Manufacturing

Inside JJ Churchill’s engineering factory, the scene is one of controlled commotion as high-technology machine tools turn out parts for diesel generators and aero-engines. The company, based in Market Bosworth, a small town in the English Midlands, was set up in 1937 by Walter Churchill, a pilot-cum-engineer who during the second world war flew Spitfires and Hurricanes from a landing strip next to the plant. The family can trace a link to Winston Churchill.

Walter’s grandson Andrew, the current managing director, says Britain could today use some of his grandfather’s derring-do and borrow from the wartime leader’s bulldog spirit to boost its prowess as a manufacturing power. “Manufacturing is a sector of the economy that requires high skills and provides a lot of innovation. It’s vital that we do more to strengthen this area of business rather than see it fall away,” says Mr Churchill.

His view fits into a debate about whether Britain should attempt to “rebalance” its economy back towards manufacturing. The notion has grown in recent months that the country that gave the world the industrial revolution now suffers from the fact that it “no longer makes things”. According to the resultant stream of rhetoric, “reindustrialisation” is the key to boosting the economy in the aftermath of the financial crisis.

“For the future, Britain needs an economy with less financial engineering and more real engineering,” Lord Mandelson, the business secretary, recently told parliament. Opposition politicians and leading industrialists have echoed his sentiments – in a debate whose importance reaches beyond the UK. As one of the first developed economies to deindustrialise, Britain’s approach to bolstering the sector is potentially applicable to other countries.

Sir Anthony Bamford, chairman and owner of the JCB excavators group, is keen to highlight some of the difficulties, especially at a time when UK manufacturing has been severely hit by the recession – with its output plummeting in recent months at above the rate for other sectors. “I’d hate to give up on British manufacturing,” he says. “But we’ve lost an awful lot [of manufacturing production] in the UK in recent years and it’s going to be hard to bring it back.”

Chart

In 2007 manufacturing accounted for less than 13 per cent of UK value-added output at current prices, compared with nearly 33 per cent in 1970 and a peak of close to 40 per cent in the 1950s. Some 3m people now work in manufacturing, compared with 7m in 1980 and a high of 8m in the 1950s. (By comparison, some 6.5m are employed in financial services, up from 3m in 1980.)

But does it make sense for Britain to try to reverse this trend? If so, what needs to be done?

First, there is a solid base to work from. For all the talk of decline, the UK is the world’s sixth largest manufacturer. Lord Mandelson, meanwhile, has been busy making the case for government-promoted “industrial activism” that could strengthen manufacturing’s position .

Sir John Rose, chief executive of Rolls-Royce, the aerospace group, says UK manufacturing is already highly competitive and “more capable than the equivalent in many other countries”. Political leaders should “capitalise on this and create the best possible conditions for manufacturing to prosper in the future”.

The solution, he says, is not for government simply to “throw money” at manufacturers but rather work out a “mix of policies that will enable businesses to make decisions about investing in manufacturing in the UK and keeping talented people here”.

Keith Attwood, the chief executive of E2V, an Essex company that is a world leader in devices such as satellite sensors, says Britain has strengths in certain areas and it should focus on these. Alongside aerospace, defence and pharmaceuticals, these include scientific instruments and upmarket audio systems.

The share of manufacturing in the UK economy compares poorly with Japan and Germany – where in each case the 2007 proportion was 22 per cent – although it is roughly in line with the US and France. “There’s a case for saying the process in Britain has gone too far. I think Britain could probably do with a certain amount of reindustrialisation,” says Bob Rowthorn, a Cambridge university economist and an authority on the deindustrialisation of Britain and other nations in the 1980s and 1990s.

But some economists are sceptical about whether Britain needs reindustrialisation. They cast doubt on the claim that industry is special. “How much manufacturing should be in the UK economy is not a question that is appropriate for politicians or anyone else to address,” says Patrick Minford, a professor at Cardiff Business School.

“It really depends on a range of resources that a country has at its disposal – such as land, quality of labour and specific skills – and it is these which will determine what the mixture of activities will be,” he says.

Stephen Nickell, of Oxford’s Nuffield College and a former member of the Bank of England’s monetary policy committee that sets interest rates, questions why Britain should be trying to buck the international trend. “I am unsure that Britain would benefit from having an economy more like Germany’s.”

