A NEW DAWN FOR WELSH MANUFACTURING?

WESTERN MAIL ARTICLE DEC 23RD 2011

Over the last year, the manufacturing sector, ignored for so long by politicians, has now become a favoured industry again.

With the UK Government partially pinning its hopes on an export led recovery, policymakers are looking to refocus their efforts on manufacturers, especially those in high technology sectors. In fact, whilst manufacturing only accounts for 10 per cent of the UK economy, it generated some £205bn in exported goods in 2009, representing approximately 53 per cent of total UK export by value.

This refocusing on the manufacturing sector could be particularly good news for Wales, especially as the industry is mainly located outside the south east of England and any growth in the sector will have a disproportionate effect on the less prosperous parts of the UK, such as the Welsh economy.

As the First Minister said recently, “Manufacturing is vital to the economy in Wales and should be considered at least as important as financial services at a UK level.” This echoes an earlier call by the innovator Sir James Dyson, who noted in a report for the Conservative Party that it was critical for the UK economy to rebalance itself away from financial services and property But successive governments in both Westminster and Cardiff Bay have hardly covered themselves in glory when it comes to developing the manufacturing sector here in Wales. Let’s take, for example, the relative contribution of manufacturing to the UK economy since 1997.

An analysis of the latest GVA (Gross Value-Added) data on the sectors of the UK economy shows that manufacturing accounted for 25 per cent of the Welsh economy in 1997 but by 2009, this has plunged to only 15 per cent of the economy. To put this into context, the contribution of public sector services had increased from 22 per cent to 27 per cent over the same period. In absolute terms, the cash contribution of manufacturing to the Welsh economy had fallen from £7.1 billion in 1997 to £6.7 billion in 2009. This in itself, is not surprising, given that low level manufacturing operations have been switched from Wales to cheaper countries overseas, most notably in parts of Central and Eastern Europe. However, it does demonstrate the lack of any strategy to support the development of knowledge-intensive products in Wales and, more relevantly, the service provision around such products, all of which add far higher value to the economy.

In this context, it is also worth comparing the relative fall and rise of employment in manufacturing and the public sector since 2001. The data shows that the numbers employed in manufacturing has declined by 26 per cent (a fall of 55,000 jobs). In contrast, the numbers employed in the public sector has increased by 57,000 over the same period. Nevertheless, there remains real potential within the manufacturing sector in Wales that can be built upon, from global giants such as Airbus, Toyota, Sony and Tata to thousands of small companies producing specialist goods across the nation.

And the new advanced manufacturing and materials sector panel set up by the Welsh Government has made its intentions clear to develop an approach that embraces globalisation, encourages R and D in innovative products and processes, matching education provision to meet the demands of the 21st century manufacturing workplace, developing new finance packages for growth and building capacity by targeting investment in a sustainable business environment.

However, the Welsh Government cannot and should not do this in isolation. For example, much of the real value added support and expertise for innovation rests in national non-devolved bodies such as the Technology Strategy Board and NESTA whilst the vast majority of R and D funding for universities operating in fields relevant to manufacturing is still controlled centrally by the UK Research Councils. There is also billions of pounds worth of funding support for exporters available through UK Export Finance whilst UKTI, the UK Government’s trade arm, can help develop international links through its global reach in embassies and consulates throughout the World.

Given this, could 2012 herald a new dawn for manufacturing in Wales? There is no reason why this should not happen, especially if our businesses have the right management, the right products and the right skills in place and, more importantly, the appropriate support is provided by governments in Wales and Westminster.

WELSH LABOUR - PLAYING THE MAN NOT THE BALL

I inadvertently forgot to publish this article on the blog last month as I was away travelling. Still, better late than never.


DAILY POST COLUMN 28th November 2011

Is the Labour Party in Wales in danger of believing that it has almost a divine right to rule in the Assembly?

That seems to be the impression one would assume from the recent spat between Welsh Labour and the Electoral Reform Society (ERS).

The argument all stems from the announcement earlier this month that Labour wants to have a first past the post system for all Assembly seats if there are boundary changes to Wales.

This would mean that if Labour had its way, there would be two seats for each of the thirty new constituencies. This would, according to a report from the ERS, give Labour 70 per cent of the seats with only 40 per cent of the vote.

Such a democratic imbalance would perturb anybody and it is only right that an organisation such as the ERS, which believes in a more proportional electoral system, would commission academics at the world renowned Department of International Politics at Aberystwyth University to examine the consequences of such a policy.

But, of course, in today's Wales, anyone who offers an alternative opinion to the Labour Party seems to do so at their own peril.

