Playing our strongest hand by The CBI

Publication title

Playing our strongest hand

Maximising the UKâ&#x20AC;&#x2122;s industrial opportunities

Playing our strongest hand â&#x20AC;&#x201C; Maximising the UKâ&#x20AC;&#x2122;s industrial opportunities

Contents

Foreword 4 Executive summary

Recommendations for government

1 It is time for a step-change in industrial strategy

2 Tilt the playing-field to compete

3 Capitalise on our existing strengths

4 Deliver sector action plans

Ready for take-off: aerospace Feeding our ambition: agri-food Moving up a gear: automotive The elements for success: chemicals and pharmaceuticals An imaginative future: creative industries Being green to grow: green-technology and services Using our heads: knowledge-intensive business services

5 Embed strategic thinking for the long-term

References 38

Playing our strongest hand – Maximising the UK’s industrial opportunities

Foreword

The UK needs to rebalance economic activity towards investment and trade, but we are not alone in this. Many of our competitors have similar aims. They are taking steps to develop their industrial capabilities and reposition their economies for the future, capturing the greatest opportunities for growth. The emphasis over the last few decades has been on linking up policies in areas like skills, infrastructure and regulation that act across sectors. The current government has also focused on addressing areas of UK weakness such as our mid-sized businesses, our education system and exports. All of this is absolutely essential to get right as part of improving the underlying business environment and securing private sector growth. However, on their own these steps will not be enough to realise the UK’s industrial potential. Vince Cable has rightly outlined a new approach that focuses on securing growth in key sectors. Tilting the playing field in industries where the UK has competitive advantage and significant opportunities to secure world-class status must be at the heart of a new industrial strategy. But previous attempts at delivering a sector approach have fallen short of the mark. This report aims to move the debate on – setting a vision for an industrial strategy where we use a smarter mix of all the tools available to deliver effective sector action. We have set out indicative action plans providing government with the architecture for the sector strategies it will publish in 2013. To be successful, we must ensure that all policies across government are designed, coordinated and delivered as a coherent whole to champion our strongest sectors.

The approach we propose here looks beyond the immediate flurry of tactical policy initiatives. It sets out our thinking on how best to shape a long-term vision for the economy and a strategy to realise that vision. There is a lot we can learn from other countries. They play to their strengths and the evidence suggests it has real impact. We now need to play to ours. Aim to be the best. Be determined to make investment happen and make the most of new opportunities. The time is right for a new industrial strategy that will help us realise our potential. I hope we will look back on this period in 20 years’ time and say: that was when the corner was turned, that was when we accepted no compromise, and that was when we secured our industrial future.

Katja Hall CBI Chief Policy Director

Playing our strongest hand – Maximising the UK’s industrial opportunities

Executive summary

The UK has to develop an industrial strategy to rebalance the economy towards trade and investment. We need the continuation of existing policies to drive growth and secure private sector investment, but that alone will not be enough. This report makes the case for going a step further, taking the initiative in a limited number of sectors to seize the global opportunities that will come from developing them into world-beaters. The prize for realising our immediate potential in these focused sectors is huge: a £30bn boost to exports and a trade surplus by 2020. Yet the prize for embedding a strategic approach in government for the long term is even greater – a sustainable industrial future for the UK. As the government has acknowledged, the current hands-off approach to growth is failing to provide the confidence necessary for businesses to compete for the biggest opportunities out there. Rebalancing the UK economy must consist of boosting our productive potential, which means reviving business investment and trade as key drivers of growth. The debate is no longer over whether the UK needs an industrial strategy, but about what form this should take. Our competitors are consistently seeking out high-growth sectors and markets, providing the engines of tomorrow’s economy with the right conditions to thrive. They aim to ensure that when it comes to future growth, the global playing field is not level. We need to learn from them. The UK has real strengths we can draw on. In order to make the most of these opportunities, we need a strategic approach of our own that uses our limited resources to maximum advantage. This requires that we build a world-class environment for businesses to operate in and then go further – tilting the playing-field in our favour. By maximising our existing strengths in sectors such as aerospace, automotive, agri-food, green technology and services, creative industries, chemicals and pharmaceuticals, and knowledgeintensive business services, CBI analysis points to a potential of over £30bn worth of export opportunities by 2020. This is a prize within our grasp, but we need concerted and focused action tailored to each sector if we are to unleash our true potential.

This report outlines an architecture to capitalise on these sectors, setting out indicative sector action plans ahead of those that the government will develop in 2013. By improving our ability to use the full range of policy tools to play to our advantages and developing the industry leadership required to provide a clear direction, we highlight how we can implement action plans with a difference. This is not about picking winners. It is about using government intervention intelligently, aligning and concentrating actions behind existing strengths capable of delivering sustained growth. But we must not stop there. This must not be a one-off exercise. We need to embed strategic thinking across government for the long term. This means connecting these opportunities with existing policies aimed at improving the general business environment, providing optimal conditions and confidence required for businesses in these sectors to invest and thrive. It also means putting in place structures capable of coordinating and swiftly implementing strategic decisions that consistently support our opportunities as they evolve. This requires strategic leadership and improved implementation to ensure that an industrial strategy turns into successful action. Getting this right is at the heart of our long-term growth challenge. Our recommendations focus on creating an overall policy environment that is more than the sum of its individual parts. Above all, in this report we argue that: • It is time for a step-change in our industrial strategy • We need to tilt the playing-field to compete • This involves capitalising on our existing strengths • We need to deliver sector action plans • We must embed strategic thinking for the long term.

Playing our strongest hand â&#x20AC;&#x201C; Maximising the UKâ&#x20AC;&#x2122;s industrial opportunities

Playing our strongest hand – Maximising the UK’s industrial opportunities

Recommendations for government

A step-change in industrial strategy

Capitalise on our strengths

1 A dopt a shared vision for what industrial strategy should

deliver for the UK economy, with the government reporting back regularly on how this vision is being delivered

F inalise the sectors for strategic focus across the whole of government – building on competitive advantages and mapping how they can be developed for the future by mid-2013

4 I ndustry and government must work together to decide on the most appropriate structure for leadership for each of the UK’s chosen sectors

Tilt the playing field to compete 2 P lace greater emphasis on policies that ‘tilt’ the playing field and play to our strengths, backed by strategic use of government resources

5 I ndustry and government must work together to implement sector action plans, identifying the long-term themes to be addressed in each sector and instigating and regularly renewing action plans designed to address them

Embed within government for the long term 6

evelop and adopt a core set of strategic Key Performance D Indicators which can be regularly benchmarked against competitors, with the results reported in an annual scorecard.

Playing our strongest hand – Maximising the UK’s industrial opportunities

Time for a step-change in industrial strategy

The UK economy needs a fundamental rebalancing towards trade and investment. Achieving this requires a new strategic approach to how government works with industry. The issue has moved beyond whether the UK should have an industrial strategy. The question now is what type of strategy is best for the economy over the long term. In designing this, there is much we can learn from the experiences and successes of other economies.

The UK needs to rebalance towards trade and investment Liberalisation has been the mainstay of Britain’s economic policy since 1979. It has brought significant benefits, improving both relative and absolute UK economic performance. Successive rounds of deregulation acted to boost the potential level of output in our economy. This generated high levels of growth in the short to medium term as businesses realised the new possibilities opened up by this approach.

But this progress masked deep-seated weaknesses. Real growth in terms of GDP per capita has slowed over the past four decades. From an annual average of 2.3% in the 1970s, annual growth slowed to 2% between 1979 and 1997, and then to 1.5% from 1997 to 20091. So, although the relative performance of the UK economy for much of the 2000s appeared strong, in absolute terms it was much weaker than in the 1990s. Furthermore, we now understand that this growth was prolonged through over-reliance on government and household consumption. As the CBI highlighted in its 2011 report, A vision for rebalancing the economy, we need to look to stronger business investment and a positive international trade balance as the key drivers of future growth. The CBI has therefore recently focused on championing fast-growing mid-size businesses, developing UK exports, supporting investment through better infrastructure and, this year, looking at how we build a stronger education system. These are all of critical importance. But we also need a strategy in place to set the right conditions for our potentially high-growth sectors to make their full contribution to the rebalancing process.

The issue is not whether the UK should have an industrial policy, but whether theis approach it has taken is “The debate no longer about whether optimal for theaneconomy and wealth the UK needs industrial strategy, creation over the long-term but getting the approach right” Katja Hall, CBI

Playing our strongest hand – Maximising the UK’s industrial opportunities

The UK can learn from other economies…

...but we must create an industrial strategy that fits the UK

The UK is not alone in looking to exports and investment as the route to sustainable growth. Other countries have been pursuing longer-term strategic plans shaping the policy landscape at home to favour this approach.

