Despite what you may have heard, the British manufacturing sector is strong and performing well.
In fact, the UK is currently the 11th largest manufacturing nation in the world, with 11% of gross added value (GVA) and 54% of all exports attributable to the industry.
That doesn’t mean to say British manufacturing hasn’t declined though. In 2006, Britain was the sixth largest manufacturing nation on Earth, so why have things changed and how are other nations fairing in comparison?
Is UK manufacturing really in decline?
Back in the 1970s, manufacturing made up 25% of the UK GVA. It’s evident that the UK’s position has weakened over the years, but that doesn’t mean the industry is now performing badly.
Overall, the UK’s manufacturing output has increased by 1.4% a year since 1948, according to a recent report from the Office for National Statistics (ONS).
Joe Grice, chief economist at the ONS, says a number of factors have caused this rise, including:
- A better quality, more skilled workforce
- Shift in production from low to high productivity goods
- Improvements in IT
- Increased investment in research and development
- A more integrated global economy
Some 2.6m people are now employed by the manufacturing industry – a figure which is also on the rise. Pay growth within this sector is also on the up, and wages are 13% higher than economy average, according to EEF.
One of the UK’s best performing manufacturing industries is aerospace, as the UK ranks second globally in this sector. Britain’s car industry is also doing well; the Society of Motoring Manufacturers (SMMT) claims that 15% of car buyers choose a UK-made vehicle. New car sales rose by 7% during the first six months of 2015 too.
If our manufacturing sector is doing so well, why have we slipped down the global rankings over the years?
One big factor is the recession (see below). Another is the fact that many of the services once counted as part of the manufacturing industry (cleaning, catering, building services, etc), were allocated to other areas of the economy instead.
Who are our biggest competitors, and how did they get ahead?
Unsurprisingly, China is currently the largest manufacturing economy on earth, holding a 22% share of the world’s manufacturing activity. It took the top spot from the United States in 2010, leaving the US in second with a 17% share.
It’s difficult to compete with China, as its large population is partly to thank for its success, along with cheaper labour costs. However, size isn’t everything – preparation is also key.
From 1992 to 2011, China invested 8.5% of its gross domestic product (GDP) on infrastructure, which was much more than any other large economy spent, according to McKinsey Global Institute. Making such a big investment ahead of when it was needed meant that supply-side constraints were eliminated, which boosted the availability of a number of production factors whilst reducing cost.
China’s policymakers also decided to boost the manufacturing industries which had the most competitive advantage already, instead of attempting to improve all industries at once. Certain geographical locations were focused on too, particularly the East Coast. China played to its strengths, and it’s a technique that certainly paid off.
Germany is another nation which has enjoyed a booming manufacturing sector, even during the recession. Around 22% of Germany’s economy is attributed to manufacturing, and it is the fourth biggest manufacturing nation in the world. Most other countries, including ours, have suffered due to cheap Asian competition, yet Germany has managed to increase exports to China and wider Asia.
It seems an impossible feat – after all, Germany is a highly regulated, high-wage country with a strong economy. However it does house many big, multinational companies, including BMW, Siemens and Volkswagen. Despite this, it seems as if a strong base of small and medium-sized enterprises (SMEs) is actually driving success in Germany’s manufacturing sector.
These SMEs avoid mass markets where it would be hard for them to compete. Instead they choose to dominate niche businesses with high quality products that can offer superior performance. This enables Germany to fetch high prices for its products and boost exports to other nations.
Both China and Germany have used what they’re best at to get ahead, and both have experienced success as a result, despite being at opposite ends of the scale when it comes to production cost.
What’s in store for the future of Britain’s manufacturing industry?
Although Britain’s manufacturing industry is improving, increasing its strength further would bring a lot of benefits.
Currently, the UK imports more than it exports, which impacts the country’s overall balance of payments deficit with the rest of the world. This payments deficit could be reduced if we had a stronger manufacturing industry, but how do we make this happen?
Manufacturing activity around the world is changing. Services now have a bigger role in the industry (see box), products focused on aiding the environment are more important, and customised goods in a niche product field have greater emphasis thanks to a low level of competition.
Further, it’s becoming less common to design and build a product in the same country – manufacturing activity is now spread across multiple nations.
The UK needs to keep an eye on these changes but, actually, it’s well equipped to do well in the 21st century manufacturing industry. We have a highly skilled workforce, while academic research and education are two of our greatest strengths. We also boast a vast supply of innovative mid-sized companies.
In comparison, countries that have experienced a rapid expansion recently, such as China, will likely see their manufacturing activity slow. Local wage costs in China will likely rise, and environmental damage will eventually become too great.
Emerging nations are unlikely to see a repeat of the large increases in world manufacturing shares they’ve enjoyed in the past. This is, however, good news for developed countries like us.
Martin Spring, a professor at Lancaster University Management School, believes that Britain needs to realise that manufacturing is about a lot more than just ‘making things’. It involves having knowledge in a wide variety of areas, including research and development, design and production, and maintenance and repair.
Companies need to create new business models which put all this useful knowledge to use, and come up with ways to increase the profitability of the manufacturing industry.
Naturally, all these alterations will take time to implement, but if the UK wants to keep up to speed with the rest of the world, it needs to try and get ahead, like China did.
By Tom Chapman on behalf of Silicone Engineering