Opinion: Manufacturing needs a hand: Colin New argues that government should intervene on investment, skills and unemployment

THE KEY role for the Government in helping manufacturing is undoubtedly to provide a stable framework in terms of inflation, interest rates and the exchange rate.

In addition, however, it should be prepared to intervene whenever the rational behaviour of markets, companies or investors is likely to bring about consequences detrimental to the long-run industrial health of the nation. From this perspective, the three priority areas of intervention are investment, skills and unemployment.

The investment crisis must be solved, because nothing else will work without long-term spending. However, the crisis is not what it seems.

It is not so much the quantity of investment being made in new plant, factories and production technology that is the problem but the quality of such investment in terms of its long-term structural implications.

Since most main board directors are preoccupied with share prices and their effect on takeover possibilities and their bonuses, projects are short-term, cost-saving and incremental.

The recently leaked DTI report on the state of UK manufacturing industry comes as little surprise to those of us who spend our time in plants. To blame management for lack of expertise and the poor state of manufacturing technology but to claim (if the leak is accurate) that 'short-termism' in the City is not an issue is, however, a travesty.

The real answer to the question 'Why have managements not invested in new product and process technology to the same extent as our major competitors?' is that they cannot do so because of the perceived short-term return required.

The ultimate effect of such policies is of course to allow the manufacturing base to degenerate, even though investment may still be made in a piecemeal way. The irony is that these short-term policies are driven by the equity investors, usually large pension funds and the like that are actually interested in long-term investment returns.

This is a classic case for regulatory intervention on the grounds that while it is not government's job to interfere with things that companies can rationally be expected to do for themselves, it is its job to intervene if the market cannot be expected to deliver the desired result without it.

The financial purists will argue that 'in the long run' such an open-market capital system will allocate resources to the most able and drive the others to the wall, thus making best use of all resources. Unfortunately, 'in the long run' all publicly owned UK manufacturing industry may well become uncompetitive with foreign companies that are not subject to the same constraints, and we may all be unable to collect our pensions.

One way out of this is to create a simple funding mechanism to redirect investment into manufacturing activities and away from paper shuffling, wheeler-dealing and asset stripping.

Each fund manager - whether in banking, insurance or pensions - would be required to hold 25 per cent of all controllable funds in the form of non-transferable Manufacturing Industry Debenture Investments, to be issued at fixed interest (say 8 per cent) for a 20-year term.

This would lock fund managers (including banks) into a long-term relationship with their corporate partners - as in Germany and Japan particularly - but still leave room for competition between fund managers in terms of choice of corporate partner and other investments.

Safeguards would be needed in terms of acceptable 'structured' investments - such as capacity expansion, new factories or new manufacturing facilities - but the principle would be to match long-term funds to investments at known cost.

In the short term, though, the best advice one can usually give to UK manufacturing businesses is to be taken over by a foreign (preferably Japanese or German) parent. Of the 1992 finalists for the UK Best Factory Awards, two out of three were foreign-owned - if one excludes the two small-company nominations.

The second prime area for intervention is in the area of key skills training.

It is absolutely clear that the general educational standard of the UK labour force, including management, is far below that of our main competitors.

The rational behaviour of the market results in a shortage of skilled people, particularly technicians and manufacturing and software engineers. This is because companies do not spend scarce resources on training for fear of losing their trained staff to other firms.

Once more, the wonder of the solution is that it need cost the Treasury nothing.

A training levy on all manufacturing businesses could be redistributed back to those companies or colleges that do carry out the training in proportion to agreed output targets.

The 'best' companies would actually be better off, while the others would bear their fair share of the nation's training needs.

Intervention in the third area - unemployment - requires even more urgent attention. While there are no easy solutions, there are some actions which only government intervention can bring about because the 'players' would take actions that are rational for them but detrimental to the industrial health of the nation.

Indeed, the first suggested action - removal of the National Insurance 'ratchet effect' was caused by government intervention in the first place. The fixed costs associated with recruiting additional employees caused by the current system inevitably delays the re-employment of people as the economy picks up. The simple (and cheap) solution is to make National Insurance contributions directly proportional to the wage bill rather than, in effect, to head count.

The second key factor that delays re-employment is that companies will initially take up extra capacity through overtime rather than through additional workers. This is of no benefit to the unemployed and of little to the Treasury.

Once more, the simple interventionist solution is to put a ceiling on paid overtime for employees. After all, why should the taxpayers (and of course, government) pay to keep people out of work by allowing those in work to work even more? In the long run, it will be necessary to reduce working hours anyway if we wish to maintain a 'full employment' economy.

By early in the 21st century, it is quite likely the UK could have either 15 million people working 40 hours per week and 15 million unemployed or 30 million people working 20 hours a week. One of these is a recipe for social disaster; the other for social equity. We need to choose the path now.

Colin New is Professor of Manufacturing Strategy at Cranfield School of Management and head of the judging panel for 'Management Today' magazine's Best UK Factory Awards.

(Photographs omitted)