“Interesting times” ahead for UK manufacturers

Posted on 21 Dec 2017 by Jonny Williamson

Rarely has the ancient curse, ‘May you live in interesting times!’ seemed more appropriate. Every opportunity seems to be offset by a threat, much of the latter due to uncertainty about how the Brexit negotiations will pan out.

And yet, there are significant reasons for UK manufacturers to be cheerful, as EEF chief economist Lee Hopley discussed with The Manufacturer’s Nick Peters.

It’s been quite an ‘interesting’ year at many levels from the point of view of UK manufacturers and their hopes for the future, wouldn’t you agree?

Lee Hopley, chief economist, EEF.
Lee Hopley, chief economist, EEF.

Lee Hopley: It’s been an ‘interesting’ year in many respects, but the issue that sounds right is that industry is performing so positively. Official indicators show that industry is actually on track for a really good year of growth in 2017, and that’s in no small part due to the fact that manufacturing, and demand globally, has been on the up.

Industrial capacity utilisation in the EU is around about 84%. This should trigger investment to cope with increased demand, something the Made Smarter Review and the Industrial Strategy announced last month said was vital if we are to improve productivity.

The fact that we are seeing a pickup in investment would suggest that companies are bumping up against capacity issues, similar to the indications from European figures.

Am I confident that industry and government can figure out what industry needs to do, and particularly what government needs to do to make sure that new technologies are diffused down through the supply chain, as well as identifying future sectors and big market opportunities for the UK? Yes.

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I’m confident that we can drive that collaborative partnership between business and government. If you ask whether we can turbocharge investment in the short term, that’s more difficult to answer because there’s a number of factors that are going to influence companies’ decision making.

There’s the big technology questions that the Industrial Strategy poses; the diffusion of new technology adoption through the supply chain that Made Smarter is looking at; then, hanging over all of this, you’ve got the huge cloud of uncertainty created by Brexit.

There is a question mark over how we can turbocharge investment in the middle of all this political uncertainty. We’d need to see how the next few months’ negotiations play out before I could answer that.

Manufacturing Automation Robot Production Assembly - Stock
Companies are becoming much more fluent in the language of the Fourth Industrial Revolution (4IR).

The Made Smarter Review forms one of the sector deals included in the strategy, and discussions are described as ‘advanced’, which sounds positive.

It seems the government has understood that productivity in the manufacturing sector, while improving four-times faster than anywhere else, still needs a boost from investment in technology.

That’s absolutely right, but I think we have to recognise that this is not a short-term endeavor – this is very much a long game. Companies we speak to are certainly becoming much more fluent in the language of the Fourth Industrial Revolution, trying to understand how they can apply some of these technologies to their business.

Ultimately, however, it will be about new products and services, and new business models, that will give UK manufacturers that competitive differentiation on the global stage. It’s not just about government’s initial response to Made Smarter. It’s about the ongoing effort to make sure that all parts of industry are making progress on that journey.

And also, I imagine, it’s about creating a greater coherence in the relationships between government, academia, UK manufacturers and local politicians. Relationships that have not always been visible in the UK, and indeed often seem atomised – a lot of public money spent in lots of small places ineffectually and very little of it channelled in a meaningful, coherent way.

That’s a fair assessment of how we’ve tried to tackle some of these growth and productivity challenges in the past. It isn’t anything new; we’ve been talking about our lagging performance for several decades.

The way it’s been identified, then dropped in and out of fashion, and relentlessly tackled, over and over again in successive budget announcements or white papers, is very much open to question, and we do need to do something different this time.

The strategy does point out the success of the Catapults. They’ve announced £178m in new interim funding, so there are very successful elements out there that can be built on. It is about reshaping and making more coherent the way everybody works together.

UK Manufacturers Manufacturing Welding Assembly Metal Working - Stock
It’s not just about government’s initial response to Made Smarter. It’s about the ongoing effort to make sure that all parts of industry are making progress on that journey.

Absolutely. The innovation package that was set out in the Budget and then the Industrial Strategy is decent. We’ve done a lot of work on building the innovation ecosystem for businesses in the UK over the last 10 years.

I think the Catapults should get special mention for bringing together the science base with businesses to solve problems in commercialising and bringing new ideas to the market. They’ve been great in that respect, and they could definitely do more. It’s all about capacity.

Other things like the R&D tax credit have made a huge difference to a lot of companies as well. Again, that’s been a piece of the fiscal landscape since the early 2000s and it’s something that UK manufacturers have come to utilise and understand. It’s definitely helped drive additional investment in R&D and new technology across the sector. We were really pleased to see the credit raised from 11% to 12%.

Just over three-quarters of private R&D investment in the UK is driven by just 400 businesses, much more concentrated than in competitor countries. That means fewer of our SMEs are introducing new products and processes than their European competitors. Should there be a drive to make SMEs more aware of the huge value of getting involved in R&D?

The SMEs that we meet across the manufacturing sector recognise that innovation in terms of new and improved products, and process innovation as it relates to the adoption of new technology is mission critical for them. It is about joining them up with expertise to make sure that their efforts are really paying off in terms of big productivity benefits.

Obviously, we can’t talk about the future without taking about the skills gap. Are you satisfied that what you see from the white paper is pulling sufficient levers to try to close this gap?

CROP-welding-apprentice pre-apprenticeships
The package of funding for STEM teaching and T-levels is very much lining things up in the right direction as far as the future skills needs of manufacturing go.

We’ve been trying to turn this supertanker around for quite a while now. The package of funding for STEM teaching and T-levels is very much lining things up in the right direction as far as the future skills needs of manufacturing go.

Will we be able to say, ‘job done’ in the next few years? – I’m uncertain about that.

Focus is needed in terms of upskilling and retraining people that are currently in the workforce, particularly when it comes to issues around digital skills, and we’ve also got to make sure that we’ve got really good quality management and leadership skills. These are some of the things that need to come next on the to-do list.

And, of course, last month, EEF was particularly scathing that uptake of apprenticeships has plummeted since the introduction of the Apprentice Levy; dropping 59% because employers found the government’s systems too cumbersome and confusing.

That’s right, there are fairly significant teething problems when you look at the impact on new starts.

You’ve already mentioned Brexit. The white paper reflected an ambition by industry to bring more supply chain component manufacturing this side of the Channel. Obviously, that will boost the country’s economy post-Brexit, but also alleviate what are clearly some headaches around the future of the UK/EU supply chain.

This is something that we’ve been striving to do for a while; our ambition to capture more of the supply chain value in the UK predates the Brexit referendum. It’s something that organisations like the Automotive Council have been quite vocal on for a while, looking at how you can increase UK content of final production.

This is a programme of investment that will be years in the making if we want to increase the proportion of UK content across a whole variety of industries. I do think there needs to be some resolution of Brexit uncertainty before we see big commitments on that front.