- Centre for Employment Relations, Innovation and Change
This article originally appeared on the Centre for Employment Relations, Innovation and Change website.
The announcement by Rolls Royce that in response to the impact of the COVID crisis, worldwide, 9,000 jobs are to be cut -most at its aerospace centre in Derby- will reverberate beyond the confines of the aerospace industry.
That the company has been in financial difficulties for a while is no secret. In December 2019 the company announced that it was to reduce its intake of apprentices and graduate trainees by almost a third. This continued a five-year trend and takes place within an ongoing programme of contracting its management head count by 5,000. The company has also disclosed that it will experience a £2.4bn cash fall between 2017 and 2023. The crisis in profitability that has beset the company has been exacerbated by serious problems involved in resolving quality issues with its Boeing bound Trent 1000 engines. The aircraft industry is suggesting that 2019 levels of output will take five years to attain.
Further job losses are, therefore, not unlikely and the company has declared there will be a retrenchment in its R&D expenditure. The history of Rolls Royce is one peppered with crises and restructuring (involving nationalisation) and although its share price has dropped 2/3 since mid-February of this year, the demise of the company is not imminent.
The wider impact on the UK’s Industrial Commons
The survival of Rolls Royce is vital to the industrial sectors in which it operates, as well as to the broader UK economy. Clearly one company does not make an economy. Nevertheless, the nature of the jobs that will be lost at Rolls Royce, the contraction of trainees and diminution of R&D effort have significance beyond their headline metrics. Engineering UK, the sector employers organisation, estimates that leading up to 2024, there will be a shortfall in satisfying demand of between 37,000 and 59,000 core engineering roles requiring level 3+ skills. Reducing the demand for engineering graduates and trainees through the contraction of engineering firms might be one solution to the problem of excess demand across the wider occupational labour market. This though, is surely a recipe for a general downward spiral in skills, R&D and innovation and culture for a low skill equilibrium.
Taken together, the R&D, engineering, manufacturing capabilities and supplier infrastructure of an economy has been referred to by Pisano and Shih, as a nation’s ‘Industrial Commons’. Crucially, the health of the Commons depends on a strong and vibrant manufacturing sector, particularly the component of this sector that is associated with high skill, high value output. That is, firms such as Rolls Royce. Pisano and Shih use the example of the declining international competitiveness of the USA to argue that if this Commons is allowed to wither on the vine, the ability of an economy to innovate and create high tech, high value added products will decline, ultimately depressing wage growth and undermining the health of the wider economy. Furthermore, the ability of innovation to ‘spawn new industries’, will be undermined.
Industrial Commons are often connected to sources of high-level knowledge such as universities, which ensures a vital, symbiotic generation of basic, applied and commercial research. Commons are also often geographically defined. For example, a feature of the aerospace industry in the UK is that 90% of aerospace jobs are outside the South East, providing a valuable dynamic for a balanced economy. The economic and social multipliers of the aerospace industry are significant. The industry has an annual turnover of £31B. It supports 12,800 direct and 14,000 indirect jobs with average earnings of £43,000, 45% higher than the UK average. Through its supply chain programmes, 330 companies have been helped to ‘boost their competitiveness to world-class levels’.
The focus of concern here is that the retrenchment of a firm such as Rolls Royce rarefies the Industrial Commons that it supports and by which it is – in turn - supported. Pisano and Shih argue that manufacturing is essential for the development of new products: it connects product and process innovation. In contrast, the decline of manufacturing invokes a negative ‘chain reaction’ in which the infrastructure for advanced process engineering and the attendant expertise and jobs are diminished. The high-value up and down stream supply chains that network around firms such as Rolls Royce will be lost or offshored.
Whither the future?
It is not possible for governments to support every company. Governments can, though, act to shape the nature of their economies. UK high-value manufacturing and the Foundation Industries that underpin it, must, however, be supported. UK manufacturing accounts for around 10% of GDP value added. This is an ever-diminishing proportion of the economy and well behind Japan and Germany’s 20% of GDP value added. It should not be allowed to fall further. In 2017 the UK spent around 1.7% of its GDP on R&D. The ambition of the UK government is for this to reach 2.4% by 2027. Assuming other countries do not also raise their games, this will raise the UK from 21st to 12th in the international league table of R&D spending. The government needs to be more ambitious.
Through its Industrial Strategy, (explicitly connected to addressing investment in R&D), the UK government appears to have understood the challenges faced by UK Inc. and specifically, through the Aerospace Sector Deal, companies such as Rolls Royce. This strategy though, must be implemented with great determination, emphasise the local dimension and crucially, it must endure.
In the here and now, the COVID crisis poses a clear and present danger to the economies of all industrialised nations. Through its announcement of, ‘Project Birch’ to rescue industries badly affected by the COVID crisis, whose demise might ‘disproportionately’ affect the economy, the UK government appears to have recognised this. The call by some in the UK trade union movement for a National Council for Recovery, that would represent a range of stakeholders, seems a sensible, indeed essential, step that must ultimately reflect a broader engagement with manufacturing, hence the future of the UK economy.
The views expressed in this article are those of the author and may not reflect the views of Leeds University Business School or the University of Leeds.