The Centre For Business Relationships, Accountability, Sustainability and Society WORKING PAPER SERIES No. 13
Manufacturing and Trade in Wales: Briefing Paper for the Welsh Affairs Committee
Jane Bryan, Calvin Jones, Max Munday & Annette Roberts
About the BRASS Centre In 2001, Cardiff University won £3.1 million in research funds from the Economic and Social Research Council to develop a Research Centre for Business Relationships, Accountability, Sustainability and Society (BRASS). The Centre is a joint venture between the University’s Schools of Business, City & Regional Planning and Law. It brings together the three Schools’ existing research expertise on issues of sustainability, business ethics, company law, corporate reporting and business communication. The Centre started work in October 2001 under the leadership of Professor Ken Peattie of the Business School, Professor Terry Marsden of the Department of City and Regional Planning and Professor Bob Lee of the Law School. The funding of the Centre covers an initial five-year period, but this should just mark the beginning of BRASS’ contribution to creating more sustainable and responsible businesses locally, nationally and globally.
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Manufacturing and Trade in Wales: Briefing Paper for the Welsh Affairs Committee
Jane Bryan, Calvin Jones, Max Munday and Annette Roberts Welsh Economy Research Unit Cardiff Business School
Report date: 8th September 2003
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Manufacturing and Trade in Wales: Briefing Paper for the Welsh Affairs Committee Introduction The purpose of this paper is to provide the Welsh Affairs Committee with a summary of the current state of, and prospects for, manufacturing and manufacturing trade in Wales, and to highlight a series of policy relevant issues relating to the development of manufacturing in the region. The remainder of the paper is structured into two main sections and conclusions as follows:
Section A: Welsh manufacturing and trade: curre nt situation and general issues •
An examination of the current state of the regional manufacturing sector, encompassing sector performance, problems and general and policy-relevant issues relating to the past and future development of Welsh manufacturing.
Section B: Specific issues on Welsh manufacturing, inward investment and trade •
UK central government (Department of Trade and Industry (DTI) and Foreign and Commonwealth Office (FCO)), and EU involvement as it relates to the development of manufacturing in Wales, the development of policy, and interlinkage with regional government and its agencies.
•
Role of the Welsh Assembly Government (WAG) and the Welsh Development Agency (WDA) in supporting Welsh manufacturing trade, inward and outward manufacturing investment.
•
Themes relating to Welsh manufacturing including: regional support of indigenous manufacturing small and medium sized enterprises (SMEs); the effect of tariffs on Welsh manufacturing and trade; and the linkages between the Welsh higher education sector and the local manufacturing base.
Section C: Summary of Welsh manufacturing issues The final section of the paper concludes and highlights the main issues arising from sections A and B of the paper. It is emphasised that this paper is in the form of a briefing note. As such it is only possible to summarise the context and issues facing the development of, and current policy on Welsh manufacturing and trade.
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A. Welsh manufacturing and trade: current situation and issues A.1 Inward investment in Welsh manufacturing Table A.1 provides an economic snapshot of the Welsh manufacturing sector. In 2001 the sector employed an estimated 191,000 people (some 15% of total Welsh employment) and accounted for around one quarter of regional gross value added (Cambrid ge Econometrics, 2003). In few UK regions does manufacturing make up such a high proportion of gross value added.
Table A.1 Manufacturing in Wales: Snapshot Employment (2001): • Largest sectors (% of total) • Food and drink • Chemicals and plastics • Basic metals and metal products • Electrical and optical • Motor vehicles and transport eqmt. • Others
191,881
Share of Welsh employment (2001) Share of Welsh GVA (2000) Exports (2002) Imports (2002)
15% 25%
11.9% 12.7% 17.3% 14.9% 9.9% 33.3%
£6.2bn £5.7bn
Source: Cambridge Econometrics, 2003
Figure A.1 shows Welsh manufacturing employment as a proportion of total employment. The sharp downward trend in the early 1980s is a reflection of the large number of manufacturing redundancies, partic ularly in steel, during the poor economic conditions of the period. Wales lost an estimated one-third of its manufacturing employment during the early 1980s. The maintenance of relatively high levels of manufacturing employment in Wales during the mid to late-1980s, and on into the early 1990s, is largely due to the success of the region in attracting inward investment, and to favourable global economic conditions. For example, Hill and Munday (1994) estimated that in the period 1982-1992 Wales gained around 16% of the inward investment jobs and projects coming to the UK, making it, relative to its size, the most successful UK region in attracting inward investment. The success of the location marketing effort has been linked to generous regional preferentia l assistance (automatic regional development grants (RDG) followed by the
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discretionary regional selective assistance (RSA) under the 1982 Industry Act), competitive labour costs, and improved road infrastructure (i.e. improvements giving easier access to consumer goods markets in the South east and to the Channel ports). Also important was the location marketing effort of the WDA, particularly in Asia (Munday, 1990).
A.2 Sharp fall in manufacturing output and employment after 1997 Figure A.1 demonstrates the sharp fall in Welsh manufacturing’s share of total employment after 1997. The Annual Business Inquiry reveals that between 1998 and 2001 just over 20,000 jobs were lost in Welsh manufacturing, or around 10% of total manufacturing employment. Manufacturing job losses have been replicated in other regions. However, components of Welsh manufacturing were hit particularly hard by poor trading conditions, global pressures for rationalisation and restructuring and the improving cost and location competitiveness of areas in central and eastern Europe. During this later period elements of regional manufacturing were also damaged indirectly by the South-east Asian crises ( see problems at LG Semiconductor (Newport) and Halla Engineering (Merthyr Tydfil)), and by structural problems in the Japanese economy which affected further investments being planned or undertaken by extant investors.