Debate has now moved beyond whether the UK should have an industrial strategy. It is widely accepted that developing one will help increase business investment and trade. The question is whether the approach we take is optimal for the economy and wealth creation over the long-term. It is not a matter of picking up another country’s industrial strategy – there are too many cultural, economic, geographical and other differences. Instead, the UK needs to map its own unique path.

China has perhaps the most ambitious industrial growth plans, seeking to grow seven strategic industries from a 2% share of the economy to 15% by 2020. But even countries such as the US and Germany have made strategic decisions on the types of industry they want to develop, adjusting policy and practice accordingly. There is a lot we can learn from what other countries are doing to maintain and build their future capabilities (Exhibit 1, pages 10-12). While it would be unwise to attempt to emulate China’s highly prescriptive plans, Singapore, South Korea, Israel, the US and some countries in western Europe can provide useful lessons. Most offer an overall vision for industry, providing a focus for prioritising action designed to improve the general business environment such as investment in education or the country’s science base, ensuring these play to the strengths of industries driving growth. Many then go further with sector goals, backing for specific growth-engines to develop further and a focus on policies designed to create the optimum conditions for production and trade. By analysing the impact of these choices, it is clear that an economic transformation over a period of 10-20 years is possible with concerted action, backed by determination from business and government to succeed. In the US for example, the focus is radical innovation and its commercialisation. This means using procurement agencies to drive entrepreneurial industrial activity in key sectors, supporting this through R&D incentives and allowances for capital investments. The result is that the US consistently spends an extra 1% of GDP on R&D than the UK.

To set an over-arching framework, the CBI has identified seven principles for a new UK industrial strategy (Exhibit 2, page 13). These were formulated earlier this year in Creating confidence.2 To turn these principles into practice, we must develop a clear vision of what an industrial strategy should deliver for the UK in terms of desired outcomes. Setting out a long-term vision will help to build business confidence and encourage investment. To be effective, an industrial strategy and its objectives will need to be adopted at the very highest levels of government. And just as firms provide an annual report on activities and outcomes, so the government should report back yearly on activity to deliver its strategy, perhaps at the time of the budget. Once formulated, the vision should guide the process of setting priorities for government spending and other policy action. Each department will need to identify and publish what the vision means for their work and their part in its delivery. In some cases this will mean setting shared objectives between departments, with action reported back through the annual review of department business plans. These high-level objectives should filter into the objectives of all teams in government departments. Each new policy proposal (not just new regulations) should be evaluated for its fit with the industrial vision, and if necessary adapted.

Recommendation 1

Adopt a shared vision for what industrial strategy should deliver for the UK economy, with the government reporting back regularly on how this vision is being delivered

Playing our strongest hand – Maximising the UK’s industrial opportunities

Exhibit 1 International examples of the effect of a strategic approach to industry, trade and investment Germany

Prioritises support for long-term needs of high-tech productive sectors with high-export potential, as well as targeting green-tech: 50

• Strong support for investment in green industry through demand stimulation such as feed-in tariffs, balanced with exemptions for energy-intensive industries at the core of the economy

Goods exported as % of GDP Germany UK

• Strong local engagement with business to cut through bureaucracy

Results 20

• Fourth largest manufacturer in the world, maintaining 6% of total world output in 2010 (UN Database)

10 90

Source: OECD Data

Approach

• From a similar position to UK in the 1990s, Germany now derives nearly four times the proportion of its energy from renewables (European Commission) • 2.82% of GDP spent on R&D in 2010, compared to 1.77% in the UK (Eurostat)

• Prioritises business environment conditions needed for its industrial ecosystem, focused on core competencies in automotive, engineering, chemical and electronics industries

• Exports concentrate on growth markets – with £51bn exports to China in 2011, compared to £9.3bn from UK (Destatis & UKTI)

• Long-established and well-resourced industrial research and development infrastructure through Fraunhofer institutes

Singapore

Pro-active stance on attracting FDI and stimulating business investment in key sectors, becoming a regional hub for high-value exporting industries: 30

Net exports as % of GDP

• In per capita terms, Singapore’s Economic Development Board has access to 11 times as much funding as UKTI

Singapore UK

• Focused on creating a regional hub of activity and driving exports, producing a consistently high trade surplus. ‘Can do’ attitude from government in how it engages with business

15 10 5 0

Results

-5

• Inward investment flows per capita of $7621 in 2010 – more than ten times UK ($738) (UNCTAD)

-10 -15

Source: IMF

Approach • Ruthlessly ‘courts’ anchor companies and their supply chain partners to build sustainable presence of activity and investment for the future

• Doubled GDP relative to the US in the last 30 years, while UK GDP has fluctuated between 80-90% (UNCTAD) • Ranked No1 for overall ease of doing business by the World Bank in 2011

Playing our strongest hand – Maximising the UK’s industrial opportunities

USA

Mission-driven approach delivers radical innovation, creating substantial commercial spillover:

R&D as % of GDP

1000

3.0

Patents filed per million of population US UK

800 2.5 US UK

600

2.0 400

1.5

Source: OECD Data

Approach • Has seeded extensive industrial activity in aerospace, health, IT and energy through its approach to public procurement and investment in R&D and innovation • The entrepreneurial roles of DARPA, NASA and NIH are important in developing strategic industries – a number of world-leading businesses have grown around contracts from these bodies or from technology that has been spun out commercially

200

Source: World Intellectual Property Organisation (WIPO)

• Critical mass of government support through research and other contracts; allowances for capital investment

Results • 21 of the top 50 ranked most innovative firms are from the US (BusinessWeek, April 2010) • Ninth for government procurement of advanced technology, compared to 49th for UK (WEF)

Israel

Targets technology-based entrepreneurship, flowing from competitive strengths in scientific and technical education and R&D: Approach • Creation of the Office of the Chief Scientist in order to isolate key market failures specifically related to the commercialisation of higher-levels of early-stage research • Lack of venture capital identified as a critical blocker and targeted with significant financial intervention. Trial-and-error approach to policy, choosing the most effective solution • Yozma Fund created, linking Israeli venture capital industry to other large venture capital markets Source: OECD Figures

• Backed by high levels of incentive for R&D together with a widespread programme of technological incubators to support early stage technological entrepreneurship

Results • Now ranked 2nd only to US in venture capital availability • Highest R&D intensity in OECD (4.25%) • Generates double the number of patents per head of population as the UK

Playing our strongest hand – Maximising the UK’s industrial opportunities

South Korea

Builds on existing competitive advantages in manufacturing, benefiting as these sectors become increasingly in-demand in large new emerging markets with future potential: 30

South Korean exports to US and China (%)

US China

UK exports to US and China (%)

15 US China

20 10

15 10

5 5 0

0 92

Approach

Manufacturing as % of GDP

• Targets development of strategic industries and future growth engines including automotive, shipbuilding, semiconductors, steel, machinery and textiles

25 20 15

• Identifies key cross-cutting capability requirements and has strategy for each – typically to maintain or build a world-leading presence

UK Korea

• Very strong in joining-up policy across government so effort pulls in same direction, linking in education, regional, cluster and R&D policies to create critical mass

5 0

Source: HMRC

Source: Korean International Trade Association

Source: OECD Data

Results • Ranks first globally on tertiary level education enrolment (compared to UK 36th), eighth on firm-level technology absorption – UK is 22nd (World Economic Forum)

Playing our strongest hand – Maximising the UK’s industrial opportunities

Exhibit 2 Seven key principles for a new approach to industrial strategy

1 Long-term strategic focus T o provide long-term certainty, industrial strategy must align with investment timeframes used by business. Commitment is required to deliver a programme of action over ten-plus years.

2 Proactive engagement with business The government must make industrial growth easy – going out to business to meet their needs as they develop new capabilities, removing barriers to investment and joining up initiatives to create advantage for the UK.

3 Whole-government ownership I ndustrial strategy must be driven at the highest level in government to ensure changes in approach can be delivered consistently across all other areas.

4 Alignment of policy and action across all parts of government ll departments, agencies and levels of government A should share common industrial strategy goals. They need to align to deliver a coherent package of action that is more than the sum of its parts –being more sophisticated in the use of policy.

5 Unremitting focus on improving delivery For the UK to be competitive, getting implementation of policy right is just as important as the policy itself. Typically this means increasing the speed and nimbleness of delivery.

