The resurgence of UK manufacturing

News of the UK manufacturing sector’s death is greatly exaggerated. After output fell by 7.4 percent across the sector between November 2008 and November 2009 – the biggest year-on-year drop since June 1981 – the Purchasing Managers’ Index rose to 57.2 this March (any figure above 50 signals growth), ahead of expectation and proving the best monthly growth in 16 years. This prompted a re-examination of the facts on how important the sector is to the UK economy that has, until recent events, seemed to pivot on the City. While manufacturing has appeared in terminal decline against contenders such as China or India for the last decade, manufacturing still accounts for a large share of the economy, at about 12 percent.

This is a larger share than financial services’ nine percent, economist du jour Roger Bootle said in a column for the Daily Telegraph a fortnight after those statistics were released in April. People find this surprising because they do not come across many UK-manufactured products in their daily lives. But amid the fog rising from the wreckage of recession is the chatter about how to re-engineer the UK economy to produce sustainable growth in the way that, crisis fresh in the mind, the banking and financial services sectors do not appear to have done. And the concept of being a country that makes things of use and purpose may turn out to be more than a nostalgic backlash.

The story behind those November output figures is, in many ways, the usual recessionary tome: companies running down their inventories and hacking cost out of their production wherever possible. By the time the Office for National Statistics (ONS) released them, many plcs with a strong focus in manufacturing had already done everything that could be done and were, in effect, idling their motors, trying to make excess capacity as cost-free as possible while they waited for the upturn. The name of the game has been to try to coax new orders from hesitant customers, while trying not to allow cuts to impair the company’s ability to respond positively to any upturn.

So, perhaps it is precisely because many companies have done this that their economic prospects do not seem that black.

Addressing delegates on the theme of manufacturing confidence at an Economist Intelligence Unit briefing last December, Dick Olver, chairman of BAE Systems – the UK’s largest manufacturer – said that though times were tumultuous, characterised by massive uncertainty and plunging consumer confidence, he remained optimistic about the prospects for UK manufacturing as a whole.

It has been said for some years now that UK manufacturing is on its last legs, because, as Bootle points out, they do not see much of it about compared with TVs from Korea or cars from Japan. But in his speech, BAE’s Olver said that he believes the real competitive struggle in the years ahead lies in winning the ideas battle with clever economies, not in trying to pump up margins through wages arbitrage or shifting manufacturing capacity to countries offering cheaper labour such as China or India.

He noted that the wage arbitrage approach would end up with those economies having a stranglehold on manufacturing while they raced to out-design and out-engineer developed manufacturing nations. That is ultimately the road to ruin for UK manufacturing: put simply, the task for UK manufacturing is not about cornering the market, but in talent and intellectual property, he warned. That echoes sentiment elsewhere that outsourcing has had its day and that upskilling the UK workforce to compete is the next big thing.

That is a critical point, particularly from a finance director’s perspective. Beyond slicing away cost and waste from the production chain, FDs among major plcs must now set the foundation to obtain and retain appropriate technical talent and to leverage the intellectual property that talent generates more smartly, and quickly, than other nimble economies. The manufac­turing base accounts for nearly 15 percent of all employment in the UK, according to the Office for National Statistics and depending on which sector you look at, research and development (R&D) spending varies from between 2.8 percent of turnover – in electrical machinery and apparatus – to 23.2 percent of turnover in pharmaceuticals. R&D in transport, equipment and aerospace average at around six percent of turnover.