Cambridge Industrial Innovation Policy, based at the Institute for Manufacturing (IfM),University of Cambridge, will be launching the fourth iteration of its annual Innovation Reportin March, featuring the machinery and equipment sector. The Manufacturer Editor Joe Bush sat down with David Leal Ayala, Deputy Head, Policy Links, IfM Engage, to find out more.
Meaningful insights into the innovation and industrial performance of the UK often come from very fragmented data sources that take time to gather and are usually only accessible to experts. Therefore, Cambridge Industrial Innovation Policy’s Innovation Report was originally created to offer centralised, easy access to this information.
It quickly provides the big picture on both industrial and innovation performance, and how one impacts the other. The report covers general trends around the structure of the UK economy and productivity. Plus, the science, technology and innovation workforce, investment trends – both public and private sectors – and deep dives into specific sectors.
In the past, this deep dive has included a closer look at automotive, pharmaceuticals, aerospace and food and beverage. The 2024 edition of the report will focus on the machinery and equipment sector, and its economic contribution to manufacturing.
This iteration of the report will also revisit the theme of net zero innovation; a topic not usually captured in traditional statistics from the Office for National Statistics (ONS). David picks up the story.
Now in its fourth iteration, how do you ensure the report remains relevant?
DLA: The report looks at policy issues from different angles, incorporates new and innovative datasets, and we try to do our own analysis of particular policy questions, which all provide a fresh outlook each and every year.
For example, in the case of industrial performance, we look at different sectors each year, and we combine desk-based data analysis and consultations with companies, industry associations and sectoral teams in government. From that we try and understand what the reasons and rationale are behind the various trends within the sector that are impacting value added, employment, exports, etc.
What did you learn from the 2023 report?
There were two key takeaways from last year’s report. The first related to the structure of the UK economy – we looked at the last 20 years of associated data and found that jobs in high productivity sectors like manufacturing have been declining. And in most regions around the UK, these jobs have been substituted by labour intensive service industries, which tend to be low productivity. This is an important trend in terms of understanding why productivity is behaving the way it is.
David Leal Ayala, Deputy Head, Policy Links, IfM Engage
“Machinery and equipment underpins competitiveness and productivity in other industries in the UK, because it produces machines that are used by other sectors.
“This report looks at policy issues from different angles, incorporates new and innovative datasets, and we try to do our own analysis of particular policy questions, which all provide a fresh outlook each and every year.”
London is an exception, because jobs have been substituted by knowledge intensive services, which are also high productivity. This has implications for understanding not only why productivity has failed to really grow in the UK during the last two decades, but also in terms of the widening gap between London and other regions, and why productivity in the capital is so high in comparison.
The other area where we saw interesting trends was in relation to investment in R&D and innovation. Last year, the ONS changed the methodology that it uses to calculate R&D expenditure as a percentage of GDP in the economy.
Under the old methodology the UK was always placed behind the Organisation for Economic Co-operation and Development (OECD) average in terms of gross expenditure in R&D as a share of GDP. With the new methodology, however, the UK actually increased in the ranking and reached the OECD average although it should be said that we are still below leading countries like Germany, the US and Japan.
Interestingly, gross expenditure on R&D can be split into public and private. Private expenditure is very comparable to other nations, while public expenditure i.e., how much the government is actually spending on R&D in the UK, is significantly lower than the OECD comparator countries. That was an enlightening trend to try and explain, particularly in light of targets set by the UK government around increasing R&D expenditure.
What are the emerging trends and challenges that will shape productivity and innovation in the UK?
On one hand, there are megatrends that are having an impact the world over, while on the other, there are economic factors that are specific to the UK.
Sustainability and net zero are, of course, ubiquitous. The UK has committed to reduce its industrial carbon emissions, but on top of that, regulation is looming on the horizon. In the European Union we’ve seen the introduction of the EU Corporate Sustainability Reporting Directive (CSRD) related to the reporting of corporate emissions, including those within the supply chain.
