The decline of manufacturing in the UK has been a topic of fierce political debate for decades, but who administered the telling blow? The EU? The unions? Thatcher? Blair? Brexit? Automation? Investment Monitor delivers an in-depth investigation.
Reports of the death of British manufacturing may have been greatly exaggerated, but obituaries written about the sector have been commonplace over the past 50 years as the UK has moved through various eras. Having adjusted to survive union-led strikes in the 1970s, EEC and then EU membership, the political leaderships of Margaret Thatcher and Tony Blair, advancements in tech, and competition from cheaper labour in developing countries, the 2016 vote to leave the EU raised the question whether the sector has another adaptation left in it. For some, UK manufacturing has been in decline for some time, and is now less about making things and more about integrating supply chains.
Now, with arguably the biggest link in its supply chain – the EU – set to divorce the UK for good, who is to blame for the decline of the country’s manufacturing and what can be done to restore this once great sector?
To answer that, Investment Monitor splits the past 50 years into eras to assess the performance of the UK’s manufacturing industry and the political landscape surrounding it…
Why was Britain rejected from the EEC?
In 1961, Prime Minister Harold Macmillan was tasked with boosting the UK’s economy. At the time, the UK’s main allies – the remaining imperial territories in the Commonwealth – had roaming eyes for business in other countries including the US.
Before the EU there was the European Economic Community (EEC) and in 1961, the UK set its sights on joining. Charles de Gaulle, then French president and a hugely influential figure within the EEC, vetoed the UK’s 1961 application citing concern that the country wouldn’t commit in the same way the French and West Germany had.
The UK, however, did not take ‘non’ for an answer and a decade-long will-they-won’t-they relationship ensued, largely fuelled by UK fears that it would end up the tortoise to the EEC’s hare.
The UK was so dedicated to acquiring EEC membership – despite France’s disdain – that it applied three times for membership between 1961 and 1972. It was third time lucky. After devaluing the pound and running a charm campaign in France, the UK buddied up with Denmark, Ireland and Norway and issued a ‘now or never’ ultimatum over membership. Despite de Gaulle’s objections, France was overruled by the rest of the EEC, and everyone bar Norway joined in 1972.
Britain before 1973 (and the EEC)
After this decade-long fight to become an EEC member, British manufacturing output plummeted for the first few years of membership between 1973 and 1975.
This was tough for an industry that had seen steady growth since the 1950s. Stephen Phipson, CEO of Make UK – a body that represents British manufacturers – explains: “We were much more involved in mass production, in particular big car plants and industrial facilities, and approximately 30% of Britain’s GDP was manufacturing. There were a lot of people employed and a lot of infrastructure around the sector as well with mass training and apprenticeship programmes – people had jobs for life.”
Phipson adds that the focus was on volume manufacturing, particularly in the automotive sector, which employed big numbers. The UK also manufactured consumer goods completely ‘in-house’, producing televisions (as many as 11,000 per week for UK-based demand) alongside white goods. As prosperity rose, so did the UK consumer’s appetite for these goods. As a result, there was an expansion of industrial activity.
Phipson stresses that this was largely due to the absence of competition. “There was no Chinese manufacturing going on,” he says. “Japan was at the beginning of its industrial expansion, and we weren’t really buying a lot from other countries. So, a lot of this was effectively before instant international supply chains existed.”
Although the 1950s and 1960s are widely considered the ‘golden age’ of British manufacturing, some point to this time as representing the first failure the UK experienced with regard to the industry.
“It is argued that the post-war settlement between government, employers and trade unions resulted in a harmful policy regime which included nationalisation, the support of failing companies, the toleration of militant trade unions and a lack of an effective competition policy,” they write.
The duo also highlight a lack of thoughtful investment in the manufacturing sector in this time. This meant that British factories went without innovative, high-quality equipment to compete with counterparts in countries such as West Germany.
By the time the UK had joined the EEC in the early 1970s the global economy was suffering. Alongside everyone’s living rooms having a burnt orange colour scheme, the UK faced a volatile GDP growth rate, unemployment was steadily increasing and an unsettling shift to free market policies was under way. This favoured the supply and demand way of working, which undermined the manufacturing industry, leading to output dropping by 2.8% during the 1970s. It also created a fast and loose approach to the manufacturing workforce, something Phipson says put the UK on the back foot.
