Britain can once again be a great manufacturing nation
Recently the manufacturing industry has been beset by negative news. The CBI reported that growth in the sector had stalled after two and a half years of consistent rises. This is in line with official industrial production figures which show a slowdown in output growth since last summer. In the North East, production has been suspended at the Redcar steel plant, creating worries about potential job losses.
The industry is feeling the cold wind from the East, and the difficulties in the Chinese economy. China produces about half of the world’s steel, whereas the UK produces less than 1pc. The difficulties in the Chinese economy are depressing the price of steel and other manufactured products, and the UK is inevitably affected by these global trends.
Britain is no longer the “workshop of the world”; Redcar is one of seven large integrated steel plants left in the UK. But just because we do not manufacture on the scale we once did, that does not mean the outlook for manufacturing is poor.
One of the success stories for UK manufacturing is the car industry where production in August was 40pc up on a year ago. In the eight months of this year so far, the UK has produced more than a million cars for the first time since 2008. High-tech UK companies, such as Cambridge-based ARM Holdings, are also doing well. Manufacturing success these days is less about churning out large volumes of metal. It is more about how we use our brains, skills and technology to make the more sophisticated products the world is demanding.
That inevitably means that manufacturing employs fewer people. Technology, machines and highskilled workers – not manual labour – are at the centre of the industries where we can now prosper and succeed in world markets. The share of the workforce employed by British manufacturers was around 30-35pc throughout the 19th century and continued around the same level until the 1960s. But from then on, there has been a steady decline. About 8pc of UK jobs are now in manufacturing, but we are now much more productive and efficient. Manufacturing exports last year totalled £224bn – about £8,400 for every household.
Can the economy prosper with such a small share of employment in manufacturing? I believe we can – for four main reasons.
First, the manufacturing businesses which remain in the UK are highly successful, innovative and productive. Inevitably, problems like the Chinese slowdown will create difficulties in some sectors. And the UK no longer holds the heights in sectors such as steel, shipbuilding, chemicals and other bulk manufacturing activities. But we still have world-leading companies in sectors such as aerospace, pharmaceuticals and advanced engineering.
The backbone of manufacturing these days is provided by mediumsized companies employing between 200 and 1,000 workers which have well established positions in their markets and are investing and innovating continually to sustain their success. I visited many of these companies when I was a member of the MPC between 2006 and 2011 and was impressed by their resilience in the testing times of the global financial crisis. The profitability of UK companies bears this out. In 2014, the net rate of return in manufacturing was 10.8pc, the highest since 1999.
Second, the UK provides a very attractive climate for investment and jobs in a wide range of sectors, not just manufacturing. Compared with other European countries we have very flexible labour markets, relatively low tax rates on profits and labour income, and a business-friendly approach to regulation. Our transport infrastructure needs to be improved and in some areas skills are lacking. But the UK continues to be an attractive location for business within the EU, attracting recent strategic investments by Hitachi and other foreign multinationals.
Third, we are a successful services exporter. We have the highest ratio of services exports to GDP in the G7 economies by a long way – 12pc compared to around 8pc in France and Germany, 4pc in the US and 3pc in Japan.
Our trade surplus on services in 2014 was £86bn, with financial services, business and professional services, IT industries and creative activities – like design, fashion and the media – all contributing. This services surplus more than covered the £82bn deficit in manufactured trade last year.
Finally, the UK has many of the ingredients needed to support the growth of new companies, either in manufacturing or services. Many ideas which lead to new businesses being set up and succeeding come out of university research programmes. We have seen this happening on the west coast of the US, which has spawned successful high-tech businesses like Microsoft, Google and Facebook.
The top UK universities are highly successful. But the UK needs to work harder at converting this academic prowess into business success and making sure that more of our universities and colleges feature higher up the world league tables.
Manufacturing may not be the dominant force in the economy that it was between the Industrial Revolution and the 1960s. But it is still a vital contributor to the way we pay our way in the world, sustain our standard of living and generate new jobs.
In his 2011 Budget, George Osborne talked about how he wanted to encourage a “march of the makers”. That is not what has happened. Manufacturing success cannot be turned on and off like a tap by a few government policy announcements. British manufacturing will succeed on the basis of the fundamentals – investment in a highly skilled and educated workforce, a flexible labour market which supports job-creation, and a business-friendly economic climate which encourages investment and growth.
Britain can still make competitive and attractive manufactured products but we need a successful services industry too. Both are needed if the UK economy is to continue to prosper.
‘Technology, machines and high-skilled workers – not manual labour – will be key to British prosperity’