemployment has (15) reached its highest level since the Second World War. At 20.5 per cent in 2002, the contribution of manufacturing to total value added is higher in Austria than in many other EU countries, but, as elsewhere, is trending downwards. State aid policies are mostly horizontal (i.e. aimed at R&D, skills etc) but sectoral support nevertheless accounts for about 11 per cent of state aid. Furthermore, regional subsidies are geared to specific industries. For example, the success of Austrian car component suppliers has been made possible by the proactive cluster policy pursued by two regional governments: the automobile clusters of Styria and Upper Austria have developed into large networks of businesses. Similarly, Vienna’s biotechnology cluster has grown strongly in recent years, both in research activities and in (16) turnover. Republic of Ireland Another interesting example is Ireland. During the 1980s, the Republic suffered an economic crisis partly triggered by the world recession. This led to the negotiation of a three-year national agreement between the government,

Trades Union Congress

An Industrial Strategy for the United Kingdom

15

Industrial Policies across Europe

employers and trade unions, published in 1987 under the title, ‘Programme for National Recovery’. The programme, and the vigour with which it was implemented, did much to restore investor confidence in the Irish economy. It also heralded a tradition of social partnership which resulted in wage restraint in return for important gains in areas of social policy of concern to trade unions. Ireland was one of the fastest growing economies in both the EU and the OECD in the 1990s, leading to its description as the ‘Celtic Tiger’. Inflation has remained significantly below the EU average. In the 16 years to 2004, employment growth reached 67 per cent. As well as social partnership, Ireland has engaged in an industrial strategy based on promoting export led growth in Irish manufacturing and encouraging foreign companies to establish manufacturing plants in Ireland, producing specifically for export markets. High tech industry has been particularly important. Pharmaceuticals, electronics, electrical and telecoms equipment, instrumental engineering and software development have increased output, exports and employment at a very high pace. Dell, Hewlett-Packard, IBM, Microsoft, Intel, Lucent Technologies, Abbott, Pfizer and Johnson & Johnson are some of the companies behind the growth rates. Ireland has several state industrial promotion agencies and state bodies, which promote agriculture, tourism and other sectors. The Industrial Development Authority is the main body charged with attracting foreign direct investment and it has had considerable success in picking winners, by targeting not individual firms but industrial sectors, such as pharmaceuticals, chemical and computer and health care sectors and, more recently, financial services. Ireland’s economic success was generated by a mix of European social partnership, state intervention in the economy and state assisted investment. It did, however, also include components of neo-liberalism, including sometimes regressive tax reductions. Elsewhere in Europe Traditions in Europe vary widely. Finland, one of the main growth economies in the EU and the eurozone, appears be favouring an Anglo Saxon approach, with an emphasis on improving competitiveness and reducing regulation. Finland suffers skill shortages at present. The Italian fashion industry, made up of garments, shoes and leather companies, is one of the leading sectors of the economy and of many Italian regions, employing 700,000 dependent and 180,000 self-employed workers, mainly women. Trade unions have campaigned for urgent measures to safeguard the industry, including a compulsory ‘Made in Italy’ label, stronger

Trades Union Congress

An Industrial Strategy for the United Kingdom

16

action against counterfeiters and a new industrial policy for the sector, including training and reduced labour taxes. The Danish industrial sector employs a quarter of the labour force, yet industrial policy plays a relatively minor role, being largely confined to export credit arrangements and funds for research and development. Denmark is one of the most prosperous countries in the world, yet government targets for labour force participation are likely to be missed and R&D spending is below the optimum. In Norway, the goals of industrial policy have traditionally been to maximise employment and the quality of production, maintain the rural population, promote a just and equitable distribution of wealth and income, and keep control over natural resources. Secondary goals have been to control inflation, protect the environment and achieve a balance between imports and exports.

Summary Table One: Output per hour in manufacturing (Indexes: 1992 = 100)

Year 1999 2000 2001 2002 2003

Bel 125.5 130.8 132.1 137.6 144.0

Den 123.1 126.6 127.2 131.3 136.0

Fra 133.0 142.5 148.0 155.1 158.0

Ger 121.4 128.6 128.9 131.6 135.1

Italy 110.5 113.5 114.0 112.1 110.9

Nor 103.6 106.6 109.8 111.7 113.5

Swe 162.7 175.5 171.4 189.2 201.1

UK 113.6 121.0 125.1 127.7 134.9

Source: US Department of Labor, Bureau of Labor Statistics, Feb 2005 Table Two: Trade Balance in Selected Countries in 2003 (in billion euros)

Country

Den Ger

Trade Balance 8.5

Spa

Fra

Italy Austria Swe

129.6 -43.6 -3.4 1.1

-1.9

UK

16.4 -76.2

Source: Eurostat yearbook 2004 Table Three: Manufacturing Jobs in Selected Countries, Q1 2001 and Q1 2005 (Thousands) (1)

Country

Den Ger

Q12001

484

8,621 3,003 4,388 4,942 737

753

4,463

Q12005

443

8,201 3,087 3,975 4,768 697

670

3,723

-4.9

-11

-16.6

% change -8.5

Spn

+2.8

Fra

-9.4

Ita

-3.5

Aust Swe UK

-5.4

Source: Eurostat (1)

Trades Union Congress

German figures are for Q2 2001 and Q2 2004

An Industrial Strategy for the United Kingdom

17

Industrial Policies across Europe

In summary, the UK economy is doing relatively well. Its annual harmonized unemployment rate for 2004 was lower than all EU countries except Luxembourg, Austria, the Netherlands and the Republic of Ireland. Its ratio of long-term to all unemployed is lower than everywhere except Sweden and Finland, Scandinavian countries with a greater culture of social inclusiveness. Regarding industry, the news is not so good. As Table Three demonstrates, most European countries have seen a loss of manufacturing jobs in recent years (although Spain has seen a modest gain). However, whereas the fall is in the order of 3.5 per cent in Italy and 4.9 per cent in Germany, it is magnified to 16.6 per cent in the United Kingdom. The UK also has the worst balance of trade deficit of any EU25 nation, as shown by Table Two. This raises important questions. If unemployment is low and inflation under control, does the status of industry matter? Does the UK need its manufacturing sector? If it doesn’t, why does the Prime Minister, the Chancellor and the Trade and Industry Secretary say it does? It is not the objective of this paper to debunk the current Government’s economic record. Low inflation, low unemployment and high and rising employment are good news for trade union members. In these areas, the UK has a record that is the envy of most of the larger European countries. Our concern is the long term sustainability of UK success. We are not convinced that, without concentration on areas of long term industrial strength, UK success will be maintained. This paper does not, therefore, call on the UK Government to replace our industrial strategy with that from France, Germany or anywhere else. We do seek to learn from best practice, so that where particular policies have strengthened certain industries or sectors elsewhere in Europe, we would like to see similar measures taken in the UK. Are we living on borrowed time? Whatever the statistics today, the long term economic success stories, within Europe, of the last half century are Germany and the Scandinavians. Had reunification not happened, would West Germany still be in its traditional dominant position? Is John Beath correct when he says that the best performing countries in the world since the 1950s have been those implementing some kind of industrial policy? If so, does the Chancellor’s Budget emphasis on competition, enterprise, science, skills and investment amount to such a policy, or is something more active required? It is clear from this brief look at industrial policy across Europe that there is no one European tradition. The Scandinavians have historically been much more statist than the southern European nations. The Austro-Germans have been