6 Willingness to back innovation and be bold at scale T o provide long-term certainty, industrial strategy must align with investment timeframes used by business. Commitment is required to deliver a programme of action over ten-plus years.

7 Strong political consensus Cross-party agreement is critical to delivering consistency beyond the political cycle. A core industrial strategy should be agreed that surmounts party politics.

Playing our strongest hand – Maximising the UK’s industrial opportunities

Tilt the playing field to compete

The task of rebalancing the economy is urgent. The longer we wait, the further our global competitors will pull ahead. A new strategic approach would ensure limited resources are used to maximum advantage – building a world-class environment for UK businesses to operate in and then going further – tilting the playing field in their favour.

A wide range of policy tools can effect change There is no shortage of government policies that impact on industry, both on the supply and demand side. But all too often they fail to generate optimum conditions for growth. The key is how policy tools are used to create a positive impact. The McKinsey Global Institute has developed a four-part taxonomy for industrial policy measures (Exhibit 3).3 This gives a useful

framework for understanding different levels of intervention by government: • Level 1 Setting the ground rules and direction: Governments can limit themselves to setting regulation covering labour and capital markets as well as the general business environment, and setting broad national priorities. • Level 2 Building enablers: Without interfering with market mechanisms, governments can support private-sector activities by expanding infrastructure, helping to ensure adequate skills through education and training, and supporting R&D. • Level 3 Tilting the playing field towards particular activities: Governments can create favourable conditions for specific activities through measures such as financial incentives, regulation, targeted support and by shaping local demand. • Level 4 Playing the role of principal actor: Governments can play a direct role by establishing state-owned or subsidised companies, funding existing businesses to ensure their survival, and imposing restructuring on certain industries.

“ensure limited resources are used to maximum advantage”

Playing our strongest hand – Maximising the UK’s industrial opportunities

Exhibit 3 CBI interpretation of McKinsey 2010 framework for policy measures low

degree of intervention

horizontal Ground rules

Enabling

Regulation

R&D tax credits

Economic & competition policy

Investment in skills

Basic vision and ambition statement General education system

high

vertical

Access to finance Business export support

Tilting

Sectoral vision, ambition and leadership coordination Innovation in specific technologies

Principal actor

State ownership and subsidy Direct investment in businesses Import tariffs

Developing innovation clusters

Headline tax rate

Infrastructure investment (incl energy, digital, transport)

Public procurement

Funding for basic research

University-business collaboration

Targeted support for investment and exports Value-chain development Initiatives to tackle sector skill shortages Sector-specific incentives and regulation

UK needs to consolidate here and move up to world class

Tools used in levels 1 and 2 are typically considered ‘horizontal’ mechanisms. The term reflects their broad benefit to many industries by creating an environment where private enterprise can prosper. The UK is still a long way from world class in many of these basic requirements – and the view from business is that a successful industrial strategy must be underpinned by prioritising action on several horizontal measures (see page 33 for more).

UK needs to strengthen positions here

Should generally be avoided

The policies in levels 3 and 4 in contrast focus on growth of particular activities or sectors through so-called ‘vertical’ measures. For level 3, this means creating the right conditions and incentives for a particular industry to thrive. In level 4, it means direct intervention, ranging from short-term measures to save a strategic business through to cushioning whole sectors from competition.

Playing our strongest hand – Maximising the UK’s industrial opportunities

The UK must pick the right policy tools The UK has learned from past experience. Overuse of level 4 policies during the 1960s and ‘70s often led to failure and tainted industrial policy with the term ‘picking winners’. These direct interventions should still generally be avoided today. But improving our strategic use of level 3 policy tools and their interaction with horizontal measures remains an area where the UK can learn much. It is through effective use of these policy tools on top of good horizontal measures that our competitors have gained and sustained their advantage. Germany, for example, is particularly effective at this. It combines a horizontal business environment that is internationally competitive in areas supporting high-tech manufacturing with focused support through long-term incentives for green technology and Fraunhofer Institutes, which are designed to focus on commercialisation of key technologies. These measures taken together have maintained Germany’s position as one of the world’s largest manufacturers, while also encouraging high-levels of R&D and commercialisation to develop the export products of tomorrow.

Exhibit 4 Winning in the material world

Following some stunning research in our universities, the UK now has a world-leading position in graphene, so supporting further basic research is a sensible ‘tilting’ action. At this early stage, its properties as an extremely strong, lightweight material with extremely high levels of conductivity make it ideal in a range of sectors such as aerospace, automotive, energy and electronics. According to the Nobel prize committee, a hypothetical one-metre-square hammock of perfect graphene could support a four-kilogram cat – the hammock would weigh 0.77 milligrams, less than a cat’s whisker, and would be virtually invisible. Early indications show that it could significantly take forward fuel cell-powered cars because of the speed at which it conducts electrical charges. Yet translating the research into applications with high economic value will require focused development activity in our key sectors where its potential use could lead to significant innovation and future opportunities. Rather than spreading resources too thinly, funding to develop the commercial potential of graphene could be targeted on the most promising of these – with government and industry working together to identify the critical roadmaps for development.

Increasing our focus on ‘tilting’ To rebalance the UK’s economy, we need to tilt the playing-field in favour of sectors and activities where the UK has competitive advantages and significant opportunities. Coordinated action across horizontal and vertical measures can help to create a business policy environment that delivers more than the sum of its parts when impacting on growth. The UK already uses many of these policy tools – but we could do much more and much better.

The new super-material graphene is a good example of how this tilting approach might work in a single area. Our world-leading universities have provided a clear competitive advantage in its development, but focused effort is now needed to commercialise its use (Exhibit 4). As with other major research breakthroughs, the UK needs to get smarter about identifying potential routes to market and then working with businesses to create a critical mass of successful development activity.

Playing our strongest hand – Maximising the UK’s industrial opportunities

In areas such as green technology, the government has a key role to play in facilitating technological change. As highlighted in the CBI’s 2012 report, The colour of growth,4 existing technology and legacy infrastructure can limit options for future investment and risk holding back innovation – unless government intervenes to create the right conditions for new technology to thrive. In these instances the government must use the full range of tilting measures, such as demand-stimulating regulation, specific tax incentives or grants to early adopters, to help offset some of the risk and additional costs of taking the lead. In some sectors government is a major customer and therefore in a prime position to stimulate industrial activity through public procurement, for example in pharmaceuticals. It can use this as a lever in industrial strategy to encourage innovation to strengthen UK competitiveness and growth. This involves working closely with businesses to identify and communicate opportunities. Of course, with the overriding need for fiscal constraint, a new approach to industrial strategy should not mean new public subsidy of industry in the hope of spending our way to growth. Instead, it should be about using government intervention intelligently, concentrating actions behind those industries capable of delivering growth. We need government to work with industry to invigorate the development of capabilities that will help restore and sustain growth, delivering long-term returns for the UK.

Recommendation 2

Place greater emphasis on policies that ‘tilt’ the playing field and play to our strengths, backed by strategic use of government resources

“To rebalance the economy, we need to tilt the playing-field”

Playing our strongest hand – Maximising the UK’s industrial opportunities

Capitalise on our existing strengths

To kick-start a more explicit tilting of the playing field, we have identified seven sectors where action should be prioritised. Getting policy right in these sectors alone has the potential to deliver in excess of an additional £30bn exports by 2020. Our list is indicative. Importantly it highlights not only our strength in creating end-products and services, but also industries with essential capabilities that underpin our current and future high-value outputs. There is some overlap here with the sectors highlighted in the recent publication on industrial strategy by the Department of Business, Innovation and Skills (BIS).5 The important thing now is that a focused final list is concluded that does not spread attention too widely. It is also critical that this list is adopted not only by BIS, but across the whole of government.

But there is no simple definition of competitive advantage. And the more diverse the economy, the wider the possibilities. To help in the process of selection, we have identified five criteria (Exhibit 5). These include advantages ranging from our reputation for innovation and design, through to areas where it is clear that demographic and global economic trends will significantly benefit existing UK industries. Based on our discussions with businesses and the resulting criteria, we have identified an indicative shortlist of key sectors where the UK has a clear competitive advantage and where there are opportunities to develop these further: • Aerospace • Agri-food

Agreeing where our future rests

• Automotive

The starting point for a more strategic long-term approach must be to identify and capitalise on our existing strengths. Ideally, this should be about understanding where we have a competitive advantage.

