Short circuiting: the Government is failing to recognise the importance of the electronics industry

Civitas' Stephen Clarke argues that the days of British manufacturing are unfairly consigned to the past.

Last week, in response to higher than expected borrowing figures, George Osborne launched a "coordinated push for growth" across Whitehall. In this push the Chancellor and the Government would do well to take a broader look at the British economy.

Before the financial crisis a political view that we do not make things in Britain any more had become disturbingly common. The official line was that we, as an advanced nation, had become a "knowledge economy" where we conceived and designed things that less intelligent people (and countries) would make.

This dangerous fallacy has now been exposed and there is an acceptance that Britain does and should produce and manufacture things. The Government has trumpeted success in a few manufacturing sectors; aerospace, the automotive industry and the pharmaceutical sector are all ministerial darlings. However Britain’s prowess goes beyond these.

The British electronics industry does not have a very large media profile yet it employs more people, pays those people more and produces more British profits than the aerospace or automotive sectors. According to official statistics, in 2010 the electronics industry employed over 200,000 people, generated a gross value added (GVA) of £13.8bn and a GVA per worker of £68,000. In contrast the automotive sector employed around 120,000 people in manufacturing and generated a GVA per worker of £45,000. The aerospace sector generated a GVA per employee of £54,000.

GVA is an important measure because it indicates how much value has been created by an industry and strips out the value of goods that an industry has consumed or transformed. GVA embodies the adage: "revenue is vanity. . . margin is sanity. . . cash is king". Profit is generated by the value a firm or an industry creates not the value it simply passes on.

The electronics industry creates a lot of value because it produces complex products for niche markets with relatively high margins. The UK stopped producing consumer electronics en masse over a decade ago and since then the industry has transformed itself. The UK is the 5th largest producer of control & instrumentation electronics, the 9th largest producer of medical electronics and the 8th largest producer of radio communication electronics. In addition, Britain is the leading designer of microchips in Europe.

Given such success one could be forgiven for thinking that it is best for the Government to continue to leave the sector to it. Unfortunately the industry faces some serious challenges, with its ability to respond to them hamstrung thanks to years of governmental neglect.

Electronics is an immensely competitive industry. Along with the technology leaders, Japan and America, countries previously specialising in low value, high volume goods, such as China, are increasingly entering the high-value markets in which the UK currently operates. As a result the British industry’s future is unclear; leading industry analysts Reed Electronics Research predict growth of only 5 per cent in the next three years.

The Government cannot afford to sit idly by and let another important British manufacturing sector slide into mediocrity. More needs to be done to stimulate Britain’s venture capital market and the current myriad of public venture capital funds should be replaced with a handful of larger public-private investment funds. More British youngsters need to be encouraged to study Electronic and Electrical Engineering and should be able to afford to do so. Most importantly the Government needs to be ready to support manufacturing: Britain may have world-class electronics designers but without greater investment in manufacturing design jobs will continue to relocate to be near production.

Britain’s politicians were almost alone in swallowing the "knowledge economy" myth. Other countries were far less blasé about the loss of productive capacity. In 2004 the President’s Council of Advisors on Science and Technology advised President George Bush on the future of the American electronics industry. They told him that "design, product development and process evolution all benefit from proximity to manufacturing". Clearly he and other American politicians were listening; the US Government has continued to support advanced microchip production, recently investing $1.4bn in a new microchip plant near New York.

Osborne and his colleagues can learn from this. Specifically: electronics form the basis of a successful industrial economy and should be supported. More generally: the idea of the "knowledge economy" has been partially jettisoned, what is now needed is a broader understanding of what makes a "productive economy".

Selling Circuits Short: Improving the prospects of the British electronics industry by Stephen L. Clarke and Georgia Plank was released yesterday by Civitas. It is available on PDF and Amazon Kindle.