Trades Union Congress

An Industrial Strategy for the United Kingdom

18

more corporatist and the French more protectionist. The Anglo Saxon model of the UK is the most fashionable at present. But is it the right one?

Trades Union Congress

An Industrial Strategy for the United Kingdom

19

A Sectoral Approach

Section three

A Sectoral Approach The case for sectors ‘Focusing on one’s strengths’ is a basic piece of advice that any of us might give. Irrespective of other differences, our European competitors have in common a desire to recognise and develop areas of particular industrial strength. Sweden has a particular focus on engineering. France, as noted above, has singled out aerospace, health and nuclear energy. Style-conscious Italy has a passion for fashion. Germany, long time home of industrial engineering, is focusing on biotechnology (about which more will be said in the next section). Wallonia in Belgium is in the centre of an automotive region that produces more than two million vehicles a year at 12 manufacturing sites, comprising General Motors, Ford, DaimlerChrysler, Renault, Nedcar, Toyota, Volkswagen and Volvo. Unsurprisingly, Wallonia’s regional government has offered investment incentives for motor companies seeking to locate there. Focusing on particular industries: picking winners or industrial common sense? Surely it makes sense to recognise strengths. However, one caveat should be added. This report argues that we should develop an industrial policy that allows strategic intervention in certain circumstances. That does not in any way negate the value of the horizontal measures introduced by Gordon Brown. Nor does it suggest that industries which are not the focus of particular government attention are unimportant or lacking in value. There are two scenarios in which we envisage intervention in support of particular sectors. The first is where that sector is an area of traditional strength that has major spin-offs for wider industry and the economy. The second is where a strategic company needs to restructure or diversify and needs bridging support. A model for the first scenario is the defence industrial policy. Defence Industrial Policy The defence industrial policy is a welcome contribution to the debate on manufacturing. Quite rightly, the first objective of this policy states: “The Government’s defence industrial policy is driven by the need to provide the Armed Forces with the equipment which they require, on time, and at best

Trades Union Congress

An Industrial Strategy for the United Kingdom

20

A Sectoral Approach

(17)

value for money for the taxpayer.” The second objective reads: “We seek to maximise the economic benefit to the UK from our defence expenditure, a healthy and globally competitive defence industry and the development of a high value technologically-skilled industrial base, consistent with the Government’s wider manufacturing strategy.” The defence industrial policy addresses a number of factors affecting the acquisition of equipment. Key factors include cost and operational effectiveness, affordability and long-term value for money. A section on wider factors includes the following words: “Industrial Participation (the placing of work on UK defence contracts with UK industry) can encourage technology transfer and ensure investment in particular industrial capabilities within the UK. Both quality and quantity of the industrial participation work will be relevant. There are industrial capabilities which it is desirable to retain in the UK industrial base not only for defence reasons but also owing to the high value which they bring to the industrial economy. Once lost, these capabilities may be difficult to recreate in the future. An industrial capability, at prime contractor level and within the supply chain, can be evaluated according to: •

Its potential for world markets;

•

The extent to which it will generate economic activity of a high valueadded nature (including its potential for attracting inward investment and for incorporation in collaborative programmes in Europe or elsewhere);

•

Its transferability into wider commercial applications outside the defence sector;

•

Its impact on industrial activity regionally (including the number and quality of UK-based jobs that are created or sustained).”

Trade unions believe there are important lessons to be learnt from the defence industrial policy. We recognise that EU procurement law is slightly different in the field of defence. EU law requires open competition within the EU for all non-warlike equipment. However, we believe there is enough flexibility within EU law to allow at least some of the principles of the defence industrial policy to be incorporated into a wider manufacturing strategy. Strategic Sectors Historically, the UK has been strong in defence and aerospace. We have been a major producer of motor cars and, whilst recent developments at MG Rover may deny a British ‘marque’, Nissan in Sunderland is the most productive car plant in Europe. It could be argued that many British cars are built – even if they do have US or Japanese badges. As well as motor cars themselves, we have a particular strength in motor components.

Trades Union Congress

An Industrial Strategy for the United Kingdom

21

References A Sectoral Approach

The pharmaceutical and chemicals industries, especially industrial chemicals, are also important for the UK. Looking to the future, our strength in pharmaceuticals should enable a positive and lucrative development into environmental technology. However, given the competition with large companies from countries such as the US and China, which enjoy huge economies of scale, we may need to collaborate with other countries in order to exploit our advantage in these industries. Airbus The obvious blueprint for European manufacturing collaboration is Airbus. At the beginning of 1995, Airbus was, for the first time ever, able to announce more orders than Boeing for the past financial year. For the first time since 1945, the Seattle based company was second in the market to a competitor.

Airbus was conceived in the mid-1960s, when political leaders saw the dangers of US dominance of the civil aircraft market. Companies including Hawker Siddeley Aviation, Avions Marcel Dassault, Dornier and Messerschmitt, among others, came together to be national partners in the Airbus programme. In fact, the UK disengaged from the project in the late 1960s, over complications about the role of Rolls Royce engines. The UK rejoined the programme 10 years later, when Hawker Siddeley, the British Aircraft Corporation and Scottish Aviation had been nationalised and merged into British Aerospace.