Almost immediately after the publication of the report, Labour wheeled out their "senior sources" to rubbish the ERS report, one of whom went so far as to question the professional integrity of the authors, stating that "this research by a Plaid Cymru-supporting academic is nothing more than guess work”.

Of course, debate and discussion are the lifeblood of a democratic society but when personal attacks are made on the academics who wrote the report and the independent body that commissioned it, then you know that the politics of Damien McBride remain alive and well in Wales.

Mr McBride, if you remember, was the special adviser to Gordon Brown who was caught trying to smear Members of Parliament.

His exposure, and subsequent sacking, shocked many outside of politics who had never thought that such underhand behaviour could be possible.

You would have thought that adopting an approach to attack individuals had disappeared from the Labour Party then but it would appear that some of Mr McBride’s disciples remain in Wales.

In fact, for someone within the Labour Party to accuse an academic from one of the most respected politics departments in the UK of being biased in his research is scraping the bottom of the barrel. 

You wonder why the First Minister is allowing himself to be associated with this style of politics?

In the absence of any apology for such a slur, it reinforces the impression that whenever anyone in Wales offers an opinion or judgment that differs from the edicts laid down by the Labour Party, it is open season to attack them personally.

In fact, such behaviour demonstrates exactly why we shouldn't have an electoral system where the Labour Party gains an automatic majority every four years.

I have often had my opinions in my Daily Post column challenged by Labour MPs such as Albert Owen but that is an expected part of the democratic debate and I welcome it.

The great French philosopher Voltaire is famous for uttering that one line that encapsulates decent democratic debate in any modern society, namely "I disagree with what you say, but I will defend to the death your right to say it"

That particular line seems to have passed some of the members of Welsh Labour by and I would suggest that before attacking anyone who disagrees with them in the future, they should repeat Voltaire’s dictum one hundred times and remember that we live in a society where free speech is not only a privilege, but a right for every citizen of this nation.

START-UP SAUNA

Given my love for all things Finnish, this is one new programme that policymakers could and should be emulating.

The Aalto Venture Garage, part of the newly formed Aalto University, is a co-working space and seed accelerator in the Nordics and Baltics, providing a free 700m open space for hackers and startups. It operates from a big industrial hall whose interiors have been optimised for entrepreneurs to work together. Shipping containers have also been brought in to create extra rooms, with even their roofs being transformed into office space, with stairs leading to the top and onto a maze of chairs and tables.

Its programmes include the Startup Sauna, which claims to be the leading open sourced seed accelerator for early-stage startups in Northern Europe and Russia. Startup Sauna pushes the selected startups develop to a stage where they are ready to take over the international markets, using coaching from some of the region’s best serial entrepreneurs, investors and other professionals.

THE DECLINE OF MANUFACTURING AND THE RISE OF THE PUBLIC SECTOR IN WALES

They say a picture can take the place of a thousand words.

Below is the relative contribution of the manufacturing industry and the public sector to the Welsh economy for the period 1997-2009.

And the graph below is the overall monetary contribution of the manufacturing industry and the public sector (in £million) to the Welsh economy for the same period.

THE RELATIVE PROSPERITY OF WALES 2010

Last Wednesday, the latest GVA (Gross Value Added) data was released by the Office for National Statistics.

It showed that this measure of prosperity had, following the recession of 2009, increased in all UK regions.

The good news for Wales is that, along with the East Midlands, it had the fastest growth in GVA/head of population in 2010 at 3.3 per cent. Before anyone gets excited about this news, it can probably be explained by the fact that both regions are the most manufacturing intensive in Britain and that the brief export led recovery experienced in 2010 was beneficial, at least in the short term. In fact, the bad news was that Wales is still the poorest part of the UK with a GVA/head of £15,145. In contrast, the richest part of the UK – London – had a GVA per head of £35,026.

And if we look at the growth of London since 1999, the year of the establishment of the National Assembly for Wales, the economic prosperity of Britain’s capital city has grown by 73 per cent. In contrast, the Welsh economy had only increased its wealth by 48 per cent.

So what has been happening by industry, where data lags regional GVA by one year? It shows that, despite the fact that Wales is still one of the main regions for manufacturing, its importance has decreased from being 22 per cent of the Welsh economy in 1999 to 15 per cent in 2009. In contrast, the public sector has grown from 23 per cent to 27 per cent over the same period. And ironically, given the way that the First Minister suggested this week that financial and insurance services was only important to the City of London, it is this sector that has experienced the largest growth in Wales since 1999, expanding by 125 per cent during this period.

What about the different parts of Wales? Has growth been even over this period? As many of you are no doubt aware, two thirds of Wales of Wales has qualified for around £4 billion of European Structural Funding since 2000 as one of the poorest regions in Europe. The aim of this funding was to close the prosperity gap.

