Should the government pay to make the steel industry sustainable?

Posted on 7 Sep 2023 by The Manufacturer

It was recently reported that the government is in advanced talks with Tata Steel, the country's biggest steel producer, to provide £500m of funding to help secure the long-term future of a key part of its steel industry.

However, Martin Vares, CEO of Fractory, a cloud manufacturing platform that connects engineering companies with the manufacturing market in real-time, argues that while this intervention is correct in the current circumstances, it shouldn’t have come to this, and asks whether public funds should be used to secure other industries.

MV: The UK steel industry is perennially under threat. And Tata, which represents much of the country’s steel production, runs its British business at an unsustainable loss. Also unsustainable are its blast furnaces. They need to be replaced by electric arc furnaces, bringing environmental improvements and economic gains – profits ultimately. But they will deliver a certain future for a critical foundation industry. And the UK needs a steel industry.

Tata has long been in negotiations with the government. ‘Help us and provide subsidies so we improve environmentally and succeed economically’, they say. And now it seems the government will help, probably to the tune of £500m, with Tata themselves investing £700m.

But I find this kind of government intervention strange. Is this how it should be? Capitalism is littered with failures; enterprises the market deemed imperfect. Yet, in this case, the ‘invisible hand’ of the market will be given guidance.

I’m the founder and CEO of a manufacturing business now headquartered in the UK, but I am firstly an Estonian entrepreneur and as such I can be sensitive to governmental influence on business. Clearly this example of government intervention is nothing like the Soviet model, the one which Estonians were freed from in 1991, the memory of which is the driving force behind the thriving Estonian business scene and has fuelled the rush to capitalism and free enterprise. But nevertheless, many of us are inclined to feel that businesses should be left to their own devices, that progress is best achieved in markets.

Industrial sustainability versus workplace gender equality

Imagine a different issue to the one presented by Tata; rather than environmental concerns, consider gender equality in the workplace. Changes had to be made to achieve fairness. Decency and legislation demanded it. But there was, mostly, no government pull-through for it. And it was costly for businesses. But that cost was absorbed and now the upside is clear: a wider pool of talent, a better work environment and much more besides. Change was required and change has now come, and little public money was spent.

If the steel industry could absorb the costs of the changes required of it, the upsides would present themselves in time. But, of course, there isn’t time.

And so, in this case, it’s quite right that the UK government digs deep to maintain a sovereign steel business and to help the industry decarbonise. No meaningful country should be without its own steel production and carbon emissions are the problem of the age. Sometimes state assistance is entirely necessary, and Tata is right to use its leverage to access it.

But generally, given longer timeframes and less urgent need, even the biggest problems can be solved in the marketplace. Of course, the government would have had to make decisions about this decades ago when the sustainability of existing steel production methods was first being questioned. That was the time to introduce clear laws on future industrial production and tell the players in the steel business to get on with it, explaining there would never be government support.

The money being spent here is enormous. And ideally, this should be the last time an industry is bailed out like this.

Are there other ways to spend £500m?

It’s too late to reallocate this money, but not too late to consider spending similar amounts to ensure this doesn’t happen again – to ensure the industry is ahead of its problems.

The UK is not currently at the forefront of the manufacturing world, as it once was. But the potential is here and nothing is yet lost. However, investment at this time would be wise. Other established manufacturing nations will be thinking similarly. If the UK is spending to salvage things, it might also think about spending to propel the nation’s industry to be competitive again. Specifically, that spend would go on engineering resources: excellent education for real life human engineers and significant technologies and automations.

And huge sums are not always necessary. Sometimes planning ahead is just as impactful. To give one small example, a well-planned public/private programme, run by education and industry, could be established, honing serious engineering ability and imbuing it with high-level business know-how. This needn’t be costly. In Estonia we have a programme which is broadly like this and the returns from it are considerable. They are calculated by measuring the small cost of the programme compared to the tax receipts from the participating students who have gone on and founded companies.

Martin VaresMartin Vares is one of the founding members of Fractory whose own experience in the manufacturing industry led to the inception of the company. He was named in Forbes’ 30 Under 30 in 2020 for the achievements in cloud manufacturing.

In his home country of Estonia, much of daily life is digitised, and Martin is bringing that experience to UK manufacturing; digitising processes through Fractory’s cloud manufacturing platform which brings customers and suppliers together in a single automated system.

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