An industrious future

An industrious future

Labour costs and productivity are both under the microscope if Yorkshire Forward’s new strategy to help manufacturing is to succeed, says Damian Ward.

Yorkshire Forward’s decision to launch its strategy for manufacturing is a sensible one and reflects the significance of the sector to the region’s economy. We have more manufacturing and more people employed in the sector than the national average. The region also has strong pockets of manufacturing with certain towns and cities more dependent on the sector than others.

For example, 20% of the workforce in Hull and Selby is in manufacturing compared to just 8% in Leeds and 6% in York. Yorkshire Forward recognises, quite rightly, that the sector needs a long-term strategy to grow and become recognised internationally.

The agency has set a tough challenge – to grow manufacturing by more than 50% so it represents 20% of the regional economy by 2030, compared to the 13% it represents now.

So is the bar set too high? Not necessarily. Manufacturing as a whole is not growing and in the past Yorkshire and the Humber has underperformed in terms of productivity and exporting.

By focusing on four high-tech manufacturing sectors Yorkshire Forward has the best chance of achieving its goal. Advanced engineering, digital, healthcare and low carbon technologies are our manufacturing ‘jewels’ and we are good at them.

Most importantly, these high-tech sectors can compete in the global market and make money.

This means they add value to the regional economy. But how will these plans fare in the current economic environment? What is going to hit home hardest? And where are the risks? I believe there are three areas that will have the biggest impact on these growth plans for the sector – interest rates, exchange rates and wages.

People are constantly misguided by interest rates – whether they are going up, down or staying where they are. What they often fail to understand is that the base rate is not important. There is a supply chain of cash in the economy with the Bank of England at one end and business at the other.

It is a bit like milk production. You have a farmer at one end paid one price for his milk and the consumer at the other who pays another, higher price. Along the supply chain a number of different people each pay or receive a different price for the milk.

Interest rates are exactly the same – at each stage people are making different margins. There are money markets lending to banks and governments; then retail bankers putting their mark-up on for the business or personal customer.

This process – the transmission mechanism – means that the manufacturing sector, like all others, is not feeling the benefit of low interest rates.

They are probably paying around 7%. Manufacturing is particularly at risk here because it is a sector heavily dependent on bank financing, whether it is an overdraft to buy stock or a hefty loan to pay for investment in capital equipment.

You can spend a lot of time worrying about interest rates but can do nothing about it.

One finance director of a global company says simply: “You just have to get over it!” My advice is you know you have to pay the rates so just plug it into your spreadsheets and live with it.

What about exchange rates? The Bank of England is keen to see sterling exchange rates against the euro stay low because Europe is our biggest trading partner.

Unfortunately, with the euro being hammered in the debt crisis in Greece and other European countries, we are seeing sterling rise again.

Of the four areas of spending in the UK – household, firms, Government and international trade – the latter is the one we are pinning our hopes on for an increase in prosperity. But we need the exchange rate to remain low as manufacturers are the key people exporting.

Germany and France came out of the recession before the UK and now they have slid back to zero growth. There is a feeling that the same could happen here. Exporting would give us some traction out of the recession, but if the pound grows stronger against the euro and our customers’ economies are weakening progress will be much slower, if we have progress at all.

Wages - the third area that can have most impact on the growth of manufacturing – perhaps offers the best hope for the sector. In order to win international sales, manufacturers must be competitive – either by pushing up their prices and adding more value or by keeping wage pressures under control and improving productivity.

The Germans have always been very good at achieving the latter and in previous recessions they had higher outputs for lower costs.

Our manufacturers need to follow suit in order to become tighter and fitter. Management must look inside their organisations to see where they can reduce labour costs, improve processes and increase their productivity.

A focus on labour costs and productivity is a key to ensuring that the region’s manufacturers gain the competitive advantage necessary to hit Yorkshire Forward’s ambitious targets.

Dr Damian Ward is senior lecturer in economics and head of the strategy, economics and international business group at the Bradford University School of Management