The importance of foreign investment to the UK: How the chemical industry supports economic growth

The chemical and pharmaceutical sector sits securely at the heart of advanced manufacturing with a greater spend on Research and Development than the automotive and aerospace sectors combined. Over a fifth of our Country’s total manufacturing R&D investment is spent in our sector. We are a crucial supplier to automotive, aerospace and other industries, without us the planes don’t fly, the cars don’t run and the food is not supplied. And net zero will not be delivered unless there is a chemical industry in the UK.

Businesses who make chemical products and solutions are integral to around 96% of all manufactured goods. Whether it is ingredients for food and medicines; paints and coatings for cars and planes or materials for mobile phones and electric vehicle batteries, the chemical industry is truly the “industry of industries” – also playing a critical role in the nation’s response to Covid-19 through its supply of hand sanitiser, PPE and vaccine ingredients.

Chemical businesses are located throughout the UK, with many of them clustered together in the North East of England, North West of England and Central Scotland. These factories and laboratories, operated by a highly trained and skilled workforce, make a significant contribution towards the UK’s productivity performance.

One hundred and fifty thousand people are employed in the sector and nearly half a million have roles that are dependent on the sector. Chemical workers typically earn around 25.4% more than other manufacturing industries and almost 37% more than the average worker.

We are one of the country’s biggest manufacturing exporters, sending goods to the value of more than £60 billion to overseas markets. The EU represents our most important market, but we continue to work closely with Government to inform and secure UK trade deals with other key chemical markets such as those in Asia and the USA.
The chemical industry is truly global and it’s helpful to acknowledge that all leading economies rely on a strong domestic chemical industry to deliver innovation and growth, Covid-19 reminded us that truly critical supply chains need to be on-shore or very close by. The UK is fully integrated in the European chemical industry which remains a world leader and highly innovative. We acknowledge that with 90% of GDP growth taking place outside Europe in the coming decades, the challenge is to stay competitive. Over the last 20 years European sales as a percentage of global sales have declined from 27% to 15%, although the value of sales has increased to record levels, exceeding €760 billion in 2021. The decline in European market share has coincided with the growth of chemical production in China whose sales are 3X that of Europe and 4X the sales from US manufacturers.

As a global industry it is not surprising that capital is incredibly mobile and investment decisions are made after consideration of a number of factors. Multi-National Companies do review corporate tax rates but they are often not the primary factor on where to locate a facility. Companies accept that tax rates are subject to change and ultimately if the broader market conditions are not supportive then taxation of profits is a rather distant goal. That being true it is also true that the Government’s decision to increase headline Corporate Tax rates from 19% to 25% was not seen as a business friendly decision.

One area the UK has recently done better is investment incentives, spearheaded by the Super-Deduction. The successor to the super deduction which allows full expensing in year one for qualifying capital investment, although less generous, remains generous by international standards. Since the new scheme is going to be in place for just three years this will inevitably create a level of uncertainty over future investment aids coupled with multi-year investment decisions which could potentially result in the scheme not being as beneficial to business as it could be. We would like the scheme extended or with greater flexibility to ensure all spend is captured.

Other key factors in determining an investment location include but not restricted to:

1. A long term and stable policy environment

2. Infrastructure

3. Proximity to market

4. Availability of a skilled workforce.

The importance of a stable policy environment is largely to do with establishing the competitiveness of the UK. We have recently seen new and significant chemical investments into the US due to inducements available under the Inflation Reduction Act and into the EU under the European Green Deal which was approved in 2020. Both the US and EU have seen new investment into hydrogen production. The UK Government should take key policy decisions to kickstart investment in hydrogen and lay out how it plans to have 10GW of hydrogen production capacity by 2030. Clarity and clear commitment will benefit existing practitioners and encourage new investment from those in the critical supply chains.

Other policy decisions that would clarify the operating environment for business and unlock investment include:

• Securing a long-term and stable carbon market policy, coupled with effective carbon leakage mitigation measures to allow UK manufacturing to compete and ultimately invest in the UK’s transition to net zero.

• Create favourable policy conditions for advance circular recycling technologies, including a clear approach to account for recycled material – the so called ‘mass balance approach.’

• Deliver on the long-awaited post-Brexit GB REACH regulation through a workable, protective and cost-effective alternative to the current regime to ensure UK manufacturers across supply chains are not at a disadvantage in a global marketplace.

• Implement a UK Chemicals Strategy with a clear roadmap that enables and supports innovation, and accelerates circular, low carbon solutions for planet and people.

Skill shortages pose a critical challenge for chemical manufacturers in the UK. Investors are aware of the UK dilemma. After the pandemic UK industry experienced a wave of early retirements leading to the loss of highly skilled and experienced professionals. Within chemical businesses that mainly affected roles as lead engineers/chemical engineers or other managerial positions.

The pandemic simply accelerated a problem previously identified. In terms of workforce, developed countries such as the UK, US, and EU members going forward are facing the challenge of an aging population. Birth rates have been declining for the past three decades. The cost of labour is cheaper in developing countries, making production in the UK, US, and EU relatively uncompetitive in terms of margins.

Additionally, the lack of young individuals pursuing careers in science, technology, engineering, and mathematics (STEM) poses a threat to the industry. The service sectors, particularly finance, often offer higher-paying jobs and greater flexibility, leading a growing number of STEM graduates to seek apprenticeships and careers outside the manufacturing industry.

A recent survey of member companies highlighted that all respondents were either carrying vacancies or had experienced difficulties in replacing experienced staff who had left the industry. One company who responded explained they were currently advertising for 100 vacant positions across the business, above the manufacturing average for vacancies.

It is worth acknowledging the excellence of UK universities. The cooperative relationships between research centres, universities, and private companies can help boost local chemical production. By collaborating on tangible projects students will gain a better sense of their career prospects and are motivated to remain in the field, whilst being instrumental for the Research and Development process. We are doing all we can to encourage more member companies to collaborate in this way.

Other considerations:

• A starting point should be recognition and willingness to boost manufacturing as % of the economy/GDP. It’s currently around 10%, so has halved in a little more than 30 years. Benefits are increasingly clear – national resilience; regional growth through higher skilled and well-rewarded jobs etc. CIA would likely support any ambition to move us from that 10% to 15%. Fundamentally we would appreciate hearing senior politicians firstly recognize the importance of but then describe the ambition to expand the UK’s manufacturing sector.

• Chemicals should be firmly at the heart of any “advanced manufacturing” agenda/commitment