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

Getty.
Show Hide image

The Brexit Beartraps, #2: Could dropping out of the open skies agreement cancel your holiday?

Flying to Europe is about to get a lot more difficult.

So what is it this time, eh? Brexit is going to wipe out every banana planet on the entire planet? Brexit will get the Last Night of the Proms cancelled? Brexit will bring about World War Three?

To be honest, I think we’re pretty well covered already on that last score, but no, this week it’s nothing so terrifying. It’s just that Brexit might get your holiday cancelled.

What are you blithering about now?

Well, only if you want to holiday in Europe, I suppose. If you’re going to Blackpool you’ll be fine. Or Pakistan, according to some people...

You’re making this up.

I’m honestly not, though we can’t entirely rule out the possibility somebody is. Last month Michael O’Leary, the Ryanair boss who attracts headlines the way certain other things attract flies, warned that, “There is a real prospect... that there are going to be no flights between the UK and Europe for a period of weeks, months beyond March 2019... We will be cancelling people’s holidays for summer of 2019.”

He’s just trying to block Brexit, the bloody saboteur.

Well, yes, he’s been quite explicit about that, and says we should just ignore the referendum result. Honestly, he’s so Remainiac he makes me look like Dan Hannan.

But he’s not wrong that there are issues: please fasten your seatbelt, and brace yourself for some turbulence.

Not so long ago, aviation was a very national sort of a business: many of the big airports were owned by nation states, and the airline industry was dominated by the state-backed national flag carriers (British Airways, Air France and so on). Since governments set airline regulations too, that meant those airlines were given all sorts of competitive advantages in their own country, and pretty much everyone faced barriers to entry in others. 

The EU changed all that. Since 1994, the European Single Aviation Market (ESAM) has allowed free movement of people and cargo; established common rules over safety, security, the environment and so on; and ensured fair competition between European airlines. It also means that an AOC – an Air Operator Certificate, the bit of paper an airline needs to fly – from any European country would be enough to operate in all of them. 

Do we really need all these acronyms?

No, alas, we need more of them. There’s also ECAA, the European Common Aviation Area – that’s the area ESAM covers; basically, ESAM is the aviation bit of the single market, and ECAA the aviation bit of the European Economic Area, or EEA. Then there’s ESAA, the European Aviation Safety Agency, which regulates, well, you can probably guess what it regulates to be honest.

All this may sound a bit dry-

It is.

-it is a bit dry, yes. But it’s also the thing that made it much easier to travel around Europe. It made the European aviation industry much more competitive, which is where the whole cheap flights thing came from.

In a speech last December, Andrew Haines, the boss of Britain’s Civil Aviation Authority said that, since 2000, the number of destinations served from UK airports has doubled; since 1993, fares have dropped by a third. Which is brilliant.

Brexit, though, means we’re probably going to have to pull out of these arrangements.

Stop talking Britain down.

Don’t tell me, tell Brexit secretary David Davis. To monitor and enforce all these international agreements, you need an international court system. That’s the European Court of Justice, which ministers have repeatedly made clear that we’re leaving.

So: last March, when Davis was asked by a select committee whether the open skies system would persist, he replied: “One would presume that would not apply to us” – although he promised he’d fight for a successor, which is very reassuring. 

We can always holiday elsewhere. 

Perhaps you can – O’Leary also claimed (I’m still not making this up) that a senior Brexit minister had told him that lost European airline traffic could be made up for through a bilateral agreement with Pakistan. Which seems a bit optimistic to me, but what do I know.

Intercontinental flights are still likely to be more difficult, though. Since 2007, flights between Europe and the US have operated under a separate open skies agreement, and leaving the EU means we’re we’re about to fall out of that, too.  

Surely we’ll just revert to whatever rules there were before.

Apparently not. Airlines for America – a trade body for... well, you can probably guess that, too – has pointed out that, if we do, there are no historic rules to fall back on: there’s no aviation equivalent of the WTO.

The claim that flights are going to just stop is definitely a worst case scenario: in practice, we can probably negotiate a bunch of new agreements. But we’re already negotiating a lot of other things, and we’re on a deadline, so we’re tight for time.

In fact, we’re really tight for time. Airlines for America has also argued that – because so many tickets are sold a year or more in advance – airlines really need a new deal in place by March 2018, if they’re to have faith they can keep flying. So it’s asking for aviation to be prioritised in negotiations.

The only problem is, we can’t negotiate anything else until the EU decides we’ve made enough progress on the divorce bill and the rights of EU nationals. And the clock’s ticking.

This is just remoaning. Brexit will set us free.

A little bit, maybe. CAA’s Haines has also said he believes “talk of significant retrenchment is very much over-stated, and Brexit offers potential opportunities in other areas”. Falling out of Europe means falling out of European ownership rules, so itcould bring foreign capital into the UK aviation industry (assuming anyone still wants to invest, of course). It would also mean more flexibility on “slot rules”, by which airports have to hand out landing times, and which are I gather a source of some contention at the moment.

But Haines also pointed out that the UK has been one of the most influential contributors to European aviation regulations: leaving the European system will mean we lose that influence. And let’s not forget that it was European law that gave passengers the right to redress when things go wrong: if you’ve ever had a refund after long delays, you’ve got the EU to thank.

So: the planes may not stop flying. But the UK will have less influence over the future of aviation; passengers might have fewer consumer rights; and while it’s not clear that Brexit will mean vastly fewer flights, it’s hard to see how it will mean more, so between that and the slide in sterling, prices are likely to rise, too.

It’s not that Brexit is inevitably going to mean disaster. It’s just that it’ll take a lot of effort for very little obvious reward. Which is becoming something of a theme.

Still, we’ll be free of those bureaucrats at the ECJ, won’t be?

This’ll be a great comfort when we’re all holidaying in Grimsby.

Jonn Elledge edits the New Statesman's sister site CityMetric, and writes for the NS about subjects including politics, history and Brexit. You can find him on Twitter or Facebook.