Shropshire, We Need to Talk About Productivity

The Office for National Statistics published the latest productivity figures last week (6 Jan 17), for Q3 2016, showing that national productivity was up 0.4% on the quarter, and 1.1% on Q1 2008, and hence, “the productivity puzzle remains.”[1] Alongside these, they also published productivity data at a sub-regional level, although this lags the overall data with the most recent publication running to the end of 2015.

0.4% growth in labour productivity on an output per hour basis in Q3 2016 https://t.co/4t5Q3aE9jv

— ONS (@ONS) January 6, 2017

This lag is potentially significant in light of the anticipated future growth in Shropshire and Telford & Wrekin related, in part, to their place in the 'Midlands Engine' initiative, and their role in the Jaguar Land Rover supply chain – this analysis suggests that sub-regional gross value added (GVA) will outpace national growth in the coming years. And, likewise, with the continued development of the T54 business park in Telford, as the Polytec Group joined Magna International as firms recently announcing factory openings there.  Although, of course, growth in GVA does not necessarily equate to growth in GVA per hour worked, which is the productivity measure.

I blogged here on last year’s sub-regional figures for my locality. In general, Shropshire and Telford & Wrekin[2] lag the rest of the UK on productivity; however, both had been outpacing the UK as a whole in terms of their productivity growth since the recession – a little less ‘puzzling’. But I ended my last article on the following ominous point:

“It is worrying that both – Telford & Wrekin in particular – fell behind the national year-on-year growth rate in 2014. And it is still true to say that productivity in both sub-regions has stalled somewhat since the recession, just not to the same extent as it has done nationally.”

The publication of the latest data shows that this concern was well-founded, as both have slipped back once more in 2015. The chart below shows how they rank against other sub-regions, alongside their rank over ten years, with Shropshire now dropping into the bottom quartile, and Telford & Wrekin sitting just ten places outside of it.

Source: Office for National Statistics data, published 6 Jan 2017, analysed by Challenger MI - same for all

In terms of productivity growth over the last five years, the chart below shows how both sub-regions initially outpaced the UK as a whole, but how both have since lagged the national growth.

Productivity by Business Type

     One of the main reasons for these differences is the industrial profile in a sub-region, and in particular the mix of business sizes and industry sectors: large firms are more productive than small, factories are more productive than restaurants. This is covered in the two charts below, showing: 

• Firstly[3], industries ranked by their productivity. Manufacture of chemicals & pharmaceuticals and financial & insurance services standout as the most productive; while agriculture is the least productive, followed by accommodation & food services (hotels and restaurants). 
• Secondly, that larger firms are more productive than smaller firms. Although this chart contains perhaps the most interesting recent phenomenon in productivity: micro-firms have overtaken small firms in recent years, and medium-sized businesses have overtaken their larger rivals.

o   Note: I plan to write much more on this latter point, given that my entire existence is pre-disposed towards identifying sources of competitive advantage for industry challengers against their larger rivals, and this seems like it could be one such!

Shropshire and Telford & Wrekin Industry Profiles

So, how do industry demographics stack up in Shropshire and Telford & Wrekin? The charts that follow consider the number of companies by size, by industry, and the amount of employment by industry in both sub-regions. They show the following:

• Business Size 
• For Shropshire, it has more micro companies than the UK as a whole (+2.4% pts) and considerably more than Telford & Wrekin (+6.2% pts). 
• For Telford & Wrekin, it has more medium- and large-sized companies than the UK as a whole (+1.7% pts). As a proportion of all companies, Telford & Wrekin has twice the national proportion of large companies (0.82%), while Shropshire has half (0.2%).

• Number of companies by industry: 
• For Shropshire, it has nearly five times the national proportion of agricultural businesses (19.4%), while fewer than 5% are manufacturing firms (broadly the same as the UK), and only just over 5% are in financial & insurance services and information & communication. 
• For Telford & Wrekin, more than 8% of companies are in manufacturing, while nearly 20% are in the wholesale & retail trade.