“The UK always, even in those times, tends to have a relatively high cost of capital, and high labour flexibility,” he explains. “So, you could hire and fire people – which is what the union bust-ups were all about. When you saw a downturn in demand, you could lay off lots and lots of people at your factories quite quickly and there wasn’t any great penalty for doing that.”
Heath had been elected in 1970 to turn around the country’s fortunes during a strong economic decline. However, unemployment continued to rise and trade unions strengthened their stance on pay demands, with strikes in the mining and manufacturing sectors becoming commonplace.
Phipson argues that this enabled other European countries to overtake the UK when it came to manufacturing.
“We created an environment where it was quite expensive to borrow money to invest in new machinery,” he says. “If you compare it to what they were doing in other countries, particularly West Germany, it was completely the opposite. They had low cost of capital, but no flexibility with labour. They invested in the latest technology all the time, because they couldn’t lay people off. They invested in training heavily to make sure they kept their skills up.”
Labour and the Winter of Discontent
After Edward Heath, the UK voted to re-elect Labour’s Harold Wilson in 1974, although ill health saw him stand down for James Callaghan in 1976.
Callaghan’s premiership between 1976 and 1979 did coincide with a small improvement in the UK’s manufacturing output, with the period seeing an increase of 1.9%. Although output increased, British manufacturing in the 1970s – particularly in the automotive industry – gained a reputation, and it wasn’t for quality. The 1972 Morris Marina is still the butt of jokes within the country, particularly on TV show Top Gear.
Under Callaghan the UK experienced steady GDP growth, and unemployment rates in 1979 were a manageable 5.4%. However, the prime minister’s terse relationship with the trade unions, combined with increased terrorist activity by the IRA and a perceived mishandling of Welsh and Scottish devolution, led to what became known as the ‘Winter of Discontent’ in 1978–79. After the Sun newspaper condensed a Callaghan quote to read, ‘Crisis, what crisis?’ in response to a question on the mounting chaos in the UK, Labour’s performance in the polls plummeted.
This came at a time when the UK manufacturing industry had begun to fall further behind its global competitors. According to EU KLEMS figures as calculated in Kitson and Michie’s paper, between 1973 and 1979, the UK’s annual growth rate for gross manufacturing stock was the lowest at 2.1% when compared with the US (4.1%), Germany (2.5%), France (4.2%) and Japan (6%). Manufacturing output growth was also trailing behind.
A vote of no confidence in Callaghan was passed by one vote, a general election was called, and in May 1979 the Conservatives and Thatcher replaced the Labour Party and Callaghan.
Thatcher’s deregulation policies
Margaret Thatcher remains a polarising political figure in the UK to this day. Some laud her efforts to create a robust enterprise economy and others blame her for dividing the nation and significantly accelerating the UK’s deindustrialisation.
When Thatcher came into power in 1979, the UK’s manufacturing industry had already begun to decline as a percentage of the country’s GDP, from 20.57% in 1970 to 17.62% in 1979, according to figures from the ONS. Alhough this figure continued to drop, it did so at a considerably slower rate during Thatcher’s time in office, recording a figure of 15.18% when she left office in 1990.
Despite the GDP percentage dropping – and an initial drop in manufacturing output of 12.5% in her first year – overall manufacturing output in the UK increased by 9.1% under Thatcher. This does not mean, however, that it was a boom time for UK manufacturing in the 1980s. Thatcher’s focus on monetarist policies resulted in high interest rates and an over-valued currency, which undermined the UK’s exports.
Phipson expands on Thatcher’s impact, good and bad. “She removed collective bargaining – which still remains in many European countries – and this had been considered a very negative thing,” he says. “There was a dark time when unions became very powerful and the UK was starting to lose the race in terms of productivity. We were falling behind, our costs were expensive, and we weren’t investing at the right rates. Before Thatcher, almost every day on the news there were strikes and big car plants closing down and so unions were perceived as having too much power.”
This power, and the resulting loss of production, was a target for Thatcher from day one of her premiership. Days lost to strikes in industrial action decreased significantly from 1979 to November 1990 (although some of this can be explained by the closures of coal pits) and union membership dropped, according to ONS figures and government reports.
Perhaps the most destructive aspect of the Thatcher era in terms of manufacturing was the manner in which the country’s progress seemed uneven. With unemployment rising to figures not seen since the Great Depression of the 1930s, and two recessions bookending the boom in the 1980s, Thatcher stood accused of creating a chasm between London and industrial cities and towns.