• Creative industries

• Chemicals and pharmaceuticals • Green technology and services • Knowledge-intensive business services

“Realising our potential could bring an export boost in excess of £30bn a year by 2020”

Playing our strongest hand – Maximising the UK’s industrial opportunities

Exhibit 5 Five criteria for determining the UK’s competitive advantage

1 W here the UK already has a core advantage: the UK’s excellent universities base, with three of the world’s top eight in the UK and 10 in the top 100 naturally lends itself to areas of cutting-edge technology, backed further by a mature, innovation-savvy consumer market creating a domestic base for new designs and technologies. For example, the NHS provides a research base for biosciences and pharmaceuticals. 2 A reputation for excellence: from factors such as brand, quality, design and innovation, productivity and price. These can come together at a sector level to build strategic advantage encompassing a wider range of industries. For example, Germany has a reputation for high quality engineering because similar strengths are repeated across different sectors and reinforce each other. 3 Market access and supply: side factors including availability of raw materials or talent or the extent of value chain activity that provides a critical mass for a sector.

Together these sectors represent around 18% of gross value added (GVA) in the UK economy now (Exhibit 6, page 20) and have significant growth prospects. Realising the UK’s potential in these sectors could bring an export boost in excess of £30bn a year to the UK by 2020 (Exhibit 7, page 21). There would also be important prizes in terms of investment and job gains. We recognise however that growth can and will come from other areas outside of those we have highlighted. In the CBI report on exports last year (Winning overseas: boosting business export

4 Strategic industries: those very important to the economy or critical to the UK in other ways. This is typically where: – i ndustry is and could remain a major component of the UK economy in terms of jobs and export potential – eg automotive, aerospace, oil and gas, knowledge-intensive services and creative industries – t here is a long-term need and a UK solution provides advantages such as security of supply – eg chemicals, energy, nuclear, defence, construction and agri-food. 5 F uture opportunities as the world changes: as highlighted in the CBI’s 2011 reports A vision for a rebalanced economy and Winning overseas,6 significant growth in emerging markets, changing demographics and shifts towards a low-carbon future all offer real opportunities in areas where the UK holds competitive advantage. At the forefront of these opportunities are growing export markets for UK goods and services in emerging and high-growth economies. Rising consumer spending, increasing numbers of high net worth individuals and urbanisation all play to significant UK strengths in sectors such as automotive, aerospace, finance, high-end retail, construction and higher education. The need for solutions to global challenges such as climate change and an ageing population are also areas where the UK can lead the way. performance, CBI, 2011) we highlighted five additional areas where strong export growth is predicted.7 These are: construction services, electrical goods, optical and high-tech goods, financial services and communication services. Research by the Ernst & Young ITEM Club showed that if UK exporters could effectively shift supply to meet emerging market needs for the high-demand goods and services in the report, this could be worth a 1.2% rise in GDP, or £18bn in today’s prices on 2020 baseline forecasts.

Playing our strongest hand – Maximising the UK’s industrial opportunities

Exhibit 6 Industrial strategy priority sectors Exhibit 6 Industrial strategy priority sectors as a proportion of UK GVA as a proportion of UK GVA

BIS has outlined its initial list, and there is considerable overlap with the sectors presented here.

Chemicals & pharmaceuticals 1.73% Creative industries 3.22% Food and agriculture 2.43% Green technology and services 2.43%

The important thing is that a limited list is agreed. This means Chemicals & pharmaceuticals 1.73% taking some tough decisions and settling on a small number of

areasindustries on which to focus. It also means ensuring that all government Creative 3.22%

Knowledge-intensive business services 7.36% Rest of economy 82.02%

departments sign up to the same list – focusing effort in the

Food same anddirection. agriculture 2.43%

Transport (mainly aerospace and automotive) 0.81%

recommend that by mid-2013 the government should complete GreenWe technology and services 2.43% and publish a full analysis of the UK’s medium to long-term industrial future potential, setting out no more than ten sectors Knowledge-intensive business services 7.36%

of the economy for strategic focus – areas in which the UK is world-

leading or holds an82.02% existing advantage and where there is clear Rest of economy

potential for growth in terms of exports, investment and/or jobs.

Transport (mainly aerospace and automotive) 0.81%

dustrial strategy priority sectors tion of UK GVA Chemicals & pharmaceuticals 1.73% Creative industries 3.22% Food and agriculture 2.43% Green technology and services 2.43% Knowledge-intensive business services 7.36% Rest of economy 82.02% Transport (mainly aerospace and automotive) 0.81%

Recommendation 3

Finalise the sectors for strategic focus across the whole of government – building on competitive advantages and mapping how they can be developed for the future by mid-2013

Playing our strongest hand – Maximising the UK’s industrial opportunities

Exhibit 7 The size of the prize – sector summary Automotive

Chemicals and pharmaceuticals

By 2050 there will be 1bn more passenger vehicles on the road than today – an increase of 143%8

Exported goods worth £52.7bn in 2011, up from £50.5bn in 201013

Exports to China grew 125%, exports to the BRIC countries in total grew 84% and exports to the UK’s top nine high-growth markets overall grew 56%14

Maintaining our market share of the Chinese premium brand sector alone, exports could grow from £2bn in 2011 to £9.3bn – an increase of £7.3bn over nine years (CBI analysis)

Maintaining the UK’s 2011 market share, exports to BRICs could increase from £2.9bn in 2011 to £6.1bn in the next 10 years. Exports to the UK’s top nine high-growth markets could double from £6bn to £12bn (CBI analysis)

Value of UK automotive exports to China (£bn) – current and forecast 2011

2.0 5.2

2015

Green technology and services

9.3

2020 2

Creative industries

Luxury retail such as fashion is predicted to grow by £37bn in Europe by 2015 as the number of high-net-worth individuals increases9 Film exports in 2010 worth £2.1bn, with average trade surplus since 2000 of £380m, consistently increased over the last decade10

Knowledge-intensive business services (KIBS) Exports have grown from £5.1bn in 2002 to £14.6bn in 2010, generating a trade surplus of £7.4bn11

Demand for KIBS exports will grow as markets mature in Latin America, Asia and Africa. Current growth rates indicate exports could increase by as much as 260% by 2020

The UK has carved out a £122bn share of a rapidly expanding global market in low carbon now worth £3.3tn15 UK market share grew in real terms by 2.3% in 2010-11 – faster than the global average, despite poor economic conditions. We are well positioned for high-growth markets, with 7% of exports heading to China alone16 Currently delivers a trade surplus of £5bn. By 2014-15, green growth is expected to halve the UK’s trade deficit (CBI analysis)

Aerospace

Estimated 20-year global demand of 25,000 new aircraft (2008-2028), worth $3.1tn17 Maintaining existing market share, growth in Asia alone has the potential to contribute an extra £4.7bn in exports annually in the next ten years, adding 20,000 high-value jobs (CBI analysis)

Value of UK aviation exports to Asia (£bn) – current and forecast

Agri-food

1.47 2.95

Gross value added of £20.4bn per year and the largest single manufacturing sector in the UK employing as many as 400,00012

China (including Hong-Kong)

2011 2016 2020

4.09

2.16

Exports have more than doubled since 2002 and have increased by 57% in the four years 2007-2011. Our modelling suggests we could secure £7.4bn of additional exports to non-EU countries by 2020 (CBI analysis)

3.48 Major Asia (excluding China)

4.25

3.63 6.43 8.34

Major Asia total 0

Playing our strongest hand – Maximising the UK’s industrial opportunities

Deliver sector action plans that make a difference

linking up policies on innovation, clusters, procurement, Once competitive advantage sectors have been investment and exports, supply-chain development, skills, selected, we need decisive, tailored action to build on and add to their strengths. This is not a one-size- incentives and regulation to ensure the core needs of our target fits-all approach. The role that government can play sectors are met. to unlock growth will differ between industries. Commercialising key technologies Some will require highly specific actions designed The support provided by the Technology Strategy Board (TSB) for to stimulate growth, for example changes to the regulatory environment in the sector or procurement commercialisation of R&D is highly valued by businesses. To deliver a new industrial strategy, however, it will be essential that rules. Others will require new tools to maximise success, such as a particular piece of infrastructure resources are sufficiently focused on champion sectors to make a real difference to investment in innovation, avoiding spreading or concerted risk-sharing for the development of a support that could make a difference too thinly. Where support is new technology. What is critical to provide confidence for these sectors is that plans are long-term and consistent and they focus effort on areas that the sectors themselves identify as key blockers of growth. For this reason, we have developed indicative sector action plans in conjunction with businesses and trade associations.

