As part of a three-part series, Stephen Radley, EEF's Director of Policy and External Affairs, is assessing the future for UK manufacturing. The first installment looked at how UK manufacturers weathered the recession, the second piece looked at the prospects for growth and this third - which coincides with the launch of EEF's Manifesto for Manufacturing - sets out what the next government should do to rebalance the economy.

 
Steve Radley lobbying Teresa May MP at the recent Conservative Party Spring Forum

Earlier this week, we've looked at how the resilience of UK manufacturing should help it tackle the challenges and opportunities of the next ten years. But the shift to a better balanced economy will happen in fits and starts - and it's up to government to set out and implement a clear, coherent strategy for facilitating that shift.

Whoever forms the next government faces a daunting task. The decisions made in the first 100 days will have long-term implications: they will determine our ability to generate the growth and prosperity, to fund much needed infrastructure improvements and to create job opportunities across our society.

The next government must, therefore, put in place a strategy that ensures that we can pay our way in the world. 

And a diverse and dynamic manufacturing base must be a part of that strategy. 

It is clear the next government needs to develop a credible plan for reducing the large fiscal deficit it inherits.  But how it goes about this will be critical.  Its plan must be centred on reductions in public spending, driven by significant improvements in the effectiveness of the public sector, strict control over costs and a fundamental rethink of what government does.

The alternative approach of saddling Britain with significant tax rises, particularly on business, would be highly damaging. It would weaken our competitiveness, undermine businesses’ ability to invest in growth and jobs, and send out the wrong signal to international companies looking at where to put their next investment.  

But the choice for the next government cannot be just a negative one - we will only overcome our problems if we know where we want to go.

In our Manifesto for Manufacturing we set out how the next government should refresh itself to become more focused and effective. We suggest reforms that will create an internationally competitive business environment that sends the right signals to would-be investors. And we set out a proactive agenda for growth.

It must send clear signals about its long-term priorities and the importance it attaches to specific technologies or markets and work more closely with business to identify and overcome the obstacles to growth in these markets. It also needs to engage much better with industry in conveying its long-term needs when it is buying goods and services from it. Finally, at a time when finances are extremely tight, a new government must prioritise spending in areas that will deliver sustainable economic growth.

We also need a business environment that encourages manufacturers to make their next investment here.  For example, the tax system must reflect the true cost of modern machinery, while we need to maintain the advantages of a flexible labour market and address longstanding concerns over regulation by developing a new approach that costs and limits the amount of new and existing regulations and by strengthening the assessment it makes of the impact of new regulations. 

More positively, the government can help manufacturers to take advantage of growing world markets by creating a single source of finance to support ambitious, growing companies that are making long-term and risky investments and by ensuring we have the world class export support that UK Trade that helps these companies to develop new markets abroad.

It must also ensure that the education system delivers the science, technology and engineering skills industry needs and that it is straightforward for companies to access the training that they need. Manufacturers must also feel confident that they won’t be facing an energy crunch, five years ahead. 

It is vital that the government delivers on these priorities but ultimately it is down to manufacturers to take advantage of the opportunities that are out there.

In that respect we can take a lot of confidence that UK manufacturing is a very different animal from what it was even ten years ago - because the path to a more prosperous Britian will be built by a stronger manufacturing base.

 

NOTE: As part of a three-part series, Stephen Radley, EEF's Director of Policy and External Affairs, is assessing the future for UK manufacturing. The first installment looked at how UK manufacturers weathered the recession, this second piece looks at the prospects for growth and the third - which will coincide with the launch of EEF's Manifesto for Manufacturing - will set out what the next government can do to rebalance the economy.

In my initial piece, I set out how UK manufacturing changed itself to remain successful - and survived the recession - despite facing competition from low-cost economies, a strong pound and rising costs.

Having weathered the worst of the last ten years, UK manufacturing is already preparing for the challenges and opportunities of this decade. At the end of the coming decade, manufacturers in the UK will need to have changed yet again.

In our vision for UK manufacturers, they will be large and global or small and capable and ambitious enough to grow into the multinationals of tomorrow. Their close relationships with customers and suppliers, investors and innovators will allow them to respond flexibly and quickly to market demands. And their innovative outlook will give them a sustainable competitive advantage and make them an attractive career option for engineers and entrepreneurs alike. In sum, they will need to become more diverse, agile and innovative.

The opportunities for generating growth will depend upon our openness to global markets, our focus on knowledge plus high value products and services, and our exploitation of fast growing markets. But given the challanges facing the sector, it will undoubtedly evolve in fits and starts, matching the disruptive tendencies inherent in global, open and flexible markets. Only a stronger, globally-focused manufacturing sector will help generate the wealth needed to correct our economic imbalances and contribute to broader national prosperity.

Indeed, the challenges facing our society - dramatic demographic shifts, strategic security challenges and serious environmental concerns - are also the potential markets for manufacturers. At the same time, we can’t be complacent that we can sit back and let these markets come to us. Manufacturers will need to be alert, agile and ambitious.