Graham K Wilson, a professor of political science at Boston University and author of Business & Politics, expands on the sectoral disparities caused by Thatcher’s policies.
“I think historically there has always been this idea that manufacturing in the UK is not regarded as centralised,” he says. “There was this sort of feeling that the interests of manufacturing were sacrificed for the promotion of the financial industry and its stability.
“One of the very controversial events was the ‘big bang’ of 1983 and the reorganisation of the City of London. You could argue that it was the big bang that cleared the way for 30 years of economic success for the UK financial sector. The British government stepped in and shook up the financial sector in a way that they failed to do for manufacturing, which was instead left to market forces to sort out.”
Major muddles on through Maastricht
John Major, who had held the position of chancellor of the exchequer in the final years of Thatcher’s reign, replaced her as prime minister in 1990. His government attempted to strike a balance of carrying on the Thatcher legacy while uniting the British public after what had been a divisive decade for the UK. His strategy upon entering Number 10 was largely considered to be business as usual.
Like Thatcher before him, Major’s first year as prime minister saw a dip in UK manufacturing output, although his was a less dramatic 4.9%. The following year saw the speed of decline significantly slow, losing just 0.1% by 1992. Five months after winning the 1992 election, Major was dealt a major blow when the UK was forced to pull the pound from the European Exchange Rate Mechanism (ERM). This was due to the pound dropping below the currency exchange’s mandated limit. Now known as ‘Black Wednesday’, the estimated cost to the UK was £3.3bn, as disclosed in a Freedom of Information request made by the Financial Times.
Alongside this, a significant development was taking place within the EEC. The Maastricht Treaty was signed in February of 1992 and came into effect in 1993. The treaty was the foundation for the EU as it is known today, created the three pillars of the EU and paved the way for the euro.
The Maastricht Treaty marked the beginning of ‘European citizenship’. This meant that talented workers could leave their home countries easily and quickly to take up employment in other EU member countries.
For UK manufacturing, output significantly grew upon the signing of the treaty and the subsequent birth of the EU. Phipson points to this time as a crucial shift for the UK’s manufacturers. “That is when we start to see the transition,” he says. “We were moving away from car factories such as Ford in Dagenham, which were moving away from being a ‘real factory’ where you are pressing the panels and machining the engines, and instead, they became assembly plants. What the UK then became really good at was logistics, and the whole manufacturing supply chain really started to accelerate during that period.”
Wilson agrees that the UK became a key access point to the European market. “The great advantage was that the UK was comparatively low cost and part of the EU,” he says. “Japanese automobile plants were set up with the intent of supplying models to the EU, and not just the British market. That was the strategy – the UK was the attractive place to invest inside the EU.”
Phipson highlights that this period signalled a momentous change for British manufacturing and laid down a lot of the groundwork for how the industry works today. “In the 1970s we were very manual – we had women sewing up car seats in factories and suddenly there was none of that going on anymore. We were now integrating products from the most cost-effective source because we could manage the logistics. We weren’t making fridges anymore,” he says.
Phipson stresses how integral the EU was in creating this new way for British manufacturing to thrive.
“Joining the EU meant that we could use supply chains across the borders really effectively,” he says. “We could buy gearboxes from Germany and have them on the side of the production line within a few hours. We saw big investments coming in, particularly the Japanese looking at the UK for access to the EU market.”
Many of the investments that happened under Major and those early years of the EU are still present in the UK today, with 35 of the Japanese companies still invested in British manufacturing. This period also saw a lot of Germany’s competitive advantages lost in the UK’s favour. The UK didn’t have onerous labour laws, the cost of labour was not as high and now there were no tariffs or quotas to access a European market through the UK.
Despite these positive developments within the manufacturing sector, Major’s perceived mishandling of the economy, and a government dogged with accusations of ‘sleaze’, saw New Labour and Tony Blair win a landslide election in 1997.
UK manufacturing under Tony Blair
Tony Blair entered Downing Street amid cheering crowds, elected on promises to embrace free markets, increase public spending and commit to the EU.
He oversaw continued growth for British manufacturing output as it continued to thrive at the heart of the EU. This was the first time the industry had grown during a prime ministerial changeover since 1976.
During Blair’s reign, manufacturing output saw a slight peak in 2000, dipped, and then shot up to its all-time high in 2007 – a height it has never reached since.
