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Top Manufacturer Comments on the State of Manufacturing in the West Midlands

We are continuing our interview with one of the region’s top manufacturers, Paul Cadman, on some of the issues impacting upon manufacturing and on local businesses.

How is the region doing?
The following is an extract from the Midlands Economic Forum’s latest report. According to the latest Lloyds Bank regional PMI (Purchasing Manager’s Index) published mid-March output growth in the West Midlands is 57 the strongest in UK despite being less than January’s 60. Price pressures continue to strengthen above UK levels with tight labour market conditions persisting. The month has been positive for the region with the launch of the Midlands Engine strategy, and the associated Midlands Connect programme, as the first concerted steps to comprehensively apply the Government’s Industrial Strategy to the region. Whilst the rhetoric was positive, much will obviously depend on the investment funds made available and programme implementation over the ensuing decades.

The region has fallen behind in terms of public sector investment, with for instance such transport capital investment in the region lagging London by £15 billion in the ten years to 2015. According to PMI-based analysis, since the start of the largely tentative recovery in the second half of 2009, and the more vigorous performance after 2013, the Midlands have tended to register stronger performance than that achieved nationally. The latest regional PMIs again record stronger growth both in the WM.

Although the immediate response to the Brexit referendum saw the PMIs record precipitous falls, subsequently the recovery has been strong and defied most pre-referendum forecasts. This has until recently been reflected in official data. However negative currency market sentiment has seen the pound sustain significant erosion since June, and this appears to have contributed to rising input prices. Coupled with firmer global commodity prices through 2016, the pound’s depreciation now appears to be feeding through into significantly higher consumer prices, despite what appears some considerable restraint on the part of producers to pass through all of the price increases.

The latest PMI again recording tightening inflationary conditions in the WM input prices increased from 69.5 in January to 70.9 Moreover, price pressures for both input and output prices seem to be rising at a consistently faster pace than that nationally. With sterling expected to come under further pressure after Article 50 is activated and when the European Council negotiating guidelines for Brexit are published (expected by the end of April).

Sterling could end up trading below $1.20 consequently price pressure could intensify further. In January the CPI rose to 1.8% and lead to speculation the Bank of England may be forced to tighten policy – particularly given the context of the US. However, the failure of the administration to secure votes for a new healthcare programme has dampened faith in achieving the promised tax cuts that will result in a rate rise. We can only guess that UK output performance is sufficiently robust enough to cope with a shift in monetary policy.

The WM PMI records employment take-up of 56 in February rising from 53.4. Although the real level of unemployment may be close to 10-12% of the notional labour market (total economically active, employed and unemployed as well as those economically inactive but wanting to work), there has been little erosion in the proportion of those deemed economically inactive but wanting to secure employment. This is in marked contrast in what could be termed the formal labour market, where unemployment has almost halved and consequently the level of economically active has risen to almost 90% of the notional labour force. The inability to reduce the level of what could be termed the economically discouraged, such as by raising their skills and employability, poses considerable challenges, not least for the regional economy, especially given the potential limitations on inward migration post Brexit. Indeed, the regional economy can be seen to be dependent on four types of migrants.

These are: Resident Migrants (those who seek semi-permanent/permanent residence to secure work); Students (who are technically not economically active); Seasonal Migrants (for agricultural or festival work) and Transit migrants (those staying for very short but repeated periods, such as HGV drivers). With non-British HGVs estimated to be responsible for 87% movements to the continent, any interruption or constraint on this capacity could prove problematic for the region’s capacity to export.

A key focus of the Midlands Engine strategy is the need to boost regional productivity. Whilst the perceived regional deficiencies are a result of a range of factors, ranging from skills, capital investment and available labour, transport and connectivity infrastructure are additional factors that need to be considered. Indeed there seems to be a correlation between supplier delivery times (as a proxy for transport bottlenecks) and productivity performance as indicated by PMI data. Therefore it would seem that tacking infrastructure constraints would have an impact on regional productivity and providing a globally competitive infrastructure would facilitate further export growth.

Do you have any concerns?
I am concerned about the extent to which growth remains dependent on consumer demand. I am also concerned that 21 out of 28 rail contracts in the UK are with foreign owned companies who can quite easily charge us more to subsidise their home rail services.

I am concerned that we no longer have a UK owned energy generation capability and the implications of this. We recently had to pay £100 million compensation to two US companies because we mishandled procurement for Hinkley point C.

Between January and June 2016 UK small businesses paid 11.47p per kWh for electricity. This is 49% above the EU15 median. For medium sized companies we pay 81% above the EU15 median. For large businesses the premium is 115% and for extra-large companies 134.4%.