Figure A.1: Welsh manufacturing employment as a proportion of total: 1980-2002. 0.3
0.28
0.26
0.24
0.22
0.2
0.18
0.16
20 02
20 01
20 00
19 99
19 98
19 97
19 96
19 95
19 94
19 93
19 92
19 91
19 90
19 89
19 88
19 87
19 86
19 85
19 84
19 83
19 82
19 81
19 80
0.14
Source: Annual Employment Survey and Annual Business Inquiry (various years), and Cambridge Econometrics, 2003
The index of Welsh manufacturing output (Figure A.2) provides further evidence of the sharp recent downturn in activity. In 2003Q1 the index of Welsh manufacturing
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output was nearly 10% below the 1995 level. Figure A.3 shows manufacturing industries that have seen the largest losses of output. Of particular note are textiles, basic metals and electrical and optical equipment. For example, in basic metals, output levels in 2003Q1 were a third lower than in 1997Q2, and in textiles around 50% lower. The significance, in terms of employment, of some of these sectors is shown in Table A.1.
Figure A.2: Index of Welsh and UK Manufacturing Output (1995=100)
110
105
100
95
W a l e s U K
90
85 98q1
98q2
98q3
98q4
99q1
99q2
99q3
99q4
00q1
00q2
0 0 q 3
00q4
01q1
01q2
01q3
0 1 q 4
02q1
02q2
02q3
02q4
03Q1
Source: www.wales.gov.uk/statistics
Figure A.3: Index of Output in Selected Welsh Manufacturing Sectors (1997Q22003Q1) 180 97Q2 160
99Q2 01Q2 03Q1
140
120
100
80
60
40
20
0 Food and drink
Textiles
Paper, print etc
Chemicals
Basic metals
Source: www.wales.gov.uk/statistics
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Machinery
Electrical and optical
Transport eqmt
Other manufacture
A.3 Worst affected manufacturing sectors Table A.2 provides an overview of job losses in the worst affected manufacturing sectors.
Table A.2 Selected sectors suffering employment losses 1998-2002. Jobs lost 19982001 4,407
Key companies losing employment/closures
Factors
Current sector prospects
Baird Group, Dewhirst, Laura Ashley
Poor outside niche markets.
Basic metals and metal products
5374
Corus, Alcoa, ASW
Competitive imports. Key clients outsourcing to lower cost production locations (eg M&S). Global restructuring and rationalisation. Poor domestic demand. Exchange rates. Tariffs.
Electrical and optical
5199
Sony, Hitachi, Aiwa, LG Phillips, LG Electronics, Matsushita.
Automotive
710
Calsonic. KruppCamford, Fenner, KTH, Exide, LucasSEI, Ford (Visteon)
Sector
Textiles and garments
Competitive locations in eastern Europe. Competitive imports. Mature products phased out. Limited new inward investment.. Labour intensive elements relocated to central Europe. Restructuring and downsizing in UK auto makers.
Poor in ‘heavy’ production, better in processing (eg coatings etc). Overall output of sector expected to fall to 2010. Improving particularly in medical and optical products. Some growth of output in sector expected to 2010.
Some growth of output expected to 2010 in selected components suppliers.
The severe losses in Welsh manufacturing have been mitigated in part by strong growth in private services and the non- market sectors of the Welsh economy. Consequently recent announcements of manufacturing redundancies in the first half of 2003, have been juxtaposed with news of considerable increases in employment in other sectors of the regional economy, notably in education, health and public administration. However, whilst overall employment growth is welcome, the decline of employment and output in the regional manufacturing sector is of some concern, particularly in the context of the longer term strategic goals of the WAG relating to reducing the GDP gap with other UK regions, and improving the innovative and learning capacity of the region.
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A.4 Growth expected in some manufacturing groups Whilst Table A.2 focuses on the bad news, it should be noted that some Welsh manufacturing sectors have weathered the storm better than others. One of the difficulties with Table A.2 is the broad level of sectoral aggregation. Then, for example, there are elements of the electricals, and metals sectors which are facing better prospects. A recent study for the WDA (Welsh Economy Research Unit, 2002) identified more tightly defined Welsh industries with the strongest developmental prospects in terms of factors such as: •
regional and sector core competencies
•
economic trade possibilities within the region
•
overseas trade possibilities
•
economic risk
This study identified manufacturing industries which scored strongly on the above characteristics and that might be of relevance to new policy developments. Industries included: •
paper, printing and publishing
•
selected chemical products and pharmaceuticals
•
materials – (includ ing structural metals)
•
automotive
•
medical and precision instruments
•
aerospace
•
biotechnology
•
optronics.
Although only accounting for around 15% of Welsh employment, manufacturing continues to be of economic significance, as will be the attraction of new inward investment into the manufacturing sector. Factors connected to the significance of manufacturing in the regional economy are now reviewed
A.5 Manufacturing in Wales is comparatively well paid Earnings in Welsh manufacturing are typically closer to UK averages, than earnings in sectors such as financial and business services. For example in 2000, male and female manufacturing gross weekly earnings were only around 7-8% lower than the UK average. In faster growing elements of the services sector (partic ularly financial
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and business services) earnings are as much as 25% below UK averages. The continued loss of manufacturing employment in Wales coupled with gains in areas such as financial and business services, where the pay gap between Wales and the UK is substantial, could contribute to widening of the income per capita gap. Closing the gross value added per capita gap is a critical overarching theme of the WAG economic strategy A Winning Wales.
A.6 Welsh manufacturing is the key contributor to regional exports Table A.3 summarises recent Welsh export performance. This reveals that in 2002 Welsh exports were worth £6.2bn, and that Wales continues to have a positive trade balance on manufactured goods. For many Welsh manufacturers, particularly those from overseas, the regional base continues to be a bridgehead to the wider European marketplace. Unfortunately the recent output losses (see above) have been in the main exporting sectors. The WAG have highlighted in a recent consultation that the development of improved international trading performance is key to improving the prosperity of the region (WAG, 2001).
Table A.3 Summary of Welsh Manufacturing Exports and Imports (£m) Exports EU Non-EU Total Imports EU Non-EU Total Exports-Imports EU Non-EU Total
2000 4569.24 1845.27 6414.51
2001 4735.79 1946.73 6682.52
2002 4494.87 1705.25 6200.12
1856.33 3740.71 5597.03
1967.99 3780.12 5748.11
2281.28 3416.53 5697.82
2712.91 -1895.44 817.48
2767.80 -1833.39 934.41
2213.59 -1711.28 502.30
Source: UK Trade International. Note: Table only covers trade in goods.
