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September 11, 2012

How to read Vince Cable's big speech on industrial strategy at Imperial College

The longer growth remains elusive, the greater the pressure on the government to make us believe that they know how to get things going again. Critical to that job of persuasion is credibility in hi-tech. As Vince Cable delivers what has been billed as a major speech on growth, here's how the key players currently stand:

Vince Cable - From his letter to David Cameron, leaked in February, we know he favours a strong industrial policy.

David Willetts - In two long and thoughtful speeches this year, he has slaughtered the Conservative Party's scared cow of "no picking winners" and set out a moderately right-wing case for what he calls an "industrial strategy" and which the rest of us would - on the evidence so far - call a "technology strategy".

George Osborne - No sign yet that he intends to try to make good on his pre-election promises of rebalancing the economy between sectors. But when he surfaces to make a speech, he often drops a hundred million or so on science. Just don't mention the cuts.

David Cameron - Still wedded to wildly overblown rhetoric undermined by the paucity of hi-tech action emerging from Number 10. But there's still the 4G spectrum auction to come...

Join me as a I discover whether, six months after that letter, Cable has managed to wring any hi-tech progress out of his Coalition "colleagues". 

***

11 September 2012 00:01

Department for Business, Innovation and Skills

Department for Business, Innovation and Skills

Industrial Strategy speech given by Vince Cable, Imperial College, London, 11 September 2012

Check against delivery, they used to say...

I think "industrial strategy" is an important bit of phrasing. Willetts has been using it. I suspect this is partly because the term the rest of the world uses for this discussion - "industrial policy" - feels too Tony Bennish to much of the Conservative Party. But it also means that the policies that emerge don't actually have to comply with what economists would think of as a proper industrial policy. While at the same time, the distinction is so slight at the linguistic level that enthusiasts for casual for a real industrial policy might miss it altogether. Very adroit.  

Two days ago we bid farewell to the Paralympics which brought the curtain down on a great summer for Britain. There are lots of explanations for this success story. Let me add mine.

This year we have had a unique opportunity to showcase the very best this country has to offer – creative talent, sporting prowess, our ability to organise and stage a major global event – and we have exceeded all expectations.

Our athletes achieved what they did because of their years of commitment and planning. They committed to countless hours of training, continuous rigorous competition, a ceaseless search for small improvements – all in pursuit of Olympic glory, even though it lay years away.



I was initially a sceptic but, the Games themselves have delivered an outstanding result for the UK because of years of planning and investment in pursuit of a clear and ambitious vision.

I think there is a read across to the way we approach our economic future. We need to take the same approach: a clear, ambitious vision; the courage to take decisions that bear fruit decades later; openness to new opportunities as they develop; focus on the things we do best; and an enduring commitment far beyond the normal parliamentary timescale.

I think this is all quite important. Run an empire? The culture in Westminster has deteriorated so badly in recent decades, the art of politics trumping the art of governing, that the government can seem incapable of almost anything. The Olympics has shifted the goalposts.

For example: how do we respond to the long-term challenge of major structural changes in the global economy – the rise of the East, the aging of the West, environmental sustainability.

Some will always say the best thing – the only thing – the Government can do is get out of the way, laissez-faire. This ignores not just the recent success of the Olympics, but the successful experiences of countries as diverse as Finland and Germany. Indeed, so many other countries who have successfully shaped their economic future, including countries like the USA where the rhetoric of markets often obscures the reality of long term planning and good organisation.

Like Willetts, Cable deploys the US example of indutrial policy as a shield against right-wing critics.

I have made it clear how much I disagree.

The Government shapes the British economy with its decisions every day.

Through its spending on skills and universities, on research, on technologies, and on infrastructure. Through what it buys, and how it goes about buying it, the regulations it sets, the markets it oversees, and tax policy. Through the support it offers to businesses to export and to invest here in the UK.

Ignoring this reality is not a policy – it is just negligence.

Indeed it is. Negligence watched over by the Treasury for 30 years.

But just as bad would be to approach all our possible interventions in an ad hoc way, subjecting every policy decision to a short term tactical decision. There is not a serious and successful major company in the world that would proceed in such an unplanned way.

A popular mantra is that government should be more like business. In many respects it should. Good businesses make plans, have clear strategies, and through this make tough choices about where to put their resources.



I know – I spent years at Shell helping them to plan for a diverse range of energy scenarios. My colleagues preparing 30 year projects for development or refining , could not simply say “let’s see what the market does” – their job was to be ahead of the market and where possible, shaping it.



