No other sector of the United Kingdom’s economy holds the same social, cultural and emotional significance with the general public as manufacturing, yet it continues to be in some respects, a misunderstood, misaligned and misrepresented part of our national identity. Britain’s imperious past as the workshop of the world, and the definition of whole towns and cities by the factories they hosted, has led to a profound sense of national and local decline as those factories have gone east and the UK’s economy has changed.
It is common to hear that “Britain doesn’t make anything anymore”. This, as readers will hopefully be aware, is actually far from true. However, the raw figures are indeed stark. Between 1990 and 2009 the percentage of UK Gross Domestic Product attributed to manufacturing fell from 22 per cent to just over 11 per cent. Perhaps more deeply felt in terms of the impact on local areas, employment in the sector fell from 5.2m to 3.1m.
Industrial decline, whether perceived or real, is a significant factor. Owing to certain characteristics of UK manufacturing – the physical footprint of factories, the interconnectedness of industrial character and urban development (many town halls being built by prominent industrialists in the 19th century) – the way in which whole towns across the UK were shaped and survived (or didn’t) was a result of their industrial activity. Industrial decline was, and is, more deeply felt at the community level than decline in other parts of the economy.
There are two caveats I always stress when analysing the data on manufacturing. Firstly, a percentage share of GDP is always a relative figure. The enormous growth of financial services over this period has, by definition, made every other sector of the economy a smaller percentage of the total. Secondly, many of the ancillary functions once included within the definition of ‘manufacturing’ have now been outsourced and hence are recorded more accurately within the service sector (in its heyday ICI once maintained its own conference centre and hotel in Hyde for the use of its senior managers on business at the nearby plant). It cannot be denied, however, that manufacturing has in recent times become a smaller part of the UK economy, and it would be desirable on many levels if we put in place policies and an Industrial Strategy to help it grow.
A stronger manufacturing sector would offer a number of advantages to the UK. In Peter Mandelson’s memoirs, he talks lucidly of his time as a European Commissioner and his realisation that in government Labour had been too relaxed about where growth came from and whether we had a sufficiently broad and resilient commercial tax base to withstand the downturn (we didn’t).Growth in manufacturing would also certainly help our balance of payment figures and, most likely, our productivity performance. In addition, it would help bridge regional inequality by recognising the strength and competitive advantage that already exists in some parts of the UK.
Some people therefore advocate government setting a target for what share of GDP manufacturing should contribute. I am sceptical of this. It is far better in my view to put in place the right framework and then see what business can do. Top down national government targets, as we will likely see with the export target, are rarely met.
When writing about manufacturing it is also de rigueur to explain that nobody wants to see government ‘picking winners’. It is true that the government would almost certainly be awful at this. Government alone cannot deliver economic growth, but we must understand that government does determine, to a large extent, the conditions under which growth can occur. An industrial strategy is therefore not about the government trying to do the job of business. But what it is about is providing the conditions under which targeted sectors of the UK economy will be as competitive and successful as possible.
For instance, it is well known German manufacturers enjoy lower energy prices than us. This is because in Germany all of the costs of the transition to renewables are borne by domestic consumers. This means German domestic energy prices are substantially higher than ours, but German households actually have much lower average bills than us because their homes are hugely more efficient than ours. This is the result of many years of successful and consistent policy that has involved grants, loans and planning changes. Whether you like the idea or not, it is a coherent strategy. In contrast, in the UK there has been little visible relationship between energy and business policy since 2010.
So at the heart of industrial policy there must be a coherent and stable policy framework that allows business to make long-term choices on investment in people and plants and equipment. I would like to see a focus on the energy efficiency of UK households and businesses, the development of green gas to decarbonise heating, electric vehicles and the continued roll out of high-speed rail.
We should be looking at fundamental reform of the current system of business rates – exempting new plants and machinery – and work with industry to ensure the apprenticeship levy genuinely delivers the skills training required and isn’t just a payroll tax. But we should also make sure people understand that UK manufacturing isn’t just about aerospace and automotive – areas like food manufacturing are also extremely valuable to the UK Industrial strategy must cover them too.
There is no doubt the UK’s decision to leave the European Union is of profound significance for UK manufacturing. The EU is a major destination for our manufacturing goods, but in addition many UK businesses form part of supply chains for goods exported from other Single Market countries. For the purposes of calculating what is a ‘Single Market product’ (particularly for exporting from the EU under the terms of a free trade agreements) this UK involvement will soon no longer count.
A UK-EU tariff-free agreement for manufacturing goods is therefore essential for the future of the country’s manufacturing industry. This is on the easier side of what the government needs to do as part of Brexit and should be deliverable fairly quickly.
Our exit from the Customs Union will necessitate considerable investment in our customs system and databases, which will come at a cost, but we have little option but to bear this. If we want frictionless trade with the EU, based on digital recognition of country of origin registrations, then we will have to pay for the systems to do this.
There will be some advantages of leaving the EU. The EU’s external tariff on some raw materials, particularly in agricultural products where the interests of French and Irish farmers have held sway, is unjustifiable. This could have significant benefits for food manufacturers, though at the same time some areas, such as the growing UK wine sector, may face greater price competition with products from the rest of the world if those tariffs go.
I believe the most essential thing to ensure when we leave the EU, other than tariff-free access to the Single Market, is that the UK remains a country open to inward investment. There are some people who maintain that a company like Nissan isn’t a British manufacturing success story because the parent company is Japanese. This is a naïve view which fails to understand the global nature of business.
Inward investment into the UK, perhaps most visibly seen in the car industry, had produced thousands of good quality British jobs with good wages producing valuable exports. There will be some who see our exit from the EU as a chance to promote protectionism. This would be nothing short of a profound mistake.
The romantic view that we can all get a job for life at the factory down the road has long since dwindled. But an outward-looking, diverse UK manufacturing sector could yet thrive outside the EU. We must be bold in laying the foundations.