Monday, 19 November 2012
Skills gap threatens Britain's industrial renaissance
As remarked in a previous report, "Supply chain shifts threaten Asia," there are many hidden costs attached to outsourcing manufacturing to the Far East to serve markets back in the West. These include inflexibility, poor responsiveness from far off factories, poor quality issues, wholesale intellectual property theft, large minimum production runs and Nature's fury which can wreck JIT delivery schedules. Many outsourcers overlooked these significant costs but the biggest oversight, and this is not hindsight, was the threat from rising production and distribution costs which are now beginning to make the Far East a less attractive, if not uneconomic, place to locate. That does not mean that the Far East will fail to attract foreign investment, but rather that it means such foreign investors will concentrate on serving the regional markets instead, given their potential for huge growth.
So just how fast are these production and distribution costs rising and will it mean that UK and European manufacturers face a golden manufacturing opportunity? Since 2003 wages in Thailand have jumped from US$3 a day to $10 a day while shipping costs have risen by 20%, says one British parts supplier for pick-up trucks. Elsewhere in Asia wage rates have been soaring. In China, minimum wages in the provinces have risen by more than 20% in the year to September and the Chinese government has pledged to double workers' average income this decade. According to one American consultancy, if Chinese wage rates rose 30% a year, the renminbi by 5% a year against the dollar, along with freight rates, it would be as cheap to produce in America as in China by 2015. But already certain products can be made in America cheaper than in China. Likewise, in Britain it is already cheaper to produce high-end clothes rather than in places such as China, Bangladesh and India.
There is no doubt that many British companies are bringing back to the UK some or all of their manufacturing side but it is, perhaps, still only a trickle rather than a trend, but many trickles reach their oceans as mighty, raging rivers. That trickle, however, will be effectively dammed if Britain cannot overcome its serious shortage in manufacturing skills, particularly at the hi-tech end. It is thought, for example, that in Britain's West Midlands there will be around 90,000 hard-to-fill manufacturing jobs over the next five years. One French fashion house now makes between 50% and 70% of its entire global production in the UK and would like to make more there but complains that Britain no longer has the skills.
It may come as a surprise to many readers that recent research claims that Britain is producing more manufactured goods than in 1966 when manufacturing employment was at its peak. This is due to survival strategies put in place by manufacturers to mitigate the effects of globalisation. But these successful firms are now concerned about the lack of high-tech skills in the labour market and some are even worried that their businesses many not survive into the next decade owing to their inability to recruit employees with the right expertise.
Closing the skills gap
There is no doubt that if Britain is to take advantage of the golden opportunity for a manufacturing renaissance then the skills gap must be closed. The British Government is fully aware of this and has some laudable initiatives, like the £140 million being pumped into high-value manufacturing and the financial support for its quango, Skills for Logistics. But the fact is that the firms that need the skilled labour do not have the capacity to offer training because they are largely SMEs.* Such training schemes were largely offered by the big firms which have subsequently relocated from the UK. This means that it it clear that much more is needed to encourage apprenticeships and may even require far more spending on school education to make manufacturing more appealing at GCSE and A level. This may require rewarding some schools better than others who can show that they are producing pupils more suited to a manufacturing society than a services economy so that pupils will be guaranteed jobs waiting for them rather than the arts degree graduates for whom the jobs paucity leaves them walking the streets unsuccessfully looking for work. The government may even need to overhaul school education root and branch for there can be no doubt that the level of education attained by many pupils leaving school is abysmal. The current GCSE qualifications attained by British pupils at 16 has been discredited as a dumbkopf version of its predecessor, the GCE O level, and there is far too much reliance on course work.
Such remedies can be very costly for the Government already strapped by a chilly economic climate but there are ways that both Government and the people, in concerted actions, can add billions of pounds to the Exchequer's coffers. Owing to the complexities of global tax laws, many leading corporations take advantage of low tax rate economies and tax havens. There is nothing illegal about this though the argument that such avoidance is profoundly immoral is unassailable. There has been much recent media criticism of American companies, like Google, Amazon and Starbucks, paying little or no tax in Britain where much of their sales and profits arise. One British MP claimed that Google, Amazon and Starbucks paid a UK corporation tax rate of 0.4%, 2.5% and zero respectively, compared with the current UK corporation tax of 25%.
Finding the cash
It will take time to resolve this through normal channels because it calls for international regulation but concerted action by aggrieved consumers could bring far quicker results. If people wish to change odious corporate cultures there is no greater weapon in their hands by far than collective, sustained and focussed boycotts of the offenders' goods and services. It is an irresistible power that is every boardroom management's potential nightmare.
Apart from the multi-billion pound loss to the Treasury through tax avoidance schemes, money which could be well spent preparing Britain for a manufacturing renaissance, there is a more alarming reason why this insidious canker must be lanced, and quickly. As pointed out by one British department store that pays its taxes in full those firms that pay little or no UK corporation tax have an unfair advantage over those who do and in time the vast sums saved on tax avoidance could be reinvested in the businesses so that, all other things being equal, they would out-compete the full tax-paying companies. Eventually, that could leave the Exchequer so short of revenues that much of its social spending would have to be slashed, risking social collapse and anarchy.
Balance of payments remains untamed spectre
Britain now stands at a crossroads presenting a golden opportunity for a more assured, long-term future. The right route must involve a manufacturing renaissance concentrating on the high, value-added products, in particular, but that will never be achieved without the closure of the skills gap. If this opportunity is missed Britain seriously risks raising the spectre that once was a frequent hot political issue -- a balance of payments crisis. The importance of these statistics has faded in recent decades owing to the liberalisation of financial markets that allowed firms and countries to ramp up their borrowings to fill the gap. But the trouble with debts, as the recent turmoil in the PIIGS** members of the EU so painfully shows, is that if the creditors' confidence in the ability of debtors to repay the loans is shattered then financial Armageddon looms.
Britain's fervent espousal of a finance-based economy to the detriment of manufacturing has had a corrosive impact on the balance of payments. In the second quarter of 2012 the UK's balance of payments deficit reached a record £20.8 billion and the deficit on goods reached £28.1 billion, the largest ever recorded. Back in 1950 Britain had more than a third of its labour force in manufacturing and there was a trade surplus in manufactured goods equal to 10% of GDP. That trade surplus has now fallen to a deficit more like 4% of GDP. Is there any wonder that there is a widespread feeling that the country has put too much faith in finance at the expense of manufacturing?
Capital inflows required to finance national trade deficits may stop, possibly abruptly, if there are mounting, imagined currency or default risks. As far as defaults go the imagined has turned to reality for many countries. For Britain, the default risk is lower but not fanciful. With a fair wind and the right moves to rebalance the economy away from a scenario dominated by paper pushers and City pinstripe bookies, Britain faces a once-in-a-lifetime, golden opportunity. It now remains to be seen if the coalition Government has the resolve to steer the right course and carry the nation with it.
*SMEs: small and medium sized companies
**Portugal, Ireland, Italy, Spain, Greece