Airbus has years of manufacturing success behind it. It now rivals the mighty Boeing. Indeed, the Airbus A380 will go head to head with the Boeing 787, as the two giants compete for the future of long haul travel. Whichever company comes out on top, Rolls Royce, which will build engines for both, will be a winner. According to the German magazine Flug Review, “Whatever the outcome may be, at the moment Airbus is the ‘Co-Number-one’ in international aircraft manufacturing. The company’s product philosophy has obviously paid off. After initial teething-troubles and some tough lessons, the European aircraft industry has matured. And even the hardest critics have to acknowledge today that Airbus Industrie is the most important European industry project. It has become a symbol for technological quality in Europe and for the continent’s (18) political and economic integration.” However, a recent development at Airbus demonstrates precisely the dilemma regarding government intervention in industry. The UK has traditionally been the centre of excellence for wing development and builds wings for all current Airbuses. Airbus is now set to switch from aluminium to composites

Trades Union Congress

An Industrial Strategy for the United Kingdom

22

A Sectoral Approach

technology for making wings. Since Spain and Germany have expertise in this new technology, the wing component manufacturing could go elsewhere in Europe. Government support, which could reach £380 million, is regarded by the aerospace industry as vital to protect the UK technological base and maintain a central role for the UK in the Airbus programme. Airbus UK, with its plants in Filton, near Bristol, and Broughton, near Chester, represents the core of the UK civil aviation industry, employing 13,000 people and supporting 135,000 jobs in the supply chain and other parts of the economy. In a global competitive environment where, more often than not, “big is beautiful”, European collaboration to allow British companies to play on the world stage has a part to play.

Other Strategic Intervention Given the ‘hands-off’ nature of industrial policy in recent years, it is difficult to find modern day examples of intervention in industrial policy. However, the Defence Aviation Repair Agency (DARA) is a good example of the type of company that might have benefited from such an approach. A decision to move Harrier Jet and Tornado aircraft maintenance work from the £80 million facility in St Athan, near Cardiff, has resulted in over 1,000 job cuts and will close the plant, which was only officially opened in April this year. The fact that the DARA facility has no equal in the UK or elsewhere in Europe means there is a strong strategic case for its continuation, a case that the manufacturing union Amicus has been pushing throughout 2005. That case has, however, not been accepted by the government.

Trades Union Congress

An Industrial Strategy for the United Kingdom

23

References A Sectoral Approach

This paper calls for recognition of ‘national champions’ that will be eligible for government support, either in response to a one-off financial difficulty or in order to restructure in times of economic change. The identification of a national champion will be made on a case-by-case basis, but in order to qualify, a company must: • Provide high value to the UK economy; • Provide capabilities that, if lost, would be difficult to recreate in the future; • Make a major impact locally, demonstrating a high number of quality UK jobs and how these benefit a local or regional economy; • Demonstrate a long term business plan which clearly specifies how the company seeks to develop in the future and why a ‘one off’ injection of government support is necessary; • Work with its trade unions, where they are recognised, in order to develop such as business plan. Definitions of ‘high value’ and ‘quality UK jobs’ must be clearly arrived at, in order that delivery of government support is not determined by a subjective interpretation of what these terms mean. Furthermore, the notion of champions must be inclusive and encompass those strategically important SMEs which form an essential part of the supply chain to major companies, as well as the major companies themselves. It is longstanding TUC policy to call for UK state aid to match the average of the EU15, and for a proportion of UK state aid to be dedicated to sectoral, rather than horizontal, support. We call for a proportion of this increase to be dedicated, over time, to a strategic industry support fund, to be used in pursuit of the above objectives.

Cars 21 One of the most strategically important industrial sectors in Europe is the motor industry. The EU is the largest automotive production region in the world, accounting for 34 per cent of total output. The automotive sector represents 3% of Europe’s GDP. The industry comprises 7.5 per cent of the manufacturing sector in the EU and a total of 10 million people are directly or indirectly employed in the automotive sector, representing seven per cent of employment in EU manufacturing. In 2002, EU motor vehicle exports were worth 66.2 billion euros, more than double the 30.4 billion euros of imports for the same period (All figures: European Commission).

Trades Union Congress

An Industrial Strategy for the United Kingdom

24

A Sectoral Approach

Recognising the importance of the EU automotive sector, a high level group, st Cars 21 (Competitive Automotive Regulatory System for the 21 Century), met for the first time in April 2005. The objective of Cars 21 is to generate recommendations to improve the worldwide competitiveness of the European automotive industry, developing a regulatory framework that enhances global competitiveness and employment while sustaining further progress in safety and environmental performance at a price affordable to the consumer. Cars 21 consists of prominent representatives of the EU car sector, EU member states, the European Parliament, trade unions, NGOs, users and the Commission. The EU Commissioners for industry, transport and the environment are members, as are the German employment and the French industry ministers and the UK Environment Secretary, Margaret Beckett. A part of the role of Cars 21 is to chart the way towards sustainable development of a competitive European automotive industry. The group agreed to draw up, by the end of 2005, a roadmap identifying the public policy measures to be adopted in the automotive area in the next ten years. EU Vice President Gunter Verheugen has described the automotive sector as “a pillar of the European economy” and key towards achieving the Commission’s overarching objective of “long-term prosperity in Europe, and in particular the (19) restoration of sustainable and dynamic growth and jobs.” Initiatives such as Cars 21 are to be welcomed. The TUC recognises the importance of making the motor industry into an environmentally friendly sector and welcomes the role of the UK Environment Secretary, which highlights the importance of this objective. We would, however, like to see this balanced with ministerial involvement from the Department of Trade and Industry. The lack of DTI involvement raises the suspicion that, unlike the French and Germans, the UK fails to understand the strategic importance of motor manufacturing for UK jobs and skills.

Community Development Funds It was noted at the beginning of this document that policymakers sometimes intervene following a company closure as a result of political calculations. It is certainly true that some high profile companies have enjoyed government support while other less visible players have not. For example, following the Corus restructuring, which resulted in over 7,000 job losses in 2001, the government provided funding to the company and the steel trade unions to set up retraining programmes for displaced workers. After the loss of MG Rover in spring 2005, the government provided help and aid to the tune of £150 million. The near closure of the UK’s coal industry in the 1980s devastated mining communities and in 1999, the Labour Government established the Coalfields Regeneration Trust to assist those areas.

Trades Union Congress

An Industrial Strategy for the United Kingdom

25

References A Sectoral Approach

The support given in the examples above is most welcome. However, in the same quarter as 6,000 jobs were lost at MG Rover, another 21,000 manufacturing jobs were lost across the UK, with little national publicity and no dedicated development funds. The workers displaced had no immediate access to retraining and many will have had to take lower paid and lower skilled work, which in turn will have pushed those with even lower skills into unemployment. One solution would be for the government to make available regional community development funds, which would provide support for the training and retraining of workers who have lost their jobs or where their existing skills are redundant. Loans, grants and other monies could be provided to both existing and new companies to attract them to invest in the local areas to help with regeneration. A particular advantage of these funds is they would be able to help provide new and upgraded skills and training to the local workforce, enabling them to command higher paid jobs in new areas of work. Having an available workforce with high skill levels would make the area more attractive for new incoming companies. These funds could be drawn down and administered through the Regional Development Agencies, involving local training, business and trade union organisations, as was the case with Corus. Of course, various grants are already available in some regions of the UK, under certain conditions.

