High-Speed Line into Wales - Essay Example

A research study of HS2 into Wales: An enabler or barrier for companies seeking investment and setting of global strategies in Wales? BY YOU YOUR SCHOOL INFO HERE DATE HERE A research study of HS2 into Wales 1. Introduction The proposed High Speed Line (HS2) maintains a great deal of debate as to whether it can provide Wales with economic advantages. Members of the Welsh Parliament are illustrating considerable scepticism as to whether the rail will provide value for the expenditure (Williamson 2015). Wales is currently experiencing positive economic growth, an environment where households have more disposable income, where exports have risen by 105 percent (compared to only 79 percent in the whole of the UK), and a total economic growth rate of 1.6 percent (Dickins 2013). Hence, the economic outlook for Wales is rather positive. In the face of positive economic statistics, there are questions as to whether the High Speed Line will actually provide benefits for Wales. Wales currently maintains diverse manufacturing industries which contribute to the country’s GDP growth. Wales is a major producer of aluminium, supplying the majority of the UK’s entire aluminium needs (Eurostat 2013). The country also produces one-fifth of the UK’s total oil products, is a significant producer of products servicing the automotive industry, and is a major producer of titanium which is utilised in jet component production and in the medical industry (TIMET 2015). Hence, at the microeconomic level, Wales is a major contributor to the Gross Domestic Product of the entire United Kingdom under the current state of the infrastructure. This research project addresses whether HS2 can make significant economic contributions to Wales, with a special emphasis on whether the rail can entice business investment and incentivise companies setting a global agenda in Wales. Based on all findings, it would appear that whilst HS2 will likely not cause significant negative impact on Wales, the contributions to the Welsh economy are trivial, offering recommendations that the line be put on hold as it pertains to Welsh stakeholder interests. 2. Can the upgrade and development be justified? The local rail line in Wales is self-sufficient, meaning that key areas in Wales are currently serviced by a busy and well-utilised rail system. The typical life cycle of a train in the current railway system is 25-30 years (Salveson 2012). Hence, there are not short-term expenditures required to ensure quality and sustainable transport systems in the current rail system, with a significant period before trains reach their decline/replacement stage. In Wales alone, the current urban rail system services 81 different destinations within the country and maintains access to other major cities in the UK such as Manchester and London which allows movement of passengers and cargo throughout the UK and at important ports. The diesel-powered trains operating on the current rail system (rather than electrification) represents the only significant detriment to the current system (modernisation). Even though the new rail system would provide a shortened journey between London and Cardiff (Barry 2011), there is little evidence that development of HS2 will improve the current rail capacity or serve as an attractive incentive for business investment in Wales. It is primarily the economic advantages that will be provided to other urban regions in the UK (e.g. London and Manchester) that have driven this intensive push to modernise and upgrade the existing rail system. The Welsh government follows the model of punctuated equilibrium, in which political changes occur incrementally as a result of stability of a rail service that has been a significant contributor to economic growth in the country (Robinson 2004). There is an old adage suggesting if it isn’t broke, don’t fix it which has underpinned a lack of government interest in upgrading the current rail system servicing Wales. However, UK government has forced this issue, creating its own macro-political agenda in an effort to coerce Welsh authorities to consider this upgrade. Bounded rationality has driven policy considerations in Wales, making decisions to sustain the status quo in a stable rail system based on legitimate quantitative statistics and information illustrating a productive and efficient existing rail system. The UK government iterates a new disequilibrium in the current rail system, which is pushing a new haste for rail system improvement which, as it pertains to Wales, is not critical. Greater connectivity, for London, will provide an estimated £2.8 billion (annually) to the London economy (Legge 2013). The current rail system is not in a state of chaos and there is little risk of strategic drift. Strategic drift theorises that an organisation is slow to respond to changes in the external market and continues forward using existing strategies that has served the organisation’s agenda sufficiently in the past (Handy 1989). The external market in this case is represented by a stable industry and manufacturing base in Wales and the ability to sustain economic growth through diversified, regional business success. It is irrational to impose substantial development costs on Wales for modernise and improve the stable rail system when the current rate of incremental responsiveness is proportionate to market conditions which favour long-term economic growth