A very interesting analysis recently completed by Oxford Economics a British consultancy centered on, and was sponsored by, Rolls Royce. The RR group designs and builds cutting edge aero, power and marine engines for civil and defense markets. The group gross revenues were in excess of £10bn (>$15bn) in 2009 with net profit before interest of nearly £1bn ($1.5bn). The engine forward order book stood at £58bn ($90bn) at the end of last year.
The analysis covers not the profitability of or prospects for the company but intriguingly seeks to quantify the benefits it brings to the UK economy. The purpose being to show that high technology companies bring a disproportionate level of additional benefits to the national economy over and above export orders and high paid jobs the usual benefits cited by government ministers and the media.
So what did the report show? Well a Financial Times report summarized various principal points and I quote “the report found that output linked to activities by the company last year added up to 0.56% of UK gross domestic product a huge amount given that its workforce accounts for only about one in 3,000 of the UK population.
Oxford Economics’ study split the benefit down into a number of tiers, the first being direct value add generated by the firm’s 21,000 employees. This could be accurately estimated at £1.6bn ($2.5bn) or £76,500 ($119,000) per employee half as much again as the average for the whole of UK manufacturing, and twice as much as for the economy as a whole.
The second tier was indirect benefits judged as value added from the activities of the 44,000 people working on Rolls-Royce programs at some 3,000 suppliers to the group across the UK. This figures came to a further £1.8bn ($2.8bn) of benefits.
The third tier of added value is that induced in the economy by all 65,000 people working for both RR and its suppliers on RR projects. This output includes the impact of their wages in all other parts of the UK economy such as retail and other services. It added a further £1bn ($1.55bn).
Lastly the fourth tier and the one called out by the article as potentially debatable are the “spill-over effects resulting from the technology ideas generated by the company and its employees which then permeate the economy in any number of ways. This was valued at £3.4bn ($5.3bn). There appeared little argument that high technology companies, especially in engineering, do have spill over effects over time but the debate was more about how it was calculated than whether it was right to include it. The OE report did not look at individual cases but rather by estimating how Rolls-Royce’s spending on parts purchases and on technology development in the UK had during a period of about 20 years accumulated a “stock of technology that has gradually added up to an influence on the economy. That is a very difficult effect to measure and unfortunately the sum they came up with was not far short of the other direct and indirect factors combined. Nevertheless the study has considerable value in terms of assessing priorities when it comes to allocating limited research funds, defense contracts and both central and local government policy.
Allegations of spin were levied from some quarters when the report closely followed fierce argument over RR role in a £151m advanced manufacturing program announced by the previous government last year in which 80% of the money is said to been channeled through Rolls-Royce. But as Hermann Hauser, a Venture Capitalist and adviser to the previous government is quoted as saying “It’s crucial to convey that £1 spent on designing a novel kind of aero-engine is worth a lot more [to the UK economy] than £1 spent employing a hairdresser or digging up coal.
With no disrespect to hairdressers or coal miners, and however much one may debate the precise assessment methods, this study does for the first time put a value to our economy of high tech engineering and underlines why it goes way beyond the foreign exchange earned on exports or the pounds paid out in wages to immediate workers it permeates the very body of our manufacturing economy.