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7 May 2013

Rebalancing the Economy (2)

Tag(s): Politics & Economics
Last week the RSA, of which I am a Life Fellow, launched a paper by Dr Finbarr Livesey and Julian Thompson called Making at home, Owning Abroad, A Strategic Outlook for the UK’s Mid-sized Manufacturers. The paper was based on a project designed and conducted by the RSA’s Action and Research Centre and sponsored by Lloyds Banking Group. I was invited to the launch where Dr Livesey gave an overview of the paper and Dr Vince Cable, Secretary of State for Business, Innovation and Skills responded. Julie Madigan, Chief Executive of the Institute of Manufacturing also gave her comments. The full title of the RSA is the Royal Society for the Encouragement of Arts, Manufactures and Commerce but in the recent past I have felt it paid precious little attention to the ‘manufactures’ part of its brief while giving a lot of time to a much softer social agenda. I blogged on Rebalancing the Economy on 26th May last year also stimulated by an event at the RSA and I am glad they are still on the case. As someone who has spent most of his career working for businesses that make and sell stuff I welcome the report which takes the thinking a bit further.

Everyone is agreed that we are in an economic crisis of great proportions. There is much less consensus on what we should do about it but there does seem to be a general consensus that there is a need to rebalance the economy. It has, so this narrative goes, depended too much on financial services and not enough on its traditional strength of manufacturing. An attitude set in back in the 1960s and 70s that our manufacturing was in long term decline and that it was an irreversible trend. We needed to understand that we would be primarily a service based economy and accept that our manufacturing would migrate to cheaper sources. Now we seem to be agreed that that was wrong, has gone too far and we need to take steps to reverse it. The paper agrees with that but takes a more challenging view of how it might be done.

Dr Livesey contends that to refocus on manufacturing needs a longer term look than the political cycle allows and a particular focus on mid-size firms. His main points are
  • that the process of globalisation will reverse and there will be a preference for regionalised production
  • mid-size firms are the key to this as they are nimbler and closer to their customers
  • there will be a global reduction in trade which will have the beneficial effect of reducing the UK’s trade imbalances
  • there will be shorter supply chains and new production technologies which will enable these changes.
He observes a fetish with small companies as the means to kick start growth despite their problems with access to capital, and then there is a tendency to jump straight to multi-national firms despite the fact that the UK is not a very good developer of such firms. In the trends he foresees there will be an undoubted increase in the automated content of this growth with a corresponding lowering of the labour content. Thus while Gross Domestic Product will grow on the back of these trends there will not be a corresponding increase in employment, an issue that needs to be faced. On the other hand it will be a more circularised economy. This is defined as follows by the Ellen Macarthur Foundation (2012) : “A circular economy is an industrial system that is restorative or regenerative by intention and design” where waste is designed out as much as possible, reusing durable components and using renewable energy sources in production.

Dr Livesey showed a matrix with local to global production on the horizontal axis and volume on the vertical axis from one to many. He foresees that new industries may emerge with characteristics suited to local, low volume production while many sectors will find large scale production on a global basis unattractive due to costs and emissions regulations.

Dr Cable supported the consensus about rebalancing the economy but noted that severe devaluation of the pound since the economic crisis in 2008 had not had much of a beneficial effect on British manufacturing overall. There was some anecdotal evidence for recovery in areas of traditional British strengths like ceramics, textiles and garments. He also quoted the success of the Automotive Council and its focus on the supply chain but even here he was uncertain if this was simply replacing business that had failed after the Lehman Brothers crash.

He agreed that a focus on Mid-Sized Businesses (MSBs) could be fertile and likened them to the famous Mittelstand of the German industrial scene. But he counselled against the angst that asked why our companies could not be more like the Germans, our banks more like the Germans, our apprentice training schemes more like the Germans. We are not German and must find our own solutions. He noted that the CBI has also recorded the inadequate attention paid to MSBs which it christens ‘gazelles’.

His government’s industrial strategy is to work in partnership with business where business welcomes such partnership, focused on the long term with a combination of horizontal and sector-specific policies.
  • In finance they have created the Business Growth Fund, are founding a British Business Bank, have put over £200m into the Advanced Manufacturing Supply Chain and ensured that advice and mentoring are in place to support financial aid.
  • In the area of technology they have created the Catapults, led by the High Value Manufacturing Catapult. These are loosely based on the German Fraunhofer model in linking universities with industry but are sector specific. The government provides the initial capital but then they are expected to be self-funding.
  • On skills where industry complain about a shortage of both trained craftsmen and professional engineers they have increased the number of apprenticeships and opened the first five of 26 planned University Technical Colleges.
  • In the autumn statement they announced £2 bn of funding for specific sectors, primarily aerospace but also automotive and Agritech.
Julie Madigan saw nothing less than the next industrial revolution primed by convergence of technologies, scarcity of resources and the economic challenges. She thought we should focus more on consumer innovation, a trend more aligned to the inventive, tinkering nature of the British. The UK has the highest rate of such innovation in the world according to a survey by MIT. There are new opportunities to build businesses using digital channels. She gave the example of a 23-year old British inventor who designed a memory stick to fit flush with an Apple iPad rather than at right angles. Through crowd sourced funding he raised £500k and it is now stocked in Apple stores. However, the sad but predictable part of the story is that it is made in China.
She sees the commoditisation of production with a 3D printer in every home, and so is not so convinced that MSBs are the answer as this trend of consumer innovation may see a tsunami of small businesses.

In questions concern was expressed that while President Obama’s State of the Nation speech had majored on restoring America’s manufacturing might Vince Cable’s Industrial Strategy seemed Mid-Size in comparison. Dr Cable did not seem to disagree with that. It was recognised that the Porter focus on clusters had not worked for the UK with the failed RDA strategy where each RDA just tried to emulate each other. There was a strong feeling that the concept of manufacturing itself might need to be redefined. Its old image of metal bashing was simply no longer relevant. The best companies control a whole business model, which allows them to earn continuing revenues whether it is Apple through its brilliant creation of i-Tunes, or our own Rolls-Royce which sells engines with a long term maintenance contract.

Dr Cable acknowledged much of this but complained of a political culture which was tribal in nature, trashed the achievements of the opposition and was very short–term thus making it difficult to reach consensus on a game-changing industrial strategy. He also could see that governments could not have created some of today’s new stars such as social media. But then, as I have observed before in the blog on Rebalancing the Economy, it was US government spending, particularly by NASA and the US Navy combined with Stanford University, that led to the stars of Silicon Valley including first Hewlett Packard and Fairchild Semiconductor, later Intel and Apple and eventually Google.

Copyright David C Pearson 2013 All rights reserved




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