Phipson says: “The UK was in a place where we were maximising what we could do with the EU. Blair encouraged a lot of inward investment. A lot of it was really focused on doing business with the EU, that is why half the manufactured goods exports we do now are exported to the EU. The EU is the major customer for us!”
Despite the high output, manufacturing is considered by some to have declined in importance with regard to its role within the British economy faster under Blair than under any previous prime minister. The industry accounted for more than 20% of GDP in 1997; by 2007 – when Blair left Number 10 to be replaced by Gordon Brown – this had fallen to 12.4%, and when Labour were voted out of office in 2010 the figure was 10%.
Comparatively, Blair’s government saw the importance of financial services and real estate to the economy rise rapidly. Between 1998 and 2007 – in terms of gross value added (GVA) – real estate rose by 18.2% (in 2016 monetary value, that is a GVA of £201.2bn), while financial and insurance activities rose by a whopping 41.1% (£135.2bn). In comparison, manufacturing only rose by 2.7% (£189.5bn) in the same period.
While manufacturing’s relevance to the UK economy dropped, jobs in the industry also plummeted. Accusations were levied at the Labour government that it had caused this drop due to its failure to control the pound’s inflated value against the euro. This was seen to have effectively priced British goods out of European markets.
This was a downfall some in the industry saw coming. The Guardian highlighted a confrontation between Tony Blair and key voices in the automotive sector on 9 April 2000. Blair was warned that “future inward investment of more than £3bn a year will dry up, putting at risk many tens of thousands of jobs in the car and components sectors”.
The article goes on to highlight the pressure that the soaring value of the pound put upon the industry: “[Blair] is threatening the UK’s entire manufacturing base by concentrating on squeezing inflation and encouraging the ‘new economy’, while rising interest rates and the pound’s [value] cripple manufacturing.”
Despite the growing concern from manufacturers over the future of the industry, Blair was convincingly re-elected in 2001. Between 1997 and 2009, a total of more than 1.5 million jobs in British manufacturing were lost.
Academics Michie and Kitson point to a lack of industrial policy from the Labour Party as the cause for this considerable downfall.
“Labour might have been expected to be more supportive of the manufacturing sector, given its importance not just to the economy but also to employment and to the regional balance of the economy – and to be accordingly less supportive of the City of London and its demands,” they argue. “New Labour avoided any active industrial policy, generally claiming instead that governments could not or should not ‘pick winners’… But arguably that is precisely what the government did in seeing (or picking) the banking sector as representing the key to the UK economy’s future prosperity.”
Phipson adds: “We saw the back end of the old industrial base disappearing. If you look at the steel sector, for example, that reduced substantially during that period in terms of its output. The UK wasn’t really setting the conditions to encourage investment in those areas. Instead the government was trying to get more banks to come to the City of London, and building Canary Wharf and railways, etcetera. The focus of attention was not really on the added value part of manufacturing. This meant manufacturing started to evolve.
“At this time, manufacturers were either an integrator or innovator. Either you are doing something very specialised – i.e. making fan blades for Rolls-Royce – or you are doing something to do with integration on big platforms. What you are not doing is middle-of-the-road manufacturing, as all of that was going to China. Shenzhen became the centre of the world for consumer goods.”
It wasn’t just China that was rising as a manufacturing powerhouse, as countries in Europe were also becoming more innovative and successful in manufacturing.
“In places such as Germany, there were a lot of incentives to rapidly move forward with things such as automation, and new techniques for manufacturing,” says Phipson. “The UK was always slightly behind [the curve], never at the forefront.”
The Lisbon Treaty, Brown’s government and the 2008 crash
Blair was elected for a third term in 2005, but with a much-reduced majority. His approval ratings dropped, largely because of his involvement in the Iraq war, and in 2007 he resigned to hand over power to long-serving chancellor of the exchequer Gordon Brown.
A year before the global financial crisis, in 2007, Brown signed the Lisbon Treaty. The treaty didn’t come into effect until 2009, but it was instantly controversial, with some claiming that it would force the UK to drop the pound in favour of the euro (among other unfounded worries).
The treaty was originally designed to streamline democracy and strategy among EU members. Supporters claimed it would enhance accountability and give more power to the European Parliament, while critics stated that it would make the EU too centralist and create an unbalanced distribution of power.
