Why Britain needs a new kind of industrial revolution

With sterling topping an eye-watering $2 on the foreign exchange markets and further rises in interest rates likely after inflation nudged above 3 per cent, GM’s decision to produce the next generation Astra model at its Ellesmere Port plant and thereby safeguard (for now at least) 2,200 jobs represents something of a vote of confidence in UK manufacturing.

In fact, what’s left of UK’s car industry beyond GM is in pretty good shape (although not exactly making profits — in part thanks to the exchange rate).

The Japanese manufacturers are flexible and efficient (witness Honda, Nissan and Toyota) whilst the others have occupied highly-branded niches which offer a degree of protection from the serious over-valuation of sterling (Rolls-Royce, Bentley, Jaguar, Land Rover, Aston Martin, even BMW with the Mini).

More generally, the strengths and importance of the UK’s industry are not properly recognised: it might now account for just one-sixth of UK GDP but a remarkable three-quarters of all business R&D and two-thirds of exports.

All too often ‘traditional’ manufacturing is seen as second fiddle to the ‘knowledge’ intensive service sector. This is superficial and misses the point entirely.

Much of the remaining manufacturing base is very much ‘knowledge intensive’ and the two sectors have blurred to the point where it is difficult to disentangle one from the other.

Buy a new car these days and you buy a complex package of financial and other services: finance, servicing, insurance and so on; all of which provide service sector jobs.

Underpinning the car itself may well be cutting-edge research and design provided by a ‘service’ firm located in the West Midlands.

The same goes for high-tech aero engines where the value of after sales and servicing is almost as high as the initial production of the engine. In other words, think holistically and think networks.

But to compete in such high-tech and cross-sectoral activities, UK plc needs to invest more and train better. It’s a familiar story, of course. As Will Hutton has consistently argued, investment pay-back periods are too short and rates of return hurdles too high.

As a result, investment per employee and in R&D remain relatively weak by international standards and this contributes to lower productivity levels in the UK than in the US, France and Germany.

Whilst patent figures need to be interpreted with care, DTI figures tellingly show that for £10m invested in R&D, the UK produced only 1.8 patents against 4.4 in the US. Whilst the science budget has increased under Labour from £1.3bn to £3.4bn, the UK can only boast three firms in the world’s top 50 in R&D.

Add in the potential skills crisis identified in the Leitch review, and some of the challenges for business and policy-makers become clearer.

In spite of a major investment in skills and plans for change, Leitch concluded that the UK will only have managed to ‘run to a stand still’ by 2020, whilst international competition will have intensified further.

Combine these long-term weaknesses with the recent strength of sterling and it’s no surprise that the UK has seen a more rapid run-down than any other European economy, with well over a million manufacturing job losses in the last ten years.

In part this is linked to the UK’s much-vaunted flexible labour markets; great at creating jobs, they are equally ruthless at destroying them when international firms look to cut capacity.

Even economists who were previously pretty relaxed about such trends are now starting to question whether this has gone too far. Too much manufacturing capacity may have been lost, and the failure to develop the new, dynamic manufacturing industries of the future may come back to haunt us in terms of lowered prosperity and balance of payments problems.

The differences with other countries are striking. Whilst competing in globalising industries, many continental manufacturers still have local roots, more protection from hostile takeover, and the availability of local and long-term finance through regional development banks or in some cases the state through semi-public ownership. The playing field isn’t level.

So, what can government do? Ideally a depreciation of the pound would help exporters and encourage more investment. This would also help reduce the UK’s trade deficit. But with an independent Bank of England targeting domestic inflation, such a rebalancing is highly unlikely.

This makes it even more imperative that the UK develops a more pro-active industrial policy; not one based on protectionism and ‘national champions’, but rather based on fostering networks of high-tech small firms linked with innovations and ideas coming out of revamped universities, underpinned by more investment in R&D, skills and training.

Such a policy needs to be forward-looking, to plan for future technologies (such as nanotechnology) and to back them.

The strengths and weaknesses of recent policy can be illustrated by the response to the recent MG Rover crisis. In the five years up to the collapse, the RDA Advantage West Midlands did a great job in helping suppliers to diversify and to move into new growth sectors such as medical technologies. Around 12,000 jobs and key engineering skills were saved in the process.

Considerable resources have also been made available to retrain workers, but mainly up to level 2 (GSCE equivalent) skills. This is a good start, but the growth industries of the future, like aerospace, will need level 3 or 4 skills.

In other words, we need to go further and faster if the UK is to compete in high-value added activities in a globalising economy.

David Bailey is Professor of Economic Policy and International Business at the Birmingham Business School.