Download A Comparison in Manufacturing: UK, France

Productivity –
A Comparison in Manufacturing:
UK, France, Germany & USA
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Introduction
In May 2015 the UK elected a Conservative Government with a majority in the
House of Commons. During the period of the previous Coalition government
with the Liberal Democrats the then Government failed to develop an
integrated industrial and manufacturing strategy.
Almost a year in the new majority Conservative Government have adopted a
“hands off policy” in regard to manufacturing and downgraded any mention
of industrial strategy to an “industrial approach”, preferring to leave policy to
the vagaries of “the market”.
The Chancellor of the Exchequer and the Secretary of State for BIS earlier
proclaimed that one of the problems of the UK economy is “low productivity”
and announced their plans to boost productivity making comparisons with
Germany in particular, stating it took UK workers five days to produce what
German workers produce in four days. A generalisation that failed to take into
account key areas of industrial and manufacturing policy in Germany and also
other Countries often quoted – France and the USA.
The issue of productivity in manufacturing will undoubtedly continue to be
debated and this short document compares productivity and manufacturing in
the UK, France, Germany and USA and identifies the differences between each
of the countries and makes some recommendations which Unite believes are
crucial to building a high productivity, high wage, high skill economy.
Tony Burke,
Unite Assistant General Secretary (Manufacturing)
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It would seem that productivity matters hugely to the kind of economy we live
in. Competition amongst companies should provide an imperative to growth.
Each company has to grow to survive and for government, charged with
overseeing the process, GDP becomes their number one economic target.
When GDP goes up, it means an economy is expanding and when the economy
is expanding, it should mean there is more wealth available for everyone in
the economy. Of course, this is reliant on a government that has an open and
supportive role in providing the elements that will provide that growth – such
as that in Germany and what also cannot be forgotten is that wealth can be
distributed extremely unevenly; over the last two decades evidence has shown
that the fruits of economic growth have very largely gone to the already
wealthy, shareholders, bankers bonus’s and government coffers via high levels
of taxation both direct and indirect.
Driving growth and increased levels of productivity means either marshalling
more resources, or making existing resources work more effectively. Until
recently, China has been a spectacular example of how activating dormant
productive resources can drive growth. Up to 340 million Chinese have migrated
from the countryside and into towns and cities since 1979, the largest
movement of people ever recorded. This immense increase in the urban
workforce, combined with huge capital investment, has delivered China’s
extraordinary economic growth for the last three decades.
Britain does not have an immense rural population to mobilise, the industrial
revolution in the UK happened many centuries ago and the UK is already a
highly advanced, technologically proficient economy. As a result the UK has
a set of economic problems in relation to productivity and growth that is also
impacting on other more advanced Western economies. For example, there is
no readily-available stock of cheap, low skilled workers waiting to move into
more productive occupations. Like other developed countries, if growth occurs
here it has to be intensive, rather than extensive: making existing resources
work more effectively and incorporating a more educated and highly skilled
workforce. In the decades since the Second World War, that has been
more-or-less what has happened. Year after year the economy delivered
increasing levels of productivity. Over time, each hour worked produced more
output. As the economy became more efficient, it could keep growing because
the crucial elements for that growth were there. Recessions interrupted this
trend, but they did not stop the continued increase in productivity.
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However, something very different has happened since the banking crisis which
created the devastating world-wide economic crash. The graph below plots
productivity, as measured by output per hour worked, after each of the four
major recessions since 1970. It is shown relative to its pre-recession peak,
marked here as 100 for each. For every recession until now, productivity had
returned to its pre-recession peak no later than 18 months after the initial
crash. After that initial drop, productivity returned to its trend growth. For the
recession beginning in 2008 however, productivity fell – and then never really
picked up again. It is as if productivity in the UK has hit an invisible ceiling.
Unite believes this is the time for a brief exploration of what is happening
with productivity in manufacturing in the UK in comparison with a few other
economies; the US, Germany and France. All of which present interesting
information about productivity in their economies and how they differ or
compare with the UK.