• Employment by industry: 
• For Shropshire, the greatest difference from the national average is higher employment in agriculture. Within the manufacturing segment, food & beverage manufacturing stands out. 
• For Telford & Wrekin, overwhelmingly, the greatest difference from the national average is higher employment in manufacturing. Within that, high tech manufacturing – incorporating vehicles, machinery and electrical equipment – stands out.

Productivity and Industry Demographics

The chart below overlays the employment by industry chart above with the previous chart on productivity by industry. Showing, at the extremes, for example, Shropshire’s higher employment in the low productivity agricultural sector; and its low employment in the high productivity financial & insurance services sector.

What this makes clear is that, for Shropshire in particular, there are certainly some structural elements of its economy that result in lower productivity when compared to other sub-regions. Notably, the greater proportion of micro companies, and the fact that agriculture, construction, government services, and wholesale & retail stand out as the areas of above average employment – agriculture is the least-productive sector of the economy, while the others are all in the bottom seven (of 22 above). These account for 59% of employment in Shropshire, with agriculture employing twice the number of people of the financial & insurance industries (the most productive).

Telford & Wrekin, however, does not have this excuse. True, like Shropshire, it employs more people than average in the wholesale & retail trade and public administration & defence (a sub-set of government services, offset by employing fewer people in health and education). True, also, that it employs fewer people in financial services.

But, it is characterised by large manufacturing firms, two characteristics that both point towards greater productivity – manufacturing, as a whole, is the third most productive sector. Furthermore, it really stands out from the national average with its predominance in high tech manufacturing – the sub-sectors that comprise high tech manufacturing (computer products & electrical equipment, machinery, transport equipment) are three of the top nine most productive sectors. As such, we should expect Telford & Wrekin to possibly be even more productive than the nation as a whole.

A similar question, at the margin, can be posed to Shropshire too, relating to the fact that it has above average employment in manufacturing as a whole, and its main manufacturing sector – considerably more so than the UK overall – is food & beverages, the fifth most productive sector in the economy. The chart below shows the types of manufacturing carried out in the two sub-regions, compared nationally.

There are some further questions for Shropshire, as well, when looking at the trend data as, in the last two years, it has experienced a divergence from its main industries. With the exception of food manufacturing – which gained strongly in 2014, and dropped back in 2015 – all of the other main employment industries in Shropshire, shown in the chart below, have made productivity gains, paced by the agriculture industry.

The equivalent picture is less clear for Telford & Wrekin, where some of its main industries – high tech manufacturing, notably – have fluctuated more in recent years.

Another possible defence for the two regions lies in the changing nature of employment in particular sectors: it is true to say that both Shropshire (-1.9% pts) and Telford & Wrekin (-2.3% pts) have seen faster than average (-0.5% pts) declines in the proportion of their workforces employed in manufacturing over the last five years, and the same for financial services (-0.47% pts, -1.53% pts, and -0.4% pts respectively) – two productive sectors.

Benchmarking

In the previous article, I benchmarked Shropshire and Telford & Wrekin against other sub-regions that were broadly equivalent in terms of their overall productivity value (output per hour worked). But this does not capture the nuance outlined above. I have now altered these benchmark groups, based on sub-regions that share a similar industry profile in terms of overall employment. Shropshire’s benchmark group – with above average employment in agriculture, food & beverage manufacturing, and so on – includes the likes of Lincolnshire, Herefordshire, Country Durham, and East Riding of Yorkshire; while Telford & Wrekin’s – with high employment in manufacturing and high tech manufacturing, specifically – includes Blackburn, Derby, Rotherham, Stoke, and Wrexham.

Now, the story becomes slightly more alarming still.

In terms of the productivity value, Shropshire is bang on its benchmark group average, at £23.7. However, in terms of growth, it lags the benchmark group average over the entire period, over the last five years, and over the last one year. Hence, its rank within its benchmark group has dropped from a peak of 5^th in 2011, to 8^th in 2015.

