British manufacturing: a success story

How bad is the damage so far?

Official figures released in April show the steepest decline in British manufacturing since records began in 1968: a fall of 6.5 per cent in the three months to February 2009. That's significantly more severe than the overall contraction in the economy, which has shrunk by 1.9 per cent this year. Car production has fallen more than 50 per cent in 12 months, with most factories moving to shorter shifts or suspending work altogether. The Engineering Employers Federation predicts 140,000 manufacturing job losses this year alone. Unions and employers have asked the Government for a £1bn subsidy to help protect Britain's remaining manufacturing jobs and stop Sarkozy being proved right.  

But didn't most such jobs disappear under Thatcher?

She did her bit. Between 1979, when she took power, and 1982, Britain's manufacturing output dropped 18 per cent. Yet, though brutal, this contraction was really the acceleration of an existing trend. Manufacturing had fallen from 31 per cent of GDP in the early 1970s to 25 per cent by the time Thatcher became PM. And the slide has continued. Between 1978 and 2008 manufacturing shed almost 4 million jobs, its share of GDP dipping to just 13 per cent.

So are we no longer a manufacturing nation?

On the contrary, thanks to the vastly increased efficiency of the industries that survived, Britain's manufacturing output, until the credit crunch, was greater than ever. True, services now make up 75 per cent of the British economy (up from 54 per cent in the early 1970s), a shift that has affected most developed countries. But since our economy has grown roughly fourfold in the past 60 years, manufacturing, while shrinking relative to services, has grown in absolute terms. For example, in 2007, twice as many cars were produced in Britain as in the early 1970s. Manufacturing still employs three million people and provides more than half of our exports. And it is some 1.5 times the size of the overall financial services sector.

But what do we actually make?

Britain is a leading producer of chemicals, green technologies, and electrical and optical equipment, and home to two of the world's largest pharmaceutical groups, GlaxoSmithKline and Astra-Zeneca. The UK aerospace industry is the largest in the world outside the US, employing 125,000 people. But since most firms are hi-tech and relatively few British companies make globally branded consumer goods, we tend to overlook this. The sector is now a tapestry of foreign companies, some huge, with UK plants; British firms that often assemble their products overseas; and thousands of smaller firms making unglamorous, technically-advanced goods like fuel cells and plastic electronics.

How do we compare internationally?

We are the 6th largest manufacturing nation in the world, behind Italy, but ahead of France (bonjour, M. Sarkozy). True, manufacturing makes up a much larger chunk of the economy in Japan and Germany (about 20 per cent) but that is unusual; at 13 per cent, the share of the economy devoted to manufacturing in the UK is actually higher than in France or the US (both 12 per cent). As for its relative efficiency, the productivity of British manufacturing has improved 280 per cent between 1980-2007, compared to 240 per cent in France over the same period and 190 per cent in Germany.

And what accounts for that rise?

A significant factor has been the focus on outsourcing assembly jobs to plants overseas, particularly in Asia. Dyson, for example, 'invents' in Britain but has its hoovers assembled in Malaysia and Singapore; but they are still exported from Britain and bring in £500m of foreign currency a year. In this way productivity - calculated by dividing output by the number of hours worked by UK employees - is dramatically increased. In the media this so-called 'off-shoring' is often cited as the cause of job losses, part of the story of 'Britain's manufacturing decline'. In reality, it has hugely benefited the economy.

So what was Sarkozy going on about?

When the president said that the "English have no industry", he was doubtless referring to our dearth of national champions and the heavy involvement of foreign manufacturers in the UK. Thus, where the British car industry is dominated by Honda, Toyota, Nissan and GM, France still has Renault, Peugeot and Citroën. Yet despite Sarkozy's disparaging tone, international investment has been of huge benefit to British industry. In recent years, it has received more foreign direct investment in manufacturing than any other EU country. In 2006 it got £26bn; Germany just £3bn.

So why are we in such trouble?

The downside of having such a high-tech, export-oriented manufacturing sector is that it has been very vulnerable to the global financial downturn. Despite the fall in value of the pound, the collapse in world trade has hit Britain's manufacturers hard, and after years of making efficiency-savings and shrinking their workforces to become more productive, there are fears that many companies simply cannot shrink any further.

Can anything be done?

Optimists argue that the crash could prove a boon, 'creatively destroying' weaker manufacturers and stimulating innovation. The big problem is cash. Traditional investment funds, like 3i, which was set up after WWII to fund new industries, are currently crippled with debt. For that reason, the Confederation of British Industry has been lobbying the Government to set up a £1bn fund to help emerging technologies. In last week's budget, Alastair Darling managed to find £750m - but will it be enough? ·