Made in Britain: the man who can see an industrial renaissance

This has been the gloomiest week in years for the economy, yet Richard Lambert is unashamedly upbeat about the prospects for the UK becoming a great industrial nation again.

"It's not too fanciful to think we could have a manufacturing renaissance in this country," says the director-general of the CBI. "We're at a moment when some enormous investments are coming very visibly over the horizon."

Lambert cites the building of new nuclear plants, which are needed to supply a fifth of our future electricity, while the potential investment going into renewables, such as offshore wind turbines, reminds him of the oil industry boom in the 1970s.

"No kid in their right mind would have gone into nuclear engineering in the last 30 years because there would have been no jobs," he continues. "But now there will be. We will be the place in Europe where nuclear is happening. Our universities are already starting new courses."

But what the former Financial Times editor finds most striking is what he sees out on the road. Much of his time at the CBI is spent travelling around the country, visiting real people running real companies, and it's these green shoots that make him optimistic about an industrial renaissance.

Manufacturing's share of the economy is, he says, actually higher than stated because the numbers don't take into account the services that are outsourced by many manufacturers. With the right comparisons, he reckons manufacturing is now about 15 per cent of the economy. His list of budding businesses to watch range from the Belfast-based diagnostic biochip company Randox, to the specialised steelmakers Renishaw and Spirax Sarco. Others, such as Sheffield Forgemasters, one of the UK's oldest steelmakers, are making a comeback with fat order books thanks to demand from China.

"You only have to visit companies as I do to see what is happening all over the country. One of the things about this job – I don't want to bang on about this too much, because we are a service economy – is that you are reminded that the UK is still great at manufacturing.

"We're good at engineering but we undervalue it. The supreme example is Rolls-Royce where the unsung hero is Ralph Robbins: everyone in the City said he was completely hopeless because he kept investing in products. Look at it now."

We meet in his tiny and rather threadbare office at Centre Point, the listed 1960s office block in central London – a perfect setting for our thrifty times. He's just come back from a visit to the Uttoxeter headquarters of JCB, the privately owned diggers-to-tractors business that was founded in 1945 by the father of the current owner, Anthony Bamford. He's still buzzing about what he saw there – he still has his nose for a story: "[Bamford's] dad was the first to make trailers out of steel, and then they made their own diesel engine. They have always reinvested heavily in the business – and have never made an acquisition.

"JCB now sells well over two million a year and shifts more machines in India than in the UK," he adds. "They make them in India and they're number three in the world after Cat and Komatsu. It really is the most astonishing story."

Lambert is off again on the road this week to New Dehli where, in a landmark move for the CBI, he's opening the organisation's first office in India. He hopes to build on the strong trading links between the two countries, just as the Bejing office has already helped boost trade between the UK and China.

Lambert's rosy optimism may be regarded as counter-intuitive, even contrarian coming after last week's OECD forecast that the UK is on the edge of recession, and the CBI's own report that manufacturing orders have slowed. But he's a realist too, describing the present financial crisis as the worst he's seen in 40 years of watching business at close quarters, both as a Financial Times journalist for 35 years – 10 as editor – and in his three years on the Bank of England's Monetary Policy Committee.

That's why he throws up the challenge to politicans and companies alike. "The really interesting question for public policy is this: what can be done, either by business or by government, to try to capture some of the value added by all this stuff to our economy?

"If, as seems likely, our nuclear reactors will be built by French experts, how can we ensure we do more than put the concrete in? That's a challenge – for business and for policymakers. You're not allowed to use words like 'industrial policy' in this country."

Although he doesn't say so, you suspect he thinks we should have such a policy, or at least have the debate. "There's a chance of creating great opportunities. It's a really high priority at the CBI. Governments are thinking about it, so is the Opposition. Every-body's thinking about it."

Lambert is naturally agnostic about politics, more interested in how people make and lose money than Westminister gossip, which is how he sees most political reporting. Having said that, he will always be remembered for causing FT readers to choke on their cornflakes in 1992 when the paper, under his editorship, advised them to back Labour in the election.

Lambert groans when I remind him, saying: "That's ancient history." But while he believes the judgement was appropriate at the time as the UK was suffering from serious economic mismanagement, he regrets "shocking" his readers. " Looking back, I should have warned them of what was coming."

Being interested in "policies, not politicians" is what is important to the CBI, he says, and it means he can be at all the party conferences this autumn with impunity. But that doesn't mean he hasn't taken the Government to task over the big issues of the day. He has been an outspoken critic of some of the more controversial fiscal changes over the past few years and the CBI has called for a radical overhaul of corporation tax, an independent tax commission, simplified and lower tax for small business and, most of all, a "no surprises" approach that allows proper scrutiny and consultation.

His quiet, modest tone works well, contrasting strongly with that of his predecessors in the role, particularly the fiery Lord (Digby) Jones. Perhaps surprisingly to many, he's also proved a punchier and better communicator than other incumbents such as Sir Howard Davies and Lord (Adair) Turner. He comes across as slightly donnish or, as a former FT colleague put it, he has what the Italians call sprezzatura – a sort of high-spirited effortless superiority.

Diplomatic but still robust would be the best way of describing his view on the Government's current predicament: "I think they got into a tangle over the last 15 months. If you think back to the pre-Budget review, which was when the wheels really started to wobble in this sense, there was the election that never was. It is un-thought-through initiatives that have come back to bite them."