By contrast a combination of businesses that needs long term certainty, with a government that refuses to make and stick to long term plans, leads to economic weakness and instability.

It is what having an industrial strategy is meant to deal with and why it is so important. There are two basic propositions. The first is that it necessary to plan for the long term. The second is that the government can and must work together to deal with genuine market failures, where the benefits of education or the costs of environmental damage – for example – are underestimated by markets.

These "two basic propositions" are a bit abstract and remote. They make me worry that Vince hasn't really got anywhere since February. Surely he'd be more concrete if the government was actually planning to change direction a bit?

Industrial Strategy



None of this detracts from the need to create an environment in which entrepreneurs find it easy to start and grow a business or from the need to pursue demand management policies which stimulate growth and maintain financial stability. But a government that fully delivers on this approach, I have described would nevertheless mark a break from the past.

Well, an industrial strategy/policy would indeed mark a break with the past. But I'm not sure yet whether Vince is actually going to describe such a thing here.

The truth is that, Britain has for a long while been regarded as an outlier in how purist we are about taking a proactive approach to our economy. ‘Naïve’ is the word I often hear from business about the traditional consensus.

Yes.

So a co-ordinated industrial strategy will not be a quick fix. Nor is it risk-free – by its nature, it cannot be. A good industrial strategy allows for failures, and recognises that innovation may strike in an unpredictable place – we must be ready for that too. But as the credit crunch showed there are huge risks to taking a complacent, hands off approach. And as our thriving automotive and aerospace sector show I strongly believe the potential rewards are substantial.

We have identified several fronts on which government action can have a real and early impact. These are: access to finance partnerships with sectors; support for emerging technologies; creating a pipeline of skilled workers; and finally government procurement and the development of supply chains. I want to focus on each of these in turn.

OK. That is more concrete. Somewhere off, that word "pipeline" is making me wonder - surely he doesn't mean manpower planning? And although I agree it is potentially really, really important, the word “procurement” just makes my heart sink. I’ve spent 20 years writing about ministers who promise to use government procurement to stimulate hi-tech sectors, and nothing has ever come of it. 

Business bank


The first area where Government will be taking urgent action to secure our long term industrial success is in the approach to access to finance. We are living with the aftermath of a disastrous banking collapse. Big firms, by and large, are able to raise short and long term finance via capital and equity markets. Many successful smaller companies finance themselves through cash flow. Others bravely launch businesses financed, as the wags put it, by ‘friends, families and fools’.

Er, I don't think calling Business Angels "fools" is very helpful. 

But many businesses face real issues in raising finance. The latest SME Finance Monitor shows that in the last 12 months, 33% of businesses who applied for a loan were rejected. The big banks including the semi state owned banks are preoccupied with repairing damaged balance sheets. So we need more competition and more diversity of supply.

There is also a real shortage of long-term, patient capital for businesses.

Try and secure a loan for more than 5 years or venture capital, and options are very limited, especially for innovative, high growth potential firms.

We are acting to tackle these issues. Launching the Funding for Lending scheme which lowers the cost of funding for banks that increase their lending. Running schemes such as the Enterprise Capital Funds and the Enterprise Finance Guarantee to help early stage businesses, without a track record or collateral, to access venture capital finance or bank finance. And stimulating the development of non-bank finance sources through the £1.2bn Business Finance Partnership.

The big banks have launched the £2.5bn Business Growth Fund providing equity.

But it’s essential we increase diversity in the supply of finance and institutions which provide a coherent relationship banking service to viable growing businesses. This is why we are working on setting up a government-backed institution.

In the UK such a bank could operate through alternative providers such as the new challenger banks like Handelsbanken, The Co-Op and Aldermore and non-bank lenders boosting their lending capacity as well as corralling existing provision such as co-investment and guarantees to support business expansion.



We are currently establishing the scale and modus operandi of such a body. The measure of the institution’s success will not be the scale of its own direct interventions, but how far it shakes up the market in business finance and helps to ease constraints for high-growth firms. As such, it will play an important role in supporting our industrial policy including existing innovations like the Green Investment Bank.

This sounds more like a "mechanism" than actually a "bank". The fact that I am starting to feel as though I am wading through a swamp of elision and obscure distinctions suggests there is not going to be much in the way of government action in this speech. But what does seem clear from the caveat about "the scale of its own direct interventions" is that the Treasury has not agreed to sanction much money going into this scheme. Given that the Treasury has pumped tens or even hundreds of billions into the established, failing banks, that is really quite a disappointment.   