A.7 Foreign manufacturing sector has different and significant economic characteristics Location marketing towards foreign manufacturing investment is becoming more difficult for Wales as competition from locations in central and eastern Europe, and other areas of the EU has increased markedly over the last decade. In spite of increasing interest in the role of indigenously controlled SMEs in the Welsh manufacturing future, the reality is tha t attracting new inward investment from
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overseas, and guarding the overseas manufacturing employment that already exists will continue to be an important determinant of regional economic prospects. Table A.4 provides information on foreign direct investment into Wales and the UK in the 2001-2 period. The foreign-owned manufacturing sector has several notable characteristics: •
Earnings and productivity tend to be significantly higher in the foreign-owned sector in Wales than the domestically owned (see UK Census of Production, 1997, Driffield and Munday, 2000, Brand et al., 2000, Munday and Peel, 1998);
•
Employment in the foreign sector has been shown to be more stable than that in the domestically owned sector (see Bryan and Jones, 2000);
•
The foreign manufacturing sector in the region has been shown to be an important conduit for new manufacturing and management practices (see Morris et al., 1993).
•
Connected to each of the above, the presence of the foreign-owned sector can be linked to positive productivity spillovers into the domestic sector (Driffield et al., 2002).
Table A.4 Foreign Direct Investment: 2001-2002 Jobs Type Wales UK
Projects 93 764
Capital Exp (£m) 495.782 N/a
New 5,469 34,037
Safeguarded 4,248 23,801
Total 9,717 57,888
Source: WDA and Invest-UK.
A.8 Manufacturing supports significant indirect employment in Wales Welsh manufacturing supports considerable employment in Wales indirectly through its purchases of Welsh goods and services. This fact has been exemplified in a recent study by Cardiff University (2001) examining the economic consequences of recent steel industry rationalisation. This study demonstrated that every direct job in the Welsh steel industry supported an additional job elsewhere in the economy as a result of local purchases and the spending of earned income. Each £1m of steel industry output supported a further £0.32m of output in other areas of the regional economy. Finally in this section there are some more general issues that have been identified in research studies examining the nature of the regional manufacturing base which are of relevance to policy development, and the Committee investigation. 11
A.9 High levels of activity in manufacturing sectors which are growing slowly at international level A high share of Welsh manufacturing employment is in sectors that are growing slowly at an international level and/or are utilising mature technologies. Good examples include the production of steel, consumer electronics (CTV), and automotive components.
A.10 Dependent nature of much of the manufacturing base A large number of studies have commented on the dependent nature of elements of the regional manufacturing base. This is connected to age-old debates about the ‘branch-plant syndrome’ and the production-only nature of local operations (see for example, Munday, 2000 for a review). The lack of headquarter-type operations provides a limited functional and occupational base, and this impacts upon the demand for skills. This problem also pervades much of the services industry base in Wales (see Bristow et al., 2000). At a time when policy making is becoming more devolved, greater levels of economic activity in the market sector are controlled externally to the region. Very few policy resources in Wales have been used to investigate this paradoxical phenomenon.
A.11 Low levels of business R&D Related to the above point is the low level of expenditure by Welsh businesses on research and development. In 1999 R&D spend by Welsh business was estimated at £203m or just 0.6% of regional GDP (UK average 1.2%). The lack of extensive R&D activity in the regional manufacturing base again limits demand for skills, and relationships with the higher education sector (see later), as well as linking through to the region’s innovative capacity.
A.12 Manufacturing job losses have occurred in disadvantaged areas of Wales which are least able to attract new investment Some less-advantaged areas of Wales have been badly hit by closures in the manufacturing sector. Examples include Blaenau Gwent and Pembrokeshire. Unfortunately these areas are least well placed to attract the new manufacturing or
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services industry investment which has tended to cluster around the M4 corridor in the south east of Wales.
A.13 Paucity of data of regional manufacturing Statistical data on the regional manufacturing sector is improving year on year. However, it is still difficult with this extant data to examine issues such as competitive and innovative position, ownership (i.e. foreign versus domestic), and levels of manufacturing investment. The possibilities of undertaking a regular census of foreign and domestic manufacturing activity in the regional economy, to provide a time-series of policy relevant information, and to support material held in the InterDepartmental Business Register (IDBR) and the sample based Annual Business Inquiry, could be investigated.
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B. Specific issues on Welsh inward investment and trade B.1 UK DTI, FCO, and EU involvement and assistance to Welsh manufacturers The DTI, FCO and European Commission associate both directly and indirectly (i.e. through ‘local’ organisations) with Welsh manufacturers. This section will consider each of these organisations, illustrating some of their connections to Welsh manufacturers using selected exa mples.
B. 1.1 DTI The DTI, in its Business Plan for 2003-2006 set out priorities, including •
Boosting innovation (the successful exploitation of ideas).
•
Ensuring business support increases productivity.
•
Acting as the voice of business success in Whitehall and Europe.
The following initiatives/examples illustrate the nature of some DTI activities, and resulting relationships with Welsh partners. Regional Centres for Manufacturing Excellence. DTI is working in partnership with the English RDAs and the WDA to establish these centres in each region. Individual centres vary slightly according to regional needs, but core services include; information/signposting; analysis of real needs; short term practical advice; limited access to follow-on (consultancy/research); access to training and demonstration/testing facilities. MAS Cymru (Manufacturing Advisory Service Wales). This is a free advisory service for Welsh manufacturers. MAS was launched in 2002 and is co- funded by the DTI and WAG and supported by the WDA. The WAG aims to signal a commitment to developing the manufacturing sector within Wales. In the new Engineering Centre for Materials and Manufacturing (ECM2), manufacturers can gain access to free telephone support and advice and book a free diagnostic visit through a helpdesk. This service is hosted by the National Centre for Product Design and Development Research (PDR) based at the University of Wales Institute Cardiff. As part of the same initiative, MAS Cymru has a close relationship with the Welsh Centre of Manufacturing Excellence (WCME) based at the Manufacturing Engineering Centre (MEC), Cardiff University. MAS Cymru will also be working closely with other centres of expertise, particularly those within the WDA’s CETIC programme (see
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below). This collaboration aims to ensure that manufacturers gain access to independent advice, develop and disseminate best practice, access the latest information on the implementation of world class manufacturing techniques, including a full range of activities to support innovation, and improve productivity to ultimately increase profits. Figure B.1 identifies the key linkages between SMEs and the regional centres for manufacturing, the centres of expertise, the Small Business Service (SBS) and its network of Business Links (BLs).