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United Kingdom
In the UK despite having the highest GDP growth among the G7 at 2.8% last
year, the GDP per hour worked is lower than it was in 2007 and is continuing
to flat-line. This means that despite the higher employment figures, labour
productivity in the UK still trails most of the G7 by a large margin. American
workers output per hour is 9% higher than it was in 2007, and even in France
it has increased by more than 2% since 2007.1
One of the biggest problems facing the UK is that lending and investment still
have not even come close to their pre-crisis rates and this has forced some
companies; especially SMEs to hire cheap labour instead of buying new
machines that would make them more productive. Unfortunately, this has
meant that UK manufacturing is slowly going down the path of becoming a
low-wage, low production manufacturing economy and government policy
has done nothing to stop this. This is backed by the numbers showing that
while productivity has stagnated, the manufacturing sector is expanding with
a 54.4 rating from CIPS/Markit. Anything above 50 shows expansion as
opposed to contraction in the market. This is despite evidence which shows
that manufacturing output declined by 0.5% in January 2015.
What this means is that companies are hiring more cheap, unskilled workers
to boost their production figures2. The jobs are often low skilled, and are often
part-time or zero hours ensuring insecurity for the workers. This does not bode
well for the workers' quality of life or spending power, since the less skilled
labour earn lower wages, and with wages down an average of £1600 per year
under the Tory government3 this does not provide the income through taxes
that the Exchequer so desperately needs to drag the UK out of recession and
into growth.
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2
3
http://www.economist.com/news/britain/21652310-britains-stall-productivity-more-serious-any-richworld-peer-closer-look?fsrc=nlw|hig|28-05-2015|UK
http://www.bbc.co.uk/news/business-32143552
http://www.theguardian.com/business/2015/apr/01/uk-productivity-growth-is-weakestsince-wwii-says-ons
Another potential problem highlighted by the Bank of England is that many
people may be underemployed in their existing jobs due to the recent high
employment figures in an economy where there may be as much as 1.5%
spare capacity, meaning the economy is underperforming due to low productivity
and under-investment by businesses. Therefore, if the government were to
incentivize businesses to invest more into making their workers more
productive, the economy could run closer to its potential4. However, On 26th
of March 2015 the UK government announced they would be investing £67
million towards strengthening the manufacturing supply chains for a total of
20 manufacturing companies in order to increase their worker productivity5
It remains to be seen whether this initiative will be successful, especially if interest
rates rise, the pound gains strength and UK exports become more expensive.
The UK is unique in Europe in that the workers have less employment rights
and protections which means although the workforce is seen as highly flexible
by companies investing in the UK they are also the first workers to be made
redundant or plants closed – just because employers can – this would not be
allowed to happen in Germany or France.
In order to achieve increased GDP since the global financial crisis the UK has
taken the approach of decreasing unemployment and by deregulating the
labour market, which enables employers to more easily make their workers
redundant, to re-organize, downsize, casualize work with zero hour contracts
and reduce access to Employment Tribunals and compensation. This allows
companies to hire more expendable and unskilled workers at a cheaper price
than hiring skilled workers to perform the same or similar tasks. This has led
to a larger, less skilled and lower paid workforce with less job security. It makes
it very difficult or downright impossible to increase productivity per worker per
hour under these conditions since higher skilled, higher paid, and more secure
employees tend to produce more per hour.
France
Although the UK and France have proportionately similar manufacturing sectors
(10-12% of the total economy) and similar GDP, we cannot ignore the fact that
French workers work less hours than their UK counterparts by law and enjoy
many more holidays. Logically this would mean that the French have higher
labour productivity measured in output per hour worked.6
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6
http://www.bbc.co.uk/news/business-32143552
https://www.gov.uk/government/news/manufacturers-get-more-support-from-government
http://www.primeeconomics.org/articles/o91sdlu312b90filbobylfincxj5sb
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France has taken a different path in achieving its productivity goal. Instead of
deregulating the labour market they have instead kept an intentionally lower
economic rate and a high unemployment rate of over 10%. French companies
are obliged to consult with trade unions and all workers even though in 2014
less than 8% of employees in France (5% in the private sector) belonged to a
trade union. This is an astonishingly low figure especially when compared to
other western industrialized nations such as: Great Britain at 26%, Germany
at 18% and the US at 11%. But, what it does show is the level of collective
bargaining involved in French companies and also underlines the Social
Partnership model which gives employees in France a much greater role in
the decision making process.