This paper recommends an audit of local and regional support, in the different parts of the UK, that is available to assist in the training and retraining of workers who have been made redundant or whose skills are out of date. Armed with this information, we further recommend the establishment of community development funds, administered at the regional level, to meet this need for retraining and to ensure that employees from all manufacturing companies, not just those with a high public profile, are assisted through the process of economic restructuring.

State Aid As noted above, it is long-standing TUC policy to achieve a level of State Aid that matches the average of the EU15. In its State Aid Scoreboard, published in th Spring 2005, The European Commission ranked the UK in 12 place, when State Aid is measured as a proportion of value-added. That is an improvement on the last place in which the UK found itself before. We are not seeking an increase in State Aid for the sake of it; we seek the

Trades Union Congress

An Industrial Strategy for the United Kingdom

26

A Sectoral Approach

increase, over time, to fund initiatives such as the policies for strategic champions and community development funds set out above. Furthermore, public money can be invested in a company, without this being deemed State Aid and hence constrained, if the state acts in a way that a private company would in a market economy, by providing loans or capital on similar terms to a private investor – in line with the Market Economy Investor Principle (MEIP). The MEIP is a principle, not a checklist, because all cases are different, so there is never a like-for-like comparison. The MEIP is used to determine whether or not State Aid is involved in the provision of public money to an enterprise and has been a cornerstone of State Aid policy since 1984. The essence of the MEIP is that when a public authority invests in an enterprise on terms and in conditions which would be acceptable to a private investor operating under normal market economy conditions, the investment is not a State Aid. Providing a public loan under the MEIP might be necessary because: •

The nature of banking may make it more difficult to get a commercial loan from a bank; and

•

New firms face particular barriers, which established commercial enterprises do not face.

Banks operate on the basis of risk and credit-scoring. Key criteria for banks include collateral, track records, industrial sectors and geographical areas: •

On an international basis, banks will have quotas on the amount of exposure they can make to any particular sector of business. If the quota is filled, they will not invest further;

•

International banking conventions mean that banks are moving further towards a risk based approach. This means track record is important, which leads to a negative assumption against start up firms;

•

Location also affects credit-scoring. There is no legislation in the UK, as there is in the USA, preventing banks from ‘red-lining’ a location. In theory, banks can ‘red-line’ a location where there have been many previous defaults on loans.

At a European level, there is great pressure for State Aid to be reduced. However, risk-capital is one area where it is recognised that the market is not operating efficiently. The TUC maintains that State Aid should be increased, over time, to the European average. Furthermore, the government should consider how it can support ventures that find it difficult to raise finance on the open market, using the Market Economy Investor Principle. Finally, while it will clearly only be pursued in exceptional circumstances,

Trades Union Congress

An Industrial Strategy for the United Kingdom

27

References A Sectoral Approach

consideration should also be given to situations where the public sector may wish to take a strategic minority public stake in an enterprise.

Trades Union Congress

An Industrial Strategy for the United Kingdom

28

Section four

Global Challenges and Industries of the Future China and India The Chancellor, Gordon Brown, has spoken much about meeting the challenge of China and India. He developed this theme in his speech to the European Parliament’s Committee on Economic and Monetary Affairs in July 2005. He said: “Twenty years ago just 10 per cent of manufactured goods came from developing countries. The challenge from China and India is now such that soon the figure will be 50 per cent. Today, Asia’s share of output stands ready to surpass Europe. In ten years time, the share will be 50 per cent higher. “Today and for the last decade Europe has not only been growing half as much as America but one quarter the rate of China and India. And to give an example from mass manufacturing, which Europe and America once dominated, today one country, China, along is already responsible for manufacturing up to 40 per cent of the world’s TV sets and microwaves, 50 per cent of the world’s cameras, 70 per cent of the world’s photocopiers, and (20) 90 per cent of the world’s children’s toys.” China does, indeed, have a central place in debates about the future of industrial strategy. Employers quote China when arguing against an extension of employment rights in the UK, and for a low regulation and low tax business environment. The threat of low cost Asian producers is also used more generally in attacks on the European social model as uncompetitive and an expensive luxury that Europe can no longer afford as a result of ‘globalisation’. It is, of course, important to look behind the headlines and focus on detail. It is certainly true that imports have increased rapidly between China and the EU15 in recent years. However, the increase in trade with China has been matched by falling trade with other Asian producers. Although imports from China increased by 36 per cent in value between 2000 and 2003, Europe today is (21) importing less from the Asia region than it was in 2000. And while much of the focus has been on imports, China has also been a major source of export growth for Europe – exports grew by 60 per cent in value

Trades Union Congress

An Industrial Strategy for the United Kingdom

29

References Global Challenges

between 2000 and 2003. In contrast, exports to the rest of Asia showed little (22) growth. This restructuring of world trade has not come about by accident. Chinese industrial policy has a set of clear goals in creating industries capable of competing globally and serving the rapidly expanding domestic market. The means has been the expansion of foreign owned production, often in partnership with major domestic Chinese concerns, and the attraction of large sums of overseas capital from the Asia region. This policy has come at a short term price, with significant job-shedding in key Chinese export industries such as electronics and textiles. China first emerged in relatively labour intensive and low cost industries such as textiles in the 1980s, but in the 1990s the focus switched to medium tech industries with higher value added such as industrial machinery and telecommunications equipment. Foreign owned enterprises were initially attracted by China’s low cost base but also increasingly by the expansion of the Chinese domestic market and the progressive opening up of new investment opportunities in new sectors of the economy. Among the different industrial sectors, the market for cars and trucks in China is expanding very rapidly, in contrast to stagnant sales growth in much of the OECD. Forecasts by the German car industry suggest China might become the third biggest market by the end of the decade. Private demand is thought to be one of the main drivers behind this growth with the emergence of a significant middle class within Chinese society. Chinese automotive policy is to establish a Chinese industry primarily to satisfy domestic demand but also to be competitive in world markets through partnerships with foreign producers, while drastically reducing the number of domestic car manufacturers around a few “national champions”. Significant Chinese producers, such as the Shanghai Automotive Industry Corporation (SAIC), typically seek engagement with more than one foreign partner to avoid over-dependence (SAIC has deals with both Volkswagen and GM). In recent years, Chinese imports into the UK have grown less strongly than for the rest of the EU. The big differences, however, are on the export side, where other major European economies have been more successful in exploiting Chinese markets than the UK. Germany, in particular, has nearly doubled exports to China by value since 2000. This is the key reason why the trade balance with China worsened for the UK, but improved for Germany, France (23) and Italy between 2000 and 2003. Germany has been singled out as uncompetitive because of high labour costs and strong employment protection laws, in contrast to the UK’s alleged competitive advantages from a flexible labour market. Yet Germany has been the European success story in exploiting growing markets in low wage China.