Figure B.1 Organisational Structure for the Manufacturing Advisory Service
Source: www.dti.gov.uk/manufacturing/index.htm
Regional Selective Assistance (RSA) is the DTI’s main instrument of direct financial assistance to business. The overarching objectives of the scheme are determined nationally, and apply to the English RDAs and the devolved administrations. The administration and delivery of the scheme in Wales is through the WAG. Grants are discretionary on projects with fixed capital expenditure of over £500,000, and which create or safeguard jobs in Assisted Areas. Scheme criteria apply relating to true additionality of supported projects. The European Commission (EC) restricts the availability of national grants in certain sectors, including man- made fibre and yarn, shipbuilding and repair, vehicles, iron and steel, coal, and some fishery and agricultural products. The DTI links to both the WAG and the WDA through the delivery of initiatives, the formulation of policy and relations with the European Commission. The nature of
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working relationships between DTI and the Assembly Government are set out in the concordat between the cabinet of the Assembly Government and the DTI (see www.dti.gov.uk for further details). In relation to issues of state aid, the UK is required to comply with EU rules, and the concordat states that: Relations with the European Union are the responsibility of the UK Parliament and Government. The Department of Trade and Industry's State Aid Policy Unit has an overall responsibility across all Departments and the devolved administrations for coordinating UK policy on State aid, providing advice on the application of the State aid rules, and taking forward all UK notifications with the Commission services. In addition, the concordat specifies the nature of communications with the EU: The Assembly will channel all communications with the European Commission on State aid issues through DTI's State Aid Policy Unit, which in turn is responsible for onward transmission to UKREP in Brussels (UKREP is responsible for onward transmission to the EC). Such communications may, for example, concern notifications of new aid and Commission enquiries about existing aids, or developments in Commission policy towards particular types of aid. B. 1.2 The Foreign and Commonwealth Office (FCO) The FCO is the UK Government department respons ible for foreign affairs. The Office works through its London Headquarters and a network of Embassies, High Commissions and Consulates throughout the world, and provides a range of services for UK based Companies and for potential inward investors. British Trade International (BTI), soon to be re- named as UK Trade and Investment, aims to bring together the joint work of the FCO and the DTI in support of British trade and investment overseas and inward investment into the UK. BTI has two operating arms: Invest UK and Trade Partners UK, and operates nationally across government departments, the devolved administrations and the English regions. Trade Partners UK (TPUK) provides market information and advice on local issues to companies visiting FCO overseas posts from the UK. Its aim is to improve business performance through sales and investments overseas. Each of the devolved administrations is represented on the BTI board. Invest UK is a business service organisation which identifies and approaches potential investors, informs them of the benefits of a UK location, and assists them with aspects of locating and expanding in the UK.
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Ambassadors and High Commissioners also have a role in developing contacts at the most senior level with companies which are actual or potential investors in the UK. Invest UK is also responsible for managing the national investor development programme, which focuses on the needs of existing inward investors.
B. 1.3 The European Union European Union relations regarding state aid issues have been outlined above. However Structural Funds are the European Union's main instruments for supporting social and economic restructuring across the Union, and account for over a third of the EU budget. Various structural funds (see www.wefo.wales.gov.uk) are providing support to Wales during the period 2000-2006 through a number of programmes. Procedures and rules relating to the Funds are established at the programme level by the EU. The programme or initiative objectives are then agreed between the EU and the WAG. The funds are managed by the Assembly, and are administered through various partnerships established throughout Wales. During the programme period, the WAG is required to demonstrate progress towards stated objectives. There are a number of general issues arising from the above. First, a number of European, national and local organisations provide both direct and indirect assistance to Welsh manufacturing. In many cases, similar schemes or initiatives are governed and implemented by different organisations making it difficult for manufacturers with limited search time to identify the most appropriate organisation to contact. Related to this, the nature of the connections between these different organisations and departments is far from transparent.
B.2 Role of the WAG and the WDA in supporting Welsh manufacturing trade, inward and outward manufacturing investment A large proportion of the WDA’s general activity has the objective of improving the competitiveness of the regional economy and hence its trade performance. In particular: •
Programmes to support general markets for Welsh goods and services (for example, Source Wales)
•
Programmes to improve the innovative capacity of indigenous firms (for example, Regional Technology Plan, and with the WDA having responsibility for SMART
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Cymru (connected to the DTI national framework, see section B.1.1), and involved in the development of a series of new sector Techniums throughout Wales). •
Programmes to improve Welsh business access to new information sources, and the internet.
•
Sectorally based development programmes and support forums (e.g. Welsh Electronics Forum, Welsh Automotive Forum).
•
Programmes to improve and support the development of indigenous entrepreneurial capacity (e.g. Finance Wales, partly funded by European structural funds).
•
WDA is one of the partner organisations in the new framework surrounding WalesTrade International (see below).
However, one of the main ways that WDA activity seeks to support manufacturing trade performance of Wales is through its location marketing activity. The Agency maintains marketing offices in a number of key global locations. Overseas manufacturing investors located in Wales make a significant contribution to overseas exports (estimated to be £6.2bn in 2002 – see Table A.3). In the longer term Welsh success or otherwise in attracting new foreign manufacturing investment, and in safeguarding employment, is expected to be a critical determinant of the regional manufacturing trade balance. In terms of location marketing much is made of the concept of TEAM Wales with the WDA at the hub of regional co-ordination of promotion activity. This activity has not been without problems, with cases on record of disagreements between, for example, local authorities and the WDA in attempts to sell particular locations (see Munday, 1990). At the other end of the spectrum the WDA co-operates with the FCO and DTI (see section B.1.1) in bringing firms to Wales (see also below). In practice these linkages are blurred with larger inward investors often approaching the regional development agencies directly. It is difficult to summarise the role of the WAG in promoting trade, manufacturing and inward investment with much of the relevant work being undertaken by agencies for which WAG is responsible. However, the WAG directly and indirectly:
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•
Is committed to developing supply side conditions through which regionally based manufacturing can prosper;
•
Recognises that a successful manufacturing sector plays an important role in overall economy prospects;
•
Takes a lead in the development of manufacturing sector specific initiatives;
•
Is a conduit for EU and UK government incentives for manufacturing;
•
Commissions research on the regional manufacturing sector to form basis for new regional specific initiatives.