Surely this suggests we should build our own energy capability? I attended the launch of the Energy Capital on 15th February 2017 at Birmingham University, once I had managed to navigate myself around the sprawling campus and found a parking space within a day's walk of the venue. I have to say I was pleasantly surprised. I have been to many 'launches' only to walk away feeling 'is that it?' This time I walked away actually believing that something can and will be done.

It is always good at these events when the first person you talk to has first-hand experience of doing what you have been telling people could be done. And with that great start, the day did not really dip at all.

After the usual pomposity of the opening video: LEPs providing opportunities for constructive collaboration, harnessing spending power, the West Midlands being full of energy innovators, John Clancy, the leader of Birmingham Council brought the matter in hand to reality. We have been taking energy supply for granted; 14% of Birmingham's population are 'fuel poor.' He introduced the themes for the day: the transition into an efficient and local energy system; taking control of consumption and generating energy locally; taking a region-wide approach focused on the needs of our SME. It was music to my ears. I can remember the blackouts of the 1970s and do not feel that our energy supply is any more secure despite a (ineffective) regulator and a focus on foreign owned corporations as our source of supply. What could possible go wrong. Incentivise our 'metal bashing' SME to move up the supply chain and work with the tolerances that turbines and solar panels require. Get some of them to generate power through biomass, wind, solar or whatever. Let's generate power for ourselves using cheap, renewable, clean energy.

Someone from JLR then droned on about JLR (a British Company - really? I thought we had sold this jewel to Tata). JLR must have sponsored the event. Next and much more interestingly, although delivered in true Finnish histrionics (deadpan delivery), came Petteri Huusko who told us all the things that are going on in Helsinki. I love the way the Finns do things. Even their entire education system is a series of experiments run by highly qualified hand-picked experts where all knowledge is shared. I think we need to get Petteri on board with our Energy Capital project and a very wise move to get him to present at the launch.

The best thing about the panel discussions was Tom Westley. Another businessman who tells it like it is: he talked about how his own business has to modify its approach because there is insufficient power; he told us that the price of electricity in the UK for industrial users is 9.74p per kwh whereas in Sweden it is 3.6p, Germany 7.95p, Finland 4.4p, France 5.5p and Spain 5.7p. Now we have chosen Brexit we will be competing with businesses who have lower energy costs (US energy costs for business are about a third of ours). Tom told us that large scale energy generation had big holes in availability (every winter for at least the last four, there have been warnings to business because of lack of availability). I started off the well-deserved round of applause.

The other panel members - specifically the private sector ones talked about energy enterprise zones, waste into biomass and multiple energy production opportunities. Put the private sector in charge of these partnerships I say. The Energy Systems Catapult, Tyseley Energy Park, the Black Country Energy Capital all seem to be useful devices by which we can get to a situation where our own SME are fabricating components for and generating enough to satisfy our own energy needs.

Then it was the hustings for the West Midlands' first Mayor and as you would expect some of the candidates answered the questions, others ignored them and did a stump speech. Some of the candidates understand the challenges associated with the role, others have a rather grandiose view of their eligibility for what will end up being a lobbying and consensus building role. Whoever becomes Mayor needs to find the means by which we can commit to energy saving in everything we do and taking ownership of security of supply and the cleanliness of generation. The Black Country was built on access to cheap energy and access to power is critical for business relocation. The West Midlands will dominate world manufacturing if we can use Energy Capital to do the same. Do we have the energy to grow? The thought that we probably do kept me going through (what appeared to be) the trek back to my car.

The bigger question is can we help our metal manufacturers develop the higher tolerances they will need to manufacture wind turbines, biomass digesters and solar panels? The answer has to be yes.

Has the budget helped small and medium sized businesses?
I actually found the budget underwhelming and anti-small business. We have had the U-turn on Class 4 National Insurance for the self-employed, but I still have misgivings.

The rhetoric about creating a stronger economy and fairer society rings hollow when all they can do is offer a pitifully small discount on business rates for SME, some of whom will get a business rate hike of 30% next month.

This at the same time as future reductions in Corporation Tax are announced, and incentives are in place that allows Amazon and Sports Direct to pay no business rates at all. Money for talent development, 5G and biotech are all aimed at large companies, who are also likely to benefit from the new apprenticeship system. It seems as if the government wants to kill off any possible disruption to the outlook of the large businesses and foreign owned multinationals they want to run energy, health care, education and prisons.