Increasing our ability to tilt A new industrial strategy demands better use of the full range of policy tools to tilt the playing field in our favour. As explained in chapter 2, this means setting out a vision for each sector and then

“We need decisive, tailored action...”

provided, it needs to cover the full length of a project and range of activities within the project scope through to commercialisation. Where R&D timescales are particularly long, we need to explore new options for risk-sharing. Long-term risk-sharing forms a key part of industrial strategies in the US and France, for example, placing UK businesses at a disadvantage when it comes to large innovative projects – those with the potential to deliver the most.

Aerospace is a prime example. In this sector R&D timescales tend to be much longer, often over the course of a decade or more. While TSB funding can cover sections of a project, we need more holistic tools. The UK should explore new ways to encourage long-term

Playing our strongest hand – Maximising the UK’s industrial opportunities

investment in capital stock and innovation in our strategic sectors, including equity sharing and other royalty-based options.

Developing innovation clusters

In some cases, the mismatch between the quality of our university base and infrastructure for commercialisation means we are not always maximising our potential for growth. The introduction of Catapult Centres in several sectors directly to address this has been welcome, especially where their introduction has seen development of shared physical infrastructure. There are still further areas that could benefit from this approach within our strategic sectors, such as low carbon automotive. The government should consider additional funding for new centres where appropriate. In other cases, government has a role in further encouraging pre-existing regional clusters of businesses, such as the emerging cluster in biotechnology in the south east. This will require Local Enterprise Partnerships (LEPs) to coordinate with neighbouring LEPs, where clusters exist at a regional level. The CBI’s report, The UK’s growth landscape,18 makes the case for a more nuanced approach, recognising that different geographic levels of co-ordination may be right for different sectors. In the case of clusters in key business sectors, this may mean taking a ‘greaterthan-local’ approach to ensure coordinated regional support.

Driving innovation through procurement

In some sectors, government is a major customer. It is therefore in pole position to stimulate industrial activity from the demand side. At present, however, procurement processes in the UK do not make the most of this position. To achieve maximum benefit in the public sector and the wider economy, procurement reforms will need to be at the heart of the government’s approach to industrial strategy, with a specific focus on the champion sectors. Poor procurement does not only mean paying more than is necessary. It can also have a huge impact on the quality of products and the wider economy, as procurement processes are often the gateway to the commercialisation of new ideas. Companies with innovative solutions often find themselves constrained by poor procurement processes that focus on the wrong measures, prioritising inputs rather than the best outcomes.

A prime example of where procurement reform could drive greater innovation is in pharmaceuticals. Existing procurement practices focus narrowly on cost-effectiveness and fail to take into account other factors, such as the need to encourage innovative new medicines or the overall costs of illness for the economy.

Rebuilding strategic value chains

The mid-sized and smaller businesses that underpin the sectors where we have competitive advantage play a vital role in helping capture the full value of production here in the UK.19 They also make the UK an attractive place for larger companies to base their operations, providing a secure, responsive resource. Over the past three decades, however, our supply chains have been hollowed out and we now need sustained action to rebuild them. The Advanced Manufacturing Supply Chain Initiative (AMSCI) illustrates a good start in addressing this, but turning around the decline of recent years will require concerted action, beginning in areas where we have the greatest opportunities to capture growth. Automotive is a good example where a sector focus can provide clear benefits. The Automotive Council has identified the potential for the UK to provide as much as 80% of all component types if we can up our capacity. Targeted action should be designed to work with industry to enhance productivity and build key capabilities for the future – helping businesses invest in skills, quality and performance improvement, innovation and physical capital.

Targeting inward investment and securing exports

Countries such as Singapore and Germany are much more proactive in terms of how government engages with individual companies and sectors to facilitate inward investment and exports. In Singapore, for example, the government has concentrated resources in the creation of a world-class inward-investment body, the Economic Development Board (Exhibit 8, page 24). As a result, inward investment flows are ten times those of the UK per capita. By taking a more strategic approach, our competitors are identifying and unlocking opportunities that offer substantial benefit to their economies as a whole.

Playing our strongest hand – Maximising the UK’s industrial opportunities

The introduction by UKTI of a strategic relations team is a welcome development. The view from business is that to have maximum effect, this strategic approach should be taken even further, securing investment in areas where it matters most. The focus should be not only on securing investment from the largest companies, but on companies of all sizes within the UK’s champion sectors. The aim should be to deliver a diverse and attractive business ecosystem, as well as identifying and encouraging investment in ‘shared’ strategic capabilities from which future innovation can emerge.

Safeguarding the talent we need

Some sectors will need a similar focus to realise their export potential. As highlighted in the 2011 CBI report, Winning overseas,20 an export strategy capitalising on our sectoral strengths could significantly contribute to boosting our trade surplus. Exports in sectors such as knowledge-intensive business services have the potential to grow as emerging economies mature, but this requires sector-specific barriers such as intellectual property protection to be removed.

In places, there is also room for a tilting approach where specific shortages are identified in our strategic sectors. Action to address shortages in engineers and other STEM skills at both graduate and higher-apprenticeship level for example are key to several of our sectors of competitive advantage including food and drink, automotive and aerospace, so it makes sense to focus additional effort here. Meeting the UK’s forecasted demand for engineers to

Freeing businesses to run apprenticeship schemes tailored to their own needs is a central part of ensuring that our policy on skills matches the needs of our core industries. Effective business leadership on skills requires support to flow direct to employers with limited red tape. The introduction of the Employer Ownership of Skills pilot, which provides a welcome boost to the ability of our key sectors to take a pro-active role in securing the talent they require. Businesses strongly support the pilots, but efforts must be made to avoid unnecessary bureaucracy in their operation.

Exhibit 8 Singapore’s Economic Development Board (EDB) Under the oversight of the Ministry of Trade and Industry, Singapore’s EDB is charged with planning and executing long-term strategies capable of leveraging business investment in key sectors for growth. This means targeting and facilitating investment from both local and foreign businesses, focusing resources on those industries offering real long-term opportunities and ensuring that wider government policy continues to reflect the importance of investment to Singapore’s economy. Having identified strategic areas to target, the EDB takes a ‘can-do’ approach to courting investment. Working with these businesses to understand their plans, it provides a one-stop-shop capable of aligning incentives, making introductions and cutting through red tape to deliver a compelling offering individualised to each company. This importance of business investment to Singapore’s economy is emphasised clearly in the scale and ambition with which the EDB is supported in its work – something readily apparent when comparing it with UKTI’s resources. Funding for investment comparison with UKTI

Singapore EDB

UKTI

Funding for investment (2011)

£73m

£80m

Per capita

£14.30

£1.29

Funding changes for joint investment and export government services in response to financial crisis

+ 6% over one year

-15% over three years

Playing our strongest hand – Maximising the UK’s industrial opportunities

2017 will require engineering graduations to increase from 12,000 to 31,000 annually21, so targeting these areas through alternative routes is a critical part of addressing specific skills deficits.

Sometimes intelligent demand-stimulating regulation also has a significant role to play. Government plans to introduce minimum energy standards in the private-rented sector are welcome for stimulating growth in the low-carbon sector and could go further. There may be scope to explore fiscally-neutral drivers to encourage greater activity, such as varying a property’s Stamp Duty banding according to its energy efficiency performance.

Targeted support to address particular skills shortages, such as through the Employer Ownership pilot and the Higher Apprenticeship Fund, is a good start and it is important that we build on this, including at action at graduate level where specific shortages are identified.

Incentives and regulation

Given the opportunities for the industries highlighted here, it is understandable that our competitors are fighting to secure these benefits too. For those we decide are critical to our future economic success, we need to ensure that the UK is an internationally competitive environment in which to do business, providing the right mix of incentive and demand-stimulating regulation. In the case of our creative industries, it is a matter of providing an internationally competitive tax environment. The recently announced consultation by the Treasury on creative sector tax relief is welcome. But any new relief will have a significant impact only if it is applicable to businesses in the whole creative industries value-chain and is competitive with regimes like that of Canada, which is leading the way.

Building leadership to decide where action is needed A renewed focus on sectors by the government is welcome, but it will only have an impact if it results in appropriate action that boosts confidence. This means taking an approach that is tailored to each sector and consistent for the long term. Having agreed on a set of priority sectors, government needs to work with each industry to target action. In this report we have tried to align our champion sectors with specific tilting policies to produce indicative actions plans tailored to each sector (Exhibit 9).