French trade unions and workers still have a significant influence in the running
of companies across the private sector. This has to do with the French law that
provides for elected union delegates representing all employees, whether they
are union members or not, in firms with over 50 staff on works councils and
separate health and safety councils. These must be consulted regularly by
employers on a wide range of different managerial decisions. This means the
people who are actually working have a higher rate of productivity than their
British counterparts. However, this comes at the cost of having a 2-3% higher
unemployment rate than the UK. Unemployment is predominantly among
teenagers between 15-24 years old and is as a direct outcome of the banking
crisis and the impact this has had on the French economy.
In addition, their higher manufacturing GDP may also be due to the fact that
France tends to produce more luxury goods and high value technical products.
If the value of the things you are producing is higher, GDP per worker, which is
how we measure productivity, will always be higher than countries that produce
lower priced or non-luxury goods7.
Germany
In comparison to the UK, Germany is commonly known as the Powerhouse of
Europe. Germany, despite the modern trend of other "developed" nations to
save money and reduce their indigenous manufacturing base has maintained
a strong internal manufacturing base, representing 10% of European
manufacturing companies, along with 30% of EU turnover in the
manufacturing sector.
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http://www.ft.com/cms/s/0/5ca6d422-d3c4-11e4-a9d3-00144feab7de.html - axzz3dOusJtxr
It is therefore not all that surprising that their manufacturing sector made up
22.2% of the country's total gross domestic product in 2013. It is also not
surprising that they have enjoyed increasingly higher levels of productivity, that
is GDP per hour worked, compared to the rest of the G7 outside of the US.8
One of the significant reasons for Germany's high manufacturing productivity
rate is their highly skilled workforce. In 2013 more than 80% of the German
workforce had received formal vocational training or was in possession of an
academic degree. This is largely to do with their world-famous dual vocational
education system whereby vocational trainees are apprenticed to a company
and work 3-4 days a week alongside industry professionals, and spend 1-2
days a week attending a state supported vocational school taking courses
relevant to their chosen vocation. The state pays for the classroom training,
while the company they are apprenticed at pays them for their services9. In
addition, more than 70% of apprentices in production based industries are
taken on as full-time employees following their graduation, which adds a significant
amount of job security which may go towards increasing their productivity.
Unite would also note that Germany tried to implement the Higher education
model currently in use in the UK where tuition fees and other costs are borne by
the student through student loans, often resulting in a student graduating with
thousands of pounds worth of debt. This was met with bitter opposition and
was eventually stopped, giving Germany an even further educational competitive
advantage. The German vision for the long term sustainability of their economy
and industries is highly commendable and it is increasingly unfortunate that
the present government has absolutely no intention of assisting students or
manufacturing in the UK.
Another big reason for the high productivity rate is in working culture. There is
an accepted and clearly defined work culture, where co-operation and peer
pressure along with the recognition of skills helps with high productivity.
There are also clear barriers between and an accepted separation of private life
and working life which develops a clear work-life balance.10
In addition, the Germans are embracing technological change in the way that
has minimal interference with employment and job creation/retention.
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http://www.gtai.de/GTAI/Content/EN/Invest/_SharedDocs/Downloads/GTAI/Brochures/
Germany/economic-overview-germany-market-productivity-innovation-2014-en.pdf
http://www.young-germany.de/topic/study/courses-degrees/germanys-dual-vocationaleducation-system
http://www.huffingtonpost.com/amol-sarva/why-germans-work-fewer-ho_b_6172262.html
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There is an apparent preference to keeping production in-house, an aversion to
off shoring work and defending their core manufacturing sectors.