Whilst, WAG can do little to influence macro-economic conditions and exchange rates, it does actively promote Welsh trade (see strategies outlined in A Winning Wales). In Wales, the WAG takes the explicit lead in overseas trade promotion rather then the WDA. The WAG has provided services similar to those which were undertaken by the Welsh Office prior to devolution. Amongst the main services and initiatives are: • The ‘New Exporter’ programme • Trade mission administration, and sectorally based missions • Special export assistance to firms in Objective 1 area • Chargeable services • Wales European Information Centre • International Trade Fund • Global Enterprise Programme.
The WAG has claimed a new direction in its trade promotion role with the publication of A World of Opportunity during March 2003 which outlined strategic directions for WAG’s WalesTrade International. It is claimed that WalesTrade International will assist Welsh companies to establish themselves abroad and with objectives for the organisation set in terms of: • Developing new export capacity • Increasing the value of exports • Promoting key exporting sectors • Providing more ‘joined- up’ delivery of services • Monitoring performance of Welsh exports.
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It is early days for WalesTrade International, and it is difficult to see how far the services it provides will differ from what has been previously available. However, the strategy document highlights that the resources dedicated to the area have been ‘significantly increased’. Moreover there appears to be a focus on directing resources towards potentially ‘winning’ sectors, and on more general aspects of internationalisation (i.e. connecting Welsh firms to more general international business opportunities including joint vent ures, strategic alliances, and technical collaboration) rather than just physical trade. The strategy highlights that assistance is available to any organisation, but the practical measures hint very much at assisting the indigenous SME base, although it remains larger firms, and inward investors that dominate Welsh exports. Within the new strategy the initial consultation elements of partnership are also emphasised strongly, and summarised below. The precise nature of these partnerships is unclear from the documentation relating to WalesTrade International.
Figure B. 2 WalesTrade International - Interrelationships
International Relations Welsh orgs, NGOs & local auths WDA, ELWa, export clubs, Inst of Exports, Chambers of Commerce, CBI Wales, Higher Education sector
Trade Partners UK, Embassies
Creating Joined-up delivery: WalesTrade International
Welsh Initiatives Food Directorate Welsh Higher Education Wales Tourist Board
Several points are made regarding the developing policy and activity of the WAG to help Welsh firms export:
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•
It is unclear why the overseas export promotion effort is headed up by the WAG as opposed to the WDA which already has representation abroad, and also has connections with UK embassies and consulates abroad (see also section B.1).
•
There is limited quantitative and qualitative economic information available on the direction of Welsh exports, and volumes. Some information is becoming available from HM Customs and Excise on export directions but this data may need further development if it is to be used to targe t sectors that require assistance. WAG has already announced a biennial Export Survey of over 1,000 businesses in Wales to gain new insights into needs.
B.3 The impact of trade tariffs on Wales Trade tariffs, anti-dumping duties, and increased trade regulation could have both positive and negative impacts on an Welsh economy. For example, the high costs of exporting to the EU, and related anti-dumping duties, have provided incentives for direct investment into the UK and other European economies. The boom in consumer electronics and office automation equipment investment into Wales during the 1980s is an example of how European trade restrictions served to create valuable employment opportunities (Munday, 1990). However, for those manufacturers located in Wales, and exporting outside of the EU, country tariffs impact directly on competitiveness. Table A.3 earlier showed that an estimated £1.7m of goods were exported from Wales to countries outside of the EU (27% of total exports). The best recent example of trading difficulties arising from tariffs relates to the steel industry. In March 2002 controversial US tariffs on imported steel came into effect. The tariffs, of up to 30% on top of normal duties, were designed to protect the US steel industry from a flood of imports. However, these tariffs were ill received by the European Union, Japan and other steel exporting economies, where steel industries have been rationalised to compete in the world market, often resulting in significant jobs losses. The EU, Japan, South Korea, China, Switzerland, Norway, New Zealand and Brazil appealed against the tariffs, taking the case before the World Trade Organisation (WTO). The WTO found the emergency United States steel tariffs to be against its rules, although the US are appealing against the decision. Retaliatory sanctions have been considered by the EU on products such as textiles and fruit and vegetables.
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However, the EU trade commissioner remains confident that the US will eventually comply with the WTO's demands. The steel industry in Wales has responded to global economic pressures with programs of restructuring and rationalisation. Sales to the EU and elsewhere have been impacted by exchange rate difficulties, as well as falling demands for steel in some key sectors as, for example, other products and technologies increase in importance. In addition subsidies to steel makers in some other European countries have caused added difficulties for the UK industry. In this context, the added problems generated by US tariffs generate further problems to an industry already in severe difficulty. Undoubtedly recent trade disputes surrounding steel have impacted negatively on employment and output in firms such as Corus. Figure B.3 shows export data by broad sector, and aims to identify those parts of the economy which would be most vulnerable to changes in trading conditions. As already noted, the steel industry in Wales is a significant exporter. Exports from the basic metals sector (which includes iron and steel, aluminium and other metals) were an estimated £840m in 2002, just over 20% of which were outside the EU. In the chemicals, motor vehicles, office machinery, TVs and instruments sectors, exports were estimated to have exceeded £800m in 2002. In a study of Welsh growth sectors (Welsh Economy Research Unit, 2002) industry experts were asked to rank external industry risk from actual or potential tariff barriers in key export markets. Significant export risks were identified in a number of important sectors (i.e. those included in figure B. 3), such as organic chemicals, electronics, optronics and medical devices. In summary, a high proportion of Welsh overseas trade is directed towards the European Union meaning that tariffs are less of an issue than general regulations and exchange rates. The economic desirability of the increasing Euro-centric nature of Welsh trade is open to question.