Sandwiched between the treaty being signed and activated, the 2008 financial crisis devastated the global economy. Up until this point, the growing financial sector in the UK had been an integral part of each prime minister’s economic strategy from Thatcher onwards. Now it was under threat.
Michie and Kitson speculate that had Blair and Brown focused more on manufacturing there could have been less of a financial fall out. “The winner that New Labour picked – financial services and banking – turned out to be a more expensive gamble than any amount of ‘picking’ or ‘creating’ winners within the manufacturing sector could have possibly cost,” they write.
While Brown’s government attempted to navigate the economy through the crisis, manufacturing output began a nosedive that would last until 2009. Between 2007 and 2009, it experienced a decrease of 11.7%.
Of this crisis, Phipson says: “There was a contraction in capacity or there was overcapacity. It was much more difficult to get access to capital in order to invest in new equipment. It was really tough to get support from the banks as they were obviously being more cautious. This deterred a lot of investment into the UK, which created a ripple effect.”
This volatility in demand, restricted capital and diminishing investment caused many companies to go out of business. As the UK’s overall economy and industry began its recovery from the crisis, manufacturing output saw a V-shaped recovery, increasing by 4.2% between 2009 and 2010.
At this time, manufacturing was the UK’s third-largest sector with regard to GDP output after business services and retail. It contributed an annual £140bn in GVA to the UK economy, and despite suffering significant job losses around this time, manufacturing still employed 2.6 million people. By almost all metrics, however, the UK still lagged behind the likes of the US, Japan, France and Germany when it came to manufacturing.
How did the age of austerity affect British manufacturing?
In 2010, with Brown’s government struggling, the UK voted in its first hung parliament since the Second World War. Conservative leader David Cameron and Liberal Democrat counterpart Nick Clegg combined to form a coalition government, with Cameron as prime minister. In an effort to balance the UK’s books, Cameron announced that “an age of irresponsibility is giving way to an age of austerity”.
The plan was to cut billions in government spending across four years, and as a result nearly half a million public sector jobs were cut. In the manufacturing industry, jobs also dipped following their mild recovery between 2009 and 2010, although they never reached the low they did during the financial crisis.
For manufacturing output, the recovery that had begun under Brown in 2009 continued through to 2011, albeit at a slightly slower pace. In 2010, the long-neglected industry was finally becoming more of a priority. Reflecting this, the government’s Department for Business Innovation and Skills (BIS) released a report entitled ‘Growth review framework for advanced manufacturing’.
At this time, industry 4.0 was still in infancy, but the UK manufacturing industry already knew that it had to keep pace with the innovations emerging in other countries round the world. The report’s foreword described itself as: “A fundamental assessment of what each part of government is doing to provide the conditions for business success and address the barriers faced by industry.”
The report set out set three goals to achieve within a decade:
1. To grow manufacturing in the UK
2. To make the UK Europe’s leading exporter of high-value goods and related services
3. To increase the proportion of the workforce seeking, and capable of, a career in manufacturing
Looking at the figures now available, it is possible to judge how successful the coalition government was in achieving these aims:
1. There are a number of ways to measure the growth of an industry. When looking at manufacturing as a percentage of the UK’s GDP, it declined by 0.95% between 2010 and 2019, according to figures from the World Bank. On the other hand, manufacturing output grew by 4.3% during this period and there was an increase of about 124,000 manufacturing jobs in the country.
2. For the second goal, although there are complexities in attaining specific data on high-value goods, it is possible to rank the top European export countries. Unsurprisingly, Germany takes the top spot, accounting for 23.6% of total EU exports in 2019, followed respectively by the Netherlands (11.5%), France (8.8%), Italy (8.6%) and, in fifth place, the UK (7.4%).
3. The third goal is slightly more complex to measure. Although manufacturing jobs did increase during this time, overall the industry lost approximately 1,385,000 jobs between 1997 and 2019. Phipson argues that this was caused in some part because the manufacturing sector has some reputational issues to overcome when it comes to attracting workers.
“There is a public perception about manufacturing, that it is still in the Victorian age with smoky factories,” he says. “We have kind of injected that into society in the UK. There is a job to do to educate about just how exciting advanced manufacturing is in the country.
“[During the age of austerity] the UK was neglecting the skills agenda. We weren’t investing anything like the rate we were before in the sort of engineering skills that we needed. We were going through a dark period, which persisted for quite some time, and still affects us now. You could argue we are still not investing in skills at the right rate to maintain what we are doing.”
