Is there a future for manufacturing in Northern Ireland?

Posted on November 6, 2014 · Posted in Business Month

The potential closure of the JTI factory in Ballymena, with the loss of nearly 900 jobs, is a warning shot for the whole of Northern Ireland.  Nor is JTI alone. Northern Ireland’s three largest manufactured goods businesses as listed in the Belfast Telegraph’s Top 100 Companies of 2013 – Bombadier, Caterpillar and Quinn – have all contracted in recent times.

 

In September, Bombadier – NI’s third largest business – announced it will reduce its workforce by around 400. Two years ago Caterpillar – the tenth biggest company in NI, formerly known as FG Wilson – laid-off 920 workers in Larne.  (It has since taken on about 300 staff in Belfast and Larne, supported by grants from Invest NI.)  And Quinn’s manufacturing business – now known as Aventas – is currently being broken-up, with the radiator, cement and glass manufacturing operations being sold separately.

 

Manufacturing, the figures suggest, is of declining importance to Northern Ireland. As recently as 1995, manufacturing generated 15% of Northern Ireland jobs.  Today it is about 10%.  The obvious explanation is that NI is simply unable to be price competitive.  While JTI’s pay for factory workers in Ballymena, according to the Irish Congress of Trade Unions, is £40,000 to £50,000 a year, pay in the tobacco industry in Romania (where some of the manufacturing is transferring) is less than £10,000 a year.

 

For large manufacturers, electricity prices in Northern Ireland are significantly higher than in most of Europe, according to market analysis undertaken by the Utility Regulator. Only Italy charges more for electricity to large customers, with Northern Ireland more expensive than the rest of the UK.  Large manufacturers in Sweden, Finland and France can buy electricity for about half the price prevailing in Northern Ireland.  Those located in the Republic have a 20% electricity price advantage over the North.

 

In addition, companies here face other additional costs. Corporation tax in the UK is 21%, compared to 12.5% in the Republic.  And distribution is likely to be significantly more expensive from Northern Ireland to most large markets.  Even water – which we often seem to have too much of – is more expensive here.

 

Quite simply, Northern Ireland has ceased to be a low cost centre of production. Many of these cost factors hit not just NI, but the whole of the UK.  One major Indian company – Apollo Tyres – complained recently: “It’s far more expensive…. The UK, as far as manufacturing is concerned, is not lucrative at all.”

 

Stephen Kelly of Manufacturing NI warns that the cost and profit pressures facing JTI apply to other manufacturers also considering whether their next major investments should be here or elsewhere. “JTI…. are essentially deciding that, in the medium and long term, to invest in the Ballymena plant [for] new production lines does not stack up given the costs of manufacturing in Northern Ireland,” he says.  “There are other major employers in North Antrim and across Northern Ireland which need similar investment in production lines.”

 

Kelly is calling on the Executive to act to tackle the issue of costs, which is damaging Northern Ireland’s productive capacity. “The issue isn’t one of demand, it’s one of cost and we must address this as a matter of urgency,” he says.

 

While electricity is the major factor in those cost disadvantages, there are others as well, says Kelly.   “Our water company is 30% less efficient than benchmarked companies in GB and the inevitable transport costs of getting raw materials to and finished products from here adds an additional burden.”

 

Yet despite all these cost challenges, it is misleading to paint a wholly negative picture. Economist John Simpson explains: “Although we talk about manufacturing employment as falling, manufacturing outputs are still increasing.  They are increasing at about 2% per annum, which is what you would expect and that is reassuring.  The short answer is that if output is still increasing and if we are doing that with fewer people employed, then we should not worry.”

 

Moreover, the official figures do not necessarily tell an accurate story.   Professor Neil Gibson, director of the Northern Ireland Centre for Economic Policy (NICEP) at the University of Ulster, points out that the scale of outsourcing by manufacturing companies has had the effect of recategorising many support jobs from the manufacturing to the service sector.   “Many workers in professional services – including agency workers – will actually be in factories, or at least serving factories,” he points out.

 

“Certain industry will always remain, food processing for example, but NI has strengths in aerospace, heavy machinery, pharma too. Industry associated with recycling is also a growing area. Whilst other locations do out-compete on cost, there are many firms looking at coming back to US or UK shores. Costs are rising elsewhere and there are other risk factors that make many other markets less attractive than their cost base might suggest.