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Figure B.3 Welsh Overseas Exports by Broad Sector, 2002, £m. 1200
1000
800
600
400
200
Ele ctr ica lm ac hin ery Ot he rm an ufa ctu rin g
Ot m he ac r tr hin an ery sp ,T ort Vs & ins tru m en ts
Of fice
M oto rv eh icle s
Ch em ica M ls ec h an W ica oo d, lm Pa ac hin pe r, p ery ub lish ing & pla stic s
M eta lp ro du cts
Ba sic M eta ls
mi ne ral s Fu els &
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&
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Source. HMCE
B.4 Issues surrounding regional support for indigenous manufacturing SMEs In Wales, as in other regions of the UK, there continues to be confusion in the policymaking community as to what constitutes an indigenous manufacturing SME. In terms of EU structural funding requirements, an SME gaining support is expected to be independently-owned (i.e. not part of a larger national group) and employing less than 250 people. Unfortunately very few strategic documents (including A Winning Wales) dealing with the SME sector in Wales accurately define the nature of businesses being targeted, with SME being a catch-all term, and with anecdotal evidence suggesting that definitions of SME are vulnerable to adjustments to meet qualification criteria for resources. Ultimately with definitions reliant on an employment cut-off of 250 employees, then included firms would be expected to have more differences than similarities. The general policy of supporting manufacturing (and other) SMEs in Wales is predicated on the perceived role of small manufacturing firms in innovation, employment provision, exporting, the creation of economic diversity (particularly relevant to Wales with its historically narrow manufacturing base) and entrepreneurial
23
spillovers (see Edwards et al.; 2003, WAG, 2001). Good quality and verifiable economic data on the contribution and economic significance of indigenous manufacturing SME sector in Wales is difficult to find. The UK Census of Production (1997) found that manufacturing units employing less than 200 people contributed 44% of manufacturing value added in Wales – however, much of this contribution is linked to subsidiaries of much larger firms. The contribution of indigenous manufacturing SMEs to innovation performance and exports is even more difficult to detect. General commentary (see Bryan and Jones, 2000) on the manufacturing SME sector in Wales has identified several characteristics including: •
relatively low formation rates
•
few growth businesses
•
poor innovatory performance
•
low take up of ICT
•
relatively lower levels of labour productivity, and profitability
•
relatively higher dependence on short term sources of finance
•
relatively low earnings and poorer employment conditions linking through to underlying job quality and skills employed.
One key issue is whether resources should be focused on the identification and support of indigenously-owned manufacturing SMEs, as opposed to other manufacturing units in Wales. The underlying issue here is the extent to which indigenous ownership is a key factor in the developmental debate surrounding SMEs. On the positive side there is some expectation that faster growing indigenously owned manufacturing SMEs may provide a greater diversity of occupational opportunities in headquarters-type functions. Policy to support manufacturing SMEs in Wales has tried to address the dual problems of improving the environment for business start-ups and firm growth, and addressing perceived areas of market failure relating to factor resources for growth. One key element of perceived market failure ha s been access to capital, with banks charging higher rates to SMEs, or having a preference for lending to firms with lower risk of failure. Unfortunately the framework of support to small manufacturing firms has often been confusing or poorly targeted. Surveys have found that small manufacturing and service firms often do not have the time to go through the complex
24
search procedures necessary to access the available resources. Moreover, some targeted firms simply have no desire to grow. Ongoing attempts are being made to streamline support and business advice, and reduce bureaucracy, but there is still much to be done. Under the devolved assembly several initiatives have been developed to support the WAG’s Enterprise Action Plan including projects to: •
improve entrepreneurial activity in the social economy
•
improve the entrepreneurial supply side in schools and colleges
•
improve access to financial resources (for example, through EU co-funded Finance Wales).
In addition projects have been undertaken to simplify the application procedures for Regional Selective Assistance for SMEs, seek means of reducing the regulatory burden on SMEs, and to assist indigenous SMEs to win more business from the public sector (Evans and Pickernell, 2002). The critical issues relating to support of SMEs in the manufacturing sector are summarised as follows: •
Accurate identification of the characteristics of market failure as it applies to SMEs in the manufacturing sector, and the extent to which policy tools address underlying structural problems that hinder entrepreneurial development in Wales.
•
Continuing confusion over which organisations in Wales ( and elsewhere) can offer different types of services even in the presence of the Business Connect network, which is soon to be replaced by Business Gateway. There still exists a high degree of duplication of services even within discrete geographies. As the number of initiatives and strategies has mushroomed then co-ordinating the various policy instruments at different spatial levels has become more difficult.
•
Growing concern over the large numbers of people involved in researching the needs of SMEs and in providing various support services. Some managers in SMEs have complained of the churning of similar initiatives under different names, and the growing size of the ‘support’ industry. Meanwhile, SME support agencies and their sub-contractors report difficulties in generating sufficient demand for their services.
•
Difficulties for manufacturing SMEs to access European structural funds directly because of complex and time-consuming application and approval procedures.
25
•
The nature of the connection between policy on SMEs and the overarching strategic objectives of the WAG in terms of GDP per capita and employment targets. In particular the extent to which the human and financial resources used to support SMEs may be used more efficiently to support other developmental objectives.
B.5 Linkages between Welsh higher education and the local manufacturing base The majority of Welsh higher education institutions (HEIs) commit themselves in their mission statements to contribute to the economic, social and cultural development of the region. In this context associations with the local manufacturing base are a key means through which this objective is achieved. Moreover, relationships between Welsh universities and global manufacturing enterprises also make them a potential conduit for best practice manufacturing, managerial and operational techniques. Examples abound of instances where the results from projects carried out by university staff within Wales for international manufacturing organisations and management/technical consultancies have then been re-applied to local manufacturing businesses (see for example, Edwards et al., 2003). The larger HEIs maintain links with the local manufacturing sectors in the following ways. •
Consultancy and bespoke services: in these cases local manufacturers usually wish to access the skills of particular individuals or research groups mainly in terms of technical consulting, management consulting, or in order to gain access to university-owned equipment, perhaps for technical testing purposes. Examples of the type of links generated here can be found by reference to the websites of Cardiff and Glamorgan Universities (see www.cardiff.ac.uk/racd and www.glam.ac.uk/business).