Trades Union Congress

An Industrial Strategy for the United Kingdom

30

German exports to China have grown more than five times faster than UK exports to China by value between 2000 and 2003. China and other low wage producers still pose a significant competitive challenge in some markets and this will increase in the future. However, total imports of goods from China (excluding Hong Kong) still account for only four per cent of all goods imported into the UK. In contrast, the UK imports nearly 80 per cent of goods from higher wage OECD economies. Moreover, since 2000 the growing trade deficit has been driven by strong imports from high wage European economies such as Germany, the Netherlands and Italy. (24)

Climate Change and Energy Manufacturing, like the rest of the world, cannot stand still. If we are to accept that relatively low skill, low value manufacturing will migrate to countries with lower labour costs than the UK, we must fight for our share of future, high technology, high skilled areas of production. It is often assumed that the increased focus on an environmentally sustainable future will involve the erosion of some areas of manufacturing; that may be true, but the green challenge will offer enormous possibilities as well. As a signatory to the Kyoto treaty, the UK government is committed to mandatory cuts in our greenhouse gas emissions by at least 12.5 per cent below 1990 levels (the so-called ‘base year’) by 2012. The government’s climate change and sustainable development strategies involve ambitious measures to cut CO2 emissions, reduce reliance on fossil fuels, promote energy efficiency and cut waste. In fact, the government is committed to moving beyond the minimum target set by Kyoto, with national goals announced in 1997 to reduce carbon emissions by 20 per cent and 60 per cent below 1990 levels by 2020 and 2050 respectively. These targets are supported by a wide range of policies, prominent among which is the development of renewable energy (wind, wave and tidal power, hydro-electricity, solar power, biomass and landfill gas). The government’s climate change programme targets are 10 per cent of electricity from renewables by 2010 and 20 per cent by 2020. However, the UK is struggling to adapt its liberalised energy market to the demands of its greenhouse gas targets. Indeed, CO2 emissions have increased in the past two years, a fact contributing to the renewed interest in carbon-free nuclear energy. Employment Opportunities through Renewables Whilst UK manufacturing has been losing 100,000 jobs a year, there is nevertheless abundant evidence of the emerging strength of the UK’s low carbon economy. Our environmental technology industry is a dynamic and growing sector, with a turnover of £25 billion per year and with 400,000

Trades Union Congress

An Industrial Strategy for the United Kingdom

31

References

Global Challenges

(25)

employees . Furthermore, the DTI forecasts that the successful development of a UK wind and tide/wave power industry could create 30,000 new jobs in (26) the UK in the next decade . A Sectoral Approach The manufacture and installation of wind-related technologies offers the longer term prospect of up to 45,000 jobs, whilst a further 7,000 Scottish jobs could be created in wave and tidal power systems by 2010, contributing 10 per cent of Scottish energy. An industry study sets out four scenarios for the waste management industry, including jobs created, (27) ranging from 40,000 to 78,000 . Remanufacturing – the practice of taking end-of-life goods and re-engineering them back to as-new condition, with warranty to match – offers further possibilities. Around 50,000 people are employed in remanufacturing in the (28) UK, in an industry with an economic value of about £5 billion . In the USA, the practice now attracts government subsidies to promote its benefits as a contributor to sustainable development. No such analysis has been conducted in the UK. Leading edge remanufacturers embrace state-of-the-art manufacturing processes, such as lean techniques, investment in people and material traceability. Other EU countries have made great progress in pursuing such industries of the future. In Denmark, 29,000 people work in the renewables sector. After 15 years of investment, wind power contributes 16.7 per cent of energy generation (29) and wind technology is a major export industry . In Germany, 30,000 people work in wind generation, with renewables contributing nine per cent of energy (30) needs, against a national target of 12.5 per cent by 2010 . The energy challenge is huge. However, according to former Energy Minister Mike O’Brien, decoupling growth from environmental damage is both essential and achievable. Since 1990, the UK economy has expanded by over 35%, but (31) CO2 emissions have fallen by at least 12 per cent. The UK has lost the lead in a number of technologies, including wind power, photovoltaic and solar, and in biofuels, such as wood burning in power stations. These sectors will create jobs in the UK, but in installation, maintenance and assembly, rather than in manufacture. However, a number of other technologies, if developed to the operational stage, will have the ability to create manufacturing jobs in the UK. They will also lead to export orders for many years to come. These technologies include: •

Trades Union Congress

Wave and tidal power. At present, the UK is the world-leader in this technology and a number of experimental systems are in place in the UK. One Ocean Power Delivery not only has a prototype called Pelamis (with 90 per cent UK content) operating in the Orkneys, it also has an order for three full sized plants in Portugal, with an option on more. However, without UK orders these additional units are likely to be manufactured in Portugal;

An Industrial Strategy for the United Kingdom

32

•

Biofuels in vehicles. At present, up to five per cent of bioethanol and biodiesel can be mixed with vehicle fuel, without any change or adaptations to engines. These fuels can be produced in the UK, where there is limited use at present. In France, usage is four times, and in Germany six times, higher than in the UK. Brazil is the world leader in this technology;

•

Clean Coal and Carbon Capture. This is another industry in which the UK has a lead in the technology, but there is no full size plant in operation in the UK. Applied to the UK’s current network of 12 coalfired power stations, and with secure contracts for indigenous coal, these technologies offer considerable mining employment potential, as well as significant manufacturing employment potential, to emerging, coal-dependent economies such as India and China.

Policy Suggestions: • • • • •

Trades Union Congress

The DTI should look again at instruments such as the Renewables Obligation, to assist in areas such as wave, tidal, clean coal and carbon capture generation; The pricing mechanism of the electricity sector should be reviewed, to assist new entrants using renewables into the market; Planning permission should be reviewed to make it easier to establish solar and wind generation; Defra and the devolved Executives should include microgeneration in their Affordable Warmth and Warm Front assisted heating renewal schemes; The DTI and Department for Transport should review the fuel obligations to encourage the change to biofuels in the transport sector.

