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04 January 2017

A new industrial strategy - strategic efforts

Industrial policy is on the menu A new focus on industrial strategy is coming from the very top of the government
In the light of Prime Minister Theresa May’s statement about industrial policy, Andrew Allcock offers a historical perspective and reviews what government and key representative bodies have said so far

Industrial policy has been given life again since Prime Minister Theresa May took on the mantle of the UK’s post-Brexit vote Prime Minister. “We need a proper industrial strategy that focuses on improving productivity, rewarding hard-working people with higher wages and creating more opportunities for young people so that, whatever their background, they go as far as their talents will take them,” she said ahead of her first cabinet meeting in August. And Greg Clark was duly elevated to the new position of Secretary of State for Business, Energy and Industrial Strategy (BEIS). The image is clearly one of a more interventionist approach, often taken as code for government direction, cash support or even nationalisation.

Machinery, December 2016 - various Prime Ministers have operated an industrial strategy

As seasoned observers have noted, it is some 30 years since Margaret Thatcher (Conservative PM from 1979-1990) moved the country away from such an approach, which was very much focused on the manufacturing sector (well in excess of 20% of GDP in 1980; it’s 10% now). Such an interventionist line was born in 1962, under Harold Macmillan’s Conservative government and when manufacturing was in excess of 30% of GDP, with the establishment of the National Economic Development Council (NEDC). Harold Wilson’s Labour government (1964-70) took on with gusto this so-called corporatist approach and, after a brief Conservative interlude under Edward Heath during which we entered the European Economic Community (now the EU), Labour returned to power from 1974 until 1979, adopting an interventionist, nationalisation agenda.

During the 1980s, grants were still handed out during the Conservative administration’s time (the Flexible Manufacturing System [FMS] grant was one – Yamazaki Mazak was a beneficiary), while the then Department of Trade and Industry (DTI – BEIS forerunner) also backed various industrial projects with cash. Attracting new industry via inward investment was also a key strategy, which today most agree saved the UK’s car industry.

But the direction of travel was away from cash hand-outs and direct intervention, and more towards offering advice, the free market and privatisation, and it was Thatcher’s successor, John Major, who finally killed off 1962’s NEDC, in 1992. A final end to “picking winners”, as corporatist intervention is described; a notorious example of which is the ‘rescue’ of British Leyland by Labour during its 1974-1979 administration, although, in a positive example, it was Ted Heath’s Conservative government (1970-1974) that rescued (nationalised) aero-engine maker Rolls-Royce in 1971.

As for the country’s regional policy (which is part of any strategy), this has gradually become more European in flavour, with funds channelled through, for example, the European Regional Development Fund (ERDF) – that is obviously going to change. Of course, previous Chancellor of the Exchequer George Osborne’s ‘Northern Powerhouse’ is regional policy, as is HS2 and the increasing number of city mayors having more powers.

Returning to the manufacturing sector specifically, even advice has been under attack lately. The Manufacturing Advisory Service (MAS), created by Tony Blair’s Labour government in 2002, was shut down this year – in the Midlands, the activity was partially salvaged through the establishment of ‘The Manufacturing Hub’ (www.machinery.co.uk/141485). And as we noted just last issue, the ‘Reshore UK’ advice initiative heralded by David Cameron approaching three years ago has similarly disappeared. The GTMA has donned the mantle here (www.machinery.co.uk/147801).

INDUSTRIAL POLICY REINTRODUCED

The previous Liberal Democrat/Conservative coalition government (2010-2015) did have an industrial strategy, announced in September 2012 (www.machinery.co.uk/47006) and mostly fronted and voiced by the LibDems’ Vince Cable – although it was George Osborne that coined the phrase ‘march of the makers’. Plus there was regional policy, as instanced above already. But it was Tony Blair’s first ‘New Labour’ government that reintroduced an explicit industrial strategy, the first for the UK in 20-odd years and described to the CBI in 1997 by Tony Blair as being part of “the pursuit of a third way between the laissez-faire of the last 20 years, and the model of statist and corporatist policies that used to be fashionable on the left …. [with government] stepping in, where the market fails, to equip business and industry to compete better in that market”. But manufacturing employment almost halved on his party’s watch.

