Manufacturing Industry

HL Deb 07 December 1994 vol 559 cc925-33

3.8 p.m.

Lord Trefgarne rose to call attention to the importance of increased output from United Kingdom manufacturing industry, with particular reference to the contribution made by small and medium sized enterprises; and to move for Papers.

The noble Lord said: My Lords, in rising to move the Motion standing in my name on the Order Paper, perhaps I may start by quoting from the Government's White Paper on competitiveness published in May 1994. At that time they said: A competitive manufacturing sector is essential for our long term prosperity. The share of manufacturing in total output has fallen over time in the UK and in other major economies. But manufacturing is a major employer and its output, more than any other sector, is tested on international markets". Let me emphasise that if our manufacturing companies are to compete successfully there is an urgent need for improved efficiency in the areas of manufacturing production, marketing and sales. At its simplest that is ensuring that we have the right product at the right price available in the right markets. In order to achieve those aims there is a vital need for sound and stable financial policies, leading to investment in plant, people, the infrastructure and, above all, education and training.

One area where government support is of importance is in the promotion and support of exports, both in European and world markets. Thus the work of ECGD in long and medium-term credit guarantees is of continuing and vital importance. Shorter term facilities are now provided by the privatised NCM company which appears to be going pretty well. But even in that market a continuing element of government involvement continues to be essential, if only in relation to political risk.

Turning to the position of our companies within the European Union and hence the single European market, I warmly applaud the position taken by Her Majesty's Government, not least in their rejection of the social chapter of the Maastricht Treaty which I believe would lead to reduced employment opportunities in the United Kingdom and greater difficulty for employers in other ways also. I should mention in parenthesis at this stage that I am the Honorary President of the Mechanical and Metal Trades Confederation and I know that my views are almost universally shared by METCOM members.

Within the broad scope of manufacturing, I should like to draw your Lordships' attention to the significant role played by small and medium-sized enterprises. These firms are defined as employing fewer than 500 people and are generally known as SMEs. It may come as a surprise to learn that more than half of all people employed in the United Kingdom work for such companies. Many of these firms employ only one or two people and empirical evidence gathered from research carried out at Warwick University suggests that such tiny organisations tend to stay small. But, of course, just one more employee for all of them would make a huge difference to our unemployment figures. The Smaller Firms Council of the CBI has estimated that there are some 100,000 firms employing between 20 and 500 people. Of those, 25,000 have been identified as expecting to grow substantially. These surely are the companies which need help and support.

What are the characteristics of these companies and what kind of support do they need? First, there must be motivational and entrepreneurial drive by the owners and the key managers. This must come from within the business itself. Without it nothing can be achieved.

Secondly, there must be a carefully planned product policy which requires both R&D and market research which is often beyond the resources of smaller companies. It has to be said that these smaller companies sometimes eschew this approach to business and, rather than focusing on becoming winners and leaders in their chosen field, become diffused in their efforts and end up "Jack-of-all-trades and master of none"! Clearly, that is wholly undesirable. One of the very important services provided over recent years by the DTI has been the availability of consultancy services, especially to smaller companies, for the purposes to which I have referred. I believe that these arrangements have made a most valuable contribution to improving the competitiveness of companies in this sector, and I hope that they will continue.

Thirdly, there is a need for professional marketing and selling of the product and, again, small companies often lack real experience and training in these areas. This is a matter on which consultants can no doubt offer some guidance, but perhaps more importantly—particularly in overseas markets—is the selection of appropriate agents in the countries concerned. Here I wish to applaud the work of our missions overseas which are able to identify suitable local partners and bring them together with British exporters. I should perhaps remind your Lordships at this point that much of the work of small companies is very often as sub-contractors to larger enterprises, so the fact that I am, on this occasion, focusing on the needs of the smaller companies should not blind us to the important consideration that their health is equally dependent upon that of their larger cousins. So much, if not all, of the encouragement I seek for SMEs should apply equally to the larger enterprises.