An Industrial Strategy for the United Kingdom

33

References The Role of Government

Section five

The Role of Government Before considering the role of government, it is important to acknowledge the central legal position of competition policy across Europe. The UK’s membership of the European Union makes it impossible – even if it were desirable – to ignore the basic rules of free trade. The TUC has no disagreement with this principle. We sometimes question the fact that competition policy is pursued to excess in the UK, unlike in some other European countries, so, for example, a policy designed to promote social or employment inclusivity might be rejected if it cannot meet the most exacting standards on competitiveness. We are committed to the principle of open competition but do not believe this is the only, or even the most important, criteria to be pursued at all times, irrespective of other social or political goals. In accordance with this principle, we urge that, in multilateral trading systems, no unfair barriers to trade exist to prevent the sale of UK exports, in raw materials such as steel or in products such as motor cars. Efforts by the DTI to eliminate trade barriers will receive the full support of the TUC. In order to deliver a successful manufacturing industry in a competitive world, the TUC believes that the first task of government is to deliver a stable and growing economy within which business can operate. The current government has done this highly successfully and is deserving of great credit: inflation is low, employment high and unemployment at record low levels. We supported the establishment of the Manufacturing Forum in 2004. This Forum, which enjoys full trade union participation, has set up three sub groups, to develop policy on public procurement, skills and the image of manufacturing. Those groups have pursued initiatives such as: the use of social clauses, covering skills, equality and sustainability in public sector contracts; the establishment of a Manufacturing Skills Academy; and the development of a modern definition of manufacturing, that may prove more attractive to young people and to women. A particularly important strand of work undertaken by the Manufacturing Forum has been to identify ways to increase the positive profile of manufacturing in schools and the higher education sector. The Forum has subdivided this audience to cover: pupils/students; teachers; parents; and careers advisors. It is understood that there are competing initiatives in this area and that, in some instances, a more specific manufacturing focus is necessary among those delivering these messages. Nevertheless, for a relatively modest amount of DTI support, it is anticipated that a strategy can be developed to

Trades Union Congress

An Industrial Strategy for the United Kingdom

34

The Role of Government

increase links to schools and colleges. We urge that this activity is pursued as a matter of priority. The DTI Manufacturing Advisory Service (MAS) has also been a success. Delivered through ten regional centres covering England and Wales, MAS is an integrated support service to industry. Information, advice and follow-up support, delivered through the regional centres, is supplemented by specialist assistance from technology institutes, manufacturing centres, centres of expertise in skills and training, industry sector bodies and others. MAS has been charged with delivering over £250 million of added value for manufacturing companies between 2005 and 2008. A concern that is increasingly familiar to trade unions within manufacturing is the effect that high energy prices have on competitiveness. The costs incurred in the UK are higher than those in other EU countries and at the September 2005 Congress, the TUC called on the government to eliminate this unfair competitive disadvantage and encourage progress by British companies in increasing energy efficiency and reducing carbon dioxide emissions, without damage to British manufacturing employment and production. The TUC believes that government should use the tax system to encourage companies to invest in the skills, innovation, and research and development that we must embrace if we are to meet the Asian challenge in the years to come. In successive Budgets, the Chancellor has sought to do exactly this. The TUC has some concern about the extent to which this has worked: employers themselves admit that voluntarism often fails, whilst opposing compulsion. It is misguided to believe that companies will always act from enlightened selfinterest, since there is enough evidence to show that many do not do so. Regulation must be considered where voluntarism consistently fails to deliver. One way of helping to encourage investment is to make full use of the new EU st Public Sector and Utilities Directives. These come into force in the UK on 31 January 2006 and allow public sector bodies to stipulate activity such as skills training, minimum standards, equality for women, black and minority ethnic communities and disabled people, and addressing pockets of long-term unemployment. The Directives also allow the promotion of sustainable procurement. The public sector spends more than £125 billion every year on goods and services, making it a major purchaser. The TUC fully understands and, indeed, shares the desire to spend taxpayers’ money carefully. Yet we also know that short-term costs often result in longer-term savings. So if, for example, public sector procurers were to require anyone bidding for a contract to include properly funded and accredited skills training for the employees delivering that contract, this may increase the cost of the good or service in the short-term, but will add to the skills pool, and increase UK productivity, over time. Similarly, integrating black and minority ethnic workers, who are more likely to be long-term unemployed, into the workforce allows them to contribute to

Trades Union Congress

An Industrial Strategy for the United Kingdom

35

References The Role of Government

the Exchequer, rather than take from it, over time. It is for these reasons that we seek the full implementation of the new Public Sector and Utilities Directives. The fact that the government is introducing the Directives in a minimalist fashion, which does not make full use of these opportunities and is contrary to the spirit of the new Directives, is both unfortunate and a huge missed opportunity. Even at this late stage, the TUC urges the government to implement the Directives fully. Public procurement must also be used to support UK manufacturing in its widest sense. It is important to develop more high performance workplaces. As the DTI has made clear, such workplaces include mechanisms such as high employee involvement practices, human resources policies, including sophisticated recruitment processes, work redesign and mentoring, and reward and commitment practices, including family-friendly policies, job rotation and flexi hours. In spite of evidence demonstrating the improved productivity of such mechanisms, too few companies adopt the high performance route. If the economy is to operate at optimum level, we must improve productivity and employment in every region on the UK. At present, there are significant and persistent differences in economic performance between and within UK regions. Greater productivity requires more innovation, which, in turn, depends partly on research and development. As the DTI Innovation Report points out: “there is a very pronounced concentration of research and development activity in the Southern and Eastern areas of England, even when adjustments are made for population differences. This largely reflects the decisions of a few large (32) companies in R&D intensive industries to locate their activities there.” Innovation should not simply focus on new technology and R&D. Innovative working practices, including high performance models, have been proven to be effective. They can utilise the experience and ideas of individual employees who are not routinely involved in company decision-making, even though they can be the very people who encounter operational difficulties when putting new ideas into practice. Evidence shows that the intensity of innovation in a region depends critically on the relationships between leading businesses and local universities. The TUC urges the government to continue to support science through public spending, but to consider ways to spread this work outside Oxbridge, the South East and the Home Counties. Inward investment can help to transform the economic performance of particular regions, as the North East discovered in the 1980s with the arrival of Japanese companies such as Nissan, Komatsu and NSK, and South Wales

