Manufacturing investment matters - here's five reasons why

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Over the past week we’ve been blogging about our recent Investment Monitor survey¸ in partnership with Santander. And we’re at it again today; as we head towards key decision dates in the November calendar – the MPC’s meeting later this week and the Autumn Budget statement – I want to focus on five of the key reasons why we need to advance our understanding of what’s happening to investment and its contribution to addressing the UK’s sub-par productivity performance. 

Contribution of business investment to GDP growth

As much as we like to take a glass half-full view of manufacturing, we’ve been struggling to mount significant optimism about the prospects for investment over the next couple of years, despite the sector returning to a stronger growth trajectory since the start of the year.

As Martyn outlined last week – manufacturers are divided in their future plans to invest and upgrade plant and machinery in their businesses. Brexit uncertainty is a major factor leading some companies to hit the pause button on plans, while the other half of our sample is being spurred on to meet the increased demands from customers around the world.

Given that our survey showed that investment had taken a step back in the previous two years, we continue to expect that the absence on clarity over Brexit outcomes will be an over-riding factorsweighing on business investment in the short term.

This hasn’t been a view shared by the Bank of England in its recent quarterly Inflation Reports. In August, the Bank expected business investment to mount something of a recovery in 2018, posting growth of 2¾%. Whether this judgement has moved is something we’ll be looking out for in the Bank’s forthcoming Inflation Report on Thursday.                                           

Not just quantum of investment, but decisions on what to invest in are important for productivity

While this may well be a statement of the bleedin’ obvious, manufacturers’ don’t invest for investment’s sake. Decisions are aligned with business objectives, whether that is to increase productivity capacity to satisfy new orders; for the launch of new products or to streamline processes with the adoption of new technologies.

We looked in more detail at the latter of these is our Investment Monitor. While automation was on the radar for almost every company we surveyed progress on implementing automation solutions was highly variable across our sample – with the most advanced being the larger companies we surveyed.

How-much-automation

But regardless of the level of advancement amongst manufacturers, a majority in our sample noted that the investments they had made in automation technology had delivered benefits to firms’ productivity – in line with or better than expectations.

Taken together this would suggest that there is plenty of scope for further productivity gains – across manufacturing at least – if more companies were in a position to accelerate their investment in such technology.

And getting on top of the weak productivity dynamics is mission critical for the Chancellor

As if it were needed, the Institute for Fiscal Studies published a fairly stark analysis reminding policy makers about the consequences for the public finances of failing to address the UK’s productivity shortfall.

The crux of their report showed that if we fail to break from the decade of lost productivity then the Treasury’s aim to eliminate the structural deficit in line with its 2020 target will be nigh on impossible.  Which would essentially mean that instead of the one parliament of painful cuts that was promised we could be looking down the barrel of a fourth.  

The right policy response needs a granular understanding of what the key barriers are and who’s affected

All is not lost (despite the previous paragraph…). Zooming in on the opportunities and challenges of investment in automations has the potential to start moving the needle on our performance. Given spending limits and the finite reach of government to influence the actions of business, I would argue that we need a pretty detailed understanding of what the most critical hurdles are and how these manifest themselves in different segments of industry.

Our Investment Monitor survey indicated these challenges can be grouped into three main categories – the availability of cash; certainty about returns from different assets and access to capabilities within the business to implement automation solutions. The extent to which these play out across manufacturing are shown below.

automation-barriers

 

In addition we also know there are key differences in the challenges faced between those in the lead and the automating majority For example:

  • The upfront costs are barriers for all; ‘lead automators’ are more likely to see external finance and tax environment as a barrier.
  • Companies, more advanced with automation of processes, are more likely to say that information is hard to come by.
  • The automating majority find workforce skills more of a challenge to automation and also struggle to tailor existing technology to their businesses.
  • Leaders admit to past concerns about negative workforce relations, but once overcome these cease to be a barrier to future automation investment.

 

We’ll be publishing more detail on how government policy can start to make a difference in the run up to the Autumn Budget, but this falls into the three categories outlined below.  

policy

Today’s report on industry digitalisation also provides some of the answers

We don’t claim to have a monopoly on good ideas, today also saw the launch of a report on industrial digitalisation, headed up by Siemen’s boss, Juergen Maier. Looking broader than automation, but at the spectrum of digital technologies that will be part of manufacturing’s journey into the 4th industrial revolution (4IR), it puts forward a package of recommendations on how government and industry can work together to improve industry productivity and competitiveness.

Unsurprisingly – there is some overlap with our past recommendations on 4IR adoption. Amongst the major recommendations the biggest added value would be on the creation of 4th industrial revolution demonstration centres (demonstrators) - allowing industry to 'see it to believe it' and go back to factories and supply chains armed with knowledge about the art of the possible.

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Chief Economist

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