It is debatable whether the goals set out in the report were achieved or not. However, one endeavour that did seem to fall flat was chancellor George Osborne’s 2011 call for “a Britain carried aloft by the march of the makers”. This vision pictured a future British economy that would create a more substantial role for the manufacturing industry.
Michie and Kitson write: “There is no reason why the UK manufacturing sector could not grow and prosper, but manufacturing firms need a financial services sector that is focused on supporting them rather than ‘innovating’ new financial products to sell globally.”
Cameron and Clegg’s uneasy union limped on until a general election was called in 2015.
Manufacturing’s role in the road to Brexit
In the 2015 general election, Cameron’s Conservative Party won with a majority that meant it no longer had to govern in coalition. The UK has remained intact – just – after a referendum on Scottish independence in 2014, but with Nigel Farage’s UK Independence Party (UKIP) becoming increasingly influential and the Eurosceptics in the Conservative Party as restless as ever, Cameron had offered a referendum on the UK’s membership of the EU in his victorious manifesto, but only after it had negotiated a new settlement for the UK in the EU.
These negotiations were driven by a desire for greater control over immigration and trade deals. Cameron was facing mounting pressure, particularly from UKIP, but also within his own party, to deliver a deal that clawed back much of what they saw as the UK’s lost sovereignty. Cameron did secure a cut in the EU budget and stayed true to his promise of an in-out referendum in June 2016. After months of bitter, acrimonious campaigning, the Leave side won the vote with a 52% majority.
Cameron resigned almost immediately, to eventually be replaced by former home secretary Theresa May, who had (very quietly) supported the Remain campaign. Upon taking office, May was quick to assure Brexiteers that she would invoke Article 50 by the end of March 2017, a promise she delivered. By triggering Article 50, May had formally given the EU notice of the UK’s intention to quit the union within the next two years.
The perceived decline of UK manufacturing was used by the Leave side in its campaigning, but other areas of British industry, such as fisheries, seemed to have a bigger emotional pull with voters. Brexit programme director at the Institute for Government Joe Owen released a statement confirming that this debate was more symbolic than economic saying: “It is a hugely political and symbolic issue, even if it is nowhere near as economically important as some other industries.”
The chart below shows just how symbolic, as opposed to economic, the debate over the UK fishing industry was. The block for fisheries as far as economic output goes for the UK is barely visible when compared with manufacturing and financial services.
May did show some support for British manufacturing. She moved to assure Nissan that its trading conditions for its Sunderland plant would be unaffected by the Brexit result. Also, in 2017 she created an industrial strategy with a heightened focus on what she saw as five key sectors. These were life sciences, low carbon-emission vehicles, industrial digitalisation, the creative sector and the nuclear industry.
The strategy planned to create specific deals that would include deregulation, increased government action, institution creation, skill building and research.
Business secretary Greg Clarke said at the time: “[This is intended to be] a consultation on what should be our priorities for a long-term industrial strategy.” May’s government believed this to be a necessary step in order to keep up with places such as China when it came to talent flow in the manufacturing industry.
Clarke continued: “What we are proposing is that if we want to prosper in the future, if we want to achieve our potential, a big priority has to be to improve our level of skills training.”
This was a point May echoed at the Bradford Manufacturing Week in 2018: “This is a great opportunity to demonstrate how our strong economy and modern industrial strategy is enabling businesses to thrive across all sectors, as well as enabling future generations to see the potential of a career in the manufacturing industry.”
Manufacturing did see an increase in export sales and a slight increase in output during May’s brief term in office. In 2017, manufacturing export sales increased by 5.4%, or £19.8bn, meaning the total value of manufacturing sales in 2017 was £384.5bn.
In fact, between 2009 and 2017, every year, with the exception of 2015, saw an increase in manufacturing sales. The biggest sub-sector with regard to sales was food manufacturing, which earned a whopping £70.3bn in 2017, followed by the automotive sector with £57.5bn in the same year.
Despite these numbers, FDI for manufacturing dropped under May. Between 2016 and 2018, foreign investment into manufacturing in the UK dropped by £16bn. The uncertainty around the Brexit process was undoubtedly a factor behind this.
Notably, FDI in financial services grew significantly in this period, from £358.9bn to £438.4bn. The difference between the manufacturing and financial services FDI was approximately £183.8bn in favour of financial services.
Boston University’s Wilson claims that this chasm between the sectors is a failure of government.
