North brains take over from muscle power

Mar 28 2008 by Iain Laing, The Journal

Manufacturers in the North East are beginning to win the battle against cheap foreign competition according to a new survey. Iain Laing looks at the sector’s renaissance.

THIS region was once synonymous with large-scale manufacturing. Shipbuilding and steel engineering were, along with coalmining, the mainstays of the economy.

Now the North East is no longer the engine room of Britain. Ships are no longer made on the Tyne and most of the pits were shut nearly a quarter of a century ago.

But manufacturing still makes up nearly a third of the region’s economic output. This famously resilient region has survived the massive job-cuts and corporate withdrawals of the 80s and 90s and there is now a new breed of manufacturer proving its mettle.

A survey from manufacturers organisation EEF showed this week that the sector is succeeding by using its brains rather than its muscle when faced with cheaper competition from Eastern Europe and the vibrant economies of India and China.

The report says that companies are reaping the dividends of moving into higher value production and by keeping the research, development and design work in this region and outsourcing the screwdriver work to other countries.

This is seen especially in sectors such as oil, where The Journal reported this week thousands of jobs are likely to be created in the next few years after growing 30% annually in recent years. The promise of the oil sector lies in the technological strength of companies such as oil and gas pipeline maker Wellstream in North Tyneside which has recently opened a huge factory in Brasil and with a £365m order book is a darling of the stock market.

And where there are large rather than specialist factories operating in the North East they are noted for world-class production methods and efficiency. Look no further than Sunderland’s Nissan plant which this year announced plans to add 800 jobs to the 4,300-strong workforce.

The survey also highlighted manufacturers fears of the strength of competition from cheaper economies. This was powerfully illustrated here with microchip maker Atmel’s recent closure of its North Tyneside plant with the loss of 600 jobs.

But the EEF report, published in association with accountants and business advisers BDO Stoy Hayward, found that fewer UK manufacturers are reporting a significant impact from price competition in key markets, compared with 2004.

Furthermore, whilst many low cost competitors, such as China, have been striving to become more innovative, only two fifths of companies saw higher value added goods from these competitors as posing a threat and only 3% a significant threat, down from 50% and 12%, respectively in 2004.

And the survey showed that manufacturers will continue to look overseas to reduce costs and 70% of companies who already have overseas operations expect this proportion to increase within the next five years and one third of companies with no production currently outside the UK expect this to change by 2012.

Alan Hall, director at EEF Northern, said: “This report shows how well that we in the North East are able to add value to the work done. Manufacturing has changed a lot in the last five to seven years. We see a lot more innovation and specialisation. It may have been a long time coming but there is an awful lot of buoyancy in the manufacturing sector.

“This survey paints a positive picture of how manufacturing companies have adapted to the challenge of the global environment. Instead of competing on price alone they are adopting a range of strategies to take advantage of emerging markets. While there are many other challenges on the horizon, manufacturers look well-placed to rise to them.”

He praised the Government’s maintenance of a broadly stable economy and introduction of measures such as the recent White Paper on Science and Innovation, which aims to build on the work done by projects like Newcastle’s Science City or Sedgefield’s NetPark to bring scientists and entrepreneurs together.

But Hall believes there is a lot more to be done to encourage companies to capitalise on their own know-how and on the expertise in our universities.

“Government economic policy has kept a stable environment for growing businesses but there is a lot more that can be done in terms of taxation, particularly Corporation Tax. We have been largely all right so far, but we have to improve the offer for companies looking to locate in the UK when they are faced with tax advantages in other countries.”

Neill Rayland, partner and head of manufacturing at BDO Stoy Hayward, said: “The competition from emerging markets is likely to increase as these new economies move further up the value chain. We see an increasing challenge from China and India as they develop the low cost models that we have seen to date and begin to add innovation, research and increasing quality to the mix.

“However, the threat from established economies such as Germany and the US must not be overlooked. Like the UK, they are associated with quality and have access to sizeable home markets with the ability to tap into overseas markets. What’s more, manufacturers in these countries can also outsource to lower cost economies.”

The region’s manufacturers are clearly moving with the times, but as globalisation tightens its grip their need to think harder and further ahead also grows sharper by the day.

Wage Settlements

THE latest pay settlement figures from manufacturing show that there continues to be no wage inflationary pressures building up in the sector, according to EEF Northern, the manufacturers’ organisation.

EEF's latest figures for the three months to the end of February show that the average level of pay settlements was 3.2%, slightly higher than the figure of 3.1% for the previous three months.

However, they still remain in the very narrow band of 3.1% to 3.3% within which manufacturing pay settlements have been for the last 15 months.

During this latest period, the number of pay freezes reported fell slightly to just under 6% of all settlements. However, the number of companies reporting that they had deferred their pay settlement rose slightly to just under 5% of all settlements, the highest figure for more than two years.