ABHI Membership

The Impact of COVID-19: A Case Study from 3M

Sir George Buckley – the former CEO of 3M, who is now Chairman of Smiths Industries (and Stanley Black & Decker amongst other) was always of the view that there are only three ways to generate genuine wealth. These are agriculture, mining and manufacturing. His contention was that everything else is just moving it around.

His view was that the foundation of any strong economy has to be a fundamental strength in manufacturing. The Covid crisis has been a prophetic reminder of his words.

The Covid-19 pandemic has brought out the worst in some countries’ protectionist tendencies. In the middle of April, well over 50 countries around the world had brought in export bans on personal protective equipment (PPE). 

When things like this happen – it’s every man for himself – or that’s what it seems. Actually, I think the UK was a glowing example of a more internationalist approach. The UK did put in place an export authorisation process for PPE – but only because it was bound by the terms of the Withdrawal Agreement to implement EU rules during the transition period. I’m pretty sure that the UK wouldn’t have chosen export restrictions if it had an autonomous choice – and this much was made clear by the many Ministerial discussions we had on the matter.

It is clear that we need to think long and hard about sovereign capability and surety of supply chains.  The British are an outward looking, friendly nation on the whole and we will always have friends around the world – but when there physically isn’t the capacity in the system to provide everyone with what they want – then there needs to be a local resilience plan that considers all these implications.

Companies are only going to invest in manufacturing in the UK if there is Government support or a readily accessible long-term local market or it makes economic sense…or a combination of all these factors. It is questionable whether these things do exist – and indeed whether they will exist in the future. 

On Government support – it is easy to say ‘if Government pays then we will invest’ but realistically, companies are not going to invest in manufacturing in the UK unless one or more of the other things are there too. Government support inevitably comes with strings attached as well - be it guarantees of jobs or local sourcing or involvement of SMEs in the supply chain or employment of apprentices.  Government has a habit of trying to kill multiple policy birds with one stone. Cumulatively, these obligations can represent quite a barrier.

On a long-term readily accessible market – this too is far from straightforward. Currently the Government are buying supplies for the Covid crisis under emergency procurement regulations.  Orders are being handed to companies who can deliver - without needing to go to competition. This is a very time-limited situation. One of the reasons the UK lacks indigenous manufacturers of many of the products in short supply during Covid is that there has been a highly aggressive long-term approach to pricing by NHS procurement bodies. We all get this – the NHS budget is not limitless and it’s taxpayer’s money…but there are consequences – and one of them is that companies can’t afford to manufacture low-cost items in the UK. And if you can’t make them in the UK, rather than open a factory in South East Asia – you may as well outsource it and then you don’t end up with redundant capacity if you get turfed-off high volume contracts in the future. The Nationally Contracted Products process is the extreme end of this emphasis on price. If the single anointed supplier lets you down, then there is likely nowhere else to go because everyone else will have scaled down their volume requirements in anticipation of a few lean years on that line. There needs to be a wholescale change in approach to procurement that places more value on well-managed and resilient supply chains. Companies are not going to put a factory in every country so it has to be about working with reliable companies who take care in selecting their partners and are realistic about what they can do. Safe, secure, reliable and low-cost are not mutually exclusive – but low-est cost might be a stretch.

On the economic sense of manufacturing in the UK – there’s a problem. The UK has many things going for it. It has good universities and a good education system. It has a reliable and trusted business environment and rule of law. It has a generally stable Government, is in the centre of the World’s time zones and speaks a major World business language. But it is also burdened by high costs – which is particularly important for manufacturers, where unit cost is of critical importance.

There are employment costs including employer’s National Insurance both on earnings (13.8% of payroll) and on benefits-in-kind. There is the Apprenticeship Levy and the Pension Protection Fund - and employers face additional costs from the Living Wage and IR 35.

There are property and asset costs like Business Rates – which for a manufacturer buying capital equipment is a drag on every new investment. Add to this Insurance Premium Tax, which for owners of substantial industrial assets is considerable.

There are energy costs and a host of consumption charges - climate change agreements; utility company pass-through charges; energy savings obligation scheme charges; producer responsibility charges; landfill tax - and we face the prospect of the plastics tax on its way too.

There are costs associated with product regulation like CE marking and moving forward we will also need to comply with the requirements of a UK-mark. There are also new charges to get products approved by NICE and it is not expected that registration for UK-REACH will be cost-free.

There are transport-related duties on vehicle fuel along with vehicle duty and air passenger duty.

Alongside this, there is an ever-increasing reporting requirement. These include duty to report on supplier payment terms; carbon reporting; gender pay gap reporting; anti-slavery reporting. Moving forward, there is the prospect of ethnicity pay gap reporting and disability pay gap reporting.

A disproportionate amount of this burden falls on manufacturing companies. Manufacturers tend to use a lot of energy. They tend to have a lot of property and machinery and there are product regulatory costs as well. Yet manufacturers also pick up all the general costs that all businesses pay, like payroll taxes, insurance premium tax, airline passenger duty and so on.

Enough. Really. This has got to change.

If the Government want to attract manufacturers to invest or re-invest in the UK, or to re-shore, then something must be done to address the burden or cost and regulation placed on business. The Government have to take a look at capital allowances, which in many other countries are more generous than in the UK. The Government must adopt a more disciplined and co-ordinated approach to business regulation and stop the ability of any Department to chuck out business regulation seemingly willy-nilly. Dare I say it – we also need to think about energy cost and energy taxation. Do we want to re-build manufacturing or not – because energy costs are an issue – that’s just a fact. The time to do this is now.

Tony Bellis, Head of Government Markets & Public Affairs, North Europe, 3M and ABHI Board Member