This places an emphasis on manufacturers to measure and report their full emissions beyond their factories, and do something to reduce them. This will have a knock-on effect for UK manufacturers who have a desire to do business with the EU – still the UK’s biggest export market. Not only that, but there is also regulation coming in from other markets such as the US and Asia.
Furthermore, in a few years the Carbon Border Adjustment Mechanism in the EU will come into effect, which will put a price on carbon. So again, if manufacturers want to do business with the EU these extra prices will need careful consideration.
Of course, there are ongoing trends related to technology, industrial digitalisation and how we can increase adoption in order to optimise productivity and help with carbon reduction and sustainability.
There’s a whole topic in this year’s report on the resilience of global supply chains and we’re seeing growing trends around nearshoring/reshoring etc. How the UK maintains resilience of critical supply chains is still an open question.
Specifically within the UK, uncertainty still abounds when it comes to the economy and trade, and there are still some barriers that need to be polished. Inflation is still high, as are energy prices. So the inputs for production remain quite expensive in the UK, in terms of being competitive with other locations around the world.
In addition, many manufacturers are still experiencing difficulties when trying to fill vacancies for skilled roles. Unsurprisingly, this is also something we saw in last year’s report, when we shone a spotlight on the aerospace and food and beverage sectors, where the percentage of vacancies is also high. That level of uncertainty is not helped by the fact that 2024 will be an election year in the UK.
Why have you chosen machinery and equipment as a deep dive for the 2024 edition?
It roughly constitutes eight percent of value added in the manufacturing sector, ten percent of exports and eight percent of employment. So, it’s quite significant in terms of its economic contribution, even if it’s not often discussed.
Also, it underpins competitiveness and productivity in other industrial areas in the UK, as it produces machines that are used in other sectors. So it is vital to the whole competitiveness of UK manufacturing.
From an analytical perspective, it is probably the most difficult sector to analyse, as it is very heterogeneous and diverse. When you look at machinery and equipment in a more granular way, almost every sub-sector is an industry in itself – all of which are extremely different – so to understand the general trends that impact everyone is not an easy task.
Therefore, we’ve made a real effort to get into the granular details; we’ve spent time talking to companies within these sub-sectors to understand them and their challenges. Despite the difficulties, it is something that is worth doing such is the importance of the sector for the economy.
What can these consultations tell you about what is happening in the innovation system?
Due to the diverse nature of equipment and machinery, any aggregated macroeconomic data doesn’t really tell you the full story of what happens in each sub-sector.
During our conversations we’ve had confirmation of just how different companies are within this sector, with various drivers and trends. These will be highlighted in the upcoming report.
As such, there certainly can’t be a one-size- fits-all approach when it comes to policy; rather, they need to be tailored in a more granular way to suit each sub-sector. We’re collaborating with companies, industry associations and government sectoral teams, collecting evidence and information on what matters for the competitiveness of each sub-sector.
Who will find this report useful?
It’s targeted at industry professionals, academics and policymakers. However, I think it will be the latter who will get the most use from the report, because it is a centralised resource which acts as a quick reference guide. They will be able to find information from very different sources, in a digestible and easy to access format. Policymakers will easily be able to see some of the high level trends around innovation and industrial performance.
Having said that, we have also received comments and enquiries from people working in academia. Likewise, when we’ve shown previous reports to industry, they have always found them insightful, featuring information that they are not used to seeing about their own sector. That generates a good reaction, and the fact that we have these three communities interested in this data is one of the reasons why the Innovation Report is one of our most popular.
Is there any other special topic in this year’s report?
We’re covering net zero, which is actually the third time we’ve done that. What’s different this year is that the ONS has introduced the Low Carbon and Renewable Energy Economy, a different way of looking at emerging economic sectors.
These are economic sectors related to, for example, the generation of offshore and onshore wind, solar power, carbon capture, fuel cells for hydrogen, etc, that are not really captured in traditional economic classifications.
It’s interesting to see the urgency and the importance of the net zero agenda, and how this translates into economic activity.
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