Exhibit 9 Indicative areas for action in the UK’s champion sectors Innovation

Exports Value chains

Procurement Skills Incentives and regulation

Aerospace

•

Agri-food

•

Automotive

•

Chemicals and pharmaceuticals

•

Creative industries

•

Green technology and services

•

Knowledge-intensive business services

•

Playing our strongest hand – Maximising the UK’s industrial opportunities

Exhibit 10 The Automotive Council The Automotive Council provides coordination and leadership to improve the UK automotive sector and the environment in which it operates. Established in December 2009 as a key recommendation of the industry-led New Automotive Innovation and Growth Team (NAIGT), the Automotive Council is driven by leading members of industry, but is jointly chaired by the secretary of state for business— providing political buy-in and ensuring government partnership to deliver on its recommendations. Rather than trying to do everything, the Automotive Council has two focused strands of priority work: one to improve the UK automotive supply chain (identifying gaps and addressing problems – eg skills) and second to develop and communicate a detailed technological roadmap for innovation, setting out key areas of R&D needed in the UK (with timelines of 30 years ahead) to ensure the industry remains competitive as technology advances. By developing industry consensus on these issues, the council makes it easy for government to know where to invest to make a difference. In taking this further, the value of sector leadership bodies such as the Automotive Council for identifying key actions to unleash growth is clear. The in-depth technology and capability mapping undertaken has already proven its value in helping to focus where and how government should support winning ideas (Exhibit 10). While sectoral differences mean that a one-size-fits-all approach to all sectors would be unwise, this type of leadership activity is widely supported. Where they are not yet in place, the government should assist industry to create leadership structures that match the needs of each of our identified areas of competitive advantage. The main purpose of these bodies should be to identify and develop consensus around the key themes in each sector that need to be addressed for the long-term. They would assist in the formation of regularly reviewed action plans in those areas to

ensure that priority actions to assist growth are identified and implemented. Where available, this should aim to build on existing industry-led work,22 for example the recently created British Plastics Federation plastics strategy in the chemicals sector.

Recommendation 4

Industry and government must work together to decide the most appropriate structure for sector leadership for each of the UK’s chosen sectors

Use our new abilities to deliver For each of the competitive advantage sectors we have identified indicative key areas where government should seek to tilt the playing-field for long-term benefit. Developed with business and trade associations, these plans highlight both key themes and the most immediate actions that need to be addressed to maximise return from the opportunities available. The recommended actions require immediate attention – however to capitalise on the medium to long-term opportunities, sustained focus on the key themes will be necessary.

Recommendation 5

Industry and government must work together to implement sector action plans, identifying the long-term themes to be addressed in each sector and instigating and regularly renewing action plans designed to address them

Playing our strongest hand – Maximising the UK’s industrial opportunities

action plan aerospace

Ready for take-off Strengths

The UK is a key R&D and high-tech manufacturing location for globally important industry players, benefitting from the UK’s excellent universities and established strengths in engine and wing design, material technologies, advanced system design and space.

Challenges Success in aerospace in particular requires long-term, large-scale innovation. Returns on investment often take 20-40 years to realise and there is considerable risk at all stages, from basic R&D to demonstration and into early stages of commercialisation. Building on our strengths requires funding takes a long-term, strategic view, de-risking development of new technologies. To remain internationally competitive, innovation must also be integrated across the UK supply chain, improving products, efficiency and productivity and building on successful schemes like the ADS 21st century supply chains initiative SC21. Similar to the automotive sector, action is required to address a critical shortage of high quality design and manufacturing engineering graduates and technicians as the industry expands, but also faces a retirement peak in the coming years.

Action plan Innovation

• Provide support for long-term innovation, mapping the needs of the sector over 20 years plus and ensuring on-going TSB and research council funding is available for long-term projects. • Support the whole innovation process, from basic research through to testing. • Prioritise support for dual technologies for civil and defence purposes, working with industry to identify opportunities.

Value chains

• Create a sustained aerospace supply-chain initiative, building on the existing Advanced Manufacturing Supply Chain Initiative, focusing on improving management and innovation skills and access to growth finance for the aerospace sector supply chain.

Procurement

•E nsure the R&D tax credit remains a viable incentive for businesses engaged in defence contracts as it moves to the new ‘above the line’ accounting system.

Skills

• Provide additional resources for industry-approved courses ensuring the specific needs of industry are met. • Continue development of the Employer Ownership pilot, enabling the aerospace sector to develop the technician level skills they need.

Playing our strongest hand – Maximising the UK’s industrial opportunities

action plan agri-food

Feeding our ambition Strengths

There is significant activity across the whole value-chain in the UK, from farms through to highly productive manufacturing plants and celebrated retailers. The UK has many internationally recognised brands (many at a premium level), combined with high levels of innovation with some 50,000 new product variants launched in the period 2005-11.23 We are world-leading in the development of ‘health propositioned’ foods and in premium convenience meals among other areas. Recent years have seen strong growth in exports to emerging markets, but this comes from a low base, suggesting real potential as demand for western foods rises.

Challenges With a large proportion of SMEs in the sector, prioritising export support into new markets will be critical. Success is also dependent on the ability of the sector to continue to innovate in response to changes in global demographics and health trends. This relies on high-level skills in science and engineering, however graduates often overlook agri-food, heading to sectors perceived as more exciting. The UK still imports a large proportion of its food, so there are opportunities to boost import substitution as well as enhance exports – improving the resilience of our supply chains. Freeing up our strength in agricultural biotechnology and translating this into products that boost productivity should be a priority as there are significant export opportunities.

Action plan Exports

• Prioritise funding in UKTI to support food and drink SMEs that are intent on entering non-EU markets with the greatest potential to grow. • Improve awareness of the sector amongst UKTI and embassies as a potential driver of export growth.

Skills

•G row the take-up of advanced and higher-level apprenticeships by working with industry to identify specific skills shortages and including these within a priority list for national apprenticeship schemes. •W hen funds allow, provide a funding incentive for short industry courses as part of a science and engineering degree, covering the role of these desciplines in the sector.

Innovation

•P ublish a long-term strategy for growth in agricultural biotechnology, working with industry to an R&D roadmap for long-term development and roll-out of new technologies. • Maintain a science-based approach to industrial biotechnology policy, as well as encouraging a similar approach at EU level.

Playing our strongest hand – Maximising the UK’s industrial opportunities

action plan automotive

Moving up a gear Strengths

The UK has strength right across the value chain: from a world-class reputation for design and innovation, especially in premium brands, through to some of the most productive manufacturing plants in Europe and additional services such as insurance and motor racing. We are currently at the forefront of new green technologies, with £5.8bn of investment announced by UK OEMs and their supply chains since 2010.

Challenges To maintain a leading position in green automotive, government has a key role to play in providing fertile conditions for the development of new technologies, stimulating domestic uptake, as well as concentrating R&D funding in areas that the industry consensus agrees will make a difference. Taking full advantage of our existing strength in premium exports is essential. Pro-active support to remove economic and political barriers in emerging markets is critical to getting the most from this opportunity, as are strong UK supply-chains capable of maximising UK content within our exports. Action is required to address shortages in specific skills, particularly in production and design engineering at degree and apprenticeship levels to underpin UK competitiveness.

Action plan Innovation

• Prioritise the five sticky technologies identified by the Automotive Council, aligning TSB, research council and EU support for R&D and innovation behind them. • Establish a low-carbon vehicle Catapult Centre as soon as possible to secure the UK’s competitive advantage.

Value chains

• Create a longer-term automotive supply-chain initiative, building on the existing Advanced Manufacturing Supply Chain Initiative (AMSCI), focusing on improving management and innovation skills and access to growth finance for the sector supply chain.

Exports

• Develop free and reciprocal trade agreements for automotive that include non-tariff barriers to trade. • Prioritise funding in UKTI’s budget for automotive export promotion in high-growth markets.

Skills

• Provide additional resources for industry-approved courses ensuring the specific needs of industry are met. • Continue development of the Employer Ownership pilot, enabling the automotive sector to develop the technician-level skills they need.

Playing our strongest hand – Maximising the UK’s industrial opportunities

action plan chemicals and pharmaceuticals

The elements for success Strengths

The UK has strong linkages between chemical production and use, creating integrated, innovative value chains reaching back into academia and the research technology organisations sector. World-leading strengths in formulation science, speciality chemicals and novel pharmaceuticals make the UK ideally positioned to lead in growth fields such as industrial biotechnology.