Fourthly, finance is the lifeblood of any business and is especially vital as small and medium-sized companies strive to grow, especially when operating in the export field. I am not sure that the range of sources of finance available to SMEs is adequate—too many rely almost solely on their bank—but let us discuss that on another occasion.

Perhaps the most important area in which the Government can assist in the creation, growth and continued health of smaller companies is in the reduction of bureaucracy and regulation. Here I must applaud the various initiatives which have emerged recently from the DTI from the personal spur, we understand, of the President of the Board of Trade himself. There is still a long way to go, not least in containing the plethora of directives, rules and regulations which emerge from Brussels—we had a flavour of that at Question Time—but I urge my right honourable friend to redouble his efforts in this area. It is, in my view, the single most important aspect of government oversight of business generally and small businesses in particular.

I now turn to the vital area of training and education. I quote my right honourable friend the Prime Minister who, in the introduction to the White Paper to which I referred, said: I believe we must give our young people the highest standards of education and training. These skills will be the key to our future". Perhaps I should say, in parenthesis again, that I have recently been appointed chairman of the Engineering Training Authority, so clearly I must take the Prime Minister's words closely to heart.

To compete effectively in international markets, the United Kingdom must address the immediate issue of skills training. In the longer term, we need to examine how our education system must develop to bring about greater levels of achievement. Compared with our main international competitors, the United Kingdom is consistently shown to be well behind in this area. This is the case in all levels of skills but especially for the intermediate levels—those traditionally described as craft, technician and supervisory skills.

Recent research carried out by the Engineering Training Authority shows that an encouraging 80 per cent. of engineering sites with 500 or more employees are implementing the new national vocational qualifications. Equally promising is the significant interest employers expressed in using NVQs at the higher levels—the very levels appropriate to the crucial intermediate skills, to which I have referred. But there is some evidence that smaller companies are not in the vanguard of these welcome developments. I hope that they will be in the future.

Investors in People is an important mechanism for employers to develop workforce skills and competence as an integrated part of the organisation's business plan. The importance of this initiative was underlined in the White Paper, to which I referred, and rightly so. There is, however, a risk that smaller companies may tend to dismiss these ideas as irrelevant to their needs. I do not agree. No company is too small to benefit from the proper management of its human resources, and Investors in People helps them to do just that.

The Government's firm commitment to modern apprenticeships is to be applauded. Prototype schemes are currently running in 17 sectors, the largest of those being engineering manufacturing. The Employment Department has pledged further major funds over the next three years to support launches in other sectors. Let us hope that they do not fall foul of whatever changes my right honourable friend the Chancellor of the Exchequer may announce tomorrow, following his "little local difficulty" in the other place last night.

Modern apprenticeships are an excellent means of giving quality training, providing young people with a foundation on which to develop a career or a route to higher education. Whatever the chosen path, modern apprenticeships, with their educational and core skills components, offer a sound basis for life-long learning which is so necessary in helping young people to adapt to change and cope flexibly with varying demands.

In an industry which has seen the number of trainees fall by about a third in fewer than three years, this initiative is an excellent opportunity to reverse this trend and to raise our intermediate skills levels to international standards.

Turning now to education, as distinct from training, the United Kingdom's failure to rank high in the industry league can, in part, be attributed to a comparatively poor output from our nation's schools. A study showed that in 1991, only 27 per cent. of 16 year-olds in the United Kingdom achieved GCSE grades A to C in the national language, maths and science, compared with 62 per cent. in Germany and 66 per cent. in France. United Kingdom pupils achieving two A-levels or equivalent numbered only 28 per cent. compared with 68 per cent. and 48 per cent. in the same countries. This country's highly selective approach to education, together with its emphasis on academic study, serve the minority well, no doubt, but the majority poorly. A fundamental cultural change is needed to bring about the acceptance of vocational courses. This change is crucially important if the manufacturing industry is not to lose out.

