How can we rebalance the UK’s economy? Increase the focus on manufacturing.

Manufacturing FDI is powering the UK’s regional resurgence…

As EY’s 2016 UK Attractiveness Survey shows, the UK is continuing to raise its game in attracting manufacturing FDI, with the total number of 183 manufacturing production projects recorded in 2015 representing the UK’s highest number since 1998. The results show that the UK ranked second in Europe securing manufacturing production investments in 2015, taking 13% of the total European market, the same as 2014.

Manufacturing FDI projects into the UK, 2006-2015

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There is a link between the revival in UK manufacturing FDI and the recent rising performance of the regions outside London. With London attracting only a tiny slice of manufacturing production investments, any increase in the UK’s performance in securing manufacturing FDI has a disproportionately positive impact at a regional level. An analysis of the percentage of manufacturing projects in the total investments for each region shows that manufacturing’s share of projects is very significant for all regions except the South East and London.

UK regions’ share of manufacturing FDI projects into the UK, 2015

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…and underpinning existing regional economic activity.

The decline of manufacturing is widely chronicled yet it remains central to economic activity in the UK’s regions outside London and the South East. Manufacturing accounts for a higher share of economic output and employment than professional services in every region of the UK except London and the South East and in the North East, West Midlands, East Midlands, Northern Ireland and Wales, it accounts for more economic output than professional services, IT and communications and financial services combined.

manufacturing table 1

Manufacturing table 2

The situation is even starker at the city level. Manufacturing accounts for 25% of GVA in HulI, the next highest sector is Wholesale and retail with 13% and 16% in Stoke-on-Trent compared to 3% for professional services. By contrast in Reading, manufacturing contributes to 3% of GVA and IT and Communications accounts for 25%. It is strikingly clear that the success of any attempts to rebalance the UK geographically must take into account the importance of manufacturing in the regional economies outside of the South East. The idea that the UK can transform to new industries  and rebalance is a nice sound bite but the reality is that without a stronger manufacturing sector, the attempts to rebalance the UK economy will fail.

We must embrace the manufacturing multiplier.

Manufacturing is not just a source of factory based projects and jobs but it also acts as a multiplier; stimulating other investment. There were 183 FDI projects to establish new (and follow on) manufacturing facilities in the UK in 2015 but another 172 projects by manufacturers across the value chain. In the West Midlands, five of the stimulated projects were in R&D facilities and four logistics bases. Yorkshire and Humberside attracted six HQs and three R&D facilities from manufacturers. Despite attracting little direct investment in manufacturing facilities, London did secure 12 HQ and 38 sales and marketing investments from manufacturers. Other sectors do not provide the all-round stimulus to economic activity that manufacturing does.

Manufacturing FDI 2015

Manufacturing 3

Manufacturing is also a key driver of employment growth. When we compare different types of FDI project, it is clear how powerful manufacturing is in creating jobs. As the chart shows, a manufacturing project typically creates over 180 jobs. Only logistics, often closely linked to manufacturers, comes close in terms of impact. Although modern plants may need less employees, the direct impact of  a new factory plus the manufacturing multiplier will mean that manufacturing will remain the investment most likely to boost local and regional economies.

Average number of European jobs created (where disclosed) by different types of project in 2015

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The UK is a competitive manufacturing location.

Commentary on UK manufacturing is far too negative. The sector accounts for almost 10% of UK economic output and nearly 8% of employment. In 2015, one third of UK FDI projects were by manufacturers and the UK attracted more manufacturing FDI projects than Germany. Manufacturing jobs typically pay more than service sector jobs and are ideal for developing skills in young people.

And there is more to play for. Across Europe, 7 of the 10 largest sectors for FDI projects were manufacturing sub-sectors. The UK has over 20% of the European FDI market but only 14% of manufacturing. As our previous work on Reshoring has shown, manufacturing is changing from a low wage to a high skill activity and this is creating opportunities for the UK to grow its presence in the sector. Industries such as electrical, optical, chemicals, aerospace, pharmaceuticals and paper all offer real opportunities for the UK in future.

manufacturing 5

We need a strategy for manufacturing.

The UK needs a more clearly articulated and ambitious manufacturing strategy. The UK regions have shown they have the capability to attract an increasing amount of manufacturing investment and the market for manufacturing investment is large – there is still more market share to win. This will not be achieved by sitting and waiting. We hear much about the failure of governments to “pick winners” yet as the performance of the UK regions with FDI in 2015 shows, collaboration between government and business can drive change.

To be successful, the first step is to identify sectors that offer the potential to drive economic growth and boost the UK’s regions and cities. This needs to be much more comprehensive than the current light touch approach. A significantly more ambitious and more integrated sector approach across skills, infrastructure, research, tax and trade is required. This should increasingly be developed through a combined national and region/city effort to capture the energy and drive we see in our regions and cities as government devolves more economic decision-making power to them.

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