“One of the many bizarre aspects of Brexit is why the places that have Japanese investment [such as Sunderland didn’t vote] to remain in very large numbers,” he says. “The British government had rightly and effectively stepped in and made London a financial sector that was globally successful. Why was it never willing or able to remake British manufacturing in the same way?”
With hopes of solidifying her role as prime minister as the hard right members of the Conservative Party became increasingly agitated by the slow progress over Brexit, May called a snap election in 2017. The gamble backfired and the Conservative Party lost its overall majority, forced into another coalition – this time with the Democratic Unionist Party of Northern Ireland – in order to govern. Within two years, May had resigned as prime minister.
No deal, no manufacturing?
In March 2017, UK manufacturing organisation the Engineering Employers’ Federation (now known as Make UK) published a paper that detailed its concern over a no-deal Brexit. It stated that the loss of access to the single market and customs union would have a negative impact on British manufacturing.
Whether or not the UK leaves the EU with a deal remains to be seen. Should it be a no-deal exit, the immediate future of British manufacturing appears bleak. Crucially, the UK’s manufacturing and export industries would see tariff-free trade with the EU instantly revoked. World Trade Organisation tariffs would be implemented, which would cause high levels of disruption to the logistics of British manufacturing supply chains.
On the prospect of a no-deal exit, Phipson says: “If we end up with tariffs and quotas, because we haven’t got a deal at the end of 2020, it is the end of volume car-making in this country. We will lose those 800,000 jobs. Investments will move – they won’t move overnight – but over the next two or three years we will start to see an exodus of that capital from the manufacturing sector in this country. It will go somewhere else, where the conditions are more favourable.”
British manufacturing is now on the verge of huge disruption amid bleak conditions caused by the Covid-19 pandemic. A big worry hanging over the industry is what will happen to its investment. Foreign direct investment (FDI), and in particular greenfield investment into the manufacturing industry, is usually a long-term commitment and recently the UK has been riddled with uncertainty over Brexit.
When it comes to the source markets for manufacturing FDI in the UK, there has been quite a change over the past decade. Back in 2010, the US was the number one country with capital expenditure of £35.16bn. The next largest investors were the Netherlands, Luxembourg, Switzerland and France, respectively. In 2018, this had changed significantly with the Netherlands in number one position with capital expenditure of £42.24bn, followed by Luxembourg, the US, Canada and Japan, respectively. For much of this time output has also remained fairly steady, with an increase of 1.3% between 2016 and 2019.
So who killed British manufacturing?
The list of suspects responsible for the decline of British manufacturing is vast. Poor management and political leadership, a continued failure to invest or innovate at speed, dominant trade unions and political unrest, and an inability to compete with faster-moving and cheaper locations have all contributed to varying degrees.
Added to this is a government focus on financial services from the 1980s onwards, a over-concentration on London that saw smaller regions neglected, brutal exchange rate policies and a wildly inflated currency. Then there is the inability to keep up with neighbouring European countries, combined with the coming removal of opportunities presented by being part of the EU.
When asked whether Boris Johnson’s government was doing enough to revive the industry, Phipson says: “The short answer is this government is not doing anywhere near enough to support manufacturing in this country.
“We have to invest far more in skills, we have to accelerate infrastructure. Our manufacturing industry always adapts to new environments and will adapt for Brexit. But what we should be doing now is investing heavily in digital technologies for manufacturing to get us to a world-class level, and we are way behind here.”
British manufacturing isn’t dead, but it is not entering the post-Covid and new Brexit landscape from a position of health. Although some of the reasons for that have been beyond the UK’s control, others have looked perilously close to managed decline at times.
The first industrial revolution of the late 1700s and early 1800s had the UK at its core. The second, driven by increased access to electricity and transport in the late 1800s, also saw the UK at the forefront. The country’s role was smaller in the third industrial revolution – occurring in the later decades of the 20th century and based on increasing digitisation in manufacturing. For the fourth industrial revolution, currently in progress and based around the automation of manufacturing, the UK risks being little more than a bystander. Will any government be willing to shift its focus from financial services and invest in ensuring the country has the skills needed to compete with the manufacturing leaders of the 21st century? Based on recent history, whatever the new normal is that emerges after the Covid-19 pandemic, this seems unlikely.
To read Investment Monitor’s article on ‘Who killed US manufacturing?’, click here.
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