A New Industrial Revolution

Chris Waller - June 2012
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As the British economy founders once again and fails to generate growth, the government speaks of 'rebalancing' the economy towards manufacturing. On the one hand it is a good thing that they have at long last realised that Britain cannot live by financial services alone but at the same time one doubts that they have fully grasped the magnitude of the task which faces this country if it is ever again to become a major manufacturer.

As at the end of 2009, Britain generated only 11 percent of its GDP by manufacturing compared to 19 percent in Germany. One needs to view these raw figures in the light of the relative populations of Britain and Germany, Britain having a population of just over 61 million with Germany having just over 82 million, about one-third larger. However, looking now at GDP we see that while Britain generated $2,175 billion, Germany generated $3,330 billion, a full 53 percent higher. For Britain to achieve German levels of per capita GDP we would need to increase our productivity by over 15 percent.

Talk of 'rebalancing' the British economy began in 2008 just after the first stage of the financial crash which began in the United States. One senses that politicians were beginning to wake up to the awful prospect that the economic strategy on which they had pinned their hopes of re-election was unravelling before their very eyes.

As one who used to work in the manufacturing industry, I am not surprised that the events of late 2007 revealed the weaknesses in the British economy. Despite all the talk over the last thirty-odd years of 'real money, real jobs', 'economic miracles', 'green shoots of recovery' and 'no more boom and bust', I have seen nothing issuing from governments of either political stripe during those same thirty-odd years which inclined me to think that they fully grasped the depth of the impending crisis. Now that the financial services sector has shown itself to be a busted flush, the present government is belatedly turning its mind to the unglamorous topic of industrial policy. Policy statements are all well and good but is there any likelihood of substance behind the rhetoric?

Between 1979 and 2008, the number of people employed in manufacturing dropped from 7 million to 2.7 million. As a raw figure that looks catastrophic but it needs to be tempered by rises in productivity. Taking the car industry as an example, the old British Leyland Longbridge plant, once the largest in Europe, employed 250,000 at its peak in the 1960s, but the Nissan plant in Sunderland now employs only 5,000 people to produce the same number of cars. In 1997, while Longbridge produced 33 cars per worker per year, Honda in Swindon and Ford in Dagenham produced 62 cars, while Nissan in Sunderland produced 98 - almost three times the productivity of Longbridge. Longbridge was surely emblematic of all that was wrong with British manufacturing.

During that same period, the number of people employed in the public sector rose by 2.3 million, and nowhere more so than in the old industrial regions of Britain. In the north-east of England, 61 percent of the increase in employment was attributable to the public sector; while in the West Midlands this figure was 55 percent. Regional disparities are thrown into sharper relief when one realises that 40-45 percent of the growth in financial services occurred in the south-east between 1989 and 2008. Other than that the growth in GDP generated by the private sector was quite feeble.

However, many of the apparent success stories of British manufacturing look less impressive when examined in the cold light of day. JCB, for example, the civil engineering plant manufacturer, surely a British success story, reveals the true extent of the decline. In 1979, the British-made content of a typical JCB product was 96 percent; by 2010 it was down to only 36 percent. Most of that decline has been during the last 10 years and has been lost to European component makers who now account for 40 percent of the value of a current JCB product.

However, one cannot blame JCB for this since they are only responding to the failure of the British economy to supply those components. The savage decline in British manufacturing which began in the early1980s has hollowed out the sector to the extent that it can no longer compete with our European neighbours. Since 1979 the number of factories in Britain employing more than 200 people has halved and three quarters of manufacturing employment is now in workshops employing 10 or fewer workers. Furthermore, the number of such workshops has doubled in the past 25 years.

Dyson, the famous vacuum-cleaner manufacturer, often cited as a British manufacturing success story, began moving its manufacturing operation to Malaysia in 2002, completing an entire relocation of production within twelve months.

