The UK is in unprecedented times. The financial services industry was saved from total collapse by the injection of £ billions of public money. The political systems that have served us for many years are being questioned and are in need of significant reform. These issues have dominated the news agenda recently, but the UK faces the even greater challenge of how to maintain our standard of living and retain our global influence.
A country’s wealth defines its standing in the world. Throughout history nations have become rich by mining, growing or making things. However, over the past decade the financial services industries in the UK and USA believed they had found new ways of generating wealth through selling ‘creative’ financial products. In this time the Chinese and Indian nations have seen their wealth and influence in the world increase significantly. This new economic power comes from manufacturing products and selling them globally. Such a route to becoming a wealthy nation is not new; the UK became rich by making things, as did the Americans, and latterly the Japanese and Germans. The reality is the UK relies on large overseas borrowings to maintain our standard of living; our current borrowing at the end of December 2008 was £750.3 billion, equivalent to 52.0% of GDP (ONS)
In March 2009, the ERA Foundation published a report “The Sustainability of the UK Economy in an Era of Declining Productive Capability”. It included a set of data (to 2007) on the state the UK trade balances. The Balance of Trade has declined 20% per year since year 2000 standing at a negative £60 billion in 2006, 5% of the UK’s GDP – see figure 1.
Figure 1: UK Balance of Trade 1946-2006. Data Source: Pink Book 2007 – ONS
This report explains how the trade deficit has been accommodated without a proportional increase in government debt. This has been accomplished through the Balance of Payments Current Account being balanced by a surplus in the Financial Account, which represents the sale of UK assets and corporate debt. Without these funds the UK would not have afforded to finance its current account trade deficits. The acquisition of UK assets continues, but in 2006, foreign owned companies contributed 40% of all sales of manufactured goods. Other business sectors have also been sold to foreign owners: 70% of mining and quarrying operations, 46% of electricity, gas and water supply companies and 34% of financial institutions. This report raises a vital alarm for the future financial prosperity of the UK and our ability to sustain present standards of living.
These are complex issues and no single initiative can resolve the dire economic situation facing the UK. The UK must embrace a balanced economy and one that can sustain profitable trade with the rest of the world; it cannot keep using the sale of its assets and debts to balance its accounts. Manufacturing industries must play a vital role in a balanced UK economy. They account for 50% of exports and they are still leading contributors to the balance of trade. It is difficult to comprehend why governments, key decision makers and financial institutions do not cherish the wealth creating and social benefits provided by our manufacturing industries, allowing tranches of them to transfer into foreign ownership? We have now reached the stage where, apart from BAE Systems, Rolls Royce and GKN who all have substantial UK military businesses; it is difficult to name a UK publicly quoted, original equipment manufacturer (OEM). Such companies head the supply chains, providing the orders for many tier 1, 2 and 3 suppliers who in turn employ people to produce components and provide the support services needed to deliver high quality products, on time, to customers.
Over the past three decades, politicians, economists and the financial services industry have believed that the UK could prosper as a post-industrial nation, but following the catastrophic collapse of the financial service businesses, whose managers made personal fortunes from selling our once thriving manufacturing assets, we must reassess the true value of manufacturing industries to the future of the UK economy.
It has been demonstrated historically that manufacturing affordable, desirable products for global markets is a viable way of balancing trade and generating the wealth needed to sustain a nation’s standard of living. We must realise overseas companies who purchase UK assets do it for their own benefit and will take decisions that best meet the interests of their businesses and stakeholders. How many cars do the Chinese owners of Rover now design and make in the UK? Very few. We must preserve our business acumen and technical knowledge gained by being at the forefront of understanding customer needs, designing products and manufacturing processes, managing supply chains and controlling the worldwide distribution of products and services to our customers.
Without a strong UK owned manufacturing base, many value-adding professional jobs will move away from the UK. Companies tend to site the core of their business development and product innovation resources within their home territory. To rely on such companies to sustain the long-term development of high level commercial and technical skills in the UK poses significant risks that we cannot directly influence. Bosch and Siemens are each reported to spend €3.8 billion a year on business development and product innovation; about a third takes place overseas but the German parent company has full access to skills and control of the intellectual property.
In the past, UK-owned companies including Rover, Lucas, GKN, BAE, RR, Dunlop, Smiths, ICI, Courtaulds, Alvis, IMI, Tube Investments and several others invested heavily in developing people with the requisite skills needed to trade internationally. Many individuals with the necessary experience and ability to create world class businesses still operate in the UK.
The IMechE Manufacturing Excellence Awards 2009 provided excellent examples of UK businesses that were regarded by key decision makers as not worthy of investment or noncore. Once taken over by foreign companies and given appropriate financial stability, the existing management teams have transformed them into strong businesses. For example, Leyland Truck (now owned by Paccar and trading as DAF) is the market leader in Europe, winning business from Volvo and Mercedes. BAE Systems Electronics in Edinburgh (now Selex Galileo owned by Finmeccanica) has exploited its core competences in electronic sensors to develop a new range of personal communication devices, winning significant orders from the American Coastguards. Also, a privately owned UK company, Gripple, has exploited an ingenious gripping mechanism to develop a range of fastener products for the global building and wine industries. Its investment in appropriate manufacturing technology has resulted in labour costs of less than 2%, allowing it to be cost competitive with low cost labour economies.
The UK has a wealth of industrial talent and has led the world in the design of aircraft, nuclear power generating systems, high performance cars, pharmaceuticals, engineering plastics, and much more. The rest of the world is desperately trying to develop many of these products, for example; both Japan and Germany are seeking to build a single aisle, 200 seat commercial aircraft. Why does the UK squander its extensive aerospace knowledge and rely on purchasing all new commercial aircraft from overseas-owned companies? The challenge of climate change is real. We must have cleaner, more energy efficient aircraft, cars, lorries, ships, trains, power stations, homes, etc. However, if we do not have manufacturing industries capable of developing these new technologies, designing products and manufacturing them in an environmentally responsible way then again we rely on foreign companies to solve the problems that threaten our future.
The UK faces some serious challenges: repaying our large government borrowings, addressing our balance of trade, providing people with meaningful jobs, tackling climate change, maintaining our social infrastructure and protecting our standard of living. A strong UK manufacturing industry provides a viable solution to many of these issues through generating the wealth needed to pay for the things we need.
So why don’t our politicians and key financial decision makers appreciate the national benefits to be derived from investing in modern manufacturing industry? The reason must be timescales, personal agendas that influence their decisions and a lack of technical / commercial understanding. Financial services look for quick returns on their investment and politicians seek re-election every five years. Manufacturing industry is not a short-term investment but is vital for the UK’s future prosperity, national security and finding ingenious solutions for climate change. Unfortunately the current systems deployed by our politicians, key decision makers and financial services have failed to sustain the UK manufacturing businesses we desperately need. Therefore part of the reform of our financial service and political systems must also include how to foster the growth and resurgence of a new UK-owned industrial base.