Remnants of these previous strategies remain, of course: the Automotive Council and the Aerospace Growth Partnership, both established under Labour in 2009, for example, and, under the coalition government, the Catapult centres, born in 2012, of which there are 11, although some of their members existed earlier (Sheffield’s Advanced Manufacturing Research Centre, for example, was established in 2001 – Catapults bridge the ‘valley of death’ between academia and industry, allowing new concepts and ideas to be developed to a point that industry can employ them).

So what will industrial strategy look like this time? In a speech made at the Institute of Directors (IoD) annual conference 2016 on 27 September (https://is.gd/yogevu), ‘minister for industrial strategy’ Greg Clark started with positives about the UK: science and innovation; cutting-edge industry, specifically automotive; the space sector; professional services (accountancy, law, consulting), creative industries and many technologists that “set the global gold standard”. Of all these he said: “We need to burnish these strengths,” adding that: “We must provide the research funding to keep us out in front.”

More revealing on the new industrial strategy he said: “In my view, any successful industrial strategy has to be local... Yet for too long, government policy has treated every place as if they were identical.” And he said too that: “Many of the policies and decisions that form our industrial strategy will not be about particular industries or sectors, but will be cross-cutting.”

He detailed his vision more, taking in: infrastructure investment; education and training (emphasising vocational education); and a tax system that encourages entrepreneurship and innovation. And in highlighting the very best and the very worst in the UK, he concluded by saying we needed to “upgrade” in many areas.

Such high level stuff maybe doesn’t sound inspiring, revolutionary or exciting, but that is what Clark has intimated, saying: “Just as in 1979, the new government knows that Britain needs to change in order to prosper in the years ahead. I think we will look back, in the years to come, on 2016 as just such a moment.”

To support policy creation, a new BEIS Select Committee has been established: Iain Wright [chair], Peter Kyle, Michelle Thomson and Chris White. Its first debate was on 20 October (https://is.gd/nefisa) and the panel is touring the country, having had a meeting on 27 October at the Coventry-based Manufacturing Technology Centre (a member of the High Value Manufacturing Catapult). In addition to this committee, there’s a new cross-department Cabinet Committee on Economy and Industrial Strategy, chaired by the Prime Minister herself.

Much was said during that 20 October debate, but Wright seemed, interestingly, to display some old-fashioned interventionist, manufacturing-linked leanings. He said: “This month’s [October’s] announcement that the hulls of the replacement Trident submarines are to be built with French steel, at a time when the British steel industry has been pushed to the brink of extinction, shows vividly an acute failure of industrial policy,” adding also: “Why is not every single public organisation’s fleet using Nissan cars built in Sunderland or Vauxhall vans built in Luton? How is the procurement process nurturing British industry, and how will a proper industrial strategy ensure that that becomes the case?”

Earlier this year, CBI director-general Carolyn Fairbairn called for a modern industrial strategy (https://is.gd/yomewa) that was sector focused, saying that all sectors should have a plan, and adding that while ultimate solutions may be cross-sector “the building blocks are sector strategies”.

She wasn’t looking for grants, though: “Modern industrial strategy isn’t about ‘handouts’ for business. It’s an investment in our future competitiveness, which will pay dividends in sales, exports, jobs and livelihoods. Let’s help other sectors to do what we’ve already seen in automotive and aerospace. Let’s scale-up this approach. And deliver long-term results by 2030.”

EEF, too, suggests a sectoral approach in any strategy and, in timely fashion, published a 24-page document, Manufacturing Ambitions (https://is.gd/najiye), on 20 October. In framing what it sees as top-level industrial policy, EEF says: “Industrial strategy should provide a framework for government’s role in removing barriers to success and delivering a business environment that makes the UK the obvious choice for all parts of the supply chain to execute their business plans here. Government can also use industrial strategy to be a partner with industry, investing alongside businesses in the capabilities and technologies our firms and our people will need to be successful over the long term.”

And rather than a long list of ‘nice to haves’, EEF suggests a focus on six outcomes in three areas: under ‘productivity’, measures for output per hour and median earnings are suggested; under ‘investment’, it’s foreign direct investment and business R&D; and for ‘trade’ it’s trade balance and trade diversification. But in more detail, the manufacturers’ organisation does offer a number of ambitions for the industry and policy priorities for government (see box item below).