Challenges Realising innovative new opportunities will require alignment of policy levers across government, ensuring all stakeholder departments and agencies work in the same direction with industry. Prioritising funding around strengths is essential for developing critical mass. Encouraging innovation through progressive procurement practices and an industry-friendly regulatory environment that encourages innovation and removes red-tape is essential too. Low and stable energy prices are critical to levelling the playing-field with competitors. Chemicals and other energy intensive industries have a vital role as innovators in a low-carbon economy, but high energy prices would lead to carbon leakage and lost opportunities. Long-term strategies to boost efficiency will enable both green objectives and the sector potential to be realised.

Action plan Innovation

•R eform Medicines and Healthcare products Regulatory Agency (MHRA) to become an enabling regulator, keeping pace with new technologies and partnering with industry to expedite implementation. •A lign funding behind industrial biotechnology and formulation sciences, building up the UK’s chemicals and pharmaceuticals value chains. • Support cluster development in biotechnology in the south east, leveraging business investment and encouraging collaboration. • Ensure effective implementation of the Patent Box regime from next year.

Value chains

• Exempt chemicals and other energy-intensive industries (EIIs) from additional costs as a result of the implementation of the Energy Market Reform (EMR) to maintain competitiveness.

Procurement

•R eform the National Institute for Health and Clinical Excellence (NICE) in advance of Value Based Pricing (VBP), ensuring assessment of a medicine’s value goes beyond cost-effectiveness, taking into account factors such as innovation and wider disease burden.

Skills

•P rovide additional resources for industry-approved courses ensuring the specific needs of industry are met. •C ontinue development of the Employer Ownership pilot in the chemicals sector to develop technician-level skills.

Incentives and regulation

•C onsider a single regulator for Control of Major Accidents and Hazards regulations, replacing joint competency of the Health and Safety Executive and Environment Agency.

Playing our strongest hand – Maximising the UK’s industrial opportunities

action plan creative industries

An imaginative future Strengths

The UK has a huge back-catalogue of creative content to draw on in the form of music, literature, educational and entertainment content for the full range of media, plus star performers, together with a strong pipeline of new ideas. Internationally recognised brands, companies and talent in sectors ranging from gaming to music, fashion, design, film, advertising and publishing.

Challenges This is a very diverse sector reliant on many small companies and it is difficult to bring a coordinated approach to its long-term survival and development. Each sub-sector has distinct skill needs and all face challenges over financing and intellectual property. Increasingly the creative industries rely on digital technology and it is essential the UK remains at the forefront of digital infrastructure developments. The UK needs an attractive tax system to attract and keep the best talent and most innovative companies.

Action plan Skills

•P ush ahead with reforms to school ICT and ensure sufficient teacher training courses are in place to successfully roll out the new curriculum and deliver digital skills, alongside art training, that the UK’s creative industries need. •E nsure the Employer Ownership pilot works for smaller companies, helping to widen the uptake of apprenticeships in craft skills required to underpin areas such as fashion and film. • Promote SME collaboration on skills, strengthening collaborative models such as the Apprenticeship Training Agencies (ATAs).

Innovation

•P rovide a certain and robust copyright regime so that those prepared to invest in creative content development can achieve sustainable returns and are best placed to tackle piracy; this includes avoiding extensive new copyright exceptions where licensing models are used successfully. •D eliver world-class digital infrastructure through which the UK’s creative industries can continue to produce high quality content, by ensuring broadband provision keeps up with international competition and that planning reforms make progress on the ground. •M ake sure EU data protection proposals do not inhibit advertisers, maintaining the industry’s ability to innovate and invest in creative content, while providing effective privacy.

Incentives and Regulation

•T arget access to finance for small firms that rely on intangible assets by working with the creative industry to tackle what can be perceived as a risky business. •E nsure introduction of corporation tax relief is internationally competitive with regimes offering similar relief, both in level of support and scope of activities. •U se competition policy appropriately by using up-to-date and flexible market definitions in this sector, reflecting the myriad routes to market and allowing the sector to respond quickly to new opportunities to grow.

Playing our strongest hand – Maximising the UK’s industrial opportunities

action plan green technology and services

Being green to grow Strengths

Industrial expertise and research strengths in biotechnology, mathematics, advanced materials, control systems, electronics, engine technology and energy management drives growth that is increasingly mainstreamed in multiple sectors. Strengths range from green manufacturing and alternative fuels to tidal power demonstrators and services such as carbon trading and environmental consultancy.

Challenges Delivering new technologies and stimulating new consumer markets in the UK is essential if we are to get ahead of the game across the range of activities. Government has a key role to play in working with industry to ensure the right mix of incentives and regulation capable of prompting demand. Getting this right requires government to build long-term confidence in investors that the green policies of today are also those of tomorrow. Government also needs to ensure these policies remain simple, encouraging those that are ready to invest, rather than confusing them.

Action plan Vision

• Maintain the UK’s ambition for the low-carbon transition by sticking to the 4th carbon budget. •W ork to get agreement on the long-term EU energy and climate framework, which means setting emissions targets for 2030 and beyond.

Incentives and regulation

• Establish clear and stable frameworks particularly for the energy market – enact the Energy Bill with requisite detail as soon as possible in order to ensure investor confidence over the long term. • To stimulate new consumer demand, explore the use of short-term fiscal incentives for homeowners to implement an energy efficiency retrofit, and take steps to reflect energy efficiency in the stamp duty regime in the longer term. • Cut ‘green tape’ by scrapping the Carbon Reduction Commitment (CRC) and replace with a time-limited, simple energy tax and implement Mandatory Carbon Reporting in a phased and proportionate manner.

Value Chains

• I dentify opportunities to develop domestic capabilities through targeted interventions and longer-term technology road-mapping in green technologies where we could have an advantage, such as in the construction, maintenance and operation of deep-sea offshore wind turbines of Carbon Capture and Storage.

Playing our strongest hand – Maximising the UK’s industrial opportunities

action plan knowledge-intensive business services

Using our heads Strengths

The UK is a world-leading global hub for high-end services, second only to the US in exports, but three times bigger in per capita terms. Expertise not only in financial services with the largest market share in the world, but also in business services with a total of 14% of global market share and number one status in the world for insurance, computer and information services.24 The UK market for software and IT services alone has a value of £58bn a year.25

Challenges With KIBS enjoying considerable flexibility around location, maintaining and capitalising on our status as a global hub requires an internationally competitive business environment. This means ensuring not only that the UK is competitive on tax, but that KIBS based here are also able to draw in the most talented individuals from around the world on which their success has been built. Getting maximum return from our world-class status also requires action to grow services exports. As economies mature and global demand of KIBS increases, opportunities are there, but only if our businesses can access them and ensure their commercial interests are protected once in-market. Significant progress can also be made in public procurement to ensure public services are more open to the sort of innovation our KIBS sectors can provide – and, in turn this will provide a further platform for growth and exports.

Action plan

Incentives and regulation

• Progress with the corporation tax roadmap to boost international competitiveness by delivering the 22p rate and committing to reducing the rate to 18p in the long term. • Develop a roadmap for personal tax competitiveness, ensuring the UK is an attractive market for high quality talent, benchmarking globally.

Procurement

•C reate an open and transparent marketplace for government services, transforming public procurement of services from being output-led to outcome-based, with government acting as an intelligent customer for innovation and engaging early on with KIBS to outline needs.

Exports

• Target facilitation of bilateral agreements that help the development of KIBS exports to new markets. • Commit to tackle IP infringement on design, trademarks and copyright as well as patents.

Playing our strongest hand – Maximising the UK’s industrial opportunities

Embed strategic thinking for the long term

Our vision is for the UK to refocus on investment and trade to rebalance the economy for long-term prosperity. We have identified some sectors where we are already strong and need to tilt government intervention to maximise their potential. This is only the starting point, however. We need to ensure that this strategic approach permeates everything we do – creating an overall policy environment that is more than the sum of its individual parts.

decisions on where to invest based on a wide range of factors such as the tax regime, the skills base, investment support, energy and material costs and the intellectual property environment. Bringing cutting-edge technologies and other new ideas to the market is risky. It routinely takes more than a decade to realise returns on investment. If the UK is successfully to fast-track investment in a focused group of high-growth sectors, it will require a consistent and long-term overall policy framework (the horizontal interventions set out by McKinsey in Exhibit 3, page 15).

A new industrial strategy will only be worthwhile if it can be delivered consistently and coherently across government. This means linking up the prioritisation of actions to improve the horizontal business environment. It also requires us to think again about how best to support implementation of a new approach, getting the most from a new industrial strategy.