Sectors



The second strand of our industrial strategy is to build a collaborative strategic partnership with key sectors. The examples I often give are aerospace, automotives, and life sciences, but the list runs far longer, and could stretch from our existing strengths in creative industries and professional and business services to our early lead in the rapidly changing electronics systems sector.

These committees are necessary. You can hardly make a sectoral strategy without involving the sector. But they are not sufficient. A strategy does not consist of talking. 

On a global scale there is fierce competition – between companies and countries. We are committed to compete while being an open economy. We are not economic nationalists and welcome foreign investment. Protectionism isn’t part of our vision of an industrial strategy.



To revert to the Olympics analogy, the task is to compete on the global arena – not design some domestic game we hope we can win alone.

Different industrial sectors require varying degrees of government support and collaboration. At one end of the spectrum, much of the economy does indeed flourish on its own. Here our efforts are best placed on making UK a good place to do business, with attractive policies on taxation, regulation, free and efficient markets.

At the other end are sectors that require a long-term, strategic partnership with government.

The Automotive Council and Aerospace Leaders Group are models of what I have in mind.

In both cases the case for intervention and partnership is clear cut and demonstrated Aerospace demands very long time horizons and there are literally trillions of pounds worth of orders for civil aircraft alone over the next 20 years or so. Britain will not get a decent share of there orders and maintain its status as having the world’s second largest industry without sustained investments in R&D. And, of course, this is an industry where government and business have long been intertwined.

Well yes, but that undermines the point Cable is making. Support for civil aerospace product development continued on a large scale unabated even under Margaret Thatcher. It has always been the exception to the rule. It is no evidence that this bunch of ministers is doing anything different.

Automobiles is another, perhaps surprising success story with £6bn of investment committed on the last two years, for the first time in decades a trade surplus. This is down to our companies – mainly foreign investors- but they make it clear that they value government as a partner supporting, low carbon vehicle development, for example research in intelligent mobility and support for building up supply chains.

I'd like to know more about all that.

Today my Department is publishing a new analysis of UK sectors, which sets out those areas where government support will be focused. All sectors which invest over a long time scale, demand a constant flow of new knowledge, skilled engineers and scientists, and often have an intimate relationship with government regulation.

Interesting.

The focus is firstly on advanced manufacturing, as with aerospace, automotive and life sciences. The second is knowledge-intensive services which now account for over 12% of GDP and 14% of exports like higher education, creative industries and professional business services. A third group are industries – the information economy, construction, energy, including green energy – which provide key inputs to our internationally traded activities.

I keep looking at that list and I can't see much that's wrong with it. It's sort of obvious, as it has to be, but also quite distinctively British. The financial sector is missing, or does maybe "professional business services" actually include insurance? Clearly the creative industries do not rely on a constant flow of scientists and engineers, but I'm carping.

These specific areas offer significant growth opportunities for the UK economy, benefiting from the long term trends like globalisation.



To give clarity to this approach we will develop and deliver a number of partnership sector strategies in the coming year. The aerospace sector is already well advanced, and a strategy for automotives will follow.



Early next year we will also deliver strategies for the non-health life sciences, including looking at agri-tech to build on our strengths in food and drink sector – as well as for nuclear; renewables; and oil and gas industries.

These will be followed by plans for the information economy building on the success of TechCity, and education exports by the spring; and construction and professional business services by next summer. We will also publish a progress report on implementation of our life sciences programme one year on.



We will keep an open mind – ready to respond as new sectors develop and new opportunities emerge. This is a plan for the long term and we must learn from success and from failure, and evolve our strategy.

OK. Well to say it again. It's all very nice having ministers talking to companies and writing stuff down. But if the government does not come up with new money, then there are not actually going to be many new jobs.

Technologies



One of the most powerful levers at our disposal is the potential of innovative technologies.



Supporting the emerging industries of the future requires us to address some of the market failures involved, especially during the development phase, and to ensure there is a pipeline of skilled people to work in them. Ground-breaking technologies are often too risky or resource intensive for individual companies to nurture on their own so government has an important role to play in accelerating the journey from pure academic research to its commercial applications.

For example, we need to think in new ways about how to harness Britain’s technological comparative advantage in algorithms, which we see in cryptography at GCHQ, private sector IT research and even financial engineering in the City.

And again. The government already spends billions on the R bit. But the D bit of R&D is massively more expensive. You cannot credibly promise more government support for development, as Vince does here, without pulling into view a truck loaded with cash.