UK manufacturing is extremely well placed to take advantage of the markets created by the major challenges facing the world. 

In the low carbon economy, we have significant strengths in areas such as low carbon vehicles, engine technology, nuclear power and renewable energy such as offshore wind and marine.  But in other areas such as global security, we have significant strengths in aerospace and defence and electronics, as we do in healthcare technology and pharmaceuticals to meet the challenges presented by an ageing population.  

The UK needs an economy that is diverse enough to prevent the future build up of economic imbalances, robust enough to face its long term challenges and dynamic enough to turn those challenges into opportunities. 

In short, we need an economy that draws more heavily on productive, high value sectors with greater export potential.

While it may seem a daunting challenge, manufacturers are well placed to put themselves at the heart of healthy economy.

 

NOTE: In a three-part series, Stephen Radley, EEF's Director of Policy and External Affairs, will assess the future for UK manufacturing. The first installment will look at how UK manufacturers weathered the recession, the second will look at the prospects for growth and the third - which will coincide with the launch of EEF's Manifesto for Manufacturing - will set out what the next government can do to rebalance the economy.

Like the rest of the economy, manufacturing has been through a tough time over the past 18 months. But more recent signs - including EEF's latest quarterly sruvey of members - suggest that the mood amongst manufacturers is changing.

But just because things are looking brighter for manufacturing, we shouldn’t be complacent.

The recession will have damaged supply chains, some companies will struggle to find the skills they need to meet increased orders and businesses will remain vulnerable if they cannot access the additional working capital they need in the early stages of a recovery.

But the more positive figures should also serve remind us of the major strides that manufacturers had made before the banking crisis hit. 

Even up to the middle of 2008, many manufacturers were reporting their best results for at least a decade: Investment intentions were strong. Profitability was soaring. And employment was expanding.

These gains were achieved on the back of a fundamental rethink of what UK manufacturers needed to do to compete in world markets. The recession of the early years of the last decade had shown that too few manufacturers had the right strategies to cope with the rise in competition from lower labour cost countries and with unfavourable movements in exchange rates.

One of the most significant changes has been a shift away from competing on costs.

EEF research in 2004 showed over a third of companies aggressively cutting prices in response to lower labour cost competition. By 2007, this proportion had fallen to just one in eight firms.  In addition, almost half of them had considered but rejected this option, recognising that this was not a sustainable response to low-cost competition. 

In contrast, nearly six in ten manufacturers had taken action to increase focus on innovation with a further 30% either planning to or considering it.  Companies also reported that they were seeking to compete by developing niche products and service offerings. Reflecting these changed priorities, more manufacturers reported that design and development rather than production and assembly would be a key source of competitive advantage in the future.  

Their commitment to these strategies is illustrated by last year’s annual EEF Innovation Monitor which showed that despite the recession, manufacturers reported an increase in most forms of innovation and expected this to continue. Our research also showed that companies were taking a longer view of investment with payback periods lengthening and were increasingly focusing on more intangible forms of investment such as research and development, design and marketing and organisational change. 

This change of tack has already started to deliver results.

After lagging behind the rest of the world’s major advanced economies in the 1990s, UK manufacturers were second to only the United States in improving productivity in the years before the recession. And despite the biggest contraction in world trade since the last world war, a recent EEF survey showed that over a third of manufacturers had managed to expand their exports, with a further 16% maintaining export volumes. Indeed, some 15% recorded an increase of 10% or more in exports. 

We are also starting to see some manufacturers starting to bring production back from abroad. Our most recent research showed one in seven firms doing this, in part reflecting disappointment with the cost savings and quality standards achieved by their investment abroad and concerns over getting products to market fast enough.

But it also demonstrates that more manufacturers have found that they can compete from a relatively high wage cost location like Britain...and it's why UK manufacturers are leading the economy out of recession.

 

December’s climate change summit in Copenhagen is now firmly in sight. The theoretical goal is to broker a plan to limit average global temperature increases to 2°C through legally-binding commitments to substantially reduce emissions of greenhouse gases.

However, if a credible deal is to be achieved it must not be at the expense of industry competitiveness.

There is no doubt that after Copenhagen politicians will turn to manufacturers to enlist their help to deliver on any promises made at the summit: it is manufacturing that will supply the low carbon products and services that will help to turn political rhetoric concerning the fabled low carbon economy into a reality.

But to do so, manufacturers must be set the right conditions to innovate. Key to this is to ensure that manufacturing sectors are subjected to comparable regulation regardless of where in the world they are located.

In the race to secure a political deal the needs of manufacturers are often overshadowed.

But at present a deal in Copenhagen remains elusive. That is probably not surprising. The agreement over 190 governments and their representatives are seeking to achieve by the 18 December is deeply ambitious. And the US and France are proposing border tariffs on carbon intensive products from countries that fail to take comparable action.

Consequently, negotiators in Copenhagen must tackle the concerns of manufacturers based in developed countries head on.

The border measures, as advocated by the French and Americans, hint of a future of greater levels of protectionism if they fail.