German industrial support for medium sized companies, notably in the supply
chain in manufacturing is well known and provides a well-established link between
SMEs (‘Mittlestand’) and larger manufacturing companies which receive on-going
support and thus stability. These companies have not been allowed to fail. This
stability helps in developing a highly productive manufacturing sector. (See Unite
Aerospace Sector report on ‘Mittlestand’ companies, 2015)11
Automation is the preferred option for routine or low skilled work rather than
the work being outsourced and jobs lost. This gives the companies an incredible
amount of control over production and also allows them to retain their skilled
workers12. This is almost the opposite of what is going on in the UK where
because of deregulation companies prefer to hire more less skilled workers –
often from agencies - because they can pay them less and can pass their
employment contracts to a third party.
The German government also invests heavily in technology and innovation to
continue to improve manufacturing productivity. Earlier this year the government
announced they would be investing €200 million to spur the research and
development of an initiative known as Industrie 4.0. This is Germany's vision
for the future of manufacturing, where ‘smart’ factories using information and
communication technologies digitize their processes; the end result being huge
benefits in the form of improved quality, lower costs, and increased efficiency.
Companies such as Siemens have already started this process and have invested
more than €4 billion into developing its product lines which can in turn be used
by industrial clients to digitize their processes13. This makes the £67 million
(€93 million) invested by the UK government to 20 British manufacturers look
paltry in comparison.
Lastly, trade unions such as the largest German trade union IG Metall have
had a direct role in maintaining productivity and employment levels. The union
has in the past worked with its members and with companies to keep wages
below the inflation rate in order to improve competitiveness and bring down
unemployment. However, on 24 February 2015 the union made a deal that
bucks this trend.
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13
http://www.unitetheunion.org/uploaded/documents/Mittelstand11-23167.pdf
ibid
http://www.zdnet.com/article/germanys-vision-for-industrie-4-0-the-revolution-will-be-digitised/
This deal includes a 3.4% wage increase for one year along with a one off
payment of €150. The 3.4% increase totally outstrips the current inflation (CPI)
rate to May 2015 of 0.6%14. Obviously companies took this as a painful blow,
but it means that employees are now able to contribute more toward private
domestic consumption that helps everyone involved15.
However, some critics claim that the German industrial model is no longer as
robust as it is popularly thought to be. They cite wage stagnation since 1999
that has artificially kept costs of production low, even to the point where
worker’s wages are less than they would have been in 1999 when adjusted for
inflation. In addition, although their apprenticeship system is still admired by
other nation states, enrolment in such programs is at its lowest point since the
1990 unification. Also, since the economy is heavily based on manufacturing,
it makes it vulnerable to fluctuations in demand for manufactured goods16.
Enrolment in Germany's dual education system has reduced for a couple of
reasons. Firstly, the recent trend is for more German students choosing the
academic route as opposed to the vocational one. This is a deviation from a
traditionally vocation heavy educational field. Many more students are now
pursuing higher education for the simple fact that in 2012 the average
university graduate earned 74% more than their vocationally trained
counterparts. In light of this trend higher education may be perceived as being
superior to those pursuing vocational apprenticeships which discourage young
people from entering the vocational field17 and it could also be that the years
of wage restraint has created this significant cultural shift.
If this trend continues, there will be less people in the workforce to replace the
aging baby boomer generation of skilled workers which could have serious
consequences for the manufacturing sector in Germany. In anticipation of this
event companies like Volkswagen are beginning to replace retiring workers
performing lower skilled or routine tasks with automation, while humans are
being used to perform the higher skilled tasks. This approach would both
take into account the shrinking core skilled workforce, while also increasing
productivity and decreasing labour costs. This type of long-term strategic
planning is crucially needed in the UK to increase and maintain productivity
in manufacturing18 this government is long overdue in providing the UK with
an industrial manufacturing strategy.