Richard Lambert, director-general of the CBI employers’ organisation, highlights the potential of manufacturing to spread jobs widely around the economy – promoting social cohesion – rather than leaving them clustered largely in just one place, as with the financial services industry in London.

Manufacturing is also good at spreading skills, says Sir John of Rolls-Royce, citing the example of nuclear engineering. “These skills are generic and as relevant to other sectors beyond manufacturing, so once those skills have been developed, they have a broad impact across the economy,” he says.

Labour productivity in manufacturing is fairly high, bolstering the argument that it can be a force for economic regeneration. In 2007 value-added per manufacturing employee per year – an indicator of how much wealth each job creates – was £55,300, or one-fifth higher than for the economy as a whole.

Lord Bhattacharyya, director of Warwick university’s manufacturing group, says the UK has little choice about whether manufacturing will grow in the medium term. “I don’t envisage much expansion in sectors such as financial services and public spending. If the UK is going to expand at all, it’s got to be in manufacturing,” he adds.

“I can envisage a lot of smaller firms springing up in fields concerning green technology, for instance solar energy production, or electric vehicles. I think the amount of manufacturing in the economy could grow to 18-20 per cent [of gross domestic product] in the next decade,” says the peer, a member of the ruling Labour party.

Manufacturing executives do not attempt to disguise the traumas facing their sector as the recession bites. Falling orders and sales, tightening credit conditions, enforced cuts in the working week and large-scale redundancies have become routine.

Yet the crisis has thrown up some positives. The large falls in sterling against other main currencies should give manufacturing a boost. Manufacturers also stand an improved chance of recruiting better people, particularly those who in previous years might have headed for finance or business services.

“Even allowing for the difficult economic conditions, I think my ability to attract and retain good people is better than it has been for some time, and this might be something to do with the wider shifts in perceptions about careers,” says Chris Rea, managing director and main owner of Aesseal, a maker of high-tech engineering seals for chemical works.

Martin Lamb, chief executive of Birmingham-based IMI, a specialist valve maker, says the UK could benefit from the fact that much of the offshoring to low-cost countries has already happened. “All kinds of factors, including the need to have production closer to the final market to allow for design changes, plus increased costs in the overseas country, are slowing down the move towards offshoring,” he says.

Such positive thoughts resonate with statements from ministers and officials who say they favour a stronger manufacturing sector. However, many in industry argue that the government needs to match rhetoric with practical action that goes beyond one-off, emergency measures such as the £2.5bn ($3.7bn, €2.9bn) boost recently extended to the beleaguered car industry.

This is where the arguments come in for some elements of government assistance to help certain groups of UK manufacturers. Such a reindustrialisation programme could, however, gain cross-party political backing, particularly when put alongside the “recapitalisation” programmes that have helped out the big banks. Assistance could include restoring tax allowances for investing in equipment, more training programmes and creating tax incentives to encourage companies to take on design staff to help in the development of new products, for instance in low-carbon technologies, and so aid the green agenda as well as helping manufacturing.

Yet while they would welcome government assistance, most manufacturers see the ingredients as already in place for the sector’s resurgence – assuming the recession does not drag on for too long.

One of the more extraordinary stints in Walter Churchill’s buccaneering career was working as a British spy inside a Messerschmitt factory in southern Germany in the early 1930s, where he sought secrets about the Luftwaffe’s new aircraft designs.

Today in Market Bosworth, his grandson reckons that it is time to learn again from Germany in another way by rediscovering the value of manufacturing. He says: “Britain now has a good chance over the next few years to put its manufacturing industry on a much more solid platform than we’ve had for decades.”

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Ways to count

In 2007, Britain made 3.8 per cent of the world’s industrial goods, compared with about 30 per cent in 1850 when it was by far the biggest manufacturing country. Now the UK ranks sixth in the league table of manufacturing as measured by value-added output, behind the US, China, Japan, Germany and Italy.

Debate has raged over the true importance of manufacturing within the British economy. Raw data show continued decline. However, analysts point to developments such as the outsourcing of support services, from legal work to cleaning, that once came under the broad category of manufacturing. Today it is also common for factory labour to be outsourced.

If all this were “added back” – along with associated disciplines such as design and development – it would add several percentage points to manufacturers’ output (currently around 13 per cent) as a share of GDP, some analysts say.

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