UK plc: invest or die

Industrialists have raised the alarm over under-spending in UK industry for more than three decades, and chancellor Gordon Brown in his March Budget claimed industrial policy since 1997 had brought the UK in line with its major competitors for the first time in 35 years.

But the latest figures from the DTI’s innovation unit paint a different picture of UK plc – with top companies still trailing behind their European competitors in terms of their level of accumulated capital investment.

Last month the government came under attack from industry for a lack of industrial strategy as General Motors axed Vauxhall car production at its Luton plant with the loss of more than 2,000 jobs, and the future of 8,000 Corus steelworkers hung in the balance in South Wales and Tyneside.

The DTI’s capital expenditure (capex) scoreboard takes the UK’s top 500 companies and compares their capital expenditure on buildings, plants and equipment with the world’s top 300 capex spenders. Sales, profits and employee numbers are included.

The capital spending of UK companies averages at 8.4%, compared to 9.7% for the international top 300.

Senior industrialist Norman Price, who advises the DTI Future and Innovation Unit and sits on the CBI tax committee, says: ‘FDs should realise that capex, along with research and development and innovation, are key drivers to business growth, productivity and competitiveness.’

Strong areas include retail and oil and gas – where a success story that last month prompted the government to announce #1bn in North Sea investment schemes to extend the life of oil fields.

Traditional manufacturing, however, continues to lag behind, with automotive, chemicals, electronics and IT hardware well below international R&D and capex levels – sectors that account for 25% of all capex internationally, but 12% of all capex in the UK.

Manufacturers struggling with the strength of the pound and overcapacity in volume areas such as the automotive sector will take little comfort that they invest less than two thirds of their international competitors both in accumulated capital as percentage of sales and per employee.

Manufacturing accounts for a fifth of top company capex in the UK, but on the international level the sector dominates, taking the largest proportion of investment in the US and over 50% in Japan, France and Germany.

Price explains: ‘Given the positive link between accumulated capital and productivity, this lower capital gearing could be part of the reason for lower rates of productivity in UK manufacturing.’

He argues there is a discernible link between companies with high levels of accumulated capital investment and high levels of productivity.

What emerges from the survey is that there is strong link between R&D and capex – and that industry sectors that are strong in both can lay claim to industrial strength.

He says: ‘The message is simple – companies that fail to invest appropriately in capital expenditure run the risk of losing market share. ‘Capex is often the essential link between successful R&D and a strong position in the marketplace.’

Lord Sainsbury of Turville, parliamentary under secretary of state for science and innovations, is matter of fact about the problem.

‘Our people cannot compete using yesterday’s tools,’ he says.

But it is not all gloom for UK industry, with exceptions in the pharmaceutical and aerospace sectors where world leaders such as AstraZeneca and BAE Systems invest on a global level.

Tom McKillop, chief executive of AstraZeneca, says: ‘An effective risk-managed capital programme is at the centre of all successful companies in our industry.’

Lord Sainsbury adds: ‘Capex is a crucial component of innovation – the exploitation of new ideas – both for companies developing their existing businesses or those in transition towards new markets.’

Mark Lambert, European telecoms analyst at Merrill Lynch, argues that the role of capex has become more critical as technological advances have driven down costs and allowed FDs and boardrooms to introduce price reductions.

‘Companies that fail to invest in capital expenditure run the risk of losing market share,’ he says. ‘Either through inadequate levels of service, incomplete product offerings or on the basis of price.’

Price adds: ‘Companies that have invested in research and development show the benefits – like Jaguar at its Halewood plant where new product developments such as the baby Jag – have turned an ailing plant around into a business with a worldwide market.

The challenge facing FDs and financial controllers at UK companies is to grasp opportunities in the new economy by matching international benchmarks for appropriate investment in the future.

Industrialist Mike Tubbs, attached to DTI, says: ‘For well established companies the opportunity is to use effective investment to make the transition to a higher growth, higher valued added future.’


DTI online

CBI online

Astrazeneca company site

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