Worse, Vince isn't even acknowledging the problem and so the whole speech starts to look shallow. But we know that in fact Vince isn’t shallow on this. His February letter proved that. So why can’t he bring himself to deal with the awkward spending issues? Answer: Because he doesn’t want, or doesn’t know how, to deal with the fact that Osborne and Cameron don’t agree with him and won’t loosen the purse strings.

The Government Office for Science is updating its Foresight report on Technology and Innovation Futures, taking a fresh look at technologies with the potential to support sustained economic growth in the UK over the next 20 years. The report has identified a number of technologies – from synthetic biology to graphene, intelligent sensor networks to service robotics – which can have a material effect on future growth rates.

This we already knew. It's important because it allows the Coalition to sign up to a vision that was not created by Gordon Brown.

The Technology Strategy Board is now concentrating on supporting these nascent disruptive technologies with the potential to grow into new industries in ten years. As it becomes clear what will be the new disruptive technology, we will be ready to adapt our strategy to reflect the new world.



Already, 70% of the companies backed by the TSB are start-ups or small firms, and that will continue as the new research programmes take shape.



So far, the TSB has identified three areas with significant economic potential for the UK. We have already announced a competition for synthetic biology, launching on October 8, to win a share of £6.5m funding. I can confirm today that two further competitions will launch on October 8, offering a share of £1.25m for energy efficient computing, and £1m for energy harvesting for autonomous sensing, developing the technology to underpin the intelligent sensor networks highlighted in the Foresight report.

These are good. But just look how little money is involved.

I can also announce today that the TSB - along with our research councils and others - will establish an Innovation and Knowledge Centre in Synthetic Biology.

Ditto.

The TSB’s work reinforces the government’s decision to invest over £200m to set up the Catapult centres, a national network of elite technology and innovation centres. These centres will support the development of core technologies in disciplines such as high value manufacturing and cell therapy; offshore renewable energies and satellite applications.

Other investments we have made include £60m to create a new UK Aerodynamics centre; £50 million of new investment to support the commercialisation of graphene; £145 million to invest in high performance computing to fund software, data storage and wide bandwidth networks; and £180 million in an Integrated Translation Programme to support the commercialisation of innovations in the life sciences sector.



I want to ensure that such investment represents not just burst of ministerial enthusiasm but commitments over future parliaments and spending reviews. Key to this will be expanding the role of the TSB as resources allow.




Another very welcome name check for the TSB. But the way in which it has displaced the research councils in ministerial speeches should be disturbing RCUK.

 Skills



We also need a long term commitment to world-class skills.

The Government has – rightly – focused on apprenticeships. We have made significant progress. We have seen a 63% increase in the numbers of apprenticeships in 2010/11, and nearly 400,000 new starts in the first three quarters of 2011/12. But, we cannot rest on our laurels and Doug Richard will report in next month with ideas on how we can get even more value from apprenticeships.



I agree we need a more highly skilled workforce everywhere. So in principle, I’ve nothing against apprenticeships even as I remember that they are massively cheaper than higher education and hence a convenient way of mopping up unemployed youth. But I worry that much of the training lacks quality and in the end I don’t think apprenticeships can solve the low skills problem. The way to get French or German standards of plumbing in the UK is to do what they do – make plumbing a restricted profession. Good plumbers in the UK are constantly undermined by cowboys – cowboys that are not tolerated on the Continent.

At the heart of our strategic thinking is the need to give employers more direct control of how the Government funding on vocational skills is spent. Clearly, they know better than anyone the long term skills needs of their workforce.



We have therefore launched an Employer Ownership Pilot scheme, which is giving businesses access to £250m funding for vocational training. Employers, working together in sectors or with supply chains, have put together a wide range of innovative proposals to design and develop their own training programmes.



I can announce today that 34 bids have been successful under round one of the scheme, securing £67m in public funding and, importantly, generating £98m in private investment.



In total the successful bids are expected to support nearly 11,000 new apprenticeships, including 4,400 for 16 to 18 year olds, and 27,000 vocational courses such as NVQs. In addition, the successful bids will offer some 49,000 training opportunities such as work experience placements.



I can confirm today that we will be launching round two of the scheme, to potentially allocate the rest of the £250m budget, in the autumn. The second round will test in more depth the value of employer ownership in terms of boosting productivity and growth.

Some of the best bids came from many of the sectors I have mentioned – such as construction, advanced manufacturing and automotive.



One of the biggest long term challenges will be the supply of engineers. We are chronically short at present. I take encouragement from the fact that this year’s applications to university have engineering as the subject most in demand. But we need much much more.