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18
http://www.inflation.eu/inflation-rates/germany/inflation-germany.aspx
http://uk.reuters.com/article/2015/02/24/uk-germany-wages-igmetall-idUKKBN0LS09D20150224
http://www.prospectmagazine.co.uk/features/dont-envy-germany
https://thelearningprofessor.wordpress.com/2013/09/09/is-the-dual-system-in-germany-at-a-turning-point/
http://www.ft.com/cms/s/4337b9a0-4d6b-11e4-bf60-00144feab7de,Authorised=false.html?
_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2F4337b9a0-4d6b-11e4bf60-00144feab7de.html%3Fsiteedition=uk&siteedition=uk&_i_referer= - axzz3e59IJkLy
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United States
The United States currently has the highest productivity of any of the G-7 nations
since the latest recession. The reason for this is without a doubt to do with the
increased use of automation in manufacturing jobs, making it possible to produce
more units per hour by using less workers than previously needed and in the
case of the automotive industry shifting the work to the Southern states or
Mexico, where the pay rates are significantly less than in the Northern states.
This has led to a negative trend in recent years that as productivity in the
workplace increases, the employment decreases, even with manufacturing jobs
returning to US due to decreasing fuel prices, the jobs are low skilled, low paid
and insecure19.
It is not only automation that is improving productivity in the US, it is only part
of a larger movement towards lean manufacturing. Lean manufacturing is about
streamlining the manufacturing process to make production more efficient. This
includes not only automation of tasks, but changing the very process of how
durable and disposable goods get manufactured. It is for that reason the
companies in the US have heavily invested in advanced manufacturing. In fact,
according to a recent poll of US-based manufacturing executives at companies
of at least $1,000,000,000, 72% of respondents say they will invest in additional
automation or advanced manufacturing technologies in the next five years.
Advanced manufacturing technologies include autonomous robots, integrated
publication of materials engineering (ICME), digital manufacturing, industrial
Internet and flexible automation, and additive manufacturing.
Autonomous robots obviously have wide appeal since they have the ability to
complement and even replace human labour at a cheaper cost to companies
while improving their ability to enhance quality by taking human error out of
the equation. It is clear the US manufacturers do not think that up-skilling their
workforce is a way of increasing productivity over the long term. The US is
using short term measures for a quick fix but this will not result in a sustainable
manufacturing sector for the future generations of workers.
ICME involves creating computer models of products and simulating their properties
before they are manufactured. This would allow engineers and designers to
develop products better, faster, and cheaper than actually building and testing
multiple physical prototypes making the process much more efficient.
19
12
https://www.boundless.com/business/textbooks/boundless-business-textbook/introduction-tobusiness-1/trends-in-american-business-24/productivity-gains-in-manufacturing-141-7863/
Digital manufacturing involves virtualization technology which can be used to
generate digital factories that simulate the production process. By using this
technology it could help engineers save time and money by: optimizing the
potential of assembly lines by identifying and automatically correcting flaws in
each step of the manufacturing process before even building or retooling the
factory. They could also be exactly replicated in different locations at a relatively
low cost.
With the industrial Internet and flexible automation manufacturing hardware
these could be linked together so that machines can communicate with each
other and ultimately adjust production based on data picked up by sensors.
The last technology being developed is additive manufacturing for example,
3-D printing that uses digital models to produce three-dimensional objects. At
present, they are used primarily for making cheaper tangible prototypes. In the
future they can be expected to be used to build small batches of new kinds of
products made out of one material, again decreasing manufacturing costs and
labour, along with increasing productivity.
In sum, the reason why the US continues to have high productivity in the
manufacturing sector is that US companies are highly invested in creating leaner
manufacturing emphasizing automation, process improvement, and quality
control20. It is clear that some of the processes used by companies in the US
would be useful for increasing productivity in the UK. But investment in these
advanced manufacturing methods is only part of the story. Although they are
clearly part of the future of the industry, and allow for the cheaper and more
efficient production of goods, the competition involved in the production of
those goods across the world is aggressive and Unite believes the future of
manufacturing in the UK is to focus more on the high technology R&D and
production of high and niche products that will utilise the highly skilled and
experienced workers more effectively.