 

“Big factories are still a part of the industrial future, though it is true that smaller production is becoming more commonplace. We worry about a 500 job factory closure, but if we lost 100 five people business it would be just as bad – it just would not make the news. Look at the world leading UK car plants or some of the big pharma plants in Ireland to see that the modern ‘big factories’ still have a place in the developed wealthy world.”

 

Overwhelmingly, the big job announcements recently have been in the service sector in Belfast, in particular with accountancy and law firms. While the jobs are good news, it is important to have a diverse economy, argues Gibson.  “We do need a variation in our sectoral mix: our skills base demands it as not everyone can work in an office,” he says. “Also factories are better suited outside of cities for the most part and this is also helpful from a policy perspective.”

 

The latest economic forecasts from NICEP predict continued growth in NI’s manufacturing output. Strengths, says Gibson, are the sterling currency, an appropriately skilled workforce for some manufacturing activities, legal certainty, property and IP protection, competitive skilled wage rates and low staff turnover rates. In addition, there are the financial incentives of industrial de-rating and Invest NI’s employment support grants.  On the down side are energy costs, lack of local energy supply (without fracking), key skill shortages and the potential impact of changing state aid rules.

 

Angela McGowan, chief economist at Danske Bank, is also positive about the sector. “One of the key lessons learnt during the economic crisis was that economies with a healthy manufacturing base were the first to emerge from the crisis,” she points out. “Our local manufacturing base is fairly precious to us in Northern Ireland. This element of the private sector is responsible for employing over 80,000 people – 10% of the local labour force – and represents nearly 15% of local GDP.

 

“The short term strategy for local manufacturing firms during the financial crisis involved cutting costs, raising productivity from their current workforce and seeking export markets further afield. In the longer term, the survival of our manufacturing base will be dependent on a number of things, such as technology, ability to innovate and operate in a globally competitive environment and, of course, access to skills.”

 

McGowan stresses: “Northern Ireland cannot compete when it comes to low value-added traditional manufacturing – this type of production has long shifted to low-cost economies.” Despite this, Danske Bank forecasts local manufacturing output to significantly outperform the wider economy – projecting 4.4% growth for manufacturing this year, compared to average growth of 2.5%.  But with manufacturing output resting on improved technological based productivity improvements, employment growth in manufacturing is projected at just 2.5%.

 

Bank of Ireland UK economist Alan Bridle is also upbeat. “It is too soon to be writing the obituaries for the sector – indeed, the irony of the recent JTI announcement is that it comes at a time when the latest data suggests NI manufacturing is outperforming the UK average with annual growth in output of almost 6%, led by engineering, metal products, chemical and pharmaceutical companies,” he says.

 

“The rebalancing of the Northern Ireland economy debate is too often defined in narrow terms of public/private sector.  In reality, if the local economy is ever to achieve the ‘escape velocity’ we aspire to of more higher productivity/higher wage businesses, the balance within the private sector merits closer consideration and policy support, particularly in terms of taxation and energy costs where quite often, a local operation faces internal competition from another plant somewhere else in the world.

 

“The retention and growth of our manufacturing sector is therefore critical as it remains the key driver of the region’s GVA [gross value added] performance and wealth creation, R&D investment and export base. The overarching challenge is one of scale – we have some notable world class business performers in Northern Ireland, but they are numbered in the hundreds and not the thousands.

 

“In my view, the future for the NI manufacturing sector is challenging but not daunting – our successful businesses will be those with strong and ambitious leaders who compete on quality and value, not price. It has been evident for decades now that any competitive advantage we may have had from relatively low wages is rapidly diminishing – the future is one of playing in markets and niches we can compete in, both in terms of the quality of our products and after-service that generate repeat business. Competitive wage rates of course will remain part of the equation.”

 

Esmond Birnie, PwC’s chief economist, is in no doubt that it is important for Northern Ireland to remain a manufacturing economy. He explains: “The important thing about manufacturing is that manufactured products still outweigh services in world trade in terms of volume of activity. So, if you are a trading economy like the UK and trying to pay for imports it is important to retain market share in world trade in manufacturing.

