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Guy Foster

Expert opinion: Will our goods soon be Made in Britain again?

In a recent study the UK was declared as being the cheapest place to manufacture in Western Europe, suggesting the current revival of manufacturing in Britain may have further to go.

Reshoring – the flipside to offshoring – refers to the growing trend of manufacturing returning from emerging market economies to the West.

When the coalition government came to power in 2010 the chancellor had high hopes of a rebalancing of the UK economy to reduce its reliance on the City of London and financial services.

Years later the country still suffers from a gaping trade deficit in goods and services and the service sector is still providing the majority of the growth in output, but this masks a renaissance of sorts in Britain’s manufacturing industry.

The shift in balance: the rise of competitive Britain

As recently as the 1970s, manufacturing was contributing 25 percent towards the UK’s economic output and employing over nine million people but that marked the sector’s modern peak.

The period’s industrial strife, coupled with improved logistics and communication technology, began a trend of offshoring which allowed companies to benefit from cheap foreign labour while the UK focussed more on services.

Employment in the sector is now below three million people and contributes just 10 percent of GDP.

Though small, manufacturing in the UK is still a strong and important part of the economy. It is worth noting that the UK remains the 11th largest manufacturing nation in the world (but is just 22nd by population).

After years of struggling to compete with low cost producers overseas, the UK is now one of the cheapest places to manufacture in Europe. The costs of producing goods in the UK are becoming competitive with those in Poland and the Czech Republic and are already lower than those of France and even Germany.

A renaissance or a rebirth?

Whether we should term this a renaissance or a rebirth is open to question. Modern manufacturing is an entirely different beast from the dirty industry of the 1970s.

The financial crisis and subsequent recession may have signalled the end of a terminal decline of industry in the UK. From those ashes however, have risen streamlined high-end sectors, specialising in technology, aerospace, energy and pharmaceuticals.

The competitive edge Britain holds is in producing high-quality, capital intensive goods, as opposed to the mass-produced, labour-intensive goods which shifted to the likes of Taiwan and Vietnam long ago.

The UK is still the second largest aerospace manufacturer in the world with 17 percent of global market share and this is an area with huge growth potential still to come as demand in the East grows and technological innovation continues.

There are over 100,000 people directly employed in this sector.

With only slivers of support, more needs to be done

The UK has adapted its approach to keep up with other economies offering lower labour costs and now has an edge through skills and intellectual capital.

Graphene is an interesting case to look at. The lightweight, conductive, super-durable and transparent substance which may one day replace silicon was a British discovery but it is likely to benefit manufacturers in other countries more.

China and the USA have provided state support to those companies in the early stages of graphene production, something not as readily supported here.

Some state support was finally announced this year for the UK’s manufacturers. The Treasury and Bank of England announced that export businesses would now have access to a special facility for banks to lend to export companies.

Not harnessing the opportunity (to be a world leader in graphene production) is a missed opportunity, the root causes of which have developed over decades as the allure of the City claimed the brightest minds for itself.

Lots of managers, no one much to manage…

There is a dearth of qualified engineers coming from our universities to drive the constant innovation needed to maintain the country’s standing as one of the world’s leading high-end manufacturers.

James Dyson, one of our most famous inventors, registered his dismay at how difficult it was to find qualified people to employ in the UK and that he had to recruit in Singapore instead.

Currently only 25 percent of engineering and technology graduates go on to work in manufacturing after university, drawn instead to the attractive wages offered in finance and management consulting.

The ten most popular degree courses in the UK are not encouraging for the UK manufacturing sector. That’s despite engineering graduates receiving starting salaries that are second only to medicine.

1. Business Management
2. Law
3. Sociology
4. Art
5. IT/Computer Science
6. Psychology
7. Education
8. Nursing
9. Biosciences
10. History

If issues are addressed, room for hope

There is a sense of optimism in the manufacturing sector about the economic outlook. This is reflected by an improved view of the government’s handling of the economy.

The key focus for companies going into 2014 was the development of new products and innovation. Eighty-two percent of companies were focussed on new product development.

The extended period of cheap borrowing is helping to drive business investment forward as inflation remains subdued. UK growth has enjoyed a volley of upgrades while unemployment is falling steadily.

The emphasis from the government throughout this recovery has been on a ‘balanced’, ‘stable’ and ‘enduring’ recovery of which manufacturing plays an important part.

There are clear hurdles that stand in the way of further progression for our manufacturers in the near to mid-term.

The spiralling cost of energy is identified as a recurring issue faced by manufacturers and heightened geopolitical risk in Eastern Ukraine will not have done anything to allay these fears.

High energy costs are only partially offset by the rising pound which itself creates a headwind for exporters. The outlook for the eurozone remains one of very tepid growth but that compares with an outright contraction for four of the last six years, so on balance the outlook is clearly one of cautious optimism.

Guy Foster is head of portfolio strategy at Brewin Dolphin. For more information about Brewin Dolphin’s products and services, click here.