My Motion calls attention to the importance of increased output from all sectors of UK manufacturing industry including, in particular, smaller companies. But this vitally important increased output depends crucially upon our companies increasing their efficiency and hence their competitiveness if they are to compete not only here at home but more widely across Europe and the world. We have made enormous strides in the right direction in recent years as our economic recovery now demonstrates. But there is still much to be done. I believe that the main thrust of government policy is in the right direction and I commend the enthusiasm and drive of Ministers in this regard. But in the end our future depends not upon Ministers, regardless of their political complexion, but on the companies themselves. My Lords, I beg to move for Papers.

3.20 p.m.

Lord Haskel

My Lords, I start by apologising to the House for the fact that I may have to leave before the end of this debate in view of the delay that will arise from the Statement which is to be made. I shall read the Minister's response and the last few contributions in Hansard with great interest.

I am most grateful to the noble Lord, Lord Trefgarne, for moving this Motion because in it he states precisely the objective of the Department of Trade and Industry. It is to increase the output from United Kingdom manufacturing industry while maintaining and expanding the wealth of every citizen. The short answer is to produce more world-class products in the United Kingdom and for the small and medium-sized enterprises to become suppliers to those companies producing them, if they are not end-producers themselves.

We must start from the point of view that international comparisons indicate that there is plenty of under-performance by our manufacturing sector, particularly among the small and medium-sized enterprises, and we must catch up. How are we to achieve that objective?

Much research shows that most manufacturing small and medium-sized enterprises are single product companies often supplying niche markets. Their future is often tied to the life cycle of their product, or to where the economy is in the economic cycle. When their product becomes obsolete, or the market moves on, everything depends on the owner or manager. Does he or she have the ability, the money, the vision or the wish to move on also?

Again, research has shown that the small and medium-sized enterprise will progress if at this stage it is a supplier to a world-class manufacturer, or to a major original equipment manufacturer or to an important retailer. The close association with such a company will have forced the small and medium-sized enterprise to progress. Their customers will have forced the company to introduce new technology, new best practice, to innovate and to become competitive. These relationships are extremely important. We have all read about retailers and manufacturers cutting back on the number of their suppliers. They do this to concentrate on improving the performance of their suppliers. The hope is that these suppliers become world class and continue to be world class. This culture of buying by developing relationships and not purely on price is becoming more important in UK manufacturing. Not only in the private sector but also large public-sector purchasers, such as the Post Office and the National Health Service, are playing an important role in this.

Of course, the customers of small and medium-sized enterprises can be in the United Kingdom, in Europe or anywhere in the world. In manufacturing it is developing these relationships which is important, and if we wish to increase the output from the United Kingdom manufacturers it is up to the DTI to encourage this activity. Perhaps the Minister will tell us what plans his department has to speed up this work.

If one believes in that scenario, as I do, a number of things follow. First, it is long term. The main element for a successful long-term strategy of this kind is for government to get away from the stop-go roller coaster economy that we have experienced during my business life. I hear what the Government say about the current positive economic outlook, but many believe that nothing fundamental has changed and that we are at the start of a period of go after a long period of stop. Perhaps that is why the current levels of investment are disappointingly low.

A second principle that follows from my scenario concerns the people working in manufacturing. My experience is rather different to that of the noble Lord, Lord Trefgarne. To create a prosperous manufacturing sector we must move away from the casualisation of the workforce. A modern manufacturing economy demands more training, skill, versatility, commitment, education, and initiative from its workforce. But you do not achieve that by punishing people with fewer social benefits than their colleagues in the rest of Europe and by casualising the labour market.

Thirdly, the relationship between government and industry changes. Most successful manufacturing nations have governments which have developed a partnership with industry to the overall benefit of the nation as a whole. This partnership provides investment in the infrastructure necessary for manufacturing to be competitive. Between 1980 and 1990 the Japanese Government invested 5.1 per cent. of their gross domestic product and their growth rate was 3.8 per cent. We invested 1.9 per cent. of our gross domestic product and our growth rate was only 1.7 per cent. I leave your Lordships to draw the conclusions.

Another element of this partnership is that government should welcome the desire of purchasers to improve their suppliers rather than to continually shop around for alternative sources. Even though this leads to customers and suppliers becoming interdependent, it is nevertheless the task of government to encourage a vigorous competition policy. At present they are failing to do this.

