Engineering growth: Can we make it?

Will 2011 be the year of manufacturing? It's going to be tricky

After a year of Battle of Britain commemorations, it is impossible when reflecting on the rebalancing of the economy not to be reminded of Winston Churchill's famous words: "Never has so much been owed by so many to so few."

A shadow of its Victorian self as the "workshop of the world", British industry is being asked to undertake a Sisyphean task: to pull the economy into a strong, sustained recovery. Manufacturing accounts for 12.8 per cent of GDP; jobs have shrunk too, to just under 2.5 million now, less than one in ten of the workforce. In 1981, before the great restructuring of the Thatcher years (back then towards services and finance), it was 6 million. The recession accelerated the baleful long-term trends, with a 10 per cent loss of output in 2009. Yet the sector accounts for more than half of Britain's export earnings.

Like the RAF in 1940, our manufacturers have a good deal riding on their efforts – and some advantages that may not be immediately obvious. Value-added has been growing as firms are forced into more high-end markets, more Ozwald Boateng suits than George jeans, if you will. And the plus side of having fewer workers in the sector is that productivity is also healthier than it used to be. The recessions of the early 1980s and 1990s cut off the "long tail" of low-productivity firms; the latestrecession has been capricious, though, with the credit crunch damaging good businesses, especially smaller ones.

The worry is that the sector is too emaciated to achieve the growth demanded of it, and it would take truly heroic growth rates to see manufacturing back even to a fifth of GDP. Growth over the past year of 5 per cent is barely a start. Things have been made somewhat easier for industrialists by their friends in the Bank of England. As a welcome side-effect of the Bank's policy of low interest rates, sterling is down around 25 per cent from its 2007 peaks, one of the sharpest mark-downs for the pound, which in the past has usually generated an export-led boost – sterling's departure from the European Exchange Rate Mechanism in 1992 set up the long boom which ended in 2008.

So far, though, the evidence is mixed. The latest trade figures show a gap as large as ever. Surveys show a strong pick-up in orders for next year. But hitherto, some exporters have taken the benefit of a lower pound by maintaining their foreign prices and improving revenues. That has helped at a time when some might otherwise have gone bust – but it has not prompted the growth in output that might have been expected, though it may come.

One problem is our pattern of trade. UK exports to China rank way below those to Ireland or the Netherlands, say. In the 1960s, the UK grew slowly because we were locked out of the then fast-growing Europe; now some 55 per cent of UK exports go to the stagnant eurozone. Hence the high-level delegations led by David Cameron to India and China, and the appointment of the former boss of the CBI, Richard Lambert, to be high commissioner to India. Beyond that, however, is the conundrum of state intervention. Is it best, as George Osborne says, to focus on the public finances and to push the headline rate of corporation tax down? Or is it better actively to support manufacturing through state support, epitomised by the last Labour government's grants to help secure low-carbon vehicle manufacture, as with its £20m grant to Nissan in Sunderland? That approach, to some extent at least, is still supported at the Department for Business.

The differences are sometimes exaggerated. Vince Cable in opposition openly called for the abolition of the department he now heads. Once in office, he declared that he wouldn't be going around the country "with an open chequebook". So the politically loaded loan to Sheffield Forgemasters was withdrawn. But of much more long-term concern is foreign investment. The abolition of the regional development agencies in favour of "local growth partnerships" is a gamble. After the Kraft takeover of Cadbury and Ferrovial's stewardship of BAA, foreign investment finds few fans. But in the motor industry and the City, the infusion of overseas capital and managerial verve since the 1980s has transformed performance: in Crewe, VW has increased Bentley's output tenfold in a decade.

One thing is clear however: the strategy of cutting the headline rate of corporation tax by reducing various investment allowances does hit at one of the few pro-manufacturing biases in the tax system, as industrial firms tend to spend more on heavy equipment than, say, banks, where the cuts in corporation tax bills will offset the new levies on them.

Yet industrial policy, even under the uneasy and neglectful single-sex partnership of Mr Osborne and Mr Cable seems weak. The Government's recent document on growth identified "advanced manufacturing" alongside creative industries, business and professional services, retail, construction, and life sciences as areas where the UK has an edge that could be honed, though there waslittle detail on how. It is a long time since a government could unveil, as Tony Benn did in 1974, a White Paper with the boldly ambitious title of The Regeneration of British Industry and put billions behind it.

Then again, manufacturing, as much as politics, has changed its nature since then. Britain will never be able to make a T-shirt as cheaply as Indonesia. Is bio-technology, with so little tangible in it, services or manufacturing? "Advanced manufacturing" is more about research, innovation, design and software than sewing or metal-bashing, blurring the traditional border with the service sector. A firm such as Rolls-Royce derives its value-added from complex research and development, rather than the bits of alloy in its engines.

It is true that there are few "indigenous" names left in the FTSE-100, with Rolls-Royce, GKN and BAE the main survivors. But that ignores many successful smaller, privately owned concerns, such as JCB , Brompton bikes, Alicat catamarans or John Smedley textiles.

More substantially, there are the transnationals happily here, from AstraZeneca to BMW. BMW now sources all its smaller petrol engines for cars built in Germany, the US and South Africa from its modern plant at Hams Hall, Birmingham.

Made in Brum, exported to the world – by Germans. Churchill would have been pleased.