•
Academic research: individual academics and groups maintain research links with local firms to promote university research agendas. A significant proportion of the publications listed in the Research Assessment Exercise (RAE) returns for individual HEIs in Wales relates to research that involves collaboration with local manufacturing firms. It is noteworthy that in most cases firms provide time to fill in surveys, and partake in interviews and workshops at no explicit charge to the individual researchers.
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•
Training and education: this ranges from short one day courses, to longer periods of more formal accredited training. A survey of the websites of the main HE providers shows that key areas include training in management (MBAs, DBAs and accredited short courses), accounting (full and part-time courses leading to professional accounting qualifications), engineering, purchasing, quality assurance, manufacturing management, information technology, and languages.
•
Recruitment: the HEIs have mechanisms for directing graduates to potential local employers and vice versa.
•
Commercialisation of research and technology transfer: Relationships in these cases may be based on licensing agreements, the development of joint ventures or spin-out companies or via collaborative R&D. For example at Cardiff University there is a list made available on the website which provides details of new licensing opportunities. Moreover the university also collaborates with Cardiff County Council in the provision of business incubator space (Cardiff Business Technology Centre and Cardiff Medicentre).
•
Provision of conferences and networking facilities: A good example of the latter is the Cardiff University Innovation Network which provides a series of regular meetings on topics of relevance to local firms. Part of the Network is the Innovation Marketplace which identifies needs and opportunities for local firms and offers free advisory, problem solving and sign-posting services (
[email protected])
A new development with ramifications for relationships between Welsh universities and locally based manufacturing is the creation of the Centres of Excellence for Technology and Industrial Collaboration (CETIC) Programme co-funded by the WDA and ELWa. There were 20 CETICs originally accredited in Wales during 2001. The individual CETICs can provide consultancy, research capability and training to industry in their area of expertise, and have personnel trained to promote linkages with commercial clients. CETIC areas at present include built environment, microtechnology, manufacturing engineering, and magnetics technology. There are several issues relating to Welsh manufacturing and HEI linkages. First, the value of relationships between Welsh HEIs and industry has grown during the 1990s, and this is largely due to increases in demands for technical services and
27
consultancy (see e.g. HHEW, 1997). However, universities often place a lower ‘value’ on funds generated from industry, as opposed to funds from ‘blue chip’ sources such as the main UK research councils. Fundamentally, monies from industry are viewed as a secondary funding source. This environment is slowly changing particularly as a result of the findings from the Dearing Committee examining the role of higher education in the economy (NCIHE 1997a, NCIHE 1997b). HHEW (1997) identified something of a paradox between the real world rele vance of research undertaken in support of industry by Welsh HEIs, and drawbacks in terms of research not being ‘leading edge’ and largely limited to testing of existing ideas. Second, there are limits on the depth of linkages that can be developed by universities with local firms. This is caused in large part by the under-developed functional base of local manufacturing, and the absence of decision making structures. For example, few manufacturing companies operating in Wales feature high levels of R&D spending which may inhibit HE linkages. Moreover, the functional base places limits on the demand side for graduates in areas such as business and engineering. Third, in the mechanisms through which Welsh HEIs are appraised (particularly RAEs) particip ating departments are not always rewarded for the industrial relevance of research, creation of spin-out companies, or their role in wealth creation. Emphasis continues to be placed on publications in largely academic (rather than applied/practitioner) journals. In summary the value of links between Welsh HEIs and the local manufacturing sector appear to be increasing, but there is still potential for improvements. This potential has already been recognised in A Winning Wales which has emphasised the importance of higher education institutions in improving the innovative potential of the regional economy.
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C. Summary of Welsh manufacturing issues The final section of this briefing paper summarises the main points from sections A and B. •
Manufacturing in Wales employed an estimated 191,000 people in Wales in 2002 (some 15% of total employment) and accounted for around one quarter of regional gross value added.
•
There has been a sharp fall in Welsh manufacturing’s share of the total employment after 1997. In 2003 the index of Welsh manufacturing output was nearly 10% below the 1995 level. Between 1998 and 2001 around 20,000 jobs were lost in Welsh manufacturing, or around 10% of the total manufacturing employment. Causes included poor trading conditions, global pressures for rationalisation and restructuring, and the improving cost and location competitiveness of areas in central and eastern Europe.
•
The reduction in employment and output in the regional manufacturing sector is of some concern, particularly in the context of the longer terms strategic goals of the WAG relating to reducing the GDP gap with other UK regions, and improving the innovative and learning capacity of the region. Jobs in Welsh manufacturing are relatively well paid, and manufacturing make a large contribution to overall Welsh overseas exports. Moreover, manufacturing creates significant indirect employment in Wales through its purchases of other locally produced goods and services.
•
Manufacturing plants from overseas are characterised by higher earnings and productivity than their domestically owned counterparts, and have been shown to be an important conduit for new manufacturing and management practices, and positive productivity spillovers into the domestic sector.
•
Wales features high levels of manufacturing activity in sectors which are growing slowly at an international level. Moreover studies have commented on the dependent nature of elements of the regional manufacturing base. This is connected to the low level of expenditure by Welsh manufacturers on R&D.
•
A large number of European, national and local organisations provide both direct and indirect assistance to Welsh manufacturing. Similar schemes or initiatives are governed and implemented by very different organisations. This can create 29
difficulties for firms seeking to target appropriate service providers. The overall framework to address business needs would still benefit from streamlining. •
The rationale for overseas export promotion effort to be headed up by the WAG as opposed to the WDA is unclear. The WDA already has representation abroad, and also has linkages with UK embassies and consulates abroad.
•
The largest proportion of Welsh manufacturing overseas trade is directed towards the EU. Hence tariffs are less of an issue than general regulations, and exchange rates.