Part of this partnership is also for government to discourage unrealistically high expectations from returns on investment and to deter short-termism in investment in manufacturing industry. I was pleased to see in the Financial Times of 5th December that the investigation into why UK companies need to pay higher dividends than companies elsewhere is being reinstated after it was cancelled earlier this year because the noble Lord, Lord Hanson, wrote to the Financial Secretary to the Treasury and accused him of acting like a socialist.

A word about inward investment. This is a welcome addition to our weak manufacturing base. It has brought jobs, new technology, and raised standards, but it is not an alternative and it is expensive in grants. Remember that the employment created is dependent on continued support from overseas investors. If we become too dependent on overseas investors, then our own ability to create manufacturing businesses will decrease.

In 1993, £9.5 billion was invested in Britain by overseas companies, but UK companies invested £17.2 billion overseas. UK manufacturing needs investment. Perhaps the Minister can say how we can redress this balance.

There are thus many elements in increasing the output of UK manufacturing and the balance is changing all the time. It is essential to get the balance right. If we improve training and fall down on quality, then all we will do is end up with a better educated army of unemployed. I welcome the research being carried out by the Warwick Business School and the Federation for Manufacturing Industry in this area.

Growth in UK manufacturing depends on our ability to produce world-class products. We will do it by the methods I have outlined which we on these Benches call "an active modern industrial policy". We do not seek intervention for intervention's sake. We see it as a means of working in partnership with manufacturing to make the market economy really dynamic.

3.29 p.m.

Lord Weatherill

My Lords, we are all indebted to the noble Lord, Lord Trefgarne, for initiating a debate on the very important subject of the contribution that is made by small and medium-sized businesses. I am pleased to return to the subject of my maiden speech not only in this House but also, incidentally, in another place many years ago when I spoke about the youth employment service. It is a plain fact that important though big businesses are in the manufacturing sector, it is to small firms and, in particular, new businesses that we must look to provide the jobs of the future and at the same time to make a vitally important contribution to solving many of our country's social problems which arise undoubtedly from unemployment.

I seek to intervene today on behalf of new businesses. I trust that I am qualified to do so from personal experience. I was apprenticed to the business that had been started by my father way back in 1912. I was not apprenticed in 1912, although some people may think so! My father had led the last successful strike of tailors. He was crippled and unemployed. I regularly go round schools these days talking about the good old days; but they were not so good if you were poor and had very little education. As my father was unemployable, he therefore had to set up on his own account. We still have the bicycle with a small wheel at the front and a bigger wheel at the back on which he used to cycle out to take the orders and then cycle back and deliver the clothes when he had made them. I entered a business which started in South Ascot and which, I am proud to say, is now in Savile Row. It is not a big business, but it employs a considerable number of people, and two-thirds of our turnover is in overseas markets.

Self-employment offers a way out of unemployment, particularly for those who are made redundant, and especially for young people for whom the inability to find a job breeds a cycle of alienation which is a threat to the quality of life in our country. No organisation knows more about those problems than the Prince's Youth Business Trust, of which I am proud to be a trustee. The trust started through the personal initiative of His Royal Highness the Prince of Wales and can claim to be the biggest—the No. 1—youth start-up organisation in the country. If a Japanese company comes to our country and creates 1,000 jobs, we lay a red carpet half way down the M.1 to congratulate it, yet the Prince's Youth Business Trust has established 24,000 new businesses since its inception, with 3,000 being created in the past year. Of those new businesses, 40 per cent. were started by females; 15 per cent. by the ethnic minority communities; 5 per cent. by the disabled; and a number were begun by former young offenders. It is a remarkable success story which should be better known, more widely appreciated and more positively supported.

The trust provides "soft" loans, small grants and post-start-up advice to those between the ages of 18 and 29, who the banks will not consider. However, no one is given money without being assigned a business adviser. That has ensured that two-thirds of the new businesses started in the past three years are still trading today. That is a much higher success rate than any of the banks can claim. Those who assist as business advisers do so voluntarily. They are all experienced people. Some are retired, but others are still working as managers in large firms and successful businesses.