However, there are significant downsides to US manufacturing. Increased use of
and investment in automation along with anti-union sentiment and a focus on
decreasing labour costs has led to a huge manufacturing skills gap in the United
States. A skills gap that is estimated to mean over 2 million highly skilled
workers will be needed within the next decade.
20
https://www.bcgperspectives.com/content/articles/lean_and_manufacturing_ production_
why_advanced_manufacturing_boost_productivity/
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It seems companies are more willing to hire cheap labour than to invest time and
money into training the workers to become more skilled in manufacturing jobs.
According to evidence provided by the US Department of Labour in 2014 there
were 410,000 apprentices registered with the federal government. Of these,
only 11,447 (2%) of the registered apprentices are related to manufacturing
industries. This means that in a manufacturing sector that employs more than
12 million workers only 11, 447 apprentices are receiving formal advanced
training in the form of an apprenticeship and make up less than 1% of the
total manufacturing workforce.
These factors combined with the 4.4% decline in real wages for manufacturing
workers from 2003 to 2013 has led to younger people shying away from
pursuing manufacturing as a career choice. This will undoubtedly have a
detrimental effect in the promotion of a sustainable manufacturing industry,
especially when aligned with the aging skilled workforce21. This shows what
happens when government and companies neglect the importance of maintaining
apprenticeship and training programs so that they can have enough skilled
workers available to be highly productive when the older generation retires.
Conclusion
There are very clear reasons for low productivity in the UK as evidenced above,
these include; a lack of investment from government and companies in plant,
machinery, innovation and new manufacturing techniques. There has been a
serious and systematic decline in investment in education, skills and training,
which will have long term repercussion for all industries.
The UK is notorious for the politicisation of the provision of education as part
of the continuing attack on public services which the present government
continues to pursue without a thought to the long term effect this will have
on the retention of highly skilled and sustainable jobs in the UK.
There is no doubt that the focus on increasing productivity by nation states has been
brought into sharp focus through the shift to right wing politics across the globe.
21
14
http://m.industryweek.com/skilled-workers
Some commentators believe that an imbalance or relatively low productivity is
the evidence that shows manufacturing is doing well but not at the expense
of a workforce forced to work ever longer hours, for less money and reduced
employment rights and protections, or a workforce replaced by robots and
forced into meaningless, repetitive, low value and insecure work.
There is much more to do with achieving a work/life balance and allowing workers
to work productively in highly skilled, sustainable and well paid jobs.
Unite recommendations
• Improve job security by ending in-secure, non-protected employment such
as zero hours contracts, endless agency working with no prospect of
permanent contracts of employment
• Develop strong structures for information & consultation and workers
involvement in decision making and create co-operation between unions,
workers and employers and create an environment where the views,
opinions and expertise of the workforce is listened to and respected.
• Lobby government to increase investment in advanced manufacturing
techniques in the same way that Germany's government has done
• Government must take the education and skills agenda seriously and assist
businesses to upskill their employees, and develop a better system of ‘gold
standard’ apprenticeships
• Provide a series of incentives for businesses to invest more into making
both the workers and the tools they use more productive
• Ensure the UK is the place for the manufacture of higher quality,
technologically advanced goods to increase GDP
• Develop a system to retain and recruit highly skilled workers by supporting
the supply chain, defending the manufacturing sector; avoiding the loss of
jobs and splitting up highly skilled and trained workforces, in the same way
Germany has done
• Invest in advanced manufacturing techniques and processes that provide
the technological R&D and innovation needed to improve productivity
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Michael Roberts
Syracuse University
Janet Golds
Unite Research Officer
@unitemanufactur
www.unitetheunion.org
(JN????) HB271015