Trades Union Congress

An Industrial Strategy for the United Kingdom

36

The Role of Government

also experienced with Sony, Panasonic and 3M. Inward investment can also help to promote clusters, which bring together companies making different products for the same industry and which are mutually dependent on each other. The TUC also seeks action on short-termism. The buying and selling of shares based on quarterly results discourages structural investment which can make a company more profitable and successful in the longer term. This works to the detriment of long-term shareholders and employees, who have made a deeper commitment to the company. Various ideas, including the granting of voting rights to shareholders after a certain amount of time, rather than as soon as they have bought the shares, and tax incentives to promote the longer-term ownership of shares, have been suggested. The TUC will return to this issue after further consideration, but we urge the government to investigate the current unsatisfactory situation and to bring forward proposals to promote longevity. The main argument of this paper, however, is for government to adopt the principle of the national or European champion. Clearly this must be done with some care. The TUC believes it should only be done on a case-by-case basis. Any company must fulfil certain criteria in order to be considered a champion. It must exist in a sector of industry that can grow with investment and that has wider benefits in terms of employment, innovation and research and development. It is very important to avoid, and to be seen to avoid, the simple giving of money to ‘lame duck’ industries. A champion should meet terms similar to those identified in the defence industrial policy: it should be in an area that can encourage technology transfer and ensure investment in particular industrial capabilities in the UK. Both quality and quantity of the industrial participation will be relevant. It should be in an area of high value to the industrial economy and in capabilities which, once lost, would be difficult to recreate in the future. Such capabilities might be evaluated according to their potential for world markets, their promotion of high value economic activity (including to attract inward investment) and their regional impact, including the number and quality of UK-based jobs created or sustained. Most ‘champions’ will rarely, if ever, need or qualify for government support. Those that do benefit from funding to restructure or to get past short term difficulties must submit a growth plan and must demonstrate how the company expects to grow after the short term needs of the funding are met. Other European governments, as well as some members of the European Commission, support the concept of ‘champions’. It is misguided to simply dismiss this as old-style government interference. The role of the market is vital, but markets are fallible. An industrial strategy that recognises national or European champions can step in to support industry when the market fails.

Trades Union Congress

An Industrial Strategy for the United Kingdom

37

The Role of Government References

Voluntarism has been failing for too long. Despite the exhortations of ministers, too few companies invest in skills, innovation and high performance work systems. Unless this is addressed, the UK cannot hope to meet the modern manufacturing challenge. For this reason, an inquiry, undertaken by the Manufacturing Forum, should be held to investigate this problem and to recommend solutions. In order to deliver the recommendations set out above, joined-up government is vital. Too often, the aims of different government departments are at odds with each other. Any industrial strategy must be supported not only by the DTI, but also by Defra and, most important, the Treasury. Finally, any strategy must have a means by which its success or failure is measured. The government, the TUC and the CBI should agree a set of key performance indicators which should be revisited at regular intervals to ensure the industrial strategy is on course.

Trades Union Congress

An Industrial Strategy for the United Kingdom

38

Conclusions and Recommendations

Section six

Conclusions and Recommendations

Trades Union Congress

•

The government should continue to pursue policies designed to ensure macroeconomic stability, growth, low inflation and high employment.

•

The emphasis on investment in skills, infrastructure, research and development, and innovation, should remain.

•

The government should develop an active industrial policy, to protect and enhance modern manufacturing capacity.

•

This strategy should recognise the contribution made to economic success, economic and social cohesion, thriving communities and a high quality of life by a vibrant manufacturing sector.

•

Central to the manufacturing strategy should be the availability of financial support to strategic champions at UK or EU level, where these companies need to restructure or face short term difficulties but have long term potential. Factors determining the potential of a champion should be similar to the elements set out in the defence industrial strategy, namely: o

Its potential for world markets;

o

The extent to which it will generate economic activity of a high value added nature (including its potential for incorporation in collaborative programmes in Europe or elsewhere);

o

Its impact on industrial activity regionally (including the number and quality of UK-based jobs that are created or sustained).

•

A rigorous method of assessing whether these criteria have been met must be developed, as must a process for establishing a short-, mediumand long-term development strategy for the company concerned.

•

Community development funds should be made available and administered by RDAs, to fund the training and retraining of workers who have been made redundant or whose skills need updating.

•

The government should fully implement the EU Public Sector and Utilities Directives, with accompanying guidance to explain to public

An Industrial Strategy for the United Kingdom

39

References Conclusions and Recommendations

sector bodies the opportunities for including social, economic and environmental criteria into tender documents.

Trades Union Congress

•

Efforts must be made to develop an effective, integrated transport strategy, to help deliver economic success to all regions of the UK.

•

The government should investigate how to encourage the longer-term ownership of shares, to enhance the ability of champions to invest in vital technologies or skills of the future, without fear of losing shareholder support.

•

The Manufacturing Forum should establish an inquiry, involving ministers, the CBI, the TUC, the RDAs and academics, to investigate the extent to which some companies fail to invest in skills, innovation and high performance work systems, and to identify solutions.

An Industrial Strategy for the United Kingdom

40

Regional Developments

Appendix One

Regional Developments This paper has concerned itself with industrial strategy at the national level. Of course, much activity takes place at regional and sub-regional level, led by Regional Development Agencies (RDAs), on which trade unions are represented. Some examples of the work of RDAs, provided by TUC regional offices, are listed below. These are followed by policy prescriptions to increase regional opportunities.

Ford Diesel Plant - Dagenham In 2004, the Ford diesel engine manufacturing facility at Dagenham found itself in competition with plants in the Czech Republic and Spain for the manufacture of the new DV4 and DV6 diesel engines. Should Dagenham have failed to secure this work, the future of the entire plant would have been jeopardised. This would , in turn, have had serious negative implications for Ford’s world-class research and development facility at the Dunton Technical Centre in nearby Basildon. Production of the engines at Dagenham necessitated large capital investment but also workforce up-skilling, in order to meet required productivity targets. Following discussions with management and unions, a decision was made to put together a workforce development package, thereby enhancing the investment potential of the Dagenham plant. The London Development Agency (£9.2 million) in partnership with London East Learning and Skills Council (£3.8 million) put together a training and workforce development package worth £13 million, alongside a £4.5 million grant from the DTI through its Selective Finance for Investment in England (SFIE) scheme. Using the nearby Centre for Manufacturing Excellence, 1,800 Ford workers would be trained to a minimum NVQ Level 2 in order to meet the skills requirements of the new production line. In December 2004, Ford Motor Company announced a £169 million investment in the Dagenham plant, thereby securing diesel engine production for the next 10 years and providing an additional 700 jobs.