Some of you will think that there is not enough money to invest in infrastructure or opportunities for small and medium sized home grown businesses. After all, there is a deficit to pay off.

I have done some calculations of my own: the West Midlands economy stood at £120 billion at the end of 2015. In 2014, the CBI reported that underperformance in schools cost the country £8 trillion across the life of a child.

That is probably £8 billion a year for the West Midlands. Recent figures show that congestion is costing the region £3 billion a year. The previous Business Minister talked about a productivity gap across the Midlands £34 billion a year and let’s say £20 billion of it was for the West Midlands. This productivity gap has supposedly come from West Midlands business leaders' lack of ability to implement 'high performance work practices.' However, the worldwide flat lining of productivity since the last recession has come from a lack of investment which in turn has resulted from unwillingness by banks to approve such investment, or small and medium sized business leaders themselves forgoing investment because of what they experienced in 2008-9 (again caused by the banks).

Between 5% and 10% of small businesses export abroad: French and German sales people abound across the world: not British. A lack of venture is hardly a feature of British entrepreneurialism. It is more likely that the 30% cuts in International Trade Advisors are limiting our visits abroad: there is not enough resource to support businesses to go around. West Midlands exports hit £29 billion in 2016. Unfortunately, a significant proportion of that will have been JLR on its own. Nevertheless, the average trade surplus SMEs have with Europe and the rest of the World is £322k. If there are another 50,000 SME across the West Midlands that can deliver this surplus, if they had the right support to say crack the US, China or Australia - the toughest markets to enter, that would add another £16 billion to the region's GVA per year.

I am not saying that large businesses and foreign owned multinationals are unimportant to the West Midlands economy: they compromise 0.1% of all businesses nationally but bring in 53% of turnover and employ 40% of the nation's workforce. Unfortunately the budget did nothing to make the burden of taxation fairer between SME and large companies.

What I am saying is that this budget, supposedly another herald of Britain's future economic success completely ignored Brexit, which is likely to have a significant impact on our economy in the future and, if my sums are right, did very little to harness what could be another £47 billion per year worth of growth to the West Midlands economy. Salvador Dali once said "so little of what could happen does happen." Imagine a budget where all that could happen in the West Midlands, did happen because we had the visionary leadership we deserved.

Article 50 has been triggered. Do you have any more thoughts on Brexit?
I cannot help feeling that the recent series of government fumbles, gaffes, alternative facts together with the arrogance of stomping party politics all over useful dissent, means that the next two years will change a lot more than our trading relationships with the rest of the world.

Some recent pieces of news worry me:

Firstly, the cost of not getting good trade agreements in place means we will end up reverting to World Trade Organisation rules (although Mr. Trump seems to want to interfere with this bastion, potentially making things even worse for us). It seems that the Brexit Minister cannot calculate the costs of having no deals with EU members, even though a report showing some figures was recently leaked to the press.

The House of Lords have criticised the department that will be responsible for negotiating deals with the top 15 priority countries saying that it lacks sufficient resources to do its job effectively. Remember the report produced by Deloitte that said it will cost another £300 million to 'resource-up' the department - the report so quickly dismissed by government?

The SNP's has announced that it wants a second referendum on devolution, something that could result with Scotland leaving the Union (with Northern Ireland closely behind). This despite polls showing 61% of Scots want to stay in the Union.

All this bodes for a very bumpy ride. A journey I expect that will be full of pratfalls, snubs, charmless offensives and the strong belief that we are better than everyone else and they are lucky to be trading with us.

We need to export much more than we do currently: not just to turn the trade deficit around, but to provide stability to our economy. Consumer demand cannot sustain a strong economy. A typical non-mortgage debt of £13,000 per household is not the right means to sustain growth (but it is better than the £30,000 of debt Osborne wanted us all to have to help him balance his books).

I predict that by 2019 the majority of British people will see the Conservative government for what it is and the clamour for an early general election will be irresistible. I predict that the current opposition party will be in no position to offer anything credible to British voters. This leaves a golden opportunity for a party truly representing the middle ground, to step in and do something that has been lacking in politics for a long, long time: change things for the better.

In addition to increasing the value and volume of exports (particularly from small and medium sized businesses), here is my manifesto for any party willing to step up to the mark. The application of World Trade Organisation rules will add 10% to the cost of cars and 14% to the cost of food and there will be a real need to raise taxes at a time when public services will be stretched beyond breaking point.