•
Several issues were identified with respect to support of manufacturing SMEs. These include: how far policy tools address underlying structural problems that hinder entrepreneurial development; confusion over which organisations in Wales offer different types of services; duplication of services even within discrete geographies; and co-ordination problems in policy delivery. The nature of the link between policy on SMEs and the overarching strategic objectives of the regional economy in terms of GDP per capita and employment targets should be clarified.
•
The value of relations between Welsh higher education institutions and regional manufacturing has grown during the 1990s, and this is largely due to increases in demands for technical services and consultancy. However, funds from industry are still viewed as a secondary funding source. There are limits imposed on the depths of university- manufacturing industry ties in Wales caused in part by the limited functional and value added base of the latter.
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D. Selected References and Bibliography Brand S. Hill S. and Munday M. (2000), Assessing the Impacts of Foreign Manufacturing on Regional Economies: The Cases of Wales, Scotland and West Midlands. Regional Studies 34: pp. 343-55. Bryan J. (2000), ‘Small Firms in Wales’ in Bryan J and Jones C (ed) Wales in the 21st Century: An Economic Future. Macmillan Press Ltd. Basingstoke and London. Bryan, J. and Jones, C. Eds., (2000) Wales in the 21st Century: An Economic Future. Macmillan Press Ltd, Basingstoke and London. Cambridge Econometrics (2003), Regional Economic Prospects. CE: Cambridge. Cardiff University (2001), Steel Communities Study: Implications for Employment, Learning and Regeneration. Volume II. Report for National Assembly for Wales, ELWa, and welsh Development Agency. Driffield N. and Munday M. (2000) Industrial performance, agglomeration, and foreign manufacturing investment in the UK, Journal of International Business Studies, 31, pp. 21-37. Driffield N. Munday M. and Roberts A. (2002) Foreign Direct Investment, Transactions Linkages, and the Performance of the Domestic Sector, International Journal of the Economics of Business, 9.3, pp335-51. Edwards T. Delbridge R. and Munday M. (2003), Learning Companies: Innovative Potential of Welsh Manufacturing SMEs. Cardiff Business School. Evans T. and Pickernell D. (2002), A review of Regional Selective Assistance in Wales. Welsh Economic Review. 14.1, pp31-35. Bristow G. Gripaois P. and Munday M. (2000), Call Centre Growth and Location: Corporate Strategy and the Spatial Division of Labour, Environment and Planning A, 32, pp519-38 HHEW (1997), The Impact of the Higher Education Sector on the Welsh Economy. Cardiff: HHEW. Hill S. and Munday M (1994), The Regional Distribution of Foreign Manufacturing Investment in the UK, London: MacMillan. Morgan B. and Morgan K. (1998) ‘Economic Development’ in The National Assembly Agenda: A Handbook for the First Four Years, ed. J Osmond, The Institute of Welsh Affairs. Morga n B. (1998) Regional Issues in Inward Investment and Endogenous Growth in S. Hill and B. Morgan (eds) Inward Investment, Business Finance and Regional Development, London, Macmillan. Morris J. Munday M. and Wilkinson B (1993), Working for the Japanese. London: Athlone.
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Munday M (1990), Japanese Manufacturing Investment in Wales. Cardiff: University of Wales Press. Munday M (2000), Foreign Direct Investment in Wales: Lifeline of leash? In Bryan J and C. Jones (Eds), Wales in the 21st Century: An Economic Future, Basingstoke: MacMillan Business. Munday M. and Peel M. (1998), The comparative performance of foreign owned and domestic manufacturing firms during recession: Some descriptive evidence from Wales, Contemporary Wales 10: pp. 50-80. Munday M. and Roberts A (2001), Assessing the regional transactions of foreign manufacturers in Wales: Issues and determinants, TESG, 92: 202-16. Munday M. Morris J. and Wilkinson B (1995), Factories or warehouses - a Welsh perspective on Japanese transplant manufacturing. Regional Studies 29: 1-17. National Committee of Inquiry into Higher Education (1997a). Main Report Higher Education in the learning society. HMSO, London. National Committee of Inquiry into Higher Education (1997b). Report 9 Higher education and regions. HMSO, London. Roberts, A. (1996), The Economic Impact of Foreign Manufacturing Investment in Wales. Unpublished Ph.D, University of Wales, Cardiff. Welsh Assembly Government (2001), A Winning Wales: The National Economic Development Strategy of the Welsh Assembly. Cardiff: NAfW. Welsh Development Agency (1999) Entrepreneurship Action Plan for Wales , Consultation Document, Principality House, The Friary, Cardiff, CF10 3FE. Welsh Economy Research Unit (2002) Welsh Growth Sector Analysis. Report for WDA. Welsh Office, (1998) Pathway to Prosperity: A New Economic Agenda for Wales, Welsh Office Publication.
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Previously published in the BRASS Centre Working Paper series: 1. The power to panic: the Animal Health Act 2002 David Campbell and Bob Lee 2. Governance and sustainability: an investigation of the role of policy mediators in the European Union policy process Andrew Williams 3. Exploring the 'limits to growth' in UK organics: beyond the statistical image Everard Smith and Terry Marsden 4. Shouldering the burden of corporate social responsibility: what makes business get committed? Heledd Jenkins and Frances Hines 5. The politics of divestment: passing the buck along the railway line Everard Smith 6. Linking the environmental and social dimensions of corporate social responsibility Andrew Williams 7. The SRI dilemma for pension fund trustees: some perceptions of their evolving role Aris Solomon and Jill Solomon 8. Waste policy in Wales: the case of construction and demolition waste Caroline Cohen, Andrew Flynn and John Ryder 9. Living differently?: an assessment of the first four years of the Welsh Assembly Government's sustainable development duty Andrew Flynn 10. A sustainable development agenda for the second term of the Welsh Assembly Government Andrew Flynn 11. System innovation in the automotive industry: achieving sustainability through micro-factory retailing Andrew Williams 12. An annotated bibliography of the accountability of multinational corporations: a review of international human rights law Tamara Egede and Celia Wells
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ISBN 1 904393 30 6
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