A report from PricewaterhouseCoopers reveals optimistic signs for the development of UK manufacturing, identifying opportunities in renewable energy and recommendations to government.
Report summary:
• UK manufacturing achieved a 50% increase in labour productivity from 1997-2007.
While the UK is suffering from the severe cyclical global downturn at the moment, the report asserts that UK manufacturing will survive this as it survived the crises of 1973, 1982 and 1991.
The question is whether it will be weaker or stronger at the end of that process.
It is true that in the UK, the manufacturing sector is in relative decline. Over the past 30 years manufacturing output has grown more slowly than services, and the number of people employed in manufacturing has dropped steadily as productivity per employee has increased. The sector faces a number of serious challenges, from the long-term threats posed by emerging markets, to the current economic downturn which is affecting manufacturers in high-wage and low-wage countries alike.
Britain has a highly negative balance of trade (total exports minus total imports) that is not sustainable. Just as individual companies have to identify their particular strengths and areas of focus, PwC believes the UK manufacturing sector as a whole, with the support and involvement of the government, needs to consider what strengths it should build on, and where it wants to specialise. The rate of globalisation means that the pace of specialisation needs to increase if the UK is to hold a meaningful position in the long-term global market. Being a leading player in all sectors is not realistic, but being a leading player in certain chosen segments is.
Through interviews with CEOs and board-level directors of leading manufacturing companies the report explores the challenges and opportunities facing the sector. Some of its conclusions may be surprising, and the recommendations that flow from them will require bold thinking and resolute action, especially in the face of perhaps the most serious
global recession since the 1930s. Its overall message is clear: UK manufacturing is not dead, nor even in terminal decline. The sector as a whole has ‘held on’ through severe recessions in the past and it will survive the current downturn — but PwC thinks it can and must do better than that. PwC sees efforts and innovations already taking shape today which, if properly leveraged, could move the UK manufacturing sector from ‘surviving’ mode to ‘thriving’.
Key findings
• The UK manufacturing and engineering sector needs to survive, not only because it is important in its own right, but because it supports so many businesses in the services
sector. Indeed, the distinction between ‘manufacturers’ and ‘service providers’ is becoming increasingly blurred, as products and services are increasingly bundled to together to provide differentiated value-added solutions. If manufacturing disappears, we believe a large element of the service sector would also be at risk.
• Most commentators and policymakers now agree that the ‘knowledge economy’ is essential to the UK’s economic future – these days the production of even comparatively
simple products like paper and packaging, for example, rely on complex computer software and intellectual capital. It is the development and exploitation of new technology that will continue to mark out the winners from the losers, both in services and in mainstream manufacturing.
• Just as in the mid 1970s, the early 1980s and the early 1990s, the manufacturing sector as a whole will come through the current economic crisis. One very positive sign is the lengths to which many firms are going in the current downturn to minimise redundancies.
In a number of high-profile cases, UK firms and unions have agreed to reduced work weeks to retain the scarce manufacturing expertise that these firms will need when the
recovery comes. That shows that they are already thinking beyond the downturn.
• Manufacturing is a long term industry. Business strategies, investment decisions, analyst reports and government policies all need to realise that sustainable competitive advantage is built up over many years. If they lose that perspective, short term decisions can damage long-term competitiveness.
• Sustainability is an extraordinary opportunity, but the UK faces stiff competition from other territories. The new focus on climate change and greener supply chains opens up a whole range of new prospects for UK manufacturing, for example in the design and production of clean technologies and renewable energy generation. In some areas (e.g. wind power) other countries already have a substantial lead, but this opportunity is by no means completely claimed and in some areas (particularly tidal energy) the UK has a strong position already. It will require focus and co-ordination between government, business, and academia to be properly exploited.
• We may now be entering a prolonged period of sterling weakness. If that proves the case, then firms should take the opportunity to push for productivity improvements as dramatic as those achieved over the past decade. The aim should be to take a clear productivity lead in their core competencies, and not merely benefit from the lower cost environment generated by a falling currency.
• The UK now accounts for 0.9% of the world’s population and falling. Economically Britain has ‘punched above its weight’ to an astounding degree over the past 200 years, but as major emerging markets increasingly claim a proportionate share of the world’s wealth, Britain’s relative economic impact must adjust accordingly. We see this as a global economic success story rather than a British failure. Moreover, we believe British manufacturing can and must succeed as more of a ‘niche player’. Once again, business, government and academia all have critical roles to play to make this happen.
The report’s key conclusions and recommendations for business are:
• In seeking to build sustainable competitive advantage, focus first and foremost on your unique knowledge and capabilities, rather than products. A strong focus on R&D, dedication to quality, reliability, and responsiveness, strong partnerships throughout the value chain and concentration on customisation will characterise the most successful businesses.
• Ensure that your ‘home’ market (i.e. the countries and customers that you know intimately) are of sufficient scale to provide a platform for global success – in most industries that will include more than the UK.
• Take full advantage of government support, and don’t hesitate to lobby for a more favourable business environment.
• Be a champion for your business and your industry – talk up your achievements, and make sure the widest possible audience knows what you have done and what you can do.
• Take advantage of the downturn. Market share is easier to take, state-of-the-art capital equipment cheaper and quicker to obtain, and top talent easier to recruit, in times like these.
And our recommendations for Government are:
• Greater clarity & public awareness is needed regarding the support that the government is providing to foster training and innovation.
• The Government has been ‘fire-fighting’ in the current crisis; efforts in support of the longer-term, strategic development of UK manufacturing need to be broader, more visible and with more conviction. For example, facilitating investment and development in key industries with exceptional growth potential.
• Active and co-ordinated R&D is critical to the long term health of UK manufacturing, but currently much cutting-edge R&D in British universities lacks commercial sponsorship. This gap needs to be more effectively bridged, and knitted together with R&D activity undertaken in industry.
• The deficit of skilled technical workers in the UK is becoming acute – the government has a role to play to ‘re-engineer engineering’ by demonstrating that we have an industry to be proud of, and attracting more top talent to pursue careers in this sphere.
• The government can encourage the further development of manufacturing ‘clusters’ analogous to Silicon Valley or Munich.
• The right tax and regulatory frameworks are critical – we explore the key steps to support optimal investment decisions by the private sector.
The reasoning behind these conclusions follows in the body of the report.
“Manufacturing is a long-term industry; competitive advantage is built up over many years, but can be destroyed very quickly,” says Loren Gerlach, manufacturing director at PricewaterhouseCoopers in London. “We need to ensure that not only does the UK emerge strongly from the downturn, but also has its sights set on the longer-term. We see promising global market growth opportunities (for example in green technologies) as well as innovative investments and adaptation amongst our clients which, if fully leveraged and co-ordinated, could move the UK manufacturing sector from hanging on to real renewal.”
To access the full report, click here
