A welcome recognition of the need for an industrial strategy…
The Government’s commitment to an industrial strategy is to be welcomed. After years of market centric policy driven by the “Washington Consensus”, having the UK Government recognise it has a role to play in the economy is a positive development. It has always amazed me that businesses have not been more strident in pointing out how they have to compete internationally against companies that are recipients of direct or indirect support from their national governments. It is equally encouraging the industrial strategy is also to be targeted on boosting activity in the UK’s regions and cities.
Despite being written off by many commentators, manufacturing remains very important to the UK economy with around three million people directly employed as well as a significant number of services jobs directly supported by the sector. Based on research elsewhere and in the UK this could account for 1 to 2 million more manufacturing related jobs. this is consistent with the findings of EY’s 2016 UK Attractiveness Survey which found that manufacturing has a significant multiplier effect – for every FDI project in a manufacturing plant, there was a matching investment across the supply chain in areas such as logistics, R&D and sales and marketing.
…with some sensible proposals…
The broad direction of the proposed industrial strategy with extra support for research and a focus on skills and infrastructure is consistent with the needs identified in our investor research. Skills and infrastructure consistently top the list of attributes that corporates tell us drive investment attractiveness, especially in the UK’s regions.
An industrial strategy also provides the opportunity to develop integrated policy. Starting with the identification of priority areas, it should then be possible to identify actions required such as the infrastructure and skills that will enable improved competitiveness in the chosen areas. For example, manufacturers are clear that roads are a priority for moving goods around the UK, and we know digital skills are critical for companies looking to benefit from the opportunities created by advanced manufacturing technology. Applied at a regional level, the potential is there to ensure that resources are being directed to the highest value uses.
…but not adequately matched to the UK’s challenges…
So far, so good. However, the UK’s industrial strategy is more appropriate for a country with a strong and growing global position in manufacturing than the UK currently. The UK has seen the number of people employed in its manufacturing sector decline in the last two decades, with offshoring of production a key reason. EY research found that the UK has off-shored a greater share of industrial production between 1995 and 2011 than any other developed country. As a consequence, investment in manufacturing has lagged our peers. Our analysis of the potential for re-shoring showed that Germany had around 270 robots per 10,000 manufacturing employees (compared to 150, 120 and 60 per 10,000 employees in the US, France and the UK respectively). It is also clear that UK supply chains have been hollowed out over this period and we lack depth in a number of growth sectors.
Our 2016 UK Attractiveness Survey showed clearly that the declining relative competitiveness of the UK is likely to be compounded by Brexit because the current arrangements for access to the single market have a significant influence on the UK’s appeal to foreign investors . Today, UK manufacturing is, to a large extent, part of complex extended value chains which are based around parts moving at speed, freely across the EU. UK manufacturers tell us they have limited stock, between 1 and two hours of production worth, in their factories and rely on timely deliveries to manage their Just-In-Time supply chains.
Modern manufacturers have their parts and goods on the motorways, autoroutes and autobahns of Europe not sitting in warehouses. While the risk of tariffs has tended to dominate the debate around Brexit, it is non-tariff barriers causing delays at customs that risk creating the most disruption. the manufacturers I have spoken to have very little confidence that existing technology could be upgraded easily, cheaply or in a timely manner to cope with the volume of customs’ checks that would be required if the UK left the customs union. It is clear that the risks and uncertainty surrounding Brexit and the nature of the UK’s future trading arrangements with the EU, whatever the future opportunities, mean that the UK’s industrial strategy needs to be even more ambitious than would be suggested by the UK’s current market position.
…more ambition is needed…
The promised investment of £4.7 billion in research, which was announced prior to the formal launch of the industrial strategy, is significant and should help improve the UK’s competitive position. On skills and infrastructure, the aims, scale of resources and timing appear much less ambitious and are unlikely to have much of an impact in the near term, creating the risk that the UK is slow to respond to major technology driven shifts in the global industrial landscape. The proposals for improved technical education are good but the scale of proposed resource does not appear to be of the scale required based on the level of skills challenges I have heard manufacturers articulate.
We need to invest more and sooner than current plans are indicating, particularly if we want to boost economic activity in the UK’s regions. An obvious starting point would be a commitment to improve east to west transport communications in the north with better rail and road links. Travel times between the major northern cities and ports are far too long and a major drag on productivity. An ambitious investment would be a clear example of an integrated strategy and underline the Government’s commitment.
The gaps in the strategy are not solely about physical capital. . Our post-EU referendum survey of foreign investor needs found that incentives are seen as important in maintaining the UK’s attractiveness in future. If the UK wishes to be a global player, we need to act to change our current competitive position. This will require commitment of greater resources on incentives to target identified assets and investors. This may also require that the UK Government is willing to consider investing in/funding selected companies or technologies to kick-start UK growth. Thirty years of neglect of industry in the UK’s regions will not be reversed without more radical thinking and a significant scale of resource commitment.
…together with more strategic thinking…
The industrial strategy holds out the promise of sector specific initiatives, with a number of priority sectors identified as having future potential. However, modern manufacturing is more complex than a pure sector focus implies. Today, trade and competition in manufacturing are based around Global Value Chains (GVCs). We have moved a long way from Ricardo’s world of country based trade driven by comparative advantage. Today, companies tend to specialise in elements of the value chain and this forms the basis for in-country clusters. So, design in one location, production in another and assembly in a third would not be unusual. These roles are in the midst of a dramatic shift as technology changes products and processes. A long-term industrial strategy needs to start with the analysis of global value chains and an identification of what is required to create competitive propositions in this emerging world and how these might be aligned across the UK’s regions. The UK’s proposed strategy appears too “laissez faire” to be sufficient to drive the scale of change required to re-position UK manufacturing as the driver of faster growth and more geographic balance. If we are to achieve something we have failed to do for over three decades, an incremental approach is unlikely to be successful.
…and improved skills in management not just in the workforce.
The Green Paper talks about skills and plans to address skills shortages but doesn’t talk much about management and especially management of our largest companies. This is despite the presentation of a significant amount of data highlighting how the UK lags our peers in productivity. This is before we consider adjusting for the fact the UK has off-shored a proportionately higher share of output than our peers. By off-shoring more, the UK has derived more of its recent productivity gains from the skills and assets of overseas producers than our peers, hence our core productivity performance is most likely even worse than the base data. It seems likely that management quality may be a factor holding the UK back and yet the industrial strategy has no significant proposals in this regard. It may be convenient for management and owners to identify skills shortages in the workforce but maybe they should look in the mirror?
Transformation, not incremental change is required.
The Green Paper is clear that it is the starting point of a journey. This is important because it sets out an incremental approach to change that is not sufficiently ambitious for the situation the UK finds itself in. With Brexit on the way, creating a competitive industrial sector sufficient to drive growth across the country requires transformation, not tinkering.