The coalition government has already done much to improve this though various growth initiatives such as reforming the planning system, taking steps to ease access to finance, reducing regulation (especially employment regulation), supporting the R&D tax credit and reducing corporate tax. This drive must continue if we are to maximise the UK’s strengths.

Prioritising actions to improve the business environment Our strategic approach must be backed by sustained improvement in the overall business environment. Businesses make rational

“We need to ensure that this strategic approach permeates everything we do.”

To ensure the coalition government remains on track with improving the overall business environment, we propose the adoption of a small number of key performance indicators (KPIs) linked to the business environment and priority areas for action. These should be benchmarked against international competitors. The aim should be to place the UK in the global top ten of countries within the next

Playing our strongest hand – Maximising the UK’s industrial opportunities

ten years, with the results reported annually, in the form of an annual scorecard. Among others, improvements in two areas of horizontal policy are highlighted by businesses in our champion sectors as especially important, requiring inclusion: • Skills & education: the UK needs to make progress at a range of levels, from school age through to apprenticeships and higher-level skills. Part of this requires that we raise the level of ambition at an early age in our schools and this forms the focus of a forthcoming CBI report. In addition, we need to build on the progress already made in growing the number of apprenticeships to fill specific skills gaps, providing a range of alternative routes into work. • Infrastructure investment: UK infrastructure has suffered long-term underinvestment – the 2012 CBI/KPMG infrastructure survey indicates that over 80% of firms see the quality and reliability of transport and digital infrastructure as significant considerations in investment decisions, yet almost two-thirds consider UK transport infrastructure to be below average by international standards.26 In particular, the real cost of energy is a concern, with the survey indicating that 95% of companies taking part considered this a major issue (Exhibit 11).

Recommendation 6

Develop and adopt a core set of strategic key performance indicators which can be regularly benchmarked against competitors, with the results reported in an annual scorecard

Improving the ability of government to deliver its strategy Ultimately, the economic transformation required to bring the UK economy back into a more balanced position with strong foundations for sustainable growth is likely to take at least a decade. This means that political determination will be needed to

Exhibit 11 Energy competitiveness in the UK Preliminary benchmarking work for the Department of Business, Innovation and Skills, looking at a specific subset of energy intensive industry (EIIs), suggests the UK is among the highest cost countries globally. For this group in 2011, the UK electricity base price plus climate change price impacts was more than double that for the US. In fact, the UK ranked as the 3rd most expensive country out of the eleven studied, with only Italy and Japan priced above us. In recognition of the key role that energy-intensive industries have to play, both in the economy overall and in the development of low-carbon technologies, other countries are taking a more nuanced approach to encouraging a switch to renewables. The German partial exemption of EIIs from its renewable feed-in tariff is designed to ensure that the industries in the bedrock of their economy remain internationally competitive. deliver a new approach to industrial strategy in a coherent way over a number of parliamentary cycles. If the strategy and the policies flowing from it are not implemented effectively for the long-term, no matter how well designed our plans are, they will struggle to make a difference. To ensure an effective long-term industrial strategy will therefore require strong political leadership. Just as certain individuals have been employed across government with a focus on delivery, such as the recent appointment of Paul Deighton at the Treasury as Minister for Economic Delivery to oversee implementation of infrastructure plans, it may be necessary to do the same in other parts of government, especially BIS. Where appointed, they should be responsible for coordination, delivery and evaluation of the industrial strategy, ensuring that growth policies support the strategy and objectives are being delivered in all departments and agencies.

Playing our strongest hand – Maximising the UK’s industrial opportunities

The effectiveness of a new industrial strategy will also depend on policies working in sync with business investment plans and timescales. This is critical to ensure the decisions have an impact on the ground. Businesses have highlighted the need to improve the accessibility of support, the speed of delivery and the nimbleness of government to help secure commercial opportunities. Growth measures to facilitate business finance, exports, apprenticeships and supply chain growth, are often provided by a range of different departments and government agencies, each with their own rules. To take a single example, 47 schemes currently exist to provide support for employers to train or hire unemployed people. This fragmentation often acts as a barrier, making it hard for businesses to make use of measures that could help them realise their potential. Businesses do not function along government departmental lines, nor do they have the resources to scan every possible source of information for schemes that fit. This is an area where business and government should be working together to improve the accessibility of support. Speed is also essential for the UK to compete internationally. Slow delivery of policies can often mean missing out on a key investment opportunity. The Regional Growth Fund (RGF) illustrates the problem of a good policy let down by lack of speed in delivery. Even companies that have been successful in wining RGF awards have been beset by the extent of due diligence and the extended timescale required to access funding. For many, this has meant the process taking 12 months or more before they are able to draw down funds. To capture the biggest opportunities business and government will need to operate speedily. To support commercial opportunities, business is willing to make secondments available to civil servants or to second employees into government to spread commercial experience.

£30bn

The boost to exports for realising the immediate opportunities in some of the UK’s key sectors.

Playing our strongest hand – Maximising the UK’s industrial opportunities

Conclusion: now is the time to maximise the UK’s industrial opportunities The UK needs an effective industrial strategy to support existing efforts to rebalance the economy towards trade and investment. This certainly requires delivery of the growth policies that are already in place, helping to lay foundations for private sector growth. But alone this will not be enough. Now is the time to take one step further and focus on a limited number of sectors where the UK has already developed a competitive edge. We cannot assume that these sectors will achieve their full potential alone – we need an active industrial strategy that tilts policies in their favour. Our competitors have been taking this approach for some time. We need to catch-up.

Now is the time to play our strongest hand. We suggest: • Adopt a shared vision for what industrial strategy should deliver for the UK economy, with the government reporting back regularly on how this vision is being delivered • Place greater emphasis on policies that ‘tilt’ the playing field and play to our strengths, backed by strategic use of government resources • Finalise the sectors for strategic focus across the whole of government – building on competitive advantages and mapping how they can be developed for the future by mid-2013 • Industry and government must work together to decide on the most appropriate structure for sector leadership for each of the UK’s chosen sectors • Industry and government must work together to implement sector action plans, identifying long-term themes to be addressed in each sector and instigating and regularly renewing action plans designed to address them • Develop and adopt a core set of strategic Key Performance Indicators which can be regularly benchmarked against competitors, with the results reported in an annual scorecard.

Playing our strongest hand – Maximising the UK’s industrial opportunities

References

1 A vision for rebalancing the economy: a new approach to growth, CBI 2011 2 Creating confidence: a new approach to industrial policy, CBI 2012 3 How to compete and grow: a sector guide to policy, McKinsey Global Institute 2010 4 Colour of growth: maximising the potential of green business, CBI 2012 5 Industrial Strategy: Sector Analysis, Department for Business, Innovation and Skills (BIS) 2012 6 A vision for rebalancing the economy: a new approach to growth, CBI 2011 7 Winning Overseas: Boosting business export performance, CBI 2011 8 Global Economics, HSBC 2011 9 The UK luxury benchmark report, Walpole 2012 10 Economic Impact of the film industry, Oxford Economics 2012 11 UN Service Trade Database, United Nations 2012 12 Office for National Statistics, Annual Business Survey 2012 13 Trade in goods by industry, Office for National Statistics 2012 14 Statistics division commodity trade database, United Nations 2012 15 Innovation and Skills (BIS), Low-Carbon Environmental Goods and Services (LCEGS) report for 2010/11, Department of Business 2012. 16 Innovation and Skills (BIS), Low-Carbon Environmental Goods and Services (LCEGS) report for 2010/11, Department of Business 2012. 17 Global Market Forecast, Airbus 2009 18 The UK’s Growth Landscape: harnessing private sector potential across the country, CBI 2012 19 Future champions unlocking growth in the UK’s medium sized businesses, CBI 2011 20 Winning Overseas: Boosting business export performance, CBI 2011 21 Meeting the challenge: Demand and supply of engineers in the UK, Institute of Mechanical Engineers 2011 22 The UK plastics industry: A strategic manufacturing sector, British Plastics Federation, 2012 23 Key sector statistics, Food & Drink Federation 2012 24 OECD Database, OECD 2011 25 The UK ICT Market, UKTI 2012 26 Better connected, better business: CBI/KPMG Infrastructure Survey, CBI/KPMG 2012

Playing our strongest hand â&#x20AC;&#x201C; Maximising the UKâ&#x20AC;&#x2122;s industrial opportunities

For further information on this report, or for a copy in large text format contact: Mark Dittmer-Odell Senior policy adviser CBI T: +44 (0)20 7395 8142 E: mark.dittmerodell@cbi.org.uk

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