High costs, but big ambitions: can UK manufacturing stay competitive?

From surging AI adoption to crippling energy costs and a deepening skills crisis, the UK’s manufacturing sector is at a pivotal moment. In this wideranging interview, Make UK’s Chief Executive Stephen Phipson, sets out the opportunities driving growth, and the structural challenges that threaten to hold the industry back.

The UK manufacturing sector is undergoing rapid transformation, shaped by digital innovation, geopolitical pressures and shifting economic realities. Fresh from one of its largest-ever conferences, Chief Executive of Make UK, Stephen Phipson, offers a front-line view of an industry balancing optimism around productivity gains – particularly through AI and digitalisation – with mounting concern over energy prices, workforce shortages and policy uncertainty.

Opportunities for manufacturing exist but can the sector scale its strengths quickly enough to stay globally competitive? Stephen picks up the story.

What were the key takeaways from this year’s Make UK conference?

SP: We had around 800 manufacturers in attendance, so it offered a great opportunity for people to network and discuss the latest trends in the sector, where the growth opportunities are, and what’s being done to ensure manufacturers are taking advantage.

We ran a series of workshops on the key issues of the day – with skills, AI and energy management taking centre stage. We also had a variety of inspiring speakers and representatives from the world of politics. It’s clear that people are really hungry for new ideas in the sector, and the conference enabled greater discussion around those.

What are the key trends shaping the sector?

It won’t come as a surprise that AI is getting a lot of attention. Within manufacturing, we’re currently seeing three applications of AI implementation. One is around automating the back office. While not a unique use case for manufacturing, we’re seeing a lot of organisations implementing AI across their financial systems, payroll etc, and extracting cost out of the business.

AI deployment on the shop floor is becoming very interesting. We’re seeing larger companies using AI to predict when failures might happen, conducting interventions quickly, improving productivity and generally linking their production and monitoring systems together.

I’ve been doing this job for eight years and I’ve had eight business secretaries… every time a new one comes in, there’s a sense of starting again from first principles.
Stephen Phipson, Chief Executive, Make UK

And actually, many of the companies that have invested in this deployment have increased employment as a result. Contrary to the fears around AI deployment, this actually makes sense. By improving productivity in a factory, all of a sudden that business will need more people loading materials, more suppliers and more data analysts.

The third area, which is new for manufacturing, is the use of AI in compliance. In heavily regulated industries such as commercial aerospace or pharmaceuticals, AI can be used to help shorten compliance cycles. When certifying a new drug or piece of aircraft equipment, can the regulators be convinced that using AI can speed up the process? And a lot of manufacturers are making investments to find out.

And of course, SMEs are looking at what larger companies are doing and asking how similar deployments could be rolled-out in their own production processes. Promoting programmes like Made Smarter, which help SMEs to get on the adoption journey, was also a key theme of the conference.

For these deployments to work fully, they need to scale. And very often, larger companies have an enormous infrastructure of SMEs in their supply chains. As such it is in their interests to help them on that journey to make the whole system more productive. On the flip side, the agility and innovation that comes from the SME community often sees a push from the opposite direction.

There’s no doubt that energy efficiency is driving digitisation within SMEs. Energy costs are huge in the UK, but if an SME manufacturer adopts a digital process, the results often show a ~45% reduction in energy consumption. While digital technology deployment is perennially about productivity and competitiveness, we’re now seeing a third dimension around energy, and that’s been a theme this year, driven by the current market.

And of course, if you look at the stats from the National Cyber Security Centre, manufacturing is now one of the most targeted sectors for cyber crime. The issue for the sector is that most cyber security systems are designed to protect the front end of the business – payroll systems, accounting software, email infrastructure etc.

By digitising production systems, internet connected devices all of sudden have a presence on the factory floor. However, often they are installed by production engineers rather than IT specialists. Some surveys suggest that connected devices on manufacturing production lines are often still set to default passwords, as it’s an environment that has not traditionally needed a mindset around cyber protection.

And this is a pattern being exploited by the cyber criminals. A lot of attacks within manufacturing are actually targeting IP from production processes, rather than the front end of the business.

Are current industrial energy prices a temporary hurdle?

The UK has the highest industrial energy costs in the world. Part of the problem is that the sector is not regulated, so in April, around a third of businesses had to renegotiate their energy contracts.

With the Iran crisis ongoing, some firms were quoted three to four times last year’s energy costs – which were already sky-high. The UK has high wholesale energy costs anyway. Then layered on top of that is a number of different levies, such as the Climate Change Levy (CCL). The upshot is that the cost of our wind farms and net zero production etc is paid for by industry, whereas in most other countries, this is covered by general taxation.