Trades Union Congress

An Industrial Strategy for the United Kingdom

41

References Regional Developments

Hatton Garden Skills and Links Project Around 10,000 workers are employed in the jewellery production industry in London, around a quarter of whom work in the cluster of 400 businesses concentrated in Hatton Garden. Jewellery production in the region faces stiff competition from foreign competitors. Combined with this, local employers reported severe skills shortages and difficulties recruiting skilled operatives in jewellery production. In 2003, the London Development Agency launched its LDA2 programme, which provided funding for locally delivered employment, training and business support schemes with the specific target of creating pathways to employment for disadvantaged groups. LDA2 funding to £420,000 was provided to the Hatton Garden Skills and Links Project, which aims to provide training places to local people. The fund was provided on the dual premise of tackling low skills and long-term unemployment among local people whilst providing a new cohort of trainees for the regional jewellery industry. 200 places for jewellery production-related training were provided for local people, at least 80 of which were defined as from disadvantaged backgrounds. In 2004, Hatton Garden was voted as the most enterprising area in London in the ‘Enterprising London’ awards. Jason Holt, who leads the Hatton Garden Skills and Links Project, said: ‘The work that has been done in Hatton Garden to support jewellery businesses in London is not about being virtuous. It was and remains the only way we can thrive, as we depend on a strong jewellery industry in London and the rest of the country. Our project enabled businesses and the public sector to work together to bring benefits to local firms and communities. It has been fantastic to have been given the opportunity to help revive this traditional industry which still plays a vital role in the capital's economy.’

High Performance Work Systems Project – North East of England The TUC is delivering a project funded by One NorthEast, part of which is seeking to strengthen understanding and awareness within the region of the important contribution of High Performance Workplace Systems to company level and broader regional productivity. This project is working with unions and employers in the public and private sectors. It has also received input into similar work being developed by the North East Employee Relations Forum. The North East Productivity Alliance and the Regional Centre for Manufacturing Excellence are also working to help deliver productivity improvements within the region’s manufacturing sector, based mainly on delivering improvements in working techniques, use of new plant equipment, etc.

Trades Union Congress

An Industrial Strategy for the United Kingdom

42

These examples show the value of what can be achieved at regional level. They are also proactive; regional development support is too often characterised by ‘fire-fighting’ in response to problems arising or existing in deprived areas. The TUC would like to see forward looking sector development strategies in areas of manufacturing that provide export, cluster development and research and development opportunities, in order that regional manufacturing industries can look forward to stability and growth.

Trades Union Congress

An Industrial Strategy for the United Kingdom

43

References

References (1) ‘Investing in our future: Fairness and opportunity for Britain’s hardth working families’, Budget 2005, 16 March 2005. th

(2) Hansard, 16 March 2005. (3) ‘Competing in the Global Economy – The Manufacturing Strategy Two Years On’, Department of Trade and Industry, July 2004. (4) ‘Implementing the Community Lisbon Programme: A policy framework to strengthen EU manufacturing – towards a more integrated approach for Industrial Policy’, Brussels, 5.10.2005 COM (2005) 474 final. th

(5) ‘European Comment: A dangerous game’, Financial Times, 26 April 2004. th

(6) ‘Sarkozy vows to rein in France’s spending’, Financial Times, 5 May 2004. (7) ‘France seeks to combat de-industrialisation with tax breaks’, th EurActive.com, 24 September 2004. (8) ‘As retail reform stalls, interventionist French industrial policy is set to th continue’, Financial Times, 4 December 2004 (9) Eurostat yearbook 2004. (10) ‘Germany is Back’, Gerhard Schroeder, Wall Street Journal Europe, 30 December 2004. nd

(11) ‘Creating Euro giants – Industrial policy’, The Economist, 22 May 2004. (12) Eurostat yearbook 2004. (13) Eurostat yearbook 2004. (14) ‘Sweden’s new Social Democratic Model’, Robert Taylor, 2005. (15) Macroeconomic Policy Making – Lessons from Austro-Keynesianism’, Franz Nauschnigg, 2005. (16) Sectoral Specialisation in Austria and the EU15’, Jurgen Janger and Karin Wagner, ‘Monetary Policy and the Economy’, Q2 2004. (17) Defence Industrial Policy, Ministry of Defence, October 2002. (18) ‘The Airbus Story’, Flug Review, February 2000. (19) ‘The future of the EU car industry: stakeholders have their say’, European th Commission, 26 April 2005. (20) Speech to European Parliament Committee on Economic and Monetary th Affairs, Gordon Brown, 12 July 2005. (21) EU Commission, quoted in ‘China, Europe and UK Manufacturing’, TUC, 2004.

Trades Union Congress

An Industrial Strategy for the United Kingdom

44

(22) EU Commission, quoted in ‘China, Europe and UK Manufacturing’, TUC, 2004. (23) EU Commission, quoted in ‘China, Europe and UK Manufacturing’, TUC, 2004. (24) ‘China, Europe and UK Manufacturing’, TUC, 2004. (25) ‘Securing the Future: Delivering the UK Sustainable Development Strategy’, DEFRA, 2005. (26) ‘Greening the Workplace’, TUC, 2005. (27) ‘Future Perfect’, Biffa, 2003. (28) Remanufacturing in the UK: A Significant Contributor to Sustainable Development’, SEEDA, 2003. (29) ‘Greening the Workplace’, TUC, 2005. (30) ‘Greening the Workplace’, TUC, 2005. (31) ‘Greenworks’, Trade Union Sustainable Development Advisory Committee, March 2005. (32) ‘Productivity in the UK: the Regional Dimension’, HM Treasury and Department of Trade and Industry, November 2001.

Trades Union Congress

An Industrial Strategy for the United Kingdom

45

References

Trades Union Congress

An Industrial Strategy for the United Kingdom

46

Trades Union Congress Congress House Great Russell Street London WC1B 3LS www.tuc.org.uk

contact: Tim Page 020 7467 1202 [email protected]

© 2005 Trades Union Congress £ 5.00 ISBN 1 85006 For more copies of this title contact our ordering point on 020 7467 1294 or [email protected]. Bulk discounts may be offered. All TUC publications may be made available for dyslexic or visually impaired readers, on request, in an agreed electronic format or in accessible formats such as Braille, audiotape and large print, at no extra cost.