The question is whether this has happened?

Unfortunately not, at least compared to the UK economy, with West Wales and the Valleys declining from 65 per cent of the UK average prosperity to 63 per cent since 1999. That is not to say that the difference between the richest and poorest parts of Wales has not been reduced. It has, but that is only because the growth in East Wales, which includes Cardiff, Newport, Wrexham and Flintshire, has been slower.

On a more local level, the good news is that Anglesey is no longer the poorest part of the UK. Unfortunately, it has been replaced by the Gwent Valleys, which now has a GVA/head of £10,654 in 2009 as compared to a UK average of £20,000.

So what does all this tells us.

Obviously, it shows that Wales remains the poorest part of the UK despite billions of pounds in additional European funding and a so-called devolution dividend. Not surprisingly, there remains the argument that the Welsh economy has suffered from long-term structural issues for decades, especially in relation to manufacturing.

Yet, the evidence suggests that the decline in this important industry, so critical for high value activities such as exporting, has actually declined at a faster rate in Wales since 1999 after actually growing during the early 1990s. There is also the issue of whether the Welsh Government could have done more or whether all the economic levers lie with the UK Government?

Certainly, some will look enviously at the growth rate of the Scottish economy, which has expanded by 60 per cent whilst Wales has demonstrated the lowest growth of any of the four nations. Critics may also argue that most of the effort of politicians and civil servants has been equivalent to shuffling deckchairs on the Titanic, bringing in a new economic document every few years rather than taking a long term view of how to truly transform the economy. From “A Winning Wales” in 2002, to “Wales: a Vibrant Economy” in 2005 to the “Economic Renewal Programme” in 2010, what we have seen is policymakers tinkering at the edges of economic development rather than coming up with a real vision for the future of the nation’s prosperity, one that truly changes the way that this country’s economy is managed.

Certainly, the lack of real and consistent strategy has had a major impact on the nation’s economic potential and, consequently, much of the billions of European Structural Funding, as well as the money available from the Welsh Government’s own funds, has been largely squandered, despite having the highest proportional spend of any region on economic development.

Back in 2001, the then Assembly Government under the leadership of Rhodri Morgan set targets to increase Wales's GVA to 90 per cent of the average for the UK by 2010. Unfortunately, we have gone nowhere near that target with Wales’ prosperity being 74 per cent of the UK average in 2010.

 Rather than writing yet another grand document, what is now needed is real action to drive forward entrepreneurship, innovation, productivity, exporting and skills to ensure that, in the next decade, the Welsh economy can make some major strides towards closing the prosperity gap and finally get off the bottom of the UK economic league table.

PREDICTIONS FOR SMALL FIRMS IN 2012

With a difficult year coming to an end, there will be a host of predictions over what will happen to the economy in 2012.

Here is a list from one of my favourite magazines, Entrepreneur, which tries to work out not only what the economy will look like but, more importantly, what trends will affect the small business sector.

Yes, it is US-orientated but how many of these will also apply here in the UK?

1.Volatility ahead. With Europe now teetering, economic uncertainty will remain the big issue for every small business owner, with 44 percent of owners naming it the "one thing that stands between where you are today and growing your company," a Guardian Life Small Business Research Institute study found. Winners will have flexible long- and short-term plans so they can shift gears quickly.

2."Right-time" multichannel marketing. Watch for new tools that will help business owners better analyze complex customer behavior and comments on various social-media platforms. Then, you'll use that data to monetize your business's social-media presence with tailored marketing campaigns that reach the right customer at the right time with the right message.

3.More cheap online ads. Marketing will center around a move to low-cost online tactics such as paid search, says Kenneth Wisnefski, founder/CEO of the SEO firm WebiMax. "Merchants and retailers who chose innovative and less-expensive advertising channels including social media and paid search were rewarded well during the Thanksgiving weekend," he says in reference to the spike in online sales.

4.Customers in charge. More businesses will involve customers directly in merchandise and marketing decisions, Susan Reda writes in STORES magazine. How? Here's a hint: If you aren't doing online customer polls yet: Facebook makes those insanely easy to set up.

5.Mobile purchasing grows. "Those retailers not optimizing their website for mobile phones need to start as soon as possible," says Diane Buzzeo, CEO of ecommerce-software provider Ability Commerce. Research firm eMarketer adds that m-commerce more than doubled this year to $6.7 billion, and expects it to quadruple again by 2015.

6.Credit gets easier. Business owners may finally get the capital they need, says Odysseas Papadimitriou, CEO of the credit-card portal CardHub. Underwriting standards relaxed this year and will continue to loosen up in 2012, he says.