within the country. Faster access to cities outside of Wales may well incentivise labourers to seek employment outside of Wales, resulting in a job-related disequilibrium in labour supply and demand (Department for Transport 2013). Furthermore, Wales does not have a major metropolitan centre which has slowed the ability to attract investment in very high value-added areas such as R&D and finance (WAG 2005). Hence, attracting business investment in these key industries has been a problem of the business infrastructure in Wales and would not, in theory, be corrected with a faster, modernised rail system. In fact, faster arrival at broader London locations would open a new type of labour-related competition which could further exacerbate Wales’ business infrastructure problems as citizens defect to other UK cities to procure a position in value-added business models such as finance. Limited data exists which provides justification that this modernisation effort will improve capacity in the existing rail system. Capacity, in relation to logistics, is represented by the maximum output that a certain system can ensure over a specific period of time (Heizer and Render 2004). The fundamental advantages of an integrated logistics system are to improve the ability of downstream and upstream supply chain vendors/partners to ensure delivery of high value by lowering supply costs (Harrison and Van Hoek 2008). Wales maintains an existing 1,708 km of various roadways, an efficient rail system, airports and 10 different commercial waterway ports (NAW 2008). Hence, Wales maintains a sufficient, integrated transport infrastructure without any data-supported deficiencies that can reduce capacity. The new HS2 does improve speed from destination to destination, but at a pace that would only marginally impact supply chain capacity. Whilst many view HS2 as a benchmark of the Chinese rail system for improving speed of cargo and passengers, a marginal 30 minute disparity would be only beneficial for firms with crisis product delivery needs. Well-managed organisations typically maintain adequate inventories and replenishment planning ideologies to avoid the need for expedition in product delivery. Hence, capacity increases would be trivial and likely not capable of being substantiated using quantitative metrics. The current rail system is already integrated within a logistics network that supports multi-modal, integrated transport solutions. Some may view HS2 as a short-term solution to supposed capacity restraints, however these suppositions are not justified by tangible data illustrating a capacity problem with the current rail system. This is problematic when attempting to determine whether using HS2 as a linear, one modal system is viable for impacting a firm’s value chain or would substantially reduce distribution costs. Along the value chain, HS2 would have no impact on service functions, HR, technology or marketing as these are internalised aspects of a business model. Operations, inbound and outbound logistics, and procurement are the only aspects of value systems in a firm that would be marginally impacted by increased time-of-arrival of products utilised in operations (i.e. manufacturing). Cost/benefit cannot be calculated quantitatively in an environment with virtually no statistics illustrating capacity-based or logistics-based cost disparities between the existing rail system and the HS2 system. Hence, evaluations are qualitative in nature and based on suppositions. Whether the new rail system will provide raw materials movements at a discounted rate from the current one modal rail system is absolutely unknown. Hence, clearly the benefit of HS2 is faster arrival of cargo required for operations, but costs of selecting this one modal system are impossible to project. From a business perspective, there are no justifiable trade-offs that will occur, losing a quality option in exchange for selecting another option (Froyen 2008; Fama and French 2002). Current multi-modal systems in Wales support effective distribution and there is simply no evidence that HS2 will revolutionise cost controls in logistics or cause a trade-off scenario for supply chain partners. 3. Determining company needs and expectations Companies currently established in Wales (or those interested in investing in the country) will want to ensure that HS2 provides accrued increases in local consumerism and corporate spending, the local multiplier effect (Moretti and Thulin 2011). However, HS2 de-incentivises local expenditures, making it more attractive to consumers to travel to other urban regions in the UK. Concurrently, more connections throughout Southern England promote more corporate expenditures outside of Cardiff and other areas of Wales. Under the current multi-modal infrastructure, Wales has struggled to attract FDI as a result of weaknesses in the Research and Development sector (aforementioned in this report). Porter (2003) supports this weakness. In fact, many researchers support that R&D is a predictor of corporate and economic growth, as well as national competitiveness (Porter and Ketels 2003; Smith and Barfield 1996). HS2 does not maintain the ability to enhance weaknesses in sustaining high value-added industries such as R&D (and finance) which has de-incentivised foreign direct investment in Wales. Cooke and Clifton (2005) further assert that many FDI projects in Wales have exited the economy or experienced job losses, illustrating