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26 May 2012

Rebalancing the Economy

Tag(s): Politics & Economics

Manufacturing is the third largest sector in the UK economy after Business Services and the Wholesale/Retail sector in terms of share of UK GDP. Its share of the total is about 12%, well ahead of financial services which is about 8%. The UK is the sixth largest manufacturing economy in the world behind China, the US, Japan, Germany and Italy but ahead of France, Russia, India and Brazil. At 12% it is comparable to other developed countries, behind Germany where it is 24% but ahead of the US. However that has fallen from about 30% in 1970. In 1990 it was still 23% even after the oil shock of the 1970s and the recession of the early 1980s. Under Labour it declined much more rapidly than in other leading industrialised nations.

The official view is that the fall in the contribution of manufacturing to UK GDP can be attributed in large part to the following two factors:

·         The fragmentation of global value chains with lower skilled, lower value modules being outsourced to lower wage cost countries.

·         Significant technological progress which has served to drive down prices more rapidly in manufacturing than services.

However, I would add to that the failure of government and business to adapt to the growth of emerging economies, the increasing cost of regulation, and the expansion of the state at the expense of the private sector.

Nevertheless, despite this, British manufacturing has been in relative decline, not real decline and is still a major force in the world with leading positions in sectors ranging from aerospace to pharmaceuticals.

This week I attended an event at the Royal Society of Arts addressing the question: Can Britain be an Industrial Powerhouse in the 21st Century? The full title of the RSA is The Royal Society for the encouragement of Arts, Manufactures and Commerce and when it was founded in 1754 its aims were:

“To embolden enterprise,

To enlarge science,

To refine art,

To improve our manufactures and

To extend our commerce…”

Over the years it can be said to have contributed greatly to the success of the British economy with highlights including the initiation of the Great Exhibition in 1851, the first public demonstration of the telephone in 1877 and the report on Tomorrow’s Company in 1995. I was elected a Fellow that year when I was Managing Director of Sony UK Limited and I became a Life Fellow in 2005. However, in recent years I have been concerned about the direction of the Society as most of its work has been in areas of social policy, not unimportant but a long way from its founding mission. Meanwhile the economy is in the doldrums, bank bashers bewail our dependence on the City of London and commentators talk aimlessly about ‘rebalancing the economy’ without saying how this will be achieved.

It was therefore welcome to me to have the opportunity to attend an event on this vital subject. Luke Johnson, the well-known entrepreneur and current Chairman of the Society chaired the event with Damien Collins MP, Jo Johnson MP and David Smith, Business Editor of The Sunday Times making up the panel. The event was triggered by the publication of a collection of essays under the umbrella title of The Growth Factory.[i]  Damien Collins has edited this collection with contributions from other Conservative backbenchers and prominent industrialists. ‘The Growth Factory’ seeks to “bring together new thinking on how we can rebalance the economy to provide the growth the UK needs in the 21st century. At the heart of this is a modern industrial strategy which defines the relationship between government and business and sets clear objectives for working together.”

Damien began by saying that we commonly underestimate the strength of ‘making things’ in the UK economy. He cited the car industry which became a net exporter of vehicles in 2011 for the first time in forty years. The Nissan plant in Sunderland produced more vehicles than any other single plant in British history. The Tech City developments in Shoreditch are exciting and world leading and we have long had leadership positions in the creative industries where he worked before becoming an MP.  So what next?

The Government should have an Industrial strategy and does. It should be based on deregulation and matched funding, but take account of the competitive context.  Blind rejection of government support can leave industries where we have strengths exposed to competitive response. Our leading position in the video games industry was undermined by tax breaks in other countries. That has now been addressed with production tax credits. A similar situation developed in high end television and animation. We have leading post production facilities and skills but can lose out to the tax regimes of other territories. Thus Julian Fellowes was able to produce Gosford Park in Britain because it was a film and so qualified for tax incentives but his recent drama Titanic was produced in Budapest because it was a TV drama and did not qualify for such benefits.

Damien reminded us of the importance of clusters such as Media City in Manchester. Often such clusters needed government sponsorship to get off the ground. The origins of Silicon Valley were investments by NASA and the US Navy with academic links to Stanford University. Out of that sprung up Hewlett Packard and Fairchild Semiconductor and then a second wave developed with Intel, Apple and Cisco. Google’s initial algorithm was developed with a grant from the US government. Damien contends that the UK government should be prepared to share risk.

David Smith said that the issue of the economic crisis is not just an excuse. Industrial policy can be both good and bad. It does not always travel well. He recalled the mistakes made in the past when the model to follow seemed to be that of MITI in Japan, or when Tony Blair flew Michael Porter in to advise the government on industrial policy and all he talked about were Australian wine clusters. Public servants are often creative people with good ideas but they are not business people. He thought we could use the strength of public procurement more. Policy should evolve rather than create new institutions such as the various industrial banks that are being proposed. Manufacturing matters but so does location. We used to think that it was enough to retain the design and other smart stuff but it does not work like that and Made in China soon becomes Designed in China. There is no need for conflict between a policy of deregulation and an industrial policy. The relative decline of countries like the UK is common but not irreversible.

Jo Johnson, the younger brother of Boris, told us that industrial policy is gaining credibility but it is a lively debate. There are still plenty of negative connotations with centralised planning, the failure of picking winners etc. It should also be remembered that in the EU the UK has been the champion of the single market and so has been critical of member states favouring their own industries. Thirdly, there is no money.

So the emphasis should be on partnership, not planning. Vince Cable has been clear in his view that market forces alone are insufficient to generate growth and rectify imbalances. At the other end of the spectrum there is still a Lawsonian wing favouring the free market. Jo’s view is that a more active role in rebalancing the economy is indicated. We should be concerned about the hollowing out of the supply chain. We still have strong champions like JCB but most of their components are imported. He was pleased that the science budget was unscathed in the comprehensive spending review.  He also gave credit to the senior politicians making efforts to encourage export led growth with business missions to emerging markets. And the model of the Automotive Council, collaboration between government and the car industry, was successful and likely to be rolled out to other industries. (I work on one of the sub-groups on the Automotive Council and can vouch for this. See my blog Intelligent Mobility Summit 28th April, 2012)

I enjoyed the discussion and was pleased to see moves for a more intelligent approach to industrial policy. But if we are going to seek to maintain and expand our position as an industrial powerhouse we need to be realistic in our expectations. After all, we have run a trade deficit in 94 of the last 100 years. We also need to be sensitive to sophisticated business models and recognise that it is not so much about making things as addressing the full needs of the customer. Thus one of our best manufacturers is Rolls-Royce but more than half of its profits come from the after sales service it offers as part of the package of buying an aeroplane engine. We are going to have to address the skills gap and the critical lack of engineers will be a barrier.

I have spent most of my career working for companies that ‘make things’ and I always thought it madness that we could persuade ourselves that the economy could prosper without manufacturing as a strong sector. I am glad that at last we are having the debate about how to restore it to playing a major role. I asked Damian Collins if any of the essays addressed 3D printing and was surprised when he said no. In my view that could be a game changer and if the UK embraces it and takes a lead  a great deal of manufacturing that has left these shores could return.

Copyright David C Pearson 2012 All rights reserved


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