UK: MAKE OR BREAK - THE CASE FOR THE MANUFACTURING SECTOR. - Britain, writes Simon Caulkin, has no choice but to manufacture its prosperity, as it did in the Industrial Revolution. Hidden in the wreckage of British manufacturing he detects a huge and dar

Last Updated: 31 Aug 2010

Britain, writes Simon Caulkin, has no choice but to manufacture its prosperity, as it did in the Industrial Revolution. Hidden in the wreckage of British manufacturing he detects a huge and daring opportunity in the lessons learned about being leaner and fitter. Now, he says, we have to learn to use the space, machines and people released in the '80s to create new products, markets and wealth. It would need more than entrepreneurs: a sense of national purpose and a policy framework constantly tested against the question, 'Does this measure help or hinder industrial innovation?' But does the Government have a policy? Chris Hopson (p32) thinks so and says what it is; 90% of our top industrialists think not (p33), and say what they would like it to be. Our Memo to Major examines decline, remedies and the needs of those at the front.

The most dismal UK industrial statistic of the last 14 years is 13. This is the number of Secretaries of State who have stepped through the revolving doors of the Department of Trade and Industry since the Conservatives came to power in 1979. The figure compares with six home secretaries, five foreign secretaries, four chancellors and, of course, two prime ministers. In that period the longest tenure at the DTI was two years, the shortest (Cecil Parkinson) five months.

Rough and ready as the measure is, it is an accurate indicator of government priorities over the last decade. However you read John Major's lips, actions prove that industry scarcely registered among them, and high office at the DTI conveyed clout in neither Cabinet nor policy-making. From industry's viewpoint, instead of a champion in Victoria Street, there has been a succession of caretakers. This is not the place to detail all the industry-hostile decisions of the era, from the exchange-rate mistakes of 1980-81 and 1991-92 to the unbelievable abolition of the National Economic Development Office last year. It is enough to say that as a consequence, industrial managers and employees have effectively had an extra dimension added to their job. As if dealing with the toughest competitive conditions they have known were not enough, they also have had to cope with the vagaries of an overall economic policy which was formulated with reckless disregard for its effect on industry. As the CBI put it: 'The improvements in manufacturing productivity and performance over the past decade have been achieved against a backdrop of relatively benign neglect by all except those directly concerned with running the country's manufacturing companies.' In this context the Government's discovery that it cares passionately about manufacturing after all is welcome but breathtaking: and 14 years too late. More than anything, it is born of the realisation, after the experiments of the 1980s, that there is nothing left to try. Industry has known this all along, of course, although it has perhaps not put the message across terribly well. It is precisely at the macroeconomic level that the least progress has been made in defining an acceptable industrial future. It is in policy-making that most firmness of purpose will be needed to systematize the manufacturing improvement which has been seen at the micro level. It has long been a truism that the problem of the British economy is one of attitudes. It is less of a truism that the attitudes that most need changing are those of the Government. How will the Prime Minister find British industry after its decade and a half in the wilderness? To prevent further waste of time, here is a summing up of the state of the manufacturing nation in 1993 - at the level of the firm, and within the context of the economy as a whole.

Starting at the level of the firm, the news in the short term is surprisingly good - despite the lack of help from economic policy. Individual firms which have survived the ordeal of two recessions are incomparably better managed than they were in 1979. In the 1970s, British companies may well have been the worst in Europe; that is no longer the case.

Signs that British managers are finally facing up to the reality of international competition come in several forms. First, the productivity of British manufacturing firms has been improving at the historically rapid rate of 4.7% over the last few years. Although part of the gain is arithmetical, the result of suppressing the least productive capacity, this compares well with the rest of Europe, although not so well with Japan. Partly because of the increased productivity, profitability is holding up reasonably well, albeit at a low level.

Next, exporters are also performing creditably in nominal terms. In the decade since 1981 manufactured exports increased by 66%, which compares favourably with other countries and represents a gently rising share of world manufacturing exports. Added, and welcome, evidence of increasing competitiveness comes from the finding that exports to sophisticated EC partners, particularly Germany and France, are increasing fastest. The final area of undoubted gain for firms is industrial relations, where there has been a remarkable turnround since the early 1980s. Days lost to disputes are now at the lowest level for half a century.

The big question, of course, is whether these welcome improvements are long or short-term, one-off or sustainable. A scrutiny of how they have been won, again suggests qualified optimism. Management Today's annual Best Factories Awards chart the changes.

