It’s more than bringing back the WDA

Rhys David argues that the Welsh Affairs Select Committee inward investment report fails to understand the lessons of post-war industrial and economic history

Rhys David is a trustee of the IWA. He writes on business and economic matters.

If Scotland does gain independence it will not be without a portfolio of its own foreign investments – in Wales at any rate. Catch a bus in Swansea or any number of other towns in Wales and you will be patronising the Aberdeen-based First Group, which we also have to thank for our rail connections with London and the south and west of England. Or you may live in an area served by Stagecoach, the Perth bus company and long distance Megabus London-Cardiff coach operator.

Turn up the gas or switch on the electricity and if you live in southern Wales you are likely to be adding to the profits of Scottish and Southern Energy. This acquired Swalec from its previous Welsh owners in 2000 after denationalisation of the electricity and gas supply industries in the 1980s. In northern Wales as a probable Manweb customer, it will be Scottish Power that provides you with your heat and light and repairs the electricity cables in bad weather. When you remember Bank of Wales becoming part of the Bank of Scotland, you might almost imagine the Marquesses of Bute had never left Cardiff.

The latest saltire saviour is Edinburgh Woollen Mill, already well known in Wales as the owner of the eponymous stores and of five Craftcentre Cymru shops in main Welsh tourist locations, “bringing you” according to the company’s website  “a genuine flavour of Wales, a wide selection of clothing for all occasions and the perfect place to browse through a beautiful selection of authentic Welsh gifts and souvenirs second to none”. Since last week Edinburgh Woollen Mill is now also the owner of the only significant UK-wide non-food retailer based in Wales, Peacocks, which crashed after loading itself with too much debt.

Of course, it is good news that the Scots are taking over Peacocks and saving the jobs of thousands of shop workers across the UK as well as hundreds more in administrative and distribution centres in Wales. However, it is probably not exactly the sort of inward investment that the House of Commons Welsh Affairs Select Committee was thinking about when on the very same day it produced its own report on the topic.

Its concern was not with companies buying Welsh businesses – which seems to happen all too often – but with the dearth of new projects that has followed, the incorporation into the Welsh Government of the Welsh Development Agency, whether this has been directly as a consequence or not. What was seen six years ago as a nation-warming bonfire of the quangos has subsequently come to be regarded by many as an irresponsible act of arson. Indeed, the Committee’s report Inward Investment in Wales, points out that the Welsh share of the UK’s inward investment has declined from an improbably high 15 per cent in the 1990s WDA era to less than 5 per cent in 2009.

There are some interesting insights and observations in the report by the committee which, as well as taking written and oral evidence, made visits to Wales, Belgium and Germany. The need for a new rail loading gauge so that freight trains entering and leaving Wales could carry larger containers has not previously been widely known and sounds like a cause that should be supported.

More emphasis in schools on the importance of business and industry is sensible, as too is closer engagement between universities and firms big and small. Weaknesses in the promotion of Wales abroad as an investment location also need to be corrected as a matter of urgency. The tentative proposals the report puts forward for creating a successor body to the Welsh Development Agency need to be looked at seriously by the Minister for Business, Edwina Hart.

Interestingly, the report hints at a possible private sector approach to the problem of the reduced visibility of Wales since the WDA’s abolition. It draws attention – but not very prominently – to the observation by the chief executive of UK Trade and Investment that his organisation had signed “an incentivised private sector delivery contract with PA Consulting.” As he told the Committee, “Such a relationship with a company that was results-based, with target outcomes, improved the quality of UKTI’s performance”. Seemingly picking up on this, the report notes:

“We repeat our call for the establishment of a dedicated trade promotion agency either sitting within the Welsh Government or as a private sector vehicle working in collaboration” [my italics].

It sounds like a possible way ahead for Welsh inward investment and overseas promotion – if our politicians have the courage to pursue it. Yet for all the mainly sensible recommendations of the report, the analysis is somewhat shallow, ignoring or failing to understand the lessons of much of Welsh post-war industrial and economic history. Like so many similar reports it starts with the assumption that in reacting to the decline of its heavy industries Wales needs to go beyond the low wage industries brought in to replace them. We need to “skill up” in our schools and universities so that we can book a passage into a “knowledge industry” future with the co-operation of willing overseas investors. If only it were that simple.

Wales has been sloughing off its heavy industrial skin since the 1930s and has long had a much more diversified economy than analyses of this sort allow. Over the years it has also replaced much of its former mineral-based activity with sophisticated capital intensive and high technology industry, the knowledge industry sectors of their day. After all one could hardly call Bosch, Sony, Panasonic, Alcoa, Warner Lambert, Johnson and Johnson – all among the 171 foreign-owned sites in Wales that closed or scaled back between 1998 and 2008 – low technology businesses.