Of course, government are loath to make that shift. They don’t want to cover those costs by increasing taxes for the general public, so they lay it all on industrial energy.

That’s why we’ve ended up with layers of levies piled on top of the already high wholesale cost, which adds up to UK industrial energy being twice the price of Germany and four times that of the US. In some areas of manufacturing, where energy is a big proportion of cost – glass, cement, steel for example – this situation is making firms very uncompetitive. So, it’s a big problem and one we’re constantly talking to government about.

Of course they have tried to aid businesses in this regard by introducing initiatives such as the British Industry Supercharger, which reduces energy costs by removing some of those aforementioned levies. However, the reality is that the Supercharger has a very limited definition of an energy intensive business, and therefore, only applies to around 450 of the UK’s 150,000 manufacturers, so most businesses are currently missing out.

To get around this the government has also introduced the British Industrial Competitiveness Scheme (BICS), as part of the Industrial Strategy. It doesn’t go quite as far as the Supercharger, but it will apply to around 10,000 British manufacturers – having been expanded in April – and again, removes some of those levies, making the cost of energy a little more comparable to the rest of Europe.

However, BICS is also not without its problems, foremost of which is the fact that the government is not planning to bring it into effect until 2027. That’s not great for a lot of those smaller companies that are struggling to survive against the current energy costs in the here and now.

Every day, I get emails from members who are struggling. So, our big push is immediate delivery and the need to bring those proposed plans forward.

What were the key findings of the recent Shape of British Industry Report?

Running alongside the issue of energy costs, the report revealed that skills is the biggest challenge for manufacturers. We have the best part of 50,000 vacancies in vocational skills – welders, tool makers and service technicians. These skills would typically be nurtured through running successful apprenticeships. However, the apprentice programme in the UK is failing, and our starts have been going down every year since The Apprenticeship Levy was introduced.

The government has made tweaks to the levy, but in truth these have been nothing like the wholesale reform it requires to really push home the important role of these specific skills.

They’ve created technical excellence colleges but in truth, the changes are little more than rebadged versions of our further education colleges. The whole definition of apprenticeships has become too wide and we need a proper apprenticeship focus on vocational skills for manufacturing.

Apprenticeships are now available in fields such as estate agency. As such, the overall government position is that apprenticeships have gone up enormously; the issue is that they’re in areas that don’t cover the core skills that we need.

The landscape of manufacturing constitutes around 800 large companies and around 150,000 SMEs, so the challenge in relation to skills provision for most of those businesses is capital. To train apprentices in the manufacturing skills we require, any facility needs lathes, milling machines, welding bays and a variety of costly equipment.

For an FE college, it’s much easier to deliver an apprenticeship that doesn’t need that capital investment. This has seen the provision of engineering apprenticeships within FE colleges going down, as those facilities have focused on apprenticeships in other, less capital-intensive areas.

We’ve ended up with layers of levies piled on top of already high wholesale energy costs, which adds up to UK industrial energy being twice the price of Germany and four times that of the US.
Stephen Phipson, Chief Executive, Make UK

Of course, there’s always exceptions. The larger manufacturers have invested enormous amounts in skills and many have incredible training academies of their own, in recognition of the failings of the current external system and the existential threat the skills issue represents going forward.

Some FE colleges enjoy backing from large manufacturing businesses situated nearby, who recognise the need to invest in training to meet their future needs. If those larger manufacturers don’t have training academies of their own, they will often sponsor the local FE college to do it for them.

That’s great for the larger players but for many SMEs, this is simply not an option. They don’t have the resources to fund and kit out their own training facilities and often, we find that local FE colleges have ceased running engineering apprenticeships due to cost.

That means there is no pipeline of talent feeding through into the manufacturing SMEs in the same area.

The Apprenticeship Levy can’t help as it doesn’t allow manufactures any capital spend, so we find that many SMEs that want to take on an apprentice very often have no avenue in which to do so.

To make matters worse the skills system is incredibly complicated. If you’re an SME, it’s very hard to work through all the different new standards, how you get levy money, etc. So, we need to make the process easier, and to work on reform of the further education system to be able to provide engineering apprenticeships properly.

Again, the government are certainly aware of the problem but still haven’t pragmatically done anything about it. It’s laid out in the Industrial Strategy, of course, but we need to see reform. The average age of someone working in manufacturing in the UK is 52. So, 20% of the workforce is set to retire over the next decade or so.

