And it is critical we continue to do so says Finbarr Livesey of the Institute for Manufacturing.
There is much discussion post-credit crisis on how the UK’s economy needs to be rebalanced.
Some see this as an opportunity to castigate those who ignored the making of things and focused purely on the making of financial products. However, the nature of the debate is distracting many from asking the real question – how do you increase the share of manufacturing in a developed economy? The response should be to remember your history.
The UK was the home of the industrial revolution, creating whole new industries and reaping huge benefits along the way in economic terms. It is only by becoming the maker of industries again that we can have a strong manufacturing sector in the UK, holding valuable activities within the UK and controlling needed activities around the world to service those industries and access foreign markets.
We are in danger of forgetting our past, too caught up in cost reduction, lean principles and other short-term attempts to keep the status quo. This local optimisation provides some immediate relief to companies under pressure on price or trying to reduce bills, but it narrows our vision and means we end up fighting over a smaller and smaller piece of territory as industries mature, commoditise and internationalise.
Why will this not work? Firstly, we cannot compete on cost. The convergence of hourly compensation for production workers between developed and emerging economies is slow, with UK costs 10 times those of Mexico and 4 times those of Taiwan. The availability of large numbers of workers at significantly lower wage rates will continue to be the norm in these economies.
Secondly, according to business consultancy PriceWaterhouseCoopers, emerging economies are producing more multinationals. The number of BRIC (Brazil, Russia, India and China) multinationals in the Fortune Global 500 has more than doubled from 27 to 58 in five years, and PwC predict it will increase by a further 40% by 2024.
Perhaps more importantly, competition in this space is intensifying. BRIC multinationals will move directly into developed country markets in services and high value manufacturing.
These challenges are coming as the global economic and social landscape undergoes massive change.
The rise in environmental pressures, combined with peak oil, mean the ability of companies to globally source and produce will be in question. Our economies are also getting older. The UK is heading for a situation where there is one pensioner for every two workers. This will put greater strain on social services and demands a new set of products aimed at a longer-lived population.
These trends are radically changing the manufacturing landscape. As they play-out the footprint of companies will fragment, leading to greater regionalisation as transport costs rise and stronger environmental regulation becomes standard.
Manufacturers will need to find alternative methods to reduce energy consumption in production. As demographics change, preferences will change and young, skilled labour will become scarce.
Creating challenge-led industries How can the UK increase its manufacturing base in this context? Any attempt to hold on to industries where production is commoditised or to re-enter sectors we have already lost is playing a weak hand.
The activities that can provide growth in the UK will be close to the technology frontier, demanding high levels of technical knowledge that will be hard for other countries to emulate. Finally, they will be challenge led – addressing issues such as climate change, food security, and health.
And that is where our history of creating new industries, from the industrial revolution to the present day, comes into play. Only by making ourselves the creators of industries again can we hope to redress the imbalance and provide a foundation for future growth. If our industry is to create industries, we will be able to exploit production that is not yet commoditised where we are addressing leading challenges such as those outlined above. Regenerative medicine and new energy technologies are just two examples. Other industries will emerge in an unpredictable way, so we will need to be forward looking and flexible, not tied to a pre-defined list. Finally, we should also be capturing the market for new production processes and ensuring we build both the machines that make and the things they make.
Making is back in fashion and we should be making industries.
Finbarr Liversey Institute for Manufacturing Finbarr Livesey is head of the University of Cambridge Institute for Manufacturing’s Centre for Industry and Government. He conducts research on the changing nature of manufacturing and its contribution to economic growth.