How well prepared are UK manufacturers for the next challenge of turning their investments in productivity and competitiveness over the past decade into transformational growth in the next?
To answer this question and to understand the current state of British industry, our new report - The Shape of British Industry - Growing from strong foundations - draws on a survey of 300 manufacturers as well as in-depth discussions with dozens of businesses.
What comes out is a picture of an industry starting from strength, but cautious about growth. Having weathered the recession, UK manufacturing emerges as an innovative, diverse and globally engaged sector. Firms have continued to boost productivity and competitiveness, even if they have struggled to deliver profits or meet their ambitions. According to our new report there's both good and bad news.
Chart 1 - SMEs less likely to turn productivity boost into profits or growth
% balance with increase in productivity, profits and meeting growth objectives
There is, however, one striking feature: the UK, has relatively fewer large manufacturers – those employing more than 250 people – than our closest competitors.
Chart 2 - UK has relatively fewer larger manufacturers,
Number of manufcturers with 250+ employees (US figure is for firms with 500+ employees), and large companies as % of total manufacturers
The twin dynamics that could drive growth in manufacturing are large companies creating markets for a dynamic, diverse supply chain and innovative, agile suppliers attracting large, mobile multinationals to the UK. The danger for manufacturing and the economy is that the lack of larger companies could slow this dynamic, leading to a hollowing out of supply chains and placing a cap on future growth
After a deep recession in which the economy shrunk by 6%, a manufacturing-led recovery has helped drive a year of good economic news. Exports to developing economies are booming and the private sector is slowly creating jobs again. But with public sector cuts looming and a currency war threatening to derail the global economy, we cannot take this growth for granted.
Generating long-term, sustainable growth will require the private sector and government to work together to build on the strengths of sectors – such as manufacturing – that are essential to tackling our future challenges, such as global security, demographic change and climate change. Government, therefore, has a big part to play in providing the right framework that will support and catalyse private sector investment and business growth.
As the Prime Minister stated in his speech on growth, this will mean more than government getting out of the way.
Instead it will need to be clear about what its role is in generating and supporting growth.
The previous government’s preferred approach was overly focused on industrial champions. The current government’s attention to start-ups and young businesses is helpful, but is in danger of swinging too far in the opposite direction.
Yet growth is not a big or small issue. It is about providing sufficient demand to sustain a dynamic and diverse supply network. It is about big businesses with the capacity to drive innovation and productivity down supply chains. And it is about growing bigger businesses with the scale and muscle to invest in tackling our long-term economic challenges.
Prior to the recession, manufacturers’ investments in innovation, their collaboration and their agility were paying dividends. But knocked off their plans for growth during the recession, many companies are now justifiably cautious about investing in growth until they gain greater certainty over the economic and business environment.
Growing more, larger manufacturers is, in part, about continuing to attract new ones to the UK. But it is also about ensuring small and medium-sized manufacturers overcome barriers that constrain them.
The limited availability of affordable finance traps some young and small companies in a Catch-22: unable to get the necessary finance, their ability to plan for growth is constrained, yet unable to demonstrate clear ambitions for growth, some firms find it difficult to get the appropriate finance. If they do manage to grow, these firms would be caught in the thicket of tax and red tape that helps make mid-sized cautious about planning to become truly global in scale.
Chart 13 Tax and regulation are major concerns for mid-size firms
% balance of companies citing UK strengths by company size
The Prime Minister has challenged industry to commit “to create and innovate; to invest and grow; to develop and break boundaries”.
This report shows that manufacturers are already rising to the challenge, but it also sets out where both manufacturers as well as government must make better progress if we are to grow a generation of bigger manufacturers.
Maintaining momentum behind the recovery is crucial. But not all economic growth is equal: imbalanced and unsustainable growth can leave a terrible legacy, as the recent financial crisis and recession have shown.
To ensure our economy can pay its own way in the future, the UK does not need a handful of bigger manufacturers, we need hundreds of them.