An Industrial Strategy or an Idealistic Solution?

Guy Hodgkinson, Director at our member firm MHA MacIntyre Hudson examines the Industrial Strategy against the findings from our annual manufacturing and engineering survey and asks whether enough is being done at Central Government level to re-instil confidence into the UK’s manufacturing marketplace.

Much has been made of the Government’s Industrial Strategy and its intention to increase the earning power of people throughout the UK while boosting productivity, but with fears that manufacturing in the country is declining, is the plan enough to rebuild confidence and performance within the sector?

The Strategy is at the forefront of many businesses minds as leaders seek to develop their teams and has been such a hot topic in recent months that Atul Kariya, manufacturing specialist at MHA, was a keynote speaker at the Cranfield University National Manufacturing Debate 2018 –the subject of which was, as we’re all wondering, Will the published Industrial Strategy help rebuild manufacturing?

The question is a reasonable one: the strategy itself focuses on productivity within the UK, which has fallen by 9% in a decade. Clearly, there is some way to go to improve productivity if we want to remain competitive with our key manufacturing competitors, and the Strategy identifies five foundations to build on to improve productivity in order to do just that: our ideas –positioning the UK as the world’s most innovative economy, our people – creating good jobs and greater earning power for all, our infrastructure – which requires a major upgrade, our business environment – which will see the country become the best place to start and grow a business, and the places the UK has to offer – honing in on the most prosperous communities in the country.

Over the past six years, MHA has surveyed a total of around 2,500 UK manufacturers to get real-time feedback from businesses across the UK into the sector as a whole. Our goal has been to glean a true insight into the trends, and fears, for the sector as a whole and the economy to which it makes such a vital contribution.

With the results in, we’ve been able to cross reference the responses to the survey with the Government’s key focus, to see if those objectives correspond with the needs of our clients and contacts.

With ideas and people being the two factors our respondents could play a role in, we chose to focus on those two facets, to see how the Industrial Strategy’s policies compared with manufacturers’ mindsets.

The Strategy’s key policies relating to ideas within the sector are raising research and development (R&D) investment from its current 1.7% to 2.4% of the GDP by 2027 and increasing R&D tax credit from 11% to 12% as of January this year.

At a glance, the figures look promising: R&D tax relief can provide innovative businesses with a cash tax refund to keep their projects viable, with £1.3bn currently being claimed by UK SMEs. HMRC estimates that the manufacturing sector accounts for 28% of R&D claims, with a total tax relief value of over £900m. In addition, loss making companies can obtain cash tax refunds of an effective rate of 33% of the R&D spend, while tax-paying companies can claim £19 back for every £100 invested in R&D through corporation tax, as well as a further £24 through R&D tax credit system.

The UK’s track record in comparison to its competitors is good, with its R&D relief to SMEs being an effective tax rate of 25-33%compared to 50% in France, and the French equivalent being more specific and onerous for the applicant.

Add to that the fact that at 19%, the UK’s corporation tax rate is the lowest in Europe – a figure that will further reduce to 17% in 2020 –compared to 28%-33% in France. This provides the UK with a strategic advantage in attracting inward investment. Indeed, the UK is the second largest recipient of inward investment, with the USA being the biggest.

However, our survey found that while an encouraging 88% of respondents are investing in R&D, 43% were not claiming relief on their costs, citing a lack of awareness and understanding, and the time and effort involved as their reasons for failing to do so.

It will take, it seems, just a little more guidance and information to reassure and encourage manufacturers to capitalise on the refunds available to them in reward for their investment into the sector.

A business is only as good as its people –entrepreneurs from Marissa Mayer to Steve Jobs have testified to that, and it seems the Government wholeheartedly agrees. The policies revolving around the people pillar of its strategy include investing an additional £406m into STEM skills, making £64m available for re-skilling into digital and construction training, and establishing a technical education system to rival the best in the world.

Everyone wants the right people, but the challenge, according to the survey results, is recruiting at the right skill level. Three quarters (75%) of respondents reported issues with recruiting and disappointingly, almost half (46%) admitted to having skilled vacancies within their business.

This ongoing difficulty has resulted in companies investing their money elsewhere: a huge 82% of our respondents stated that they are now looking to technology and AI to increase productivity, with more than half (53%) admitting that they would rather invest in technology than people –not what those responsible for drawing up the Strategy will want to hear. So, back to the Big Question. Is enough being done at Central Government level to rebuild the nation’s manufacturing reputation?

Ultimately, the answer is no: The overwhelming feeling from respondents is that the Government has not done enough to make the ‘people’ policies it outlined in the Industrial Strategy work for the manufacturing sector specifically.

The Strategy pledges a boost to the government R&D budget that will total £4.7 billion over four years, yet the investment in people highlighted in the report is £407m –not enough to provide the training necessary to allow widespread recruitment at the necessary skill-level.

Meanwhile, the Government’s apprenticeship levy initiative, introduced to help employers recruit, train and manage apprentices to create skilled roles in-situ, has not worked due to the level of administration required and the complexity of the rules. As a result, the levy is largely viewed as an additional cost to businesses, clearly illustrated in the fall of apprenticeship take up.

So, what would it take to restore and maintain confidence in UK manufacturing beyond the current policies?

While the general consensus is that our clients are pleased the Government has created a vision to help restore faith in the sector, 60% of respondents don’t feel the plan goes far enough to address the key issues affecting the sector.

Perhaps it’s a case of trying to do too much too soon, when in reality, a simplified system to encourage key behaviors within the sector would, in turn, help to implement a results-based strategy that can be monitored, reported and ultimately evaluated and improved.

If you have any questions or if you would like to discuss this in more detail, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with a member of our Manufacturing team.

This article featured in issue 2 of our manufacturing and engineering newsletter series. Read the full newsletter here: The Engine – Issue 2