It’s easy to say that technology will fill the gap. But AI can’t do everything; neither can automation. We’re going to need production engineers, service technicians and welders. There’s an amazing amount of technology that’s being developed and manufactured in the UK, but if we’re not careful we won’t have anyone left to carry that on.

Another interesting finding from the report is that it’s clear manufacturers are willing to invest, but they need long-term clarity. The average investment cycles in manufacturing are around seven years, so it’s key that the policy environment is stable.

When policy, government and people change it is extremely challenging. And historically, it’s been a big problem; I’ve been doing this job for eight years and I’ve had eight business secretaries. And every time a new one comes in there is a sense of starting again from first principles. Discussions have to happen all over again about why manufacturing is important.

If you look at the stats, the sector only accounts for around ten per cent of GDP, so from the government’s perspective, it’s perhaps easy to consider manufacturing as a lesser priority. However, manufacturing underpins so many other elements of our society, and we’ve certainly had to repeat that message more than once.

We’ve got the Industrial Strategy, which is a great step forward, and I would go as far as to say the Steel Strategy saved that particular industry from terminal decline in this country. So this government have been good at strategy, we just need them to quickly move forward on getting some of those implemented and delivered.

Can you explain more about Make UK Defence and Lloyds’ new practical guide for how SMEs can break into the defence sector?

Most of my career has been in the defence manufacturing sector. The UK has 270,000 people employed in defence and we’re the second largest exporter of defence equipment in the world, after the US. We’ve got some world class technologies, true pockets of excellence and are really leading the way in certain areas.

The challenge the defence sector is currently facing is that we’ve traditionally relied on the larger platforms – fast jets, aircraft carriers, etc. However, what we’ve seen in Ukraine, and what we’re now seeing in Iran, is a very agile, low-cost form of warfare.

We’re currently shooting million dollar missiles at $30,000 drones. That’s not a sustainable way of dealing with these sorts of conflicts. We need a lot more agility and quicker innovation, and that comes from the SME community.

This guide provides SMEs with an overview of the support available to improve their technology adoption and manufacturing output, including routes to market within MOD and the wider supply chain, details of future defence programmes, how they can access finance, and the sector’s accreditation and cyber security requirements.

SMEs are becoming more and more important in the new types of warfare that we are witnessing and their ability to move quickly is going to be vital. And this guide sets out to explain to innovative SMEs, that defence is a good place to go and work.

It’s a sector that a lot of businesses are put off from entering due to its complicated nature around prime contractors, the MOD, support from the banks, compliance regulations – the list goes on.

What we’re trying to do is set out a pathway for SMEs to come and participate. We have no shortage of demand and the large manufacturers are anxious to get more companies into their supply chain with new innovative ideas and processes.

But the guide also aims to cast the net wider to the myriad of very clever companies that are operating in completely different sectors. They’re the ones with the good ideas that we can bring to bear on some of these new challenges in the defence sector.

Make UK is celebrating its 130th anniversary this year – time for reflection?

The key attributes that I’ve seen in my 45 years in the manufacturing sector is resilience and pragmatism. The UK has been through endless shocks, challenges and upheaval, but you always find engineers that find answers to the problems at hand.

The UK is the place where innovation happens. I participated in a roundtable with US manufacturers in Washington last year and I asked for their view of UK manufacturing. Their response was simple; the UK does the innovation, the US has the resources to develop it at scale.

We are experts at R&D and finding solutions – just look at what’s happening in the UK around advanced materials and composites – and that’s always been the case, but we need to get better at scaling those innovations into large companies.

Pace of change in the sector has obviously been dramatic. Looking back 30 years, we were very commodity driven and were the centre for manufacturing items such as TVs, white goods, volume cars etc. The trend of globalisation saw much of our low-cost, high-volume manufacture offshored.

Our focus now is on advanced engineering and manufacturing. We’re the leader in commercial aerospace components and, as previously mentioned, the world’s second largest defence exporter. The UK is also the centre of the luxury car market so we really excel when it comes to advanced manufacturing.

What does the next ten years look like? We are rapidly becoming the leader in renewable energy technologies, creating 50,000 new jobs in that sector last year.

We’re the biggest wind turbine installation and production location in the world, leaders in hydrogen technology and jet engines, and we’re catching the US when it comes to small modular reactors (SMRs).

The next ten years is going to be about increasing that pace of change. Much of that will be done digitally of course, and that’s why we’re so keen to get as many companies as possible to adopt technology.

The government’s role is to make sure we have the right policy environment for the sector to thrive. And that fundamentally means ensuring that we don’t have the highest industrial energy costs in the world and that we’re producing young people who want a career in manufacturing.