7.Services head offshore. Service-sector businesses will be in demand overseas, Elance forecasts. This year, U.S.-based contractors exported their services to more than 140 countries through Elance's freelance portal.

8.Daily deals die down. Experts agree: The daily-deal space is oversaturated with competing offers. Also, many business owners lost money doing daily deals. Expect a shakeout, both in the number of deal companies and in the types of deals offered.

9.Retail-format experimentation picks up. From pop-up stores to smaller-format Wal-Marts to food trucks, expect more retailers and restaurateurs to experiment with their store layouts. As the economy slumbers, retailers will look for ways to make cheaper, smaller footprints work, the Booz and Company's "2012 Retail Industry Perspective" report says.

10.More collaboration. This one's my prediction: the small businesses that stay afloat will be the ones that reach out to complementary businesses in their town or their industry and find ways to help each other.

BUSINESS BIRTHS AND DEATHS IN WALES 2010

As those who read this blog regularly are no doubt aware, I believe passionately in entrepreneurship as the main vehicle by which the global economy can recover again after the worst recession since the 1920s.

In my opinion, the passion, creativity, innovation, perseverance and sheer hard work of entrepreneurs are the vital ingredients needed to get economies moving again.

Given this, I was hoping that the latest data on business births and deaths, published by the Office for National Statistics last week, would have some good news for the Welsh economy and show that it was on the road to recovery.

Unfortunately, my optimism was misplaced.

Instead, the official statistics showed that the situation in Wales was worse than expected, especially compared to the other devolved nations.

For example, the data released showed that in 2010, there were 7,505 enterprise births in Wales as compared to 8,325 in 2009. This represented a decline of 9.9 per cent, the worst performance of any region in the UK. In contrast, the number of new enterprises increased by 16.4 per cent in Northern Ireland and by 5.5 per cent in Scotland.

Only Cardiff, out of all the counties in Wales, showed any increase in new business starts.
In terms of business closures, the statistics are also depressingly bad for the economy. The number of  business deaths has increased by 9.5 per cent with only London and Yorkshire and Humberside performing worse in terms of the number of businesses that have closed down during the period 2009-2010.

This means that the total stock of businesses in Wales continues to decline (see graph below). Given that the average turnover of all businesses in Wales is around £100,000, this means that, in the last year alone, a minimum of £300 million has probably been lost to the Welsh economy.

Therefore, Wales seems to be losing ground in terms of entrepreneurial activity to other parts of the UK. This is despite having tens of millions of pounds of additional European Structural Funding available to support new business creation, funding which seems to be having little effect on increasing the number of start-ups, especially in our poorer regions.

For example, the most recent results from the European Structural Funding Programme  show that the number of new businesses being created in the more deprived parts of Wales is well behind target. Instead of 3,439 firms being set up by October 2011, only 1,140 had been established i.e. only a third of the expected output.

Something is clearly going wrong in terms of encouraging greater numbers of new firms in Wales and as I have emphasised many times in this column, I believe this is down to the lack of vision and a comprehensive strategic approach to develop entrepreneurship as the poorest region of the UK.

Of course, it was not always this way and Wales once had the world's first regional enterprise strategy, namely the Entrepreneurship Action Plan for Wales (EAP). Whilst managed by the Welsh Development Agency, it was the private sector, universities and voluntary bodies that led its design and implementation.

And, more importantly, it worked, as the evidence on start-ups clearly shows.

During the period 2002 and 2004, the number of new enterprise births in Wales went up from 8,970 to 11,525, an increase of 28 per cent. In contrast, after the EAP was abolished, the number of  new firms created in Wales fell by 28 per cent between 2004 and 2009, thus reversing the success of the programme, a trend that has sadly continued as the recent statistics have clearly shown.

In fact, if Wales had kept the same level of business creation as at the height of the EAP, then an additional 13,500 new businesses would have been created during the last six years, with considerable impact on employment and prosperity in Wales.

As governments around the World struggle to develop comprehensive strategies to deal with the current economic crisis, Wales already has a tried and tested approach that has already been proven to make a real difference to the economy by releasing the entrepreneurial potential of the Welsh population.

Therefore, policymakers at the Department for Business, Enterprise, Science and Technology could do worse than to dig out an old copy of the Entrepreneurship Action Plan for Wales and study it carefully.

This would not only create an understanding of how to arrest the decline in new business starts, but might also help ensure that our entrepreneurs are again driving forward employment growth and prosperity in the Welsh economy.