*This post is an exerpt from my article in this month's The Manufacturer.

Yesterday, EEF held a fringe meeting at the Labour Party conference with the Work Foundation and Pat McFadden, the Industry Minister, to debate the role that manufacturing should play in the economy and how best to achieve it.

(Given the dire state of the public finances, it seemed somehow appropriate that we were meeting in Brighton, the home of Fatboy Slim's Skint record label.) 

But despite this and the still fragile state of the economy, there was a sense of optimism in the room that the coming decade will see a resurgent manufacturing industry in the UK that is poised to repeat the wave of innovation that we saw in the 1930s after a similar period of economic crisis. 

Also encouraging was a shared understanding of the role that government should play, in particular setting a clear direction for the economy, mapping out the markets and technologies which will bring increased prosperity to the UK and ensuring that industry has access to the finance that will enable it to bring the new generation of products and service to market.

Such was the strength of feeling on the finance issue that the Prime Minister responded within hours by announcing the creation of a new National Investment Corporation.

 

The government has announced today that business will now be able to access free online information about a much greater range of public sector contracts.

These can be accessed through the Government's website - www.supply2.gov.uk. 

Previously this service was charged for. Most of these contract opportunities are worth less than £100,000 and are generally aimed at SMEs. 

 

 

In a surprise move today, the Bank of England announced that it would expand its quantitative easing programme to inject an extra £50bn into the economy on top of the £125bn that it has already spent.   This was a surprise, given that recent business surveys have pointed to the recession moderating with even the odd sign of growth. The Bank's statement commented on the recession 'being deeper previously thought'.  And that's the key issue. This week's data on bank lending and on the banks' half yearly results have illustrated the severity of this recession. It confirms our thinking that the recovery is likely to be halting and that it would be extremely dangerous to take away support for the economy too quickly.      

Despite the recession moderating, getting finance is still difficult for many businesses.

We are always keen to hear from firms about these problems and to take them up with government if appropriate. But from today, business can also access help directly.

The government has set up a new Financial Intermediary Service in each RDA region.  This can be accessed by calling 0845 600 9 006 or through the Business Link website (businesslink.gov.uk). 

The Business Link advisers will work with banks and businesses to resolve problems and will also provide free support and guidance.

 

The last week has seen increasing speculation that the recession might be over and recovery imminent, with a string of economic data and surveys suggesting that the pace of decline in the economy was slowing. Today's Inflation Report was therefore eagerly anticipated to see whether the Bank would cheer on the recovery or dampen our spirits again. Though its assessment refers frequently to the large amount of uncertainty around, the Report indicates that it its feet are placed firmly in the weak and slow recovery camp. The Bank expects the year on year contraction in the economy to peak at 4.5% in the summer with no return to real growth till next year. This will squeeze its target measure of inflation - the Consumer Price Index - to 0.5% by the end of the year.  

Is the Bank right to be so gloomy? We believe it is. There are forces which are helping to reduce the severity of the recession and lay the basis for recovery - very low interest, fiscal stimulus, measures to support bank lending and a highly competitive pound. But the pressures that pushed the world and UK economy into recession are still strong. Though measures to shore up the banks have helped, lending conditions are still a long way from being normal. And despite retail sales being better than expected, rising unemployment, tighter credit, substantial losses in personal wealth and the fear of significant taxes are all good reasons for people to save more. While exports may get a boost as households start buying again, problems with export credit and the creeping fears of protectionism are likely to limit the recovery in world trade.  So while things may have stopped getting worse as fast as they were at the start of the year, our economic glass is likely to remain half empty for the foreseeable future.  

  

       

 

Today's Budget was never going to be received with rapture by business.

You can read more detail about what it means for your business in this briefing hot off the press from our economics team.

With public borrowing hitting £175bn this year, the Chancellor had limited room to provide business with much relief or to help it invest for the upturn.  Probably the most important measure was the £5bn scheme to compensate for the reduction in trade credit insurance, while the increase in capital allowances and the car scrapping scheme were also helpful. Firms would also have been relieved not to have been hit with any immediate significant rise in costs, save for the increase in statutory redundancy pay.

But it's the scary borrowing numbers and how the government will get them down that loomed large in everyone's minds. The Chancellor projects that public sector borrowing will fall from 12.4% of GDP this year to 5.5% by 2013, with higher tax receipts doing a third of the work and lower public spending growth the rest. But this assumes the economy returns to robust rates of growth, expanding by an annual 3.25% for three years from 2011, based on a return to its trend growth rate of 2.75% per year with growth temporarily boosted by picking up some of the slack built up this year.

The lessons from Japan in the 1990s suggest that the UK and the world economy face major challenges in dealing with the damage caused by the collapse of its banking system. Add in the danger of increased protectionism and a likely long-term increase in the cost of credit and those growth numbers look particularly optimistic.  Business will need to keep its fingers firmly crossed for the next few years that the numbers add up and that the government will not be tapping it up to plug the hole in its Budget.