It’s make or break time

Is manufacturing in decline? Is government abdicating its responsibility to our future prosperity? And what is ‘manufacturing’ anyway? John Dunn and Paul Carslake investigate.

Michael Leahy, general secretary of steel union ISTC, had had enough of Gordon Brown’s indifference to the state of manufacturing in the UK. He had grown weary of listening to the Chancellor’s cure-all for industry’s ills — improve productivity.

And so, backed by all the other major trade unions, Leahy had come to the Trades’ Union Congress annual conference in Glasgow earlier this month to beg the government to push manufacturing higher up the political agenda.

Productivity alone was not going to save British manufacturing, the unions told the Chancellor. Something had to be done about the ‘grossly overvalued’ pound which was ‘throttling’ British manufacturing. And there were calls for a minister for manufacturing and for the Bank of England’s Monetary Policy Committee to appoint someone with real industrial experience. ‘Gordon, for Christ’s sake,’ cried Leahy to the mass of delegates, ‘take manufacturing seriously and save it!’

But is the TUC right? Is manufacturing that important to Britain’s economy and does it matter much if its decline is not halted? Is the City of London to blame for everything? Are we actually measuring manufacturing’s worth properly? And in this so-called post-industrial age of the internet and dot.coms, is it not time to redefine what we mean by manufacturing?

Financial commentator Eamonn Fingleton, author of the book In Praise of Hard Industries, reckons he has the answers to some of these questions. He argues that manufacturing is more important than the post-industrial services in three vital ways. Manufacturing offers a wider range of jobs than service industries and thus creates jobs that mirror closely the skills profile of the community. It creates goods that are highly exportable because they require little or no adaptation to different markets. And it pays higher wages than the service industries for the samelevels of skills needed.

Fingleton also holds the City ofLondon uniquely responsible for keeping the pound too high since the end of the last century, so crushing exports, squeezing exporters’ profit margins and reducing the money available for investment. But quantifying the damage done to manufacturing industry as a result of all this is not easy — not least because the very nature of manufacturing activity itself is changing. Mike Gregory, Professor of Manufacturing at Cambridge University, answers another of the questions. He claims that the definition of manufacturing has become too narrow. Many of the activities that used once to take place within a factory’s walls now appear as part of the service sector. There is much more ‘manufacturing’ taking place in Britain than the figures suggest, he argues.

While academics and pundits will theorize, the TUC conference showed the level of frustration that has built up within the manufacturing community, and which has fuelled months of debate over what kind of shape UK manufacturing is really in.

Early this summer there were the regular CBI, British Chambers of Commerce and EEF trend surveys, all showing a slowdown in manufacturing activity and worsening trade conditions for engineering. Then in July the TUC launched its manufacturing manifesto Britain Can Make It. This bitterly attacked the post-industrial doctrine in Britain that manufacturing no longer mattered and that the UK’s future was instead secure with a mix of service industries and e-commerce.

Slowdown showdown

Anyone who believed that, the TUC said, showed ‘breathtaking ignorance of today’s economic realities and the trends of the past 40 years’. And it put forward a 30-point programme to tackle the crisis in manufacturing, which included strengthening the euro against the pound.The TUC report was followed by another, Rebalancing The Economy, which argued that the government’s current spending plans were creating a two-speed economy with a booming service sector and a depressed manufacturing sector. The study was commissioned from Oxford Economic Forecasting by five organisations representing some of the UK’s biggest traded goods sectors including machine tools, aerospace, farming and steel. It forecast that if nothing changed, manufacturing industry would be in an even worse state four years from now. And it called on the government to shift the balance of its expenditure from current account spending to capital investment. This could increase GDP by 0.5% over four years, said the study, boosting output by an extra £5bn. The report also suggested giving investment a further boost by bringing back 100% first year allowances for companies investing in plant and machinery.

The debate was aired in the House of Lords in July, at the instigation of liberal democrat peer Lord Ezra, a former chairman of the National Coal Board. Manufacturing output had fallen steadily in the past half century, said Ezra. In 1950 it provided 37% of GDP. Today it provides less than 20%. In the early 1980s we had a surplus in overseas trade in goods. Last year it was £29bn in deficit. Since May 1997, over 200,000 jobs had been lost in manufacturing industry — ‘that is 10 per hour.’ Yet despite the decline, said Ezra, the manufacturing industry still provides 4 million out of the 24 million jobs in Britain (around 17% of the workforce), and accounts for 62% of our exports.