The consequence of this is that Britain no longer has the supply chains to feed large industries and with a few notable exceptions - aerospace and pharmaceuticals - large indigenous manufacturers with head-offices in this country are almost extinct. At the last count - and that was two or three years ago - a full 8,500 British companies were in foreign ownership, and those companies are not twopenny-ha'penny little outfits but medium to high ranking firms. That in itself is not necessarily a bad thing since those companies tend to enjoy more investment from their foreign parent companies and are generally better managed, but it does mean that all significant decisions are taken in foreign boardrooms.

Nevertheless, the factory sector of UK manufacturing is now dominated by foreign owned firms, employing on average 200 people, that account for one-third of UK manufacturing employment and as such have limited ambitions. British owned firms are much smaller generally lacking the structural position and capabilities to build capacity or move up the supply chain. It also means that when the market turns down, a foreign company can shed employees in Britain while retaining employment in their home country. A further consequence of this hollowing-out of British manufacturing means that if there were to be any attempt to increase manufacturing in Britain it would suck in imports of components from foreign manufacturers.

As has now become painfully apparent, Britain has been living beyond its means, though equally clearly we have not been alone in that. What has sustained the ostensible vigour of the economy is our propensity to borrow money, and both governments and individuals are guilty of this. During the last thirty years there have been two major credit booms which have resulted in property price bubbles. Homeowners have not been slow to convert their increased equity into cash and spend it. This equity withdrawal has been a major buttress of an otherwise weak economy: under both Thatcher and Blair the rate of equity withdrawal was actually greater than the increase in GDP and at one point peaked at over 5 percent of GDP.

If Britain is to revitalise its manufacturing industry then it has a Herculean task ahead of it. Germany has an outstanding record of investment in research and development, manufacturing technology and production engineering. If we take the figures for 2009 then the full magnitude of the problem becomes clear. In that year, while Britain invested the equivalent of about €18 billion in R&D, Germany invested over €40 billion. More significantly, it invested in the medium-high technology sector over 12 times as much as did Britain. We should not be surprised then that between 2004 and 2006 Volkswagen increased its productivity by 23 percent (quoting Bernard Osterloh, deputy chairman of VW's supervisory board).

A further impediment to any growth in manufacturing will be that of shortage of skills. Britain does not have the same commitment to developing the necessary skills for manufacturing as is evident in Germany. For over a hundred years now, Germany has invested far more in technical education than Britain, a fact attested to by Correlli Barnett in the fourth volume of his 'Decline and Fall' series, 'The Verdict of Peace'.

Between 1997 and 2007, spending on education in Britain increased by over 50%, yet, despite the building of a lot of fine new schools, in the final year of that decade, one in five teenagers failed to get a single good GCSE, while only a quarter gained good GCSEs in the four core subjects of English, maths, science and a modern language. At the same time, the number of 'Neets' (Young people who are not in education, employment or training) rose by a third. By 2010, education spending had almost doubled from the 1997 figure.

In 2005, 9 per cent of 16 to 24-year-olds in Britain were unemployed - compared with 4.6 per cent in Germany and only 3.4 per cent in France. Whereas in 1997 the UK ranked 14th in international comparisons of adult literacy, we had dropped to 33rd place by 2009. Our performance in mathematics declined even more by international comparisons. If Britain is to see a resurgence in its manufacturing then technical education will have to be a major part of any strategy but it is difficult to see how this can be achieved in any reasonable timescale given the lead-time in education, particularly given the current devastating cuts in public spending. One has to think that all this talk of economic 'rebalancing' back towards manufacturing is little more than empty rhetoric given that any significant improvement in our industrial performance will require levels of investment which we will be neither prepared, nor indeed able, to make. It would also require expert management of that investment, and that is another area in which Britain has historically been far less than spectacular. The future, I suspect, will be 'decline as usual'.

'Rebalancing the Economy' - Economic and Social Research Council, Centre for Research of Socio-Cultural Change, 7th February 2010.
'The Pocket World in Figures 2012' - The Economist
'2010 EU Industrial Research and Development Investment Scoreboard' - EU Commission.

Chris Waller - Permission granted to freely distribute this article for non-commercial purposes if attributed to Chris Waller, unedited and copied in full, including this notice.

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