a long-term problem with incentivising firms to invest in the Welsh environment. Hence, the business infrastructure, itself, poses barriers for businesses to enter Wales. Whilst faster and modernised, one modal rail system provides some marginal degree of incentive for market entry into Wales, there are fundamental problems in the business infrastructure in this country that supersedes rather insignificant logistic advantages that HS2 could potentially provide. It is a point of significant conjecture whether business stakeholders would primarily be concerned about logistics-based advantages for investing in Wales or establishing a global agenda in this country. Who, though, are the stakeholders in such a scenario? Stakeholder mapping, as illustrated by Fletcher (2003), classifies stakeholders as shareholders, firm managers, suppliers, investors and bankers, the public, trade unions, competition and government as those with disparate power influence in business. However, which of these stakeholders have a substantial power interest in market entry in Wales simply as a consequence of trivially-improved logistics-based advantages? Typically, the internal stakeholders of a firm and perhaps suppliers that would maintain a moderate cost reduction (theoretically) with improved rail system speed and moderate capacity improvement. It is doubtful that inconsequential cost-related advantages created by HS2 would incentivise market entry into Wales as pertaining to high-power stakeholder groups. Let Porter’s Diamond (1990) further justify why HS2 is insufficient for promoting interest in Wales investment. As shown by the model, demand conditions are unlikely to change in favour of businesses entering the Wales market, firm structure will be virtually unaffected (operations or governance), and capital resources (factor conditions) unchanged other than faster receipt of raw materials (in a best case scenario). There will be virtually no corporate-level changes, or improved access to factor conditions (land or capital) as a result of upgrading the existing rail system, hence it is doubtful that firms will find incentive or motivation to trade to conduct business in Wales. Figure 1 illustrates a Gap Analysis of the current position and future position of the Welsh Government and solutions which could put the government into a more desirable position. As shown by the model, franchising HS2 is an option, however this has proven to be problematic at the managerial level historically in rail systems in the UK (Salveson). More rail stations throughout Wales are feasible, however local or national level government would have to incur the high short-term investment for this strategy. More urban development to ensure a more substantial metropolitan area could entice finance and R&D (high value-added), however this is a substantially costly endeavour. However, with decades of problems attracting business investment, this is a major problem in Wales that cannot be offset by structural changes to the current railway systems. Figure 1: Gap Analysis of Welsh Government 4. Recommendations Clearly, the Welsh Government desires to have economic and competitive advantages achieved as a result of the HS2 upgrade and development. However, the data (or lack thereof) does not support that this investment would be a viable and profitable model for attracting business investment and enticing the establishment of global agendas within Wales. There are far too many urban development infrastructure problems currently existing within the country (WAG 2005; Porter 2003) that is forbidding gaining important finance industry and R&D businesses that are predictors of competitive advantage for a region. These issues far supersede logistical issues and potential benefits of a potentially cost-effective rail system and one that will provide only moderately faster advantages in terms of delivery of supply chain products. With this project still in development stages, the Welsh Government and broader UK government authorities are still debating the advantages to Cardiff (and Wales) for investing in the HS2 project. Certainly, if Wales is willing to invest billions of Pounds into developing new railway stations for passengers and cargo (or subsidise these activities through government schemes), then it would provide, at least, a moderate incentive for companies to invest in Wales and establish a global agenda there. The costs of creating new railway stations which make better connectivity between existing multi-modal transport systems far outweighs the benefits of this activity, especially in an environment where faster travel to London and other highly-developed urban areas provide incentives to citizens to seek employment elsewhere. There is simply no evidence that capacity would be more than marginally increased in comparison to the current rail system and unless the HS2 system provides economic incentives, little improvement in distribution costs would be recognised for firms seeking cost-related advantages. For most firms, logistic concerns do not supersede other concerns along the value chain as a determinant for direct investment in a different region. In fact, Legge (2013) iterated that Cardiff would likely lose £68 million in GDP every year as a result of the HS2 system. The problem in determining a quantitative cost-benefit analysis or determining the ultimate value of HS2 to Wales is that the project has not yet launched and multiple