Well, you know, why not do something about it then? The government provides huge subsidies for HE. If it says “train more engineers”, it has the levers to make sure universities do precisely that.

The decision – announced in the aerospace strategy - to fund jointly with industry 500 Masters Degree places in aerospace engineering between 2013 and 2016 is an example of how we will have to work together to dismantle the barriers to growth arising from skills shortages in the priority sectors.

That all sounds useful. And, thankfully, nothing like manpower planning.

Procurement



Why does nothing ever come of ministerial promises on procurement? Because the Treasury never lets go of the narrow value-for-money criterion. And Whitehall lacks what Cable earlier called the Olympic spirit, the talent, the vision and the will to do anything other than snatch what looks like the cheapest bid. Please Vince, show me I’m wrong to be so cynical.

But we understand, too, that government has a responsibility to take seriously the role that public procurement plays in creating business confidence to take long-term investment decisions.



Procurement regime rules are set at European level. To maximise the benefits from a single procurement market across Europe, we are pressing for some changes in it. But there is a constraint on our freedom of action outside the defence sector. There and elsewhere, value for money is also a key concern. Nonetheless, there is scope for using public sector spending to shape markets and influence supply chains.

That is why we are overhauling the way the government procures services, to give businesses, particularly SMEs, greater clarity. In April we published £70bn of future government contracts, planned in 13 sectors, over the next five years. For example, I held a roundtable with the rail sector earlier this year – an area where we are making substantial investments.



We are also assessing what the 13 pipelines tell us about the strategic capabilities required in the future. For example, the information on the construction and infrastructure pipeline was used to identify a demand for tunnelling capability. Consequently, Crossrail has launched a tunnelling academy to boost workforce skills in this area: an approach that could be replicated in other sectors. We are collaborating with industry to identify other capabilities - an early candidate that has emerged is high voltage cabling, and work is ongoing to seek out others.



Clearly we need to strike a balance between buying strategically with an eye on long-term capability and saving money in the short run by going for the cheapest off-the-shelf options. Either way, government can and should be a responsible customer, developing a considered, long-term relationship with our supply chain, and that is what we intend to do.




All too vague for me, I’m afraid. I don’t see anything changing here.

Conclusion



So these are the contours of the Industrial Strategy that we will work with industry to round out in the months ahead – a new approach, but one based on sound principles.

A spectrum of systematic support for sectors; clear choices and backing for core emerging technologies; continued efforts to boost skills; and extracting the maximum value from the government’s position as a market-shaping customer. It will be backed by strategic deals with business and a cast-iron commitment, right across Whitehall, to identifying and dismantling the barriers to growth.



Woooah. “Strategic deals with business” – it may just be a slip of the pen but that sounds positively Mandelsonian, and expensive, and - despite all the committees - ad hoc.

These are the building blocks of the pragmatic, sophisticated industrial strategy that will generate the confidence needed for businesses to invest for the long-term.

***

Conclusion

That final para rounds up some genuinely important themes, but overall this speech doesn't really outline an industrial strategy because the oomph of government commitment is missing. Most obviously this is in the area of spending, but it's other things too. Theres no mention, for example, of market regulation. The UK legislation aims to promote competition and consumer choice - not stimulate new world-beating industries. 

The contrast between this lack of commitment to the UK's knowledge infrastructure and the real efforts (such as sacking an awkward Transport Secretary) being made by the government on physical infrastructure are striking (as I told the Today programme this morning). 

With regards to spending, health, defence and other forms of consumption – as well as the banks of course - have been protected by the government. Investment in the future has been cut, through the research councils and the now defunct Regional Development Agencies. That remains the bottom line on the government’s priorities. I like Vince's emphasis on stability, but sticking with the cuts made in hi-tech spending means there is almost nothing there to stabilise. And remember, the budget of the TSB on which so much ministerial rhetoric now rests, is tiny compared to the support for technology development in France or Germany.

To look at this pessimistically, we could say it’s been more than two years now. The Coalition has had plenty of time to sort out where it stands on hi-tech growth and not much is yet really happening. The sale of the 4G spectrum is starting to look like the last chance saloon for this lot.

More optimistically, we could say that the kind of  networking, thinking, strategising discussions that are starting to go on are an essential pre-requisite for a genuine industrial strategy. The job David Willetts has taken on in trying to change Conservative thinking in this area is mammoth, so perhaps we should not be surprised that progress is slow. And if the Cameron and Osborne do at some point in the future opt in, then at least we're in a better position then to spend our money wisely. 

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