The average net cost of taking someone off the unemployment register and putting him or her to work in this way is £2,500 per annum. That is far far less than the cost of a year of unemployment. The trust is able to be so successful and cost-effective because a high proportion of its staff are seconded from the private sector, and because some 6,000 people give their time voluntarily to support its work. One of them is the noble Lord, Lord Mason of Barnsley, who has been chairman of the South Yorkshire Board of the Prince's Youth Business Trust since its inception. He is one of 38 such chairmen throughout the United Kingdom. It must be true that the Prince's Youth Business Trust is the largest free consultancy service in the world.

I am also patron of Croydon Business Ventures, an enterprise agency in my former constituency of Croydon, North-East. Some 13 years ago, shortly after I was chosen as Speaker of another place, I attempted to attend a party on the ground floor of the House of Commons. I was dragged into a room by the honourable Member for Bow and Poplar who, pulling me in, said, "I am very anxious to introduce you all to our new Speaker, Sir Jasper More". I said, "I suppose that I ought to know your name". The name of that organisation was the Tower Hamlets Enterprise Agency. I went to visit it and resolved that we would have such an agency in my constituency. I wrote a letter to 12 friends saying, "Please send me £1,000", and giving a telephone number. All of them rang me up, asking why I wanted the money. I said, "To finance your future competitors". We have been in business now for 10 years, during which time we have established 1,170 new businesses and provided, we estimate, 5,300 new jobs in Croydon. Despite difficult times, three-quarters of those businesses have survived. We estimate that Croydon Business Ventures generates £100 million turnover per year. Some of those businesses, which started from scratch, have grown into quite big firms. The average turnover is £76,000, and 37 per cent. of the firms have a turnover of between £100,000 and £500,000.

It is good that the Minister who is responsible for small firms is a Member of your Lordships' House because I should like to address a number of concerns directly to the noble Earl, Lord Ferrers, who is to reply to the debate. First, both the Prince's Youth Business Trust and Croydon Business Ventures, like other enterprise agencies, are concerned about the business start-up scheme, which was previously known as the enterprise allowance. The latter seemed a good phrase and it is a pity that it has been dropped. Many small enterprises have depended on that allowance to help them through the crucial start-up phase. I hope that the noble Earl will be able to reassure the House that that crucially important allowance will not be neutered, let alone done away with.

A further worry is the trend to focus TEC and the Business Links support on firms with between 20 and 200 employees. Few firms start with 20 employees, and to reduce support from the very small enterprises and new businesses that have been nurtured by the PYBT and the enterprise agencies is to cut off at source one of the key features of healthy industrial and commercial birth. I must tell the Minister that there is considerable concern that local enterprise agencies, which as I have sought to prove have been highly successful in helping to establish new businesses, may themselves not survive if, as seems possible, TECs and Business Links put a lower priority on the future of small enterprises. For many small businesses, the loss of the business start-up scheme would be a major blow; but the loss of the associated start-up training would, if anything, be worse leading inevitably to a higher rate of business failure. I hope therefore that the Minister will intervene on their behalf to ensure that those important sources of funding are not cut off.

Napoleon never did say that we were a nation of shopkeepers. What he did say was that we were a nation of merchant adventurers. Britain's prosperity in the past, and also in the future, is, and will be, dependent upon trade, and in particular upon a healthy manufacturing base. We must not be simply a nation of shopkeepers selling other people's goods. Of course, as other noble Lords have said, big businesses, as major employers, must be the concern of the Government; but employment in that sector has declined steadily since 1980, while employment in small and medium-sized enterprises has grown steadily.

The figures have been quoted already; but it is worth repeating them: firms with fewer than 10 employees comprise 90 per cent. of all enterprises and contribute 25 per cent. to our GDP. It therefore seems inevitable that we must look to small firms to provide jobs for the future, and in doing so, that sector will be making a vital contribution towards the solution of social consequences—the social consequences of unemployment which besides costing millions of pounds a year is a source of deep frustration which is potentially a threat to the life of us all in this country.