government sources and reports have conflicting data, likely as a product of attempting to secure the economic utility of regions likely to gain the most business investment and economic growth as a result of HS2. Hence, in the face of uncertain data and lack of tangible, government-constructed statistics, the most viable recommendation is for Wales to consider investing in urban development to create a motivating and incentivised metropolitan centre to attract high value-added industries. Of course, this would represent a trade off from creating new railway stations to access more favourable factor conditions (i.e. land or labour), but the long-term benefits of this strategy would be making the Welsh business environment much more attractive for investment. Shipton (2003) shows statistics that Wales has consistently been insufficient in attracting FDI over 30 years of job creation and strategy development. In an environment where the current rail system maintains adequate capacity, an extended life cycle for expensive capital assets (the trains), and where labourer defection could cause significant economic problems, the Welsh Government should resist this development project with all of its authorities and capacities to do so and focus on internal infrastructure developments instead. Incremental changes to respond to changing market conditions have served the Welsh Government well, under the punctuated equilibrium model. The urgency promoted by other UK government authorities to approve and invest in HS2 are simply not supported by relevant metrics or data that this endeavour will provide Wales with measurable economic or competitive advantages that will entice business stakeholders to trade for investment in this country. Perhaps this is why such rail upgrades have been successful in developing economies such as China where multi-modal systems are disparate. Wales provides ample capacity for integrated transportation systems (NAW 2008) and, generally, little is chaotic about the current system that has serviced Wales’ economic needs well for decades. References Barry, M. (2011). High Speed Rail – Written evidence from the Cardiff Business Partnership (HSR 188A). [online] Available at: http://www.publications.parliament.uk/pa/cm201012/cmselect/cmtran/writev/rail/hsr188a.htm (accessed 7 March 2015). Cooke, P. and Clifton, N.C. (2005). Visionary, precautionary and constrained varieties of devolution in the economic governance of the devolved UK territories, Regional Studies, 39(4), pp.437-451. Department for Transport. (2013). High Speed Two (HS2) Limited: HS2 regional economic impacts. Dickins, S. (2013). GVA figures: Welsh economy grows faster than most in UK, BBC News. [online] Available at: http://www.bbc.com/news/uk-wales-politics-25333666 (accessed 10 March 2015). Eurostat. (2013). Wales: Economy. [online] Available at: http://circa.europa.eu/irc/dsis/regportraits/info/data/en/ukl_eco.htm (accessed 7 March 2015). Fama, E. and French, K. (2002). Testing trade-off and pecking order predictions about dividends and debt, Review of Financial Studies, 15, pp.1-33. Fletcher, A. (2003). Mapping stakeholder perceptions for a third sector organization, Journal of Intellectual Capital, 4(4), pp.505-527. Froyen, R.T. (2008). Macroeconomics, 9th edn. London: Prentice Hall. Handy, C. (1989). The age of unreason. Hutchinson: London. Harrison, A. and Van Hoek, R. (2008). Logistics management and strategy, 3rd edn. Essex: Pearson Education Limited. Heizer, J. and Render, B. (2004). Operations management – flexible version package, 7th edn. Prentice-Hall. Legge, J. (2013). HS2: cities which stand to lose out revealed, The Independent. [online] Available at: http://www.independent.co.uk/news/uk/home-news/hs2-cities-which-stand-to-lose-out-revealed-8891280.html (accessed 6 March 2015). Moretti, E. ad Thulin, P. (2011). Local multipliers and human capital in the United States and Sweden, Industrial and Corporate Change, 22(1), pp.339-361. NAW. (2008). One Wales: Connecting the Nation – The Wales Transport Strategy, Welsh Assembly Government. [online] Available at: http://gov.wales/deet/publications/transport/wts/wtstrategy/wtsfe.pdf?lang=en (accessed 9 March 2015). Porter, M.E. (1990). The competitive advantage of nations. New York: Free Press. Porter, M. (2003). The economic performance of regions, Regional Studies, 37, pp.549-578. Porter, M. and Ketels, C. (2003). UK competitiveness: moving to the next stage. DTI Economics Paper, London. Robinson, S. (2004). Punctuated equilibrium, bureaucratisation and budgetary changes in schools, Policy Studies Journal, 24, pp.25-40. Salveson, P. (2012). Rail Cymru: A people’s railway for Wales, The Cooperative Party of Wales. Shipton, M. (2003). Wales slips further in UK wealth table, Western Mail, August. Smith, B. and Barfield, C.E. (1996). Technology, R&D and the economy. Brookings Institution Press. TIMET. (2015). First in Titanium Worldwide, Titanium Metals Corporation. [online] Available at: http://www.timet.com/ (accessed 10 March 2015). WAG. (2005). Wales: a vibrant economy, Welsh Assembly Government. [online] Available at: http://gov.wales/deet/publications/bande/wave/wavee.pdf?lang=en (accessed 6 March 2015). Williamson, D. (2015). Welsh MPs cast doubt on HS2 delivering value for money to the country’s taxpayers, Wales Online. [online] Available at: http://www.walesonline.co.uk/news/wales-news/welsh-mps-cast-doubt-hs2-8456681 (accessed 8 March 2015). Read More