TURKEY AND THE DIGITAL ECONOMY

Last week, I was honoured to be speaking at a conference in Istanbul on the future of the digital economy in Turkey.

Attended by around 500 businesspeople, the event brought together speakers from government, academia and industry to discuss how this fast growing sector was having an impact on the economy.

 Unlikely as it seems, Turkey has been one of the rare economic success stories of the last couple of years as the rest of the World emerges from recession.

Led by its charismatic leader, President Recep Tayyip Erdoğan, the country’s relative wealth grown by six per cent in 2011 whilst its neighbours to the west have been in the doldrums. In fact, whilst much of the European Union looks set to fall back into recession next year, the Turkish economy looks set to grow again in 2012, albeit at a rate of three per cent.

There are numerous reasons to explain this growth, such as the fact that the country has a diversified industrial base, a fairly stable political environment and a strong domestic market. Of course, there remain a number of key factors that could be a drag on the Turkish economy if they are not resolved. These include limited access to capital, especially for young people, as well as a lack of an entrepreneurial culture. There are also difficulties in hiring and firing, with Turkey ranking among the most difficult countries in this element of business.

Despite these issues, the digital economy continues to grow in Turkey, and whilst the e-commerce market in 2010 was worth £10.4 billion, it had already hit £6.8 billion in the first six months of 2011. In addition, the twenty largest Turkish e-commerce companies have grown by an average of 60 per cent in the last twelve months.

And investors are beginning to take notice of Turkey as a fast emerging market in this area after years of neglect. For example, online specialists eBay recently acquired 93 percent of Turkey’s largest auction site, GittiGidiyor, in a deal which valued the company at £137 million.

The microchip maker Intel has also made its first investments in Turkey this year, backing a leading online media company Nokta as well as the shopping site Grupanya. In addition to corporate takeovers, venture capitalists and business angels are also taking a closer look at the Turkish economy. Kleiner Perkins, one of Silicon Valley’s major venture capital firms, recently invested £17 million into Trendyol, a large private shopping site whilst social gaming site Peak Games, seen as company to watch by analysts, attracted £8 million from various investors.

So why is this all coming together now?

First of all, Turkey has around 35 million Internet users, ranking the country as twelfth in the World and the fifth largest in Europe, after Germany, UK, Russia and France. In addition, not only do Turks spend more time online than the average European, they are also more interactive when they get online, being the fourth most active in the world on Facebook and the eighth most active on Twitter. In terms of online shopping, the availability of credit and easy logistics are key to the development of one of the fastest growing sectors of the digital economy.

In Turkey, there is 62 per cent credit-card penetration rate among consumers, second only to the UK in Europe, and there is a group of shipping firms is already active that can deliver products anywhere in a radius of more than 350 miles around Istanbul within 24 hours. More importantly, it is expected that the digital economy will continue to develop at a faster rate than many other nations in this country of 73 million people.

Consider the fact that half of Turkey’s population are under the age of twenty eight, ensuring that a digital culture where social media is part of the majority of the population’s everyday lives will become embedded very quickly. It is also worth noting that despite the relative lack of broadband penetration, the use of the social networking has developed at a rapid pace.

With plans for considerable investment in the country’s high-speed communication capability over the next few years, the demand for new products and services will grow even further. With the relentless march of social media affecting everyone’s daily lives, the digital world is changing quickly and who would have thought that a country at the edge of Europe would be seen as being one of the leading advocates in embracing the new opportunities of the future.

Certainly, Turkey will be an economy to watch over the next few years, not only as a political exemplar to those nations emerging from the Jasmine Revolution in the Arab World but also as a place where a major digital revolution is taking place. I can only hope that Welsh business will take advantage of this and develop trade links with a vibrant nation that is making great strides in the development of its economy.

WHERE DO ENTREPRENEURS GET THEIR MONEY?

The latest sketchbook from the Kauffman Foundation, this time on the sources of funding for entrepreneurs from their own funds to venture capitalists.

ISTANBUL NOT CONSTANTINOPLE

Another week, another continent!

However, I am really excited to be here in Turkey for the very first time to speak at the Digital Economy e-commerce summit, to be held over the next couple of days in Istanbul.

There are over 300 delegates at this conference and, given Turkey's economic growth and the fact that it is in the global top ten of internet usage (with 27 million internet users), the event should be one that creates considerable debate as to how this nation develops in the future.

I am particularly looking forward to the speech by David Rowan, editor of Wired magazine, on the ten trends that are going to change the digital economy in the future.

Also, as I am sharing the stage tomorrow with Zafer Çağlayan, the Turkish Minister for the Economy, it will also create an opportunity to see whether we can link in Welsh fast growth firms into this growing economy.

More on this later.