The government has become adept at brushing aside such statistics. Industry minister Lord Sainsbury says he does not believe manufacturing has to represent a particular percentage of GDP, or that Britain needs a trade surplus in manufactured goods. The decline in manufacturing in Britain, he maintains, is no worse than that in of most of our competitors.

He has a point. As the figures show, in all major industrialised countries, employment in industry is on the wane. In this respect, the UK is just a shade below the average for the G7 nations, though the decline in jobs in the industrial sectors in Britain has been faster than elsewhere.In terms of measuring value added by manufacturing as a share of GDP, its share in the UK is actually higher than that in the US or in France — both countries where the ‘decline’ of manufacturing is not considered to be an issue.

Fingleton believes that the biggest problem with manufacturing in the UK is that for over 100 years we have been led to believe that it doesn’t really matter whether manufacturing is successful, because Britain dominates the world in financial services and they will support the economy.’But Britain’s period of greatest economic success was in the mid-19th century when it was by far the world’s most successful manufacturer. Since then, manufacturing has been in decline,’ he says. ‘There is nothing wrong with services. However, somebody must be generating the basic economic value that pays for everything else — and that generator is largely manufacturing.’

Fingleton argues that we shouldn’t measure manufacturing’s contribution as a percentage of GDP — that fails to exclude imported materials and manufactured goods and can hide the fact that much so-called manufacturing is little more than an assembly job. The government, for example, is quick to point to the UK as Europe’s largest producer of PCs, televisions and mobile phones, with information technology and electronic communications industries representing 7% of GDP. But what this data omits is just how many of the chips, LCD screens and other high added value components are imported.

Manufacturing measures

Fingleton suggests instead that we measure manufacturing by the number of jobs it supports as a share of the total workforce. On that basis the UK is worse off than strongly manufacturing oriented countries such as Japan or Germany. If fewer people in Britain are employed in manufacturing compared with Japan, that has a substantial effect on Britain’s place in the world wages league table, says Fingleton.

He blames the City. ‘It has been disproportionately influential in the public debate in Britain and has always had a vested interest in a strong pound. To me it’s obvious that the pound has been overvalued for virtually the last 100 years. It has been an enormous penalty for British exporters. It has deprived them of their retained profit needed to invest to make sure they are the world’s leading players.’ The basic reason manufacturing is important to a rich nation like the UK, says Fingleton, is that it enables companies to equip their workers with huge amounts of capital and proprietary knowledge. This in turn boosts companies’ productivity and allows them to succeed in markets where those who cannot afford the investment cannot compete. Japan now has a virtual world monopoly of LCD production for this very reason, Fingleton suggests.On the other hand, software requires very little capital investment, he says. ‘This means an entrepreneur in India, say, can afford to equip his workers with the same amount of capital equipment to produce computer software as a company in Britain.

‘The countries that have really succeeded in terms of boosting their position in the world wages league table are those driven by manufacturing.People in Britain are never going to be poor on any world measure. Britain is still a rich country. But whether it can ever regain the position it occupied in the mid-1850s is debatable.’ Fingleton’s detractors would say: so what? Times have moved on. For most people, the relevant issue is how to leverage the best industrial policy from the government, to make the most of the kind of industries we have now, and can create for the future. To this end, the statistics are just ammunition — though they can be used in a confusing way.

Some proponents of engineering and manufacturing have taken steps to prove that the engineering sector is actually much larger than most people think, because of the engineered element of almost every part of our daily lives. Their point is that engineering is vital to the modern world, so the government ignores it at our peril. At the same time, other figures will show the contribution of manufacturing activity to the overall economy is in decline — again, data that the government cannot afford to ignore.

The issue of ‘decline’ is complex, and clouded by structural changes, technological advances and the increase in outsourcing. Cambridge University’s Gregory says the definition of manufacturing should include the whole process or value chain from understanding the market and designing the product through to getting it made and distributed. And on that basis it is hard to assess how much that process has declined in Britain because activities in the chain have fragmented.

‘The structure of business has changed dramatically and a lot of what we now call services used to be within the definition of manufacturing.’But it is not clear what has been hived off as ‘services’, or how much. ‘You could say so what, it’s only of historical interest. But to those who argue that manufacturing is declining, I would say that if it is, we are doing a lot more of it than you think!’

Gregory says his gut feeling is that manufacturing in the UK is going with the grain of the British way of doing things. It is moving, he says, towards smaller, specialist companies working in networks. The public’s perception of ‘dark satanic mills’ is fading, he believes, with the growth of high tech, exciting entrepreneurial companies. ‘I’m optimistic. Our ability to work in small teams, moving and reconfiguring quickly, and working without too many internal rules and regulations — it might just be rather good for us.’