Lockdown puts brake on Aston sales
Chances for productivity gains will be squandered if zombie firms are allowed to keep labouring on ‘A surprising consequence of the pandemic is that many firms have been forced to adopt state-of-theart techniques’
ASTON Martin’s sales collapsed in the first half of 2020 as the pandemic destroyed demand for its cars.
The Warwickshire-based luxury carmaker reported a 64pc slump in revenues to £146m in the six months to the end of June, with losses ballooning to £227m compared with £80m a year earlier. Car sales plunged 41pc to 1,770 after lockdown made test drives impossible and hammered millions of consumers’ finances.
The company is fighting to steady its finances two years on from a disastrous stock market float, with a string of profit warnings and fundraising even before Covid wrecked the market for luxury vehicles.
The impact of coronavirus has been felt across Britain’s motor industry. Car production in the UK plunged to a near 70-year low in the first half of 2020, with just 381,357 rolling off production lines.
Factory stoppages and lower demand caused by dealer closures and weakening consumer confidence drove the 48.2pc decline on the previous year, according to data from the Society of Motor Manufacturers and Traders (SMMT).
Economic success in the long run comes down to one simple matter: gains in productivity translate into higher incomes, wealth and earnings. After surging throughout the 20th century, productivity growth has languished in recent decades among advanced nations.
Output per worker, the standard measure of productivity, increased across the G7 by just 9pc during the 2000s and by 7pc during the 2010s after rising by 16pc during the Nineties.
The consequences of the slowdown are far-reaching. Track the problem of political disenfranchisement to its root and, sure enough, you find stalling living standards caused by slowing productivity growth as a major cause.
Westerners would have more readily accepted the indignities of globalisation and modern life if they had been accompanied by more rapid and widespread gains in prosperity.
In the UK, pundits often refer to this creeping ailment as the productivity “puzzle”, which implies more mystery than really exists. The productivity “problem” – alliteration preserved – has two proximate causes.
First, we seem to be partly underestimating our own progress. Our ageing statistical methods for measuring output were designed for a more primitive economy dominated by production, construction and agriculture. In the old days, output could easily be counted and adjusted for changing prices. But in our increasingly digital and servicesoriented world, output cannot be counted using what is basically a highly evolved tally mark system.
Growing evidence suggests that errors have crept in over time as the gap between the job of measuring economic output and the suitability of the statistical tools used has widened. As a result, statisticians have overestimated inflation and, in turn, underestimated the gains in output.
The UK’s national statistics office recently announced that it had made major errors over the past 20 years measuring prices and output in the telecoms industry. When the updated estimate, which shows that prices in the industry declined by 95pc between 1997 and 2016 rather than by half as initially calculated, is incorporated into the national accounts in the second half of 2021, headline GDP and productivity will likely be revised up.
In time, we will better understand exactly what proportion of the slowdown is due to mismeasurement. Nevertheless, the bigger underlying problem of genuinely weaker productivity growth remains.
The second factor causing the slowdown is a lack of technological diffusion. OECD research finds that the speed at which the frontier of technological progress has expanded has remained fairly steady during the period that productivity has slowed. However, as digitalisation and globalisation have continued to rapidly push out the frontier, substantial parts of the economy have not adopted the new technologies. The firms that have managed to keep pace with the technological frontier are a well known minority that includes the Silicon Valley giants and top European manufacturers.
In services, the best-in-class design, tech and financial services firms all utilise cloud computing and other such technologies to support remote working. In manufacturing and distribution, the leaders are heavy users of cutting-edge technologies such as advanced robotics, threedimensional printing and big data.
Early adopters of technology often outperform until their peers catch up. However, the current gap has lasted longer than during past phases of diffusion, such as the widespread adoption of the PC in the Eighties.
But some things just take time. After all, it was not until some 50 years after Thomas Edison’s “Electric Light Company” started to produce and sell light bulbs (c1880) that half of US households had access to electric power in their homes.
Things may be changing for the better already. One surprising consequence of the pandemic is that many firms, faced with major disruptions to their normal working practices, have been forced to adapt and, in doing so, adopt many state-ofthe-art techniques. In professional industries, workers are utilising remote-working technologies, including video-conferencing and cloud-computing instead of making the daily trip to their office.
In production and manufacturing industries, firms are reacting to the massive disruption to global trade flows by shortening and diversifying supply chains. If this leads to a wave of onshoring to protect against future disruptions, firms will need to invest in new productive capacities and technological upgrades simply in order to remain competitive.
Lockdowns have forced major industries to innovate. The productivity gains may only begin to show up in the data in three to four years’ time, once economies exceed their pre-Covid levels of GDP. Even if major economies manage to avoid renewed lockdowns, it will take time for employment and output to return to exceed the pre-Covid levels.
Against these positive underlying trends, we need to tackle one real concern: whether the high debt environment, in which many unprofitable “zombie” firms manage to just survive thanks to generous policy support, will prohibit major overhauls and upgrades of key industries.
This is indeed a risk. It is crucial that policymakers do not succumb to political pressure and provide too much support to fully save industries such as transport, travel and traditional store retailing, whose futures are less bright as economies advance. Government policy should emphasise retraining workers for new industries rather than preserving unsustainable jobs.
As long as healthy firms have easy access to capital and can expand, the problem of zombification would only delay rather than inhibit a productivity leap that comes from greater technological diffusion.
For now, while still in the middle of a crisis, the job of governments and central banks is to just keep economies afloat and help them recover from the mega recession. But once the headwinds of the pandemic have passed, policymakers will need to embrace the tailwinds of creative destruction again. If they do so, stronger productivity growth could lift incomes and wealth at a faster rate than in the last few decades.
Workers at Nissan’s factory in Sunderland, which has used robotics to advance productivity