Nor was foreign direct manufacturing investment in the quarter century from 1970s onwards establishing a completely new phenomenon. The big companies that arrived in that period were merely succeeding the British based manufacturing companies that invested in Wales in the 1940s, 1950s and 1960s – ICI, Courtaulds, British Motor Corporation, Rover, BP, and the British Aircraft Corporation, to mention just a few of the bigger entities.

Many of these companies disappeared, downsized, or were taken over by other companies often from outside the UK before the big wave of overseas investment. A very important question for Wales is why these and the later overseas investors have not just left but gone without trace. For reasons that are not entirely clear, there appears to be only a very limited propensity in Wales for management to carry on businesses that decide to call it a day, either acquiring assets no longer being utilised or starting up new enterprises – a prospect one might have expected to happen at least with some of the smaller closures.

Nor are there groups of Welsh business people who will come forward to secure the future of potentially valuable businesses so that time and again a rescue has to be sought from outside. Yet one of the hoped-for side-effects of inward investment, whether from the rest of the UK or further afield, was meant to be skills and technology transfer to Welsh individuals and businesses which could then establish indigenous operations.

It is equally unclear why businesses are reluctant to find new products to succeed those for which a market no longer exists and choose almost invariably to pack their bags. The Select Committee report makes the assertion that Wales attracted a number of end-of-life-cycle projects in the heyday of overseas investment. Glass television and PC screens undoubtedly became obsolete after flat screen technology arrived, as too did conventional television manufacture but was there nothing else to fill these factories?

Having invested so much in Wales why did Nippon Electric Glass simply decide to walk away from its Cardiff operation of little more than 10 years. Surely there must be other reasons apart from low labour costs why companies – including more recently Bosch – do not choose to use management, logistics and other support facilities already in place?

The Welsh Government is reminded in the report that Wales operates in a competitive global environment and must “market Wales on the international stage more vigorously and must develop a clear narrative about the benefits of Wales that can be promoted to overseas markets.”  The abolition of the WDA and the “complete disarray” in selling efforts cited by one of the witnesses before the Committee take most of the heavy lifting for the fall-off in FDI but again can this be the whole story?

Wales gets more than its fair share of international news coverage, not least as a result of the exploits of its rugby team, and it also had the boost from the Ryder Cup. Have these not provided any countervailing force over recent years, giving Wales a better shout than, say, Yorkshire when potential investors look at where to settle? Is no one being encouraged by this exposure to come and have a look at what at any rate on the surface must appear a lively place?

Perhaps it is the case that we set too great a store by our environmental, cultural and historical assets, allowing these to become a handy comfort blanket when they mean little to hard-nosed investors, more interested in for example skill levels. Are there drawbacks to investing in Wales which these are just not outweighing and if so what are they? Do we need to research this topic more fully? These are areas that the Committee’s report fails to address.

There are other gaps in the report, such as for example any discussion on re-shoring, the process whereby big companies are beginning to look at bringing back operations taken offshore to low-cost locations. US companies in particular have begun to find there are hidden costs in setting up plants many thousands of miles away and have started to move operations back. The same is likely to occur within Europe. Can Wales perhaps recover some of the first mover advantage it seems to have had in the 1990s by going hard for this type of overseas investment?

However, the saddest omission appears not to be the committee’s fault. After all, it could only talk to those who showed an interest in its work. Though one of its professors acted as an adviser, Cardiff University left it to Swansea (and Glyndŵr) to offer evidence on links between universities and business. This was despite the fact that Cardiff receives the largest amount of research funding of any of the Welsh universities and has highly important interests in bioscience, a field in which Wales hopes to specialise. Surely Cardiff University should have had something to say?

But let us return to Peacocks. Relief at the number of jobs that will be saved has to be tempered with concern that the acquisition of one of the few headquarters companies based in Wales will result in high quality jobs being lost. This was a sort of win-lose investment from outside Wales. Whatever medium term guarantees now being given about the future of headquarters operations for the chain in Wales, down the line it is not difficult to see some of the more important headquarters functions, including financial management, fashion market analysis, sourcing of supplies and human resources transferring to Langholm in the Scottish borders, where Edinburgh Woollen Mill is based, or possibly to London.

The company already owns another fashion chain, Jane Norman, and will presumably be looking to secure some economies of scale across its fashion operations. The Welsh Government will need to act skilfully to ensure Wales remains long term at the centre of the scaled-back Peacock operation and perhaps even attracts other parts of the Edinburgh Woollen Mill operation.

It emphasises the point made in the Select Committee report that indigenous growth and inward investment strategies need to be run in tandem – and both improved upon. Wales needs to attract more companies willing to move operations to Wales and willing to invest in Welsh businesses such as Peacock. It also needs to be regularly growing scores of Peacock businesses of the future and rooting them firmly in Welsh soil.

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