The main vehicle of advance has been what might be called the Total Quality Management movement or 'the new manufacturing'. This is partly a result of the influx of Japanese transplants into the UK (40% of the EC total of Japanese direct investment in the 1980s). Quite apart from the economic effect of renewing the export base of, say, the home electronics and motor industries, the transplants have acted as quality missionaries, preaching the gospel, forcing suppliers to measure up to their own exacting standards and providing visible benchmarks of good practice.

The implications of the new practices can hardly be overestimated. There are three reasons. In the first place, they provide for the first time a unified, readily understood model of the production process as a system which reconciles the needs of customers, suppliers, employees and the firm. The emphasis on the employee was perhaps the most crucial consideration of all in the climate of fear and loathing unleashed by the industrial relations legislation of the early 1980s. The transformation of attitudes required to make TQM work - investing in people as the only lasting source of competitive advantage - bodes well for the permanence of good industrial relations.

The second capital feature of TQM is that it can be applied with equal effect in almost any sector. Management Today's 'best factories', for instance, have been in such unlikely areas of British achievement as machine tools, automated teller machines, computer peripherals, power tools and television components. The outstanding performance of the UK's Nissan, Peugeot and Rover car plants is another testimony to the new techniques. These successes have a twofold bearing on the larger debate about manufacturing and services. First, the idea that manufacturing has to be surrendered to lower-wage-cost economies is pathetically defeatist. If UK factories can manufacture the products listed above, they can also make a great many other things that currently swell the import bill.

There is a further, less obvious point. The quality movement which emerged from the high-pressure retort of manufacturing competition is only now filtering into the less competitive arena of services. Far from being an innately superior kind of business activity, service companies need to be taught to excel by humble manufacturers. The message is clear: a country which has not absorbed the lessons of manufacturing is unlikely to be any good at services either, in the long run.

The third point about the new manufacturing is that the pay-off goes far beyond industrial relations. As the continuous improvement cycle takes hold, the cumulative effect is potentially dramatic. For example, by reducing inventory to the levels already achieved by the best companies, UK industry could free £5 billion for investment in plant and R and D from its own resources. Moreover, by coupling manufacturing more closely to the customer, better inventory management could help to smooth the peaks and troughs of the economic cycle associated with lurches in stocking and de-stocking. The best Japanese firms make a fetish of low stocks and production smoothing, which is perhaps why in the post-war period Japan's business cycles have been barely perceptible compared with those of the West.

The macroeconomic potential of adopting the best management practice underlines the point that, important though UK company improvements are, they are not yet cause for self-congratulation. They need to be built on and extended to a much larger base of firms if they are to translate from individual success into lasting benefits for the economy as a whole. While the good British firms are a match for anyone, there simply are not enough of them, particularly smaller ones. This is why the picture of UK manufacturing changes considerably for the worse when it is placed in the longer term, and in the context of the wider economy.

The aggregate truth is that, while during the 1980s the performance of the UK industrial sector has been good compared to itself, the low base from which it starts means that there is still a huge amount of ground to be made up on more consistent competitors. This applies to nearly every performance measure. For example, although British productivity is improving, the CBI estimates that on average it is still 30%-40% below that of the world's best. The quality of the skills base is deficient by a similar amount. Investment, in both fixed capital and innovation, likewise lags behind foreign rivals. To put this in perspective, remember that since on all these counts rivals are not standing still - on the contrary, it is on the whole the best which are improving fastest - catching up will require running even faster still, and certainly faster than they have ever had to before.

Again, although the UK's share of world manufacturing exports recovered from a low point of 7.6% in 1985 to 8.7% in 1991, that compares with an average of 9.1% in the mid-1970s and 20% as late as the 1950s. The result, finally, of all these shortfalls is that British output growth, particularly over the longer term, is puny. Measuring from peak to peak, in 1990 UK manufacturing output was less than 10% above the crest of 1979 (compared with 18% and 50% for much bigger Germany and Japan) and just 4% above the all-time high in 1973. No miracle here - over two full cycles UK manufacturing output had hardly increased at all.