The Aerospace Technology Institute (ATI) has also published a document to stir into the industrial strategy recipe (https://is.gd/qetoho). ATI is an independent not-for-profit company driving aerospace R&D, with industry/government funding support of £3.9 billion between 2013 and 2026. ATI’s core message in its 30-page publication is that government should prioritise innovation, which “drives productivity and accounts for 70% of GDP growth in the long run”. This call is set against a backdrop of the UK investing “just 1.6% of its GDP in R&D, in contrast to 3% invested by Germany and the US”.

And using an old phrase in a modern context, ATI’s document adds: “It [government] can do this by ‘backing winners’ – by harnessing the ingenuity of British people and industry.” It should do so by priming and thus de-risking private investment. The ATI is, after all, just such an example, it is highlighted. But it also underlines that the UK has a ‘missing middle’ – companies employing 50-249 – and that we particularly need some that operate in R&D-intensive activities (pie chart, below).

Aerospace R&D is concentrated very heavily within just three companies

TOP-LEVEL GET-TOGETHER PLANNED

There’s a top-level meeting in London next year, 16 March, that will inform the new policy further – ‘Priorities for shaping the UK’s Industrial Strategy’ (https://is.gd/isusew). Guest of honour, unsurprisingly, will be BEIS Select Committee chair Iain Wright.

But just ahead of Machinery going to press, the Prime Minister revealed there would be £2 billion extra funding annually for R&D “by the end of this Parliament” (so in 2020-21 and after EU funding ends – historically around €1.25 billion/year). She said also that there would be tax breaks to encourage firms to invest in research.

In his Autumn Statement, Chancellor Philip Hammond reiterated that £2 billion and also announced a “new National Productivity Investment Fund of £23 billion to be spent on innovation and infrastructure over the next five years”. There was also a doubling of UK Export Finance to help companies export. He said a ‘Midlands Engine’ strategy will follow shortly, but announced funding for an evaluation study for the Midlands Rail hub. He also recommitted to the Northern Powerhouse project. Corporation tax at 17% is another aim: “by far the lowest overall rate of corporate tax in the G20”. We can expect some of this to turn up in any industrial strategy.

But in all of this, any strategy needs to have a long life, if it is to have lasting effect. As the EEF notes: “Manufacturers have been frustrated by stop-go efforts in the past and inconsistent and unpredictable policy making.” It suggests, without irony, the EU’s Horizon 2020 programme (2012-2019) as a potential model (https://is.gd/nirifu) – it lasts seven years, bridging five-year parliamentary terms, EEF observes.

Adopt a Horizon-style seven-year strategy? Supported by £7 million Horizon funding, Scotrenewables leads a consortium to optimise its SR2000 – at 2 MW, the largest and most powerful tidal turbine in the world – within the ‘FloTEC’ project, scheduled to run until 2019, when the UK exits the EU

Main article ends

Box item

EEF – 2026 ambitions for UK manufacturing

EEF’s Manufacturing Ambitions (https://is.gd/najiye) document (p14) says there should be three priority areas for the UK’s manufacturing sector:

■ Be more productive: have productivity levels out-ranking the G7 average (with UK based as 100, the G7 average is about 110); significantly reduce skills shortages and hard-to-fill vacancies via upskilling and automation; develop a UK ‘mittelstand’ (German medium-sized, long-term focused family-owned firms), with more SMEs becoming mid-size and large.

■ Gain a stronger trading position: stay as a world-leading destination for inward investment; increase UK sourcing; reduce manufactured goods’ trade deficit/increase service trade surplus from manufacturers; build on strengths of transport, defence and life sciences.

■ Increase investment in technology & innovation: be early mover in Industry 4.0; double R&D as a proportion of GDP, becoming leader not follower; improve resource efficiency and embrace the circular economy.

Also in ‘Manufacturing Ambitions’ (https://is.gd/najiye), EEF suggests four policy priorities for government: a more skilled adaptable workforce; more reliable and resilient infrastructure; better support for growing businesses; and reducing the cost of doing business in the UK.

Each one is supported by further specific actions, such as, respectively: the apprenticeship levy, airport capacity, continued access to Horizon 2020 and lower corporation tax

This article appeared first in Machinery magazine, December 2016


William Dalrymple

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