Is British industry the new financial services?

Manufacturing is back on the political agenda, but it will be tough turning rhetoric into reality

Manufacturing has long been the poor relation of the British economy, often characterised as a sector in inexorable decline, overshadowed by the booming modernity of super-sexy high finance. But in the wake of the collapse of the banks, politicians from across the spectrum are turning back to making things, in an effort to "re-balance" the British economy. And to coincide with "Manufacturing Week", business is laying out what is needed to turn the rhetoric into reality.

Recession hit the sector hard. Twelve months ago, manufacturing output was falling at its fastest rate since records began in 1948, and although the sector is now back in growth there have been high-profile scalps, including the Teeside Cast Products steel plant in Redcar and vanmaker LDV.

But – like Mark Twain – reports of the death of manufacturing are premature. The sector still accounted for 13.5 per cent of the economy last year, compared with less than 10 per cent from the much-vaunted financial services sector. Manufacturers carry out 74 per cent of business-funded research and development, employ 2.6 million people and generate 53 per cent of the country's export earnings. And their reputation for world-leading, high-end, specialist industries – from Formula 1 to defence to civil aerospace – is respected abroad, even if not always recognised at home.

The problem is that there is not enough of it. Britain has far fewer large-scale manufacturers than its rivals. Just 0.5 per cent of UK manufacturing companies have workforces of more than 500, compared with nearly 1 per cent in Europe and 1.4 per cent in the US. The question is how to remedy the situation. The "Manifesto for Manufacturing", published by the lobby group EEF today, tries to provide an answer.

"An economic strategy linked to an industrial strategy has been difficult to articulate in Britain for some time, but it is absolutely central to the economic growth of this country," said Nigel Whitehead, the managing director of BAE Systems, one of Britain's biggest manufacturers.

There is no easy answer. It is too late to resurrect mass-market, world-leading industries of the past, such as machine tools or textiles, and recent attempts to kick-start new industries have tended to fall flat – nanotechnology being the most obvious example. Tattered public finances do not help.

But what is different this time around is the strong pull of genuine demand. The energy sector is a case in point. The combination of slowing North Sea oil and gas production, ageing infrastructure and looming EU environ-mental regulations is forcing a massive renewal of Britain's energy sector. Offshore wind is also a fertile prospect. UK coastal waters already contain half of the entire world's offshore wind farms, and the capacity will have to be multiplied more than 50 times to meet EU 2020 targets, sucking up £100bn in investment and creating 70,000 jobs. Low-carbon cars and high-end healthcare technologies are similarly burgeoning new markets, both domestically and internationally.

"There are major structural changes which are big opportunities for manufacturing," Steve Radley, EEF director of policy, said. "It is not just about the budget deficit, but also climate change, the global security concerns, and adapting to an aging population." Like all businesses, what manufacturers need in the short term is to know how the spending cuts and tax rises needed to cut the deficit after the general election will be balanced. But to make the most of the opportunities ahead, manufacturers also need such plans to be linked to a clear statement of industrial strategy, which includes creating a business environment sufficiently attractive to draw inward investment and foster nascent supply chains.

The price of failure is high. "If we don't get it right we won't have the competitive business environment manufacturers need, we won't meet the country's energy challenges, and we will end up importing many of those solutions," Mr Radley said.

The past year has already seen a significant shift in political language as manufacturing reappeared on the radar. The Business Secretary, Lord Mandelson, has been touting a policy of "industrial activism", calling for "less financial engineering, more real engineering". His opposite number on the Tory benches sounds remarkably similar. "Britain has to make things again," shadow Business Secretary Ken Clarke said in a speech last autumn.

Some of the government's efforts – including a string of investments in "low-carbon economic areas" – have borne fruit. Various international firms have in recent weeks revealed plans for offshore wind-turbine projects in the UK, and both Nissan and Honda are investing in building low-carbon car technologies here.

But the full-scale industrial revolution needed to get back to the global top table will need much more. The government's low-carbon industrial strategy, for example, was welcomed by industry, not least because it is the first evidence of a national plan. But lead times are such that the plan's horizon needs to be 10 years rather than two. And industrial strategy needs to be joined-up across all areas of government for it to be effective – which means taking it into account in every area, from labour-market changes to education policy to tax changes.

There is even less certainty about the impact of a Conservative win in May. So far, the Opposition has not produced a full-blown industrial strategy, and the piecemeal policies that have been publicised have met a mixed response. A commitment to cut red tape with the introduction of "regulatory budgets", so that any new burden must be offset by a reduction elsewhere, was broadly welcomed, as were plans to cut corporation tax by 3p to 25p. But David Cameron's team was forced back to the drawing board on plans to scrap Regional Development Agencies after an outcry from business groups. And the suggestion that the tax changes will be paid for in part by cutting capital allowances, from 20 per cent back to 12.5 per cent, has been met with squeals of anguish and gloomy conclusions that a genuine understanding of the issues is not there after all.

"The Tory plan for capital allowances would be very damaging for manufacturing because it would constrict the ability to invest in the modern machinery needed to be competitive in the high labour-cost economy of the UK," said Jeegar Kakkad, a senior economist at the EEF. "And if you can't buy new machines, then that activity will move abroad because competitors overseas will be able to make those investments."

One thing is certain: business as usual simply will not be enough.

It takes attitude: Manufacturing makes a comeback

Britain must "get confident again" if it is to meet the challenge of the budding manufacturing renaissance, says one UK industrial giant.

The Government's desire to create a vibrant climate for business growth through sympathetic tax and regulation regimes is only half the battle, says Nigel Whitehead, the managing director of BAE Systems. Business must also play its part. "The Government can help... but there is a matching element of ambition from us in the industry," Mr Whitehead said. "As a nation we have got to get confident again and go out there and be world-class." Defence group BAE Systems is one of Britain's biggest manufacturers, contributing around £2.5bn to UK GDP and paying nearly £1bn in tax every year. The company employs more than 30,000 people in the UK – 18,000 of them highly skilled engineers – and spends nearly £3.5bn a year with its 13,500-strong domestic supply chain.

Over the past year, there has been a palpable change in attitudes to manufacturing industries, Mr Whitehead reports. "For the previous decade at least, there has been an understanding that the decline of British manufacturing was part of our economic set-up and that it was acceptable," he said.

"In the last year the headwind has become a tailwind and genuine investments are now being made, not just by government but also by academic institutions and industry itself." The renewed interest from government has brought with it a shift back to a more interventionist approach. The old government strategy was to offer incentives even-handedly to all business. The new approach is to pick specific sectors – low-carbon automotive, for example. The move is not a return to the discredited "picking winners" pursued in the Sixties and Seventies, but the only option if the UK is to compete globally, Mr Whitehead says. "We can play the game with great fairness and lose, or we can recognise that we should be realistic about the fact that the UK has to compete in a harsh worldwide marketplace," he said. Strong British industries such as aerospace and defence will be a firm foundation. "The Government is pushing at an open door," Mr Whitehead said.