In the long-term perspective, therefore, the diagnosis would seem at first sight not to have changed much from the 1970s and early 1980s. In spite of the management progress made in individual firms, the UK overall remains an economy bedevilled by a nexus of low output growth, low investment and low wages, with a tendency for imports to rise faster than exports, triggering balance of payments and eventually currency crises, each time at higher levels of unemployment and lower levels of growth. There is one respect, however, in which the situation changed substantially for the worse over the Thatcher years. As ex-trade minister Alan Clark pointed out in a recent broadcast, the Prime Minister allowed herself 'to be persuaded that the manufacturing base is unimportant to a country's wealth ... (This view) had acquired the status of doctrine and it was reinforced at every turn by the Treasury.' In 1979, the UK manufacturing sector accounted for around 29% of GDP. By the end of 1992 it was more like 20%. That is, relative to its size, while the Government's back was turned, the UK had lost one-third of its manufacturing base. This was a steeper decline, to a lower level, than almost all its main economic rivals. This is the figure which has belatedly set the fire bells ringing in Whitehall.

And for good reason. While the Government's attention has been on higher things, a substantial amount of evidence, from the learned to the anecdotal, has piled up to confirm not only that manufacturing matters, but that UK capacity is approaching the danger point where it becomes impossible to regenerate itself, let alone the economy as a whole. For a start, it is the decline of manufacturing which is at the bottom of the current balance-of-trade problems as imports grow to fill the demand for goods which British factories no longer make. In 1982 the UK became a net importer of manufactures for the first time since the Industrial Revolution.

This time, even recession has not been able to choke off the appetite for imports. Economists worry that in the next cycle, with capacity at its present levels, growth will be halted in its tracks by trade deficits with unemployment rates not much below three million. The point about capacity, of course, equally applies to exports. As one economist put it in the wake of devaluation: 'If we don't produce motorbikes, vacuum cleaners and fridges in the first place, simply chopping 15% off the exchange rate is not going to solve the (balance-of-trade) problem.' Second, consider the performance of competitor economies. While it is true that manufacturing has declined as a proportion of GDP in many developed countries, there are wide variations. And it is notable that countries like the US and UK, where de-industrialisation has proceeded fastest, have experienced much slower growth than the two most successful economies, Germany and Japan, which in turn have strikingly larger manufacturing sectors: Germany 32%, Japan 29%. Size as well as efficiency of the industrial base appears to be an important factor in achieving steady economic growth.

Third, there is in any case no option but to pin the main hope on manufacturing, since despite the hype of the 1980s it is now clear that services, the erstwhile white hope, are not a primary engine of wealth creation. On the contrary, they all ultimately depend on manufacturing, which alone creates the technologies which become the basis of new industries and new employment. Nor is there any immediate prospect of services making inroads into the employment or trade deficits.

The CBI's National Manufacturing Council has put forward some quantitative targets on the road to making UK industry internationally competitive by the year 2000. It wants to see UK productivity increasing by 5% a year for a decade, doubled per-capita investment in plant and machinery, similar investment in skills, innovation and marketing, and an export market share gain of 1%, worth £10 billion to the balance of trade.

But if the Conservative conversion to the industrial cause is serious, to these targets should now be added the goal of expanding the manufacturing sector to, say, 27% of GDP in the same period. The key to achieving this is a factor which is at the heart of growth and competitiveness but which conventional economics ignores: innovation.

Working with the Royal Society of Arts, the forecasting group, Cambridge Econometrics, has produced a scenario in which a package of tax incentives, increased spending on training and education and greater effort put into selling to the EC, lead to a 10% improvement in the British innovation effort in the years 1993 to 2000. The results are startling: sustainable economic growth of 4% a year from 1995, a balance of payments moving into surplus, unemployment falling to under one million - and a manufacturing sector which grows to (guess what?) 27%. The cost of the package is put at £3.5-£5.5 billion a year. Not all of it, as we have seen, would need to be supplied by the Government, and in any case the returns, in the shape of a lower PSBR, outweigh the cost of the tax concessions for innovation over a five-year period.

Now, this is a simulation, ridden with assumptions and caveats - but so is the Treasury model which got us into this mess in the first place. As for intervention - if the lesson of the 1980s is anything, it is that the remains of the British industrial base cannot afford another 14 years of absentee landlordism at the DTI and indifference at the Treasury. It needs macroeconomic encouragement to speed up the good work of the 1980s and begin the task of recreating the manufacturing capacity that has been lost. For the first time it can be stated without special pleading that industry is playing its part; the buck now stops in Downing and Victoria Street.

Ministers might take to heart the conclusion of Alan Clark's broadcast, previously mentioned. He was talking of 'The Recovery of Power', but his words apply equally to industrial revival. Politics, noted Clark, teach that it takes a national emergency to attempt anything courageous. History, on the other hand, 'teaches that it is never too late. Never. It is just that the price keeps going up.'

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