Education and tax are still the subjects that get the CBI's members most worked up, and tax is perhaps the most vexacious issue Lambert has had to deal with in his two years at the helm. "We understand that public finances are in a poor shape, that we can't have big tax cuts right now," he says. "But let's have a strategic sense of where we're going and measure our policy initiatives against that. Our message to the Treasury is that consistency, clarity and certainty are very, very important. Our tax rate needs to be competitive against other major industrialised countries."

The message is more than clear: the CBI doesn't want to see more companies like Shire, Henderson and Regus moving to Dublin to pay less tax.

Nor do CBI members want to see any attempt by the Treasury to tax foreign profits – a move they hope has been abandoned. It was, says Lambert, the controls on foreign companies that raised alarms about taxing assets such as brands and intellectual property. "This would have had very serious consequences for some firms. Overall, the proposals were a bit of a ragbag. We were happy to go ahead with two but not the third. The Treasury's position was that if we go ahead with two, we'll lose out.

"Our argument to them was that we didn't think the fiscal cost would be as great as they did. That's why they agreed to consult business on whether the fiscal consequences of giving away the deferred interests would need to be matched."

After three years of strong growth, he says, Britain should not be heading for a downturn. "The public finances weren't in as great a shape as reported in the Budget. It's clear that the Treasury's economic forecasts were too optimistic. Well, they weren't wildly out of consensus – they were on the optimistic side of the consensus. Our own forecasts were a bit below theirs. The consequence – plus the fact that financial services is one of the big taxpayers, both in corporation and personal tax – is that we are going to see revenue slipping. The figures for public borrowing in the last few months aren't good."

While Lambert agrees that the Government has done some good things for education over the years – mainly getting rid of the really rotten schools – there is, he believes, still too far to go. "I think the greatest problems are in the secondary system in literacy and numeracy and, secondly, in science, technology, engineering and maths. There's a strong feeling that the shift to a dual award in science (all three sciences studied but two GCSEs) has weakened the knowledge base. There is anxiety about literacy and numeracy skills."

Diplomas are the latest hot subject among employers, who dislike some of the latest qualifications. There are grave concerns that those for languages, science and humanities are not as rigorous as GCSEs and A-levels. "In science," says Lambert, "the risk would be that it would become too applied, and a further step down from the dual award. Our members are concerned that they're going to be dropping GCSEs in 2013 and having an entire diploma programme, and that wouldn't be as rigorous as they would like. It's a very sweeping set of changes."

When I suggest that today's GCSEs are themselves less rigorous than in the past, Lambert is quick off the mark: "They get very cross if you say that because they say you're an old fart. But I think it's a legitimate argument that in this country we have failed in a sense to do what the Germans have done, which is to give respect to practical courses."

Most employers, he says, are also bewildered by the volume of qualifications and training, and would like them simplified. They also want greater incentives to get the young through higher education.

The next priorities on the CBI's hitlist are energy security and climate change. As Lambert points out, Britain is no longer energy independent for the first time in its industrial history. "This is a real concern for business. Our wholesale gas prices are higher than in continental Europe, which is pretty much unheard of. There is also concern that we need more generating capacity because, without it, by 2016 there's a real danger that the lights will go out."

Business wants a proper plan that will build a secure and diverse energy supply for the long term, he says. That's why he's an enthusiastic supporter of the Independent Planning Commission; he believes it will take the politics out of planning a nuclear future – so long as it maintains democratic legitimacy.

Most businessmen, he says, have been swift to put the effects of climate change much higher up the agenda than in the past as they see opportunities as well as costs. "There has been a big change. Many are saying they want to be ahead of the game."

None more so than at the CBI itself. Lambert reveals that his staff have gone totally green.

A rather pained look comes across his face as he explains: "My wastepaper basket's been taken away. It has to be sorted and recycled – I'm not allowed to waste."

The figures add up to recession

* On Tuesday, the OECD forecast that the UK's economy will shrink at an annual rate of 0.3 per cent in the third quarter of this year and 0.4 per cent in the fourth, so meeting the technical definition of a recession.

* The Purchasing Managers' Index came in at 45.9 last month, below the 50 mark that indicates a shrinking of the manufacturing sector. The index had improved slightly from 44.1 in July. This, though, was the fourth negative reading in a row – further evidence that the UK economy is soon to enter a recession.

* In this month's CBI Industrial Trends Survey, 20 per cent of firms said they believed their volume of output would increase in the coming quarter, while 33 per cent expected it to fall. This -13 percentage-point balance is the worst since the -28 per cent of December 2001.

* A 31 percentage-point balance of manufacturers expected prices to rise during the same period, slightly lower than July's 18-year high but consistent with enduring and intense upward price pressures.

* In the three months to July, average unit costs rose for 65 per cent of manufacturers, while only 7 per cent saw a fall. The resulting balance of +58 is the largest since October 1980.

* The CBI's most recent forecast, published in June, predicted a slowing of UK GDP growth from 1.7 per cent this year to 1.3 per cent next.

* Financial services account for 25 per cent of all corporation tax and 12.5 per cent of all income tax. Financial services and the oil sector accounted for 55 per cent of large business corporate tax receipts in 2006.

* The Pricewaterhouse-Coopers Total Tax Contribution survey, involving the 100 Group of Britain's biggest firms, showed the largest 15 members of the group accounted for 75 per cent of all corporation tax paid by the group as a whole in 2006.

* According to the Office for National Statistics, manufacturing represents 14.7 per cent of the UK economy, as measured by "gross value added", which is GDP plus taxes on products, minus subsidies on products and business services. Finance represented 27.7 per cent.

Jacob Lloyd

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