Britain's exporters need more than a short-term currency boost post-Brexit

Those selling their goods in sterling are enjoying a short-term surge but the cost of production will rise too.

by Dr Graeme Malcolm
Last Updated: 02 Nov 2016

The post-Brexit slump in the pound has been bad news for consumers as the prices of several goods – from KitKats to Marmite and Apple MacBooks – is set to rise. But what about the impact on exporters?

For manufacturers selling their goods in sterling, there is a huge short-term boost. Their lower price in real terms makes their goods vastly more competitive in the global market. Indeed, a survey this week by the CBI showed that, after the pound’s tumble, Britain has seen the biggest uptick in exports since 2014. ‘UK manufacturing has become a global contender once again,’ Leave.EU founder Richard Tice has declared.

But it’s not as simple as that. Manufacturers compete on innovation: researching and developing more efficient factory-floor technologies allows manufacturers to keep costs low permanently. Today’s manufacturing sector is R&D-intensive. Though only around 10 per cent of the UK’s total GVA, according to the EEF, it accounts for 67 per cent of private sector R&D investment.

High-value manufacturers build high-cost components out of difficult-to-handle materials and assemble complex machines and electronics. They are hard to make, requiring not just higher costs but specialist tools and expertise that is in high demand both in and out of the factory.

This means that every pound spent on British-manufactured goods goes as much towards 3D printing, robotics, artificial intelligence and cloud-assisted smart factories, as it does marmalade, whisky and sausages. And that pound no longer stretches as far.

British goods – from automobiles and jet engines to jam and beer – are getting a short-term boost in overseas markets looking to import. But it’s the UK’s high-value manufacturers that will now find it harder to grow their turnover, given they have to purchase a large share of their components from overseas. The weaker the pound, the more difficult that challenge becomes.

This is bad news in the long term. The UK’s phenomenal output of scientific research and intellectual property makes us an ideal place for high-value manufacturing, as long as the overhead costs can stay low. There is a huge opportunity here to close the UK’s trade deficit.

Unless you have been distilling whisky on the same site for a decade or more, or your family name is a byword for great food products of another kind, the chances are that intellectual property and innovation will form most of the value of your brand. That is certainly true in our part of Scotland.

In my experience, photonics has flourished in Glasgow because it has deep roots in local universities and research institutions. They go back to the First World War and the development of advanced optics for the Royal Navy. Today, this equates to a local hub of connected industry firms, forming a significant portion of the necessary supply chain, all in one place. Photonics has strong roots in Glasgow but we still have to buy other goods from abroad; we purchase optics tools from the US and computer hardware from Germany too.

Locating your supply chain in the UK protects industries from exposure to currency fluctuations like the ones caused by Brexit. There are huge cost-efficiencies if you would otherwise be assembling parts from overseas and paying for them in dollars or euros. It makes high-value manufacturers excited about the government’s promise of an ‘industrial strategy’ and their willingness to invest more in research, hard infrastructure and civil engineering projects.

An industrial strategy would allow us to deliberately support certain industries by boosting our ability to develop our own products and fill in gaps in the supply chain. The Quantum Technology Hubs at Birmingham, Glasgow, York and Oxford could be an early example of how this kind of strategy can unlock future industries. Innovative SMEs can tap into university and research networks, and treat the public sector as a loyal customer.

Brexit might yet derail the industrial strategy. The government saved thousands of jobs in Sunderland’s Nissan plants last week by assuring the automotive manufacturer that it would fight to keep Britain’s economy competitive. But it shouldn’t overlook British SMEs who will be searching assurances that punitive taxes will not be introduced.

Now worth £161 billion in the UK, tech is Britain’s fastest-growing sector and overwhelmingly made up of small companies but they are not looking for a Nissan-style sweetener deal. The sector needs the government to know that a ‘hard Brexit’ and its effects on currency prices are unlikely to be reversed, but also we cannot continue our long-term neglect of Britain’s future industries. An industrial strategy is not built on a thousand sugar fixes. It requires complex arrangements, R&D tax breaks and all-encompassing support for home-grown firms.

Dr Graeme Malcolm OBE is Co-Founder and CEO of M Squared, one of the UK's leading fast-growth technology firms.

Image source: Håkan Dahlström/Flickr


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