A Sony PSP, the wireless chip for which comes from ARM in Cambridge. Photograph: Getty Images

Selling Circuits Short: Improving the prospects of the British electronics industry by Stephen L. Clarke and Georgia Plank was released yesterday by Civitas. It is available on PDF and Amazon Kindle

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Will Euroscepticism prove an unbeatable advantage in the Conservative leadership race?

Conservative members who are eager for Brexit are still searching for a heavyweight champion - and they could yet inherit the earth.

Put your money on Liam Fox? The former Defence Secretary has been given a boost by the news that ConservativeHome’s rolling survey of party members preferences for the next Conservative leader. Jeremy Wilson at BusinessInsider and James Millar at the Sunday Post have both tipped Fox for the top job.

Are they right? The expectation among Conservative MPs is that there will be several candidates from the Tory right: Dominic Raab, Priti Patel and potentially Owen Paterson could all be candidates, while Boris Johnson, in the words of one: “rides both horses – is he the candidate of the left, of the right, or both?”

MPs will whittle down the field of candidates to a top two, who will then be voted on by the membership.  (As Graham Brady, chair of the 1922 Committee, notes in his interview with my colleague George Eaton, Conservative MPs could choose to offer a wider field if they so desired, but would be unlikely to surrender more power to party activists.)

The extreme likelihood is that that contest will be between two candidates: George Osborne and not-George Osborne.  “We know that the Chancellor has a bye to the final,” one minister observes, “But once you’re in the final – well, then it’s anyone’s game.”

Could “not-George Osborne” be Liam Fox? Well, the difficulty, as one MP observes, is we don’t really know what the Conservative leadership election is about:

“We don’t even know what the questions are to which the candidates will attempt to present themselves as the answer. Usually, that question would be: who can win us the election? But now that Labour have Corbyn, that question is taken care of.”

So what’s the question that MPs will be asking? We simply don’t know – and it may be that they come to a very different conclusion to their members, just as in 2001, when Ken Clarke won among MPs – before being defeated in a landslide by Conservative activists.

Much depends not only on the outcome of the European referendum, but also on its conduct. If the contest is particularly bruising, it may be that MPs are looking for a candidate who will “heal and settle”, in the words of one. That would disadvantage Fox, who will likely be a combative presence in the European referendum, and could benefit Boris Johnson, who, as one MP put it, “rides both horses” and will be less intimately linked with the referendum and its outcome than Osborne.

But equally, it could be that Euroscepticism proves to be a less powerful card than we currently expect. Ignoring the not inconsiderable organisational hurdles that have to be cleared to beat Theresa May, Boris Johnson, and potentially any or all of the “next generation” of Sajid Javid, Nicky Morgan or Stephen Crabb, we simply don’t know what the reaction of Conservative members to the In-Out referendum will be.

Firstly, there’s a non-trivial possibility that Leave could still win, despite its difficulties at centre-forward. The incentive to “reward” an Outer will be smaller. But if Britain votes to Remain – and if that vote is seen by Conservative members as the result of “dirty tricks” by the Conservative leadership – it could be that many members, far from sticking around for another three to four years to vote in the election, simply decide to leave. The last time that Cameron went against the dearest instincts of many of his party grassroots, the result was victory for the Prime Minister – and an activist base that, as the result of defections to Ukip and cancelled membership fees, is more socially liberal and more sympathetic to Cameron than it was before. Don’t forget that, for all the worry about “entryism” in the Labour leadership, it was “exitism” – of Labour members who supported David Miliband and liked the New Labour years  - that shifted that party towards Jeremy Corbyn.

It could be that if – as Brady predicts in this week’s New Statesman – the final two is an Inner and an Outer, the Eurosceptic candidate finds that the members who might have backed them are simply no longer around.

It comes back to the biggest known unknown in the race to succeed Cameron: Conservative members. For the first time in British political history, a Prime Minister will be chosen, not by MPs with an electoral mandate of their own or by voters at a general election but by an entirelyself-selecting group: party members. And we simply don't know enough about what they feel - yet. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog. He usually writes about politics.