1: Significantly raise taxes on the super-rich and on large corporations to raise finance; 2: Encourage people to buy local by reducing VAT to zero for homemade/grown goods and services and selectively introduce tariffs on imports that compete with our own; 3: Create a 50 year infrastructure development plan that attracts private investment funding; 4: Regionalise health and education: put the professionals in charge and stop unnecessary testing/counting; 5: Incentivise the production of homemade clean energy, creating a circular economy and reducing the cost of waste; 6: Avoid trade deals with any other country that seeks to compromise our journey to becoming a high knowledge/high pay economy with an adequately resourced public services sector; 7: Empower the voluntary and community sectors to address issues of inequality, inequity and exclusion. Help us truly become one nation thriving on diversity; 8: Incentivise investment in small and medium sized manufacturing companies and at the same time protect homemade innovation from foreign exploitation; 9: Implement universal basic income that will reduce the cost of poverty using crypto currencies to administer the system; and finally 10: Reduce the costs of ownership: for example explore mobility as a service as a viable alternative to car ownership.

You ran a survey for businesses in the West Midlands regarding what they expected from the new Mayor. What are the results?
There were 10 questions: the first asked if business leaders were up to date with the West Midlands Combined Authority and the election of the Mayor: 65% of the respondents said that they were, with 18% saying they knew something but needed to know more and 17% said that they were not up to date but should be. No respondents said that they were not interested. This suggests a high level of interest from the business leaders who completed the survey, which is the opposite of general public perception.

41% of respondents said that having a Mayor would have a positive impact on their business with 69% unsure. No respondents said that having a Mayor would have no impact. This result suggests that despite the high level of interest from the business community, business leaders are not getting the information they need from candidates. Perhaps this is as a result of attempted Mayoral engagement with the general public (which is not getting the message across) or that too much time is being spent with party supporters. I think that the lack of engagement with businesses is an oversight and is symptomatic of the poor engagement of the private sector with the Combined Authority.

In response to the question about Mayoral focus: 70% said that the focus should be lobbying activity with Central Government, bringing more resources into the region; 12% said it should be ambassadorial work – spreading the region’s reputation abroad; another 12% said it should be meeting top business leaders and helping to resolve their issues; 6% said it should be getting the local authorities to work together better. No respondents said that the focus should be attending celebrations and events across the region.

When asked about the biggest barrier to business growth: an overwhelming 76% said it was the lack of skilled people; 12% said it was Brexit; 6% said access to finance at reasonable levels of interest; 6% said not enough land for expansion. No respondents said a lack of homes or a lack of export support was their biggest barrier to growth.

59% of respondents said that they already knew who they were going to vote for with 12% saying that they were fairly sure; 24% said that they were open to hearing what the candidates have to say; 5% said they were not sure. No respondents said that they were going to vote as they had always done or that they had no idea who to vote for.

71% of respondents said that they had not taken part in the Combined Authority consultation on Mayoral powers with 6% unsure. This means, if we apply the same ratio to all West Midlands businesses, that less than a quarter of businesses are engaged in the process of shaping the Mayor’s powers underlining the lack of business engagement referred to above.

When faced with the question ‘Faced with a shortfall in funding, what one thing must the Mayor not do?’ 41% said increase business rates; 24% said raise other charges (e.g. congestion charges, low emissions taxes, employee car parking charges); 18% said try to squeeze more efficiency from the local authorities; 12% said help the local authorities raise additional finance (where possible) and 5% said raise council tax. No respondents said use new financial tools (e.g. crowd funding) to raise money for projects which is interesting considering how stretched local authorities are in even delivering mandatory services like adult  social care and children’s services.

When asked what does the future growth of the West Midlands depend on; 71% said focusing on growing our own small and medium sized businesses; 59% said focusing on helping businesses that make things; 41% said attracting more foreign owned corporations into the region; 35% said getting more young people into work; 17% said access to HS2 and the same said access to the world via Birmingham Airport. Finally 12% said building more homes. Respondents could vote for more than one option.

The final question asked ‘What would you tell the Mayor to prioritise?’ 50% said education although the Mayor only has control over the adult skills budget. 31% said seamless public transport. 25% said land remediation. 12% said free use of the M6 Toll, the same as who said building new homes. 6% said growing Birmingham Airport's capacity; the same proportion who said HS2. No respondent said mental well-being – one of the Combined Authorities priorities. Respondents could vote for more than one option.

What would you say to local businesses?
I have a team developing the capability to do 3D printed prototypes. If you are interested, please contact me. In addition a few of my friends have created a great diagnostic tool for manufacturers: using it will help you plan out what you need to be focusing on. Again, if you are interested, let me know.

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