Telford & Wrekin, meanwhile, is marginally below its benchmark group average value, at £24.1 (vs. £24.3). And, likewise, lags its benchmark group in short-, medium- and long-term growth. Its rank within its benchmark group has dropped from a peak of 2^nd in 2012, to 9^th in 2015. It would have been top of its benchmark group in 2011 and 2012 were Derby – where Rolls Royce and Toyota are the two biggest employers and where 16% of employment is in manufacturing, and 50% of that in high tech manufacturing – to be excluded.

Starting the Conversation: a Target

I have made an assessment as to where I would like to see Shropshire and Telford & Wrekin, compared to the national average, based on the mix of industries that are resident in each sub-region.[4] It is my assessment that, all else being equal (it’s not!), Shropshire should expect to be about 5.5% below the national average, and that Telford & Wrekin should expect to be about 0.7% below the national average. In fact, Shropshire is 15% below it, and Telford & Wrekin is 13.5% below it; meaning that Shropshire is 2.7 times worse than I assess it should be, and Telford & Wrekin is a massive 19.3 times worse than I asses it should be.

This leads me to the overall view that it is Telford & Wrekin that we need to worry about, more so than Shropshire. There are structural factors in Shropshire’s economy that explain the majority of its performance below the national average; but these do not exist in the same way in Telford & Wrekin. There, both in terms of company size and sector, it leans towards a structure that is more productive nationally. Telford & Wrekin, in particular, the birthplace of industry, with its high tech manufacturing and large firms, characterised by a number of sprawling industrial estates, should be doing better. Shropshire, much more rural, more artisan and touristy (Shrewsbury), with more micro companies, is doing slightly better, but still falls below expectations.

Now, of course, there are a multitude of other factors that impact upon the macro-economic productivity figures, and this is even more acute at the sub-regional level: ‘zombie’ firms, cheap labour disincentivising investment in machinery, employment growth outpacing economic growth, skills gaps, qualification levels in a sub-region, exchange rates, etc. The targets I have hinted at immediately above, based on industry profiles alone, are slightly too simplistic.

However, the clustering in the benchmark groups above, and the fact that both sub-regions are so close to their group averages, demonstrates that there is a strong correlation between industry profiles and productivity. 

Furthermore – with the exception of slight changes in the amount of employment in certain sectors – these industry profiles do not explain why the trends in both sub-regions are not in their favour, despite initial gains post-recession. Nor why, concerning Shropshire in particular, three of its most predominant sectors are among the top five most improved in recent years (the divergence).

There is much hope for future productivity gains in both sub-regions, particularly as this data lags by a year. But the puzzle persisted in the UK as a whole in 2016, and it seems unlikely that either will have bucked that trend to any great extent. A county-wide examination of productivity is required to arrest these recent declines in their tracks.

About the author: Tom Fletcher is an MBA-qualified, Shropshire-based freelance Market Analyst, specialising in market and competitive intelligence for industry challengers and SMEs. In the context of this article, he has particular interests in how challengers can use productivity for competitive advantage, and how they can use open data and micro-level productivity benchmarking to improve performance. If you’re interested in benchmarking your organisation against similar data, then get in touch.

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[1] https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/labourproductivity/bulletins/labourproductivity/julytosept2016

[2] All of the analysis herein refers to the local authority areas of Shropshire and Telford & Wrekin, as opposed to the County of Shropshire (incorporating Telford) which is referred to in the title.

[3] This chart excludes the Real Estate industry, for the following reason as articulated by the ONS: “Real Estate productivity is affected by the National Accounts concept of output from owner-occupied housing, which adds to the numerator but without a corresponding component in the denominator. As such, users should approach productivity estimates for the real estate industry with some caution.” It excludes non-manufacturing production industries, namely Mining, Electricity, Gas, Water Supply, Sewerage, Waste Management, etc. These account for 1.5% of UK employment, 1.5% of Shropshire employment, 1.7% of Telford & Wrekin employment.

[4] For the purposes of this benchmark, I have calculated an expected productivity level by summing the productivity by sector figures weighted according to the % employment in each sector.