 

“There may also be some distributional consequences which flow from the strength or otherwise of manufacturing. In percentage terms, manufacturing makes up only a small share of the economy in the South East of England and London whereas it is proportionally more important in the Midlands and the North of England and NI, Scotland and Wales, so manufacturing matters from the point of view of greater regional balance within the UK.

 

“Similarly, some commentators now fear that the income distribution is undergoing an hour-glass effect, i.e. fewer middle income jobs compared to more at the very top or very bottom of the distribution. Manufacturing, more so than many service activities, may produce more jobs in the middle.”

 

Birnie believes that re-shoring – bringing back off-shored jobs closer to companies’ head offices and nearer to their primary markets – provides major opportunities for Northern Ireland. “In March 2014 PwC forecast that such re-shoring could add 100,000 to 200,000 extra manufacturing jobs by the mid 2020s at the UK level,” he says. “Pro rata, that would imply significant gains to NI.”

 

Stronger clusters, including in aerospace, pharma/life sciences and agri-food, that bring industry into closer links with support organisations, universities, colleges and government, could also benefit NI, suggests Birnie. Perhaps 12,500 jobs could be created in NI over the next decade if the UK as a whole has a clearer industrial strategy, suggests the CBI. That strategy would be built on a greater focus on exporting, re-shoring and strengthened supply chains, including through industrial clusters.

 

Nigel Smyth, director of CBI NI, says that NI’s STEM (science, technology, engineering and maths) strategy and its innovation strategy “arguably” puts NI “ahead of the game in some areas”. He adds that the key is maximising the skills, knowledge and productivity available in NI. “There is a place for higher value added.  We have done a lot of work with highly skilled businesses.  The key companies – eight, 10, 12 medium to large manufacturing companies – are all going out and doing most of their business outside Northern Ireland.  And that has accelerated over the last four or five years.

 

“There is a lot of growth in medium sized companies,” adds Smyth. He praises, especially, some companies in the engineering, IT and pharma sectors.  “Most of them have links with universities and further education colleges,” he explains.  “That is where you see the fastest growth at the moment.  These are highly productive businesses.  Lots of good things are going on in manufacturing.  But they are not going to grow to the position where they create tens of thousands of jobs.”

 

The Northern Ireland Science Park is also central to the efforts at modernising our manufacturing sector. Dr Norman Apsley, chief executive of the NI Science Park, says:  “The shape of manufacturing in NI has changed and is changing again, from the big structures of the past – ships, cars, planes – to finer, more advanced engineering-based processes.  Advanced manufacturing and engineering is the bedrock of the regional economy, supplying the materials and composites necessary to the evolving manufacture of products.”

 

Apsley believes that while advanced manufacturing is responsible for growth in manufacturing sales and exports, it could achieve even more. “Despite the prevalence of manufacturing companies, it is acknowledged that this sector is not achieving its full potential,” he argues. “The under-development of the regional advanced manufacturing sector can largely be attributed to a lack of awareness of advanced manufacturing as an enabling technology and the failure of the regional manufacturing sector to develop new technologies and skills in line with the rest of Europe.

 

“With digital connection and new technologies such as 3D printing of plastics and metals, not only can design be done anywhere, manufacturing can be centred geographically according to need. The Science Park – and the new NW Regional Science Park in Derry – acts as the hub of an innovation eco-system.  It provides the link from the latest innovations and breakthroughs in engineering and scientific developments in the top academic and research institutions.  This allows inventors and entrepreneurs to bring these new ideas through a process which, with our help, can be translated into a commercial entity.”

 

It seems, then, that Northern Ireland can have a future as well as a past as a manufacturing economy, even though it may not either employ the numbers of people or perhaps pay the high wages of the past. If we focus on what we can do well, rather than just producing things more cheaply, NI might return to something like its glory days.

 

Leastways, that is the view of the sector itself. Manufacturing NI’s Stephen Kelly is bullish. “Do we have to accept that the NI economy is changing and it is inevitable manufacturing jobs are moving abroad?,” he asks.  “Not at all, manufacturing sales and job numbers are growing again.  We won’t hit the numbers of jobs in pre-war years, but we have very many world beating companies here.  Strong clusters in South Tyrone, Craigavon, North Antrim, along the Lough Shore, etc, show that we have the innovation, endeavour and ability to win globally.”