Achieving growth and rebalancing the UK economy are among the key challenges facing the newly elected Conservative government. To succeed, it would do well to move away from the present over-reliance on retail, construction and the financial sector – and towards manufacturing. As well as a much-needed shift in policy, this requires a redesign in the way manufacturing is perceived in the UK.
Manufacturing suffers from a poor image. Despite a track record of sustained success, the sector remains burdened by pictures of plant closures, off-shoring, smokestacks and mundane factory line work. They all signal poor future prospects.
Even those most passionate about the making economy often reinforce the notion that the UK’s manufacturing prowess has been lost – when in fact the opposite is true. All too often, manufacturing is seen as something the UK once did, leading to the false perception that the UK no longer makes things.
Despite these negative perceptions and the fact that, relative to the service sector, manufacturing employs fewer people, it matters significantly for the UK economy. We know, for instance, that more balanced economies with stronger manufacturing bases have fared better since the Global Financial Crisis (in terms of GDP growth) than others.
It is also worth noting that while manufacturing now accounts for only 9% of UK GDP – below the EU average of 13.5% – the UK is the world’s sixth largest manufacturing economy. The UK retains a significant, albeit much diminished, manufacturing base. It is a world leader in industries such as aerospace and pharmaceuticals, green technology, luxury crafts, and it has a strong creative sector. In recent years some if its traditional industries (such as automobiles and ceramics) have also begun to witness a renaissance.
UK manufacturers contribute 80% of the country’s exports and account for 80% of research and development investment, while 25% of private sector employment is in industry. Manufacturing also ties in well with other sectors. For example, manufacturing is a significant purchaser of services and invests heavily in design. This supports employment and growth in many areas outside the south-east, especially in the West Midlands, reinforcing the idea that manufacturing plays an important role in alleviating inequities in the UK’s regional development.
A serious need for investment
Yet the UK economy and manufacturing, in particular, faces serious long-term structural problems. Recent output growth has been weak, while labour productivity is stagnant and remains below its pre-2008 crisis levels. It is 30% below that of Germany, Europe’s leading manufacturing nation. This partly reflects low levels of capital investment in the UK which, as a proportion of GDP, is significantly lower than any other leading industrial nation.
Indeed, investment has been falling (in real terms) for more than 20 years. This has inhibited productivity growth, since workers are lumbered with ageing equipment. What’s more, the UK’s persistent trade deficit continues to deteriorate and is now almost 6% of GDP, the highest since modern records began.
In their new book, my colleagues David Bailey, Keith Cowling and Phil Tomlinson explain how industrial policy plays an important role in ensuring both balanced growth and the long term success of the UK economy. As they argue, modern industrial policy is about creating the environment for sectors and regional clusters to prosper. In essence, modern industrial policy is about “creating successful stables from which winners can emerge”.
In creating these successful stables, my colleagues Beverley Nielsen, Vicky Pryce and I have identified the need to invest in winning capabilities rather than solely in new technological platforms or individual firms or sectors.
Long ignored in the revitalising manufacturing debate, branding underpins stock market valuation, price premiums, and customer loyalty. Branding also drives how firms structure their operations and in particular, how they innovate. Compare for example the different approaches of Dyson and the Morgan Motor Company.
Dyson’s brand lies in its emphasis on shaking up the establishment through engineering and design prowess to deliver customer benefits like cleaner floors and dryer hands. Their innovation is focused on improving products that are needed by consumers, but that frustrate them in use. Their recruitment policies are driven by the same need, setting aspiring employees the challenge of improving on an everyday product that they view as frustrating to use. The Morgan Motor Company in contrast is built around the brand promise of being driven at heart. As a result their innovation is more incremental, driven by craft expertise and a motor racing heritage.
Although innovation has been the focus of much policy discussion, for too long the focus has solely been on investments in science, technology, engineering, and maths (co-called STEM subjects). While valuable, such an approach ignores the value of design, craft, process improvements, a customer focus and creative marketing in ensuring the sustained success of UK manufacturing.
A renewed industrial policy must therefore include investments in creative industries, alongside the manufacturing sector. This is particularly relevant to the devolution or Northern Powerhouse debate as it builds on existing manufacturing strengths and the emergence of a strong creative tradition in Northern cities, builds a positive regional identity that will ensure investment and graduate retention, and takes the focus away from London and financial services.
The UK would also benefit from investments in specialised sector training, exposing potential employees to a mix of disciplines, as well as strategies that build on the actual success of the sector to improve manufacturing’s image among school leavers, university students, investors, the media, and policymakers.
This will involve renewed government interest in the sector – with subtler policy instruments than just picking winners, protecting sectors, or investments in research and development.