Made in Britain? The crisis in manufacturing

Manufacturing accounts for half of UK exports, worth £150bn a year. But despite the sharp fall in sterling, the sector is still bearing the brunt of the downturn. Sean O'Grady reports

Tuesday 04 November 2008 01:00

Why is manufacturing doing so badly? With sterling down around 15 per cent from its peaks in the summer of 2007, down to six-year lows against the dollar and all-time lows against the euro, surely our manufacturing exporters should be thriving? The crisis sweeping the banks, the housing slump and the collapse in consumer confidence have understandably dep-ressed the financial, construction and retail sectors. Yet it is manufacturing that is now bearing the brunt of the downturn.

Yesterday's figures from the Chartered Institute of Purchasing and Supply (CIPS) confirmed the grim state of affairs in industry. The institute interviews a broad range of managers at the "sharp end" of making things, and its surveys are a reliable leading indicator of future prospects. They are not good. For the sixth month in a row, the survey shows a contraction in manufacturing output, though the rate of decline eased slightly last month, up a little from a truly dreadful September. Employment intentions and new orders – domestic and export – are still falling. The Engineering Employers' Federation says it has noticed an increase in the number of its members turning to short-time working and making contingency for redundancies. The Office for National Statistics reported last week that manufacturing output fell by 1 per cent in the third quarter, following a 0.9 per cent decline over April to June. Thus, with two successive quarters when output has fallen, manufacturing is firmly in recession.

Nowhere have problems been more evident than in the motor industry, where the number of brands cutting output or hours reads like a who's who of what is left of the British car industry. Honda in Swindon, GM in Luton, Nissan in Sunderland, Ford in Southampton and Land Rover at Halewood are all cutting back, a disturbing sign given that these have been some of the engines of manufacturing growth in this country. The "British" volume car makers, all of whom are owned and controlled by a variety of Japanese, German, Indian and American-based transnationals, account for about 10 per cent of manufacturing, and a good deal of the gloom now enveloping the sector reflects their plight. Cars are the ultimate "big ticket", usually discretionary, purchase that can easily be postponed for a few months. Even top-end makers such as Aston Martin and Bentley are feeling some chill from their ultra-rich clientele.

That gives us some clue as to why manufacturing is slumping badly. About three-quarters of the vehicles made in the UK are exported, but the downturn in global demand has more than outweighed the competitive advantages offered by the fall in the overseas value of the pound. That should improve, as the very recent falls translate into softer prices in the longer term. Overall, about two-thirds of UK manufacturing output is sold abroad, and encompasses everything from aero engines to Kit-Kats. Manufacturing is an extremely varied sector, and still matters enormously to the British economy.

There are some very large, internationally famous players, such as British Aerospace, Pilkington, JCB and Rolls-Royce, which contribute large positives to the balance of trade; there are also a large number of small to medium-sized enterprises making things from switch gear to garden hoses. Exporting is a fairly high priority for most, and the majority are raising their game in terms of productivity and skills. Average labour productivity is up 50 per cent since 1997, though from a relatively low base. The Department for Business, Enterprise and Regulatory Reform (DBERR) says the number of graduates in the manufacturing workforce is up from 9 per cent in 1994 to 16 per cent now. Around 25 per cent of the UK's manufactured exports are hi-tech, compared with 22 per cent for the US, 15 per cent in France and 11 per cent in Germany.

Foreign direct investment, running lower than its high points in the 1980s and 1990s, is also a significant feature of the UK scene; research and development (R&D) is increasingly significant, as is business-to-business (B2B), supplying other manufacturers in the supply chain rather than customers directly. The new Business Secretary, Lord Mandelson, is thought to be keen to revive the idea of hi-tech "clusters" around the nation.

Though not the force it was when Britain was "the workshop of the world", manufacturing is a vastly more efficient part of the economy than it was, say, three or four decades ago. A long way behind the US, China, Japan and Germany, the UK remains, perhaps surprisingly, the world's sixth largest manufacturing power, just ahead of France and not far behind Italy. Successive recessions in the 1970s, 1980s and 1990s have hit manufacturing hard, and only the very fittest have managed to survive. It will come as little consolation that this downturn should be much milder than the 1979-82 "shakeout", which saw output drop by a total of 16 per cent.

And manufacturing still matters. Just under 3 million Britons rely on the business of making things for their livelihood. Manufacturing accounts for 13 per cent of the UK's GDP, about £150bn, and punches way above its weight in trade, comprising about half of Britain's exports. Even the Conservatives have abandoned their previous stance that manufacturing does not need to be taken seriously. In the immediate future, much depends on the Government. Given that the public sector will be the only area of the economy liable to expand over the next year or two, and the express aim of the Treasury to bring forward major public infrastructure schemes, manufacturers will be looking for major contracts.

Industrialists may wonder how it came to be that hundreds of billions of state aid can be spent in the banks, with all competition considerations waved away, when ministers of both parties have pursued a policy of benign neglect of the sector for so long. The City of London, notably, was the only part of the economy to be granted its own special test by Gordon Brown in his famous five tests set before sterling could qualify to join the euro. The latest White Paper form the DBERR suggests a slightly more activist attitude, for example over nuclear power. Yet here, and even more so in the defence sector, state favouritism has been a traditional source of strength and reliable orders in virtually every Western power.

Longer term, the future of manufacturing looks as challenging as ever. Difficult as it may be to believe that it has still further to decline, it is perfectly possible. The Chinese have already managed to export toothpaste and pet food to the US, areas that might be thought the last bastions of domestic strength. The newly industrialising nations of China, India, Brazil, Turkey, and the next wave, of Vietnam, south America and some African nations, means the UK will have to continue to drive towards the high skill, hi-tech end of the market. The only good news is that Britain has had so much practice at tactical retrenchments and refocusing that manufacturing may still survive this downturn – if not unscathed, then at least viable.

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