Manufacturing success: policies to revive the industry: Key issues for the 2015 Parliament
In common with many other advanced economies, the UK has seen an absolute decline in manufacturing employment and a relative decline in manufacturing output in recent decades.
The impact of globalisation, which has resulted in the fragmentation and relocation of production overseas, has been felt very acutely in this sector.
The UK's deindustrial revolution has been particularly dramatic: from close to 9 million (more than a quarter of the workforce) in 1966, the manufacturing sector now employs fewer than 3 million (8% of the workforce).
Today, the sector's R&D expenditure, levels of investment and share of global exports are low in comparison with other advanced economies.
Since the recession
The previous Government saw a revival in manufacturing as central to its efforts to rebalance the UK's economy, both geographically and sectorally. The recovery in manufacturing has been more tentative than in the rest of the economy, however, and output remains well below its previous peak.
Chart 1: Output relative to previous peak
Output relative to previous peak, Q1-2007 to Q4-2014
Despite the long-term decline of manufacturing, the sector still makes an important contribution to UK exports.
Chart 2: Share of manufacturing in selected aggregates
share of manufacturing in selected aggregates, 1970-2013/2014
All bad news?
The apparently poor performance of the manufacturing sector in the UK may be at least partly explained by the claim that our principal means of understanding and measuring its economic importance – looking at the value of output and the numbers employed in the production of physical goods – is out-of-date.
In particular, it fails to reflect the value that many manufacturing firms now derive from selling services allied to their products, and licensing the fruits of their innovation.
For instance, Rolls-Royce now derives more than half of its revenue from selling services, up from 35% in 2000, while the electronics company ARM designs microprocessors used in smartphones that are manufactured by companies overseas.
In both cases, the product is a kernel for other revenue-generating activities that are “counted” as services, rather than manufacturing output.
Stuff and nonsense
A recent report from the Government Office for Science argued that this failure to understand how modern manufacturing creates economic value may be hindering efforts to revive the sector.
The future of UK manufacturing arguably lies not in mass production of consumer goods – after all, to compete with emerging economies to supply the world with smartphones would require a dramatic cut to wages – but in capitalising on the knowledge and services associated with innovative products.
In order to do so, the next Government may have to tackle a number of inter-related issues in the UK's manufacturing sector:
Skills shortages
The nature of advanced manufacturing means that, even if it grows quickly, it is unlikely to generate significantly more employment in the production process specifically.
However, the sector will increasingly require more highly qualified employees. By 2020, it is estimated that the number of people employed in the industry with higher qualifications will have risen by 35% compared with 2012.
The Government will have to ensure there is an adequate supply of skills to meet this demand.
The innovation gap
Whereby important products and processes are invented in the UK, but their development and commercialisation occurs abroad. Graphene is a widely quoted example of this problem: it was invented at Manchester University in 2004, but of the 3,500 graphene-related patent applications in 2012, the UK contributed just 50.
Turning innovations to economic advantage requires connecting academic expertise to industry, but it also requires tackling…
…the funding gap
It can be difficult for firms to access funding necessary to take a product from development to commercialisation. Funding for R&D expenditure in the UK is low in comparison to other advanced economies, it is concentrated in a few industries, and a very high proportion comes from abroad.
Access to patient capital
More generally, an emphasis on short-term returns in UK capital markets, and a distant relationship between providers and users of finance, have meant the sector has sometimes struggled to access the “patient capital” necessary for long-term investment in equipment, R&D and skills.
A sustained pick-up in manufacturing growth could help to address what are currently seen as two weaknesses in the UK economy: low rates of exports and productivity growth.
No Government of recent decades can credibly claim to have revived the UK manufacturing sector, or even arrested its relative decline. There may be considerable economic and political benefits to any administration that can do so.