Industrial Strategy & The Productivity Problem

This week Theresa May has launched a new Industrial Strategy centred around increased investment in new technologies, education and the Northern Powerhouse. This strategy has received a mixed welcome following the modest results of previously announced initiatives to support UK manufacturing. Is there any reason to believe this will be different?

It is generally recognised within the manufacturing community that the conflagration of new industrial process and technologies, commonly referred to as Industry (or Industrie) 4:0 has the very real potential to divide the world's major manufacturing nations into winners and losers for the next 20 years, with a new level of automation, interoperability and manufacturing flexibility freeing us from some traditional labour and material constraints.

With the UK's strong position in academic research and development, technology leadership and strong capital markets (and therefore efficient access to capital) it would be reasonable to assume we are well placed to prosper and increase automation will allow us to recover some manufacturing from lower cost countries and to be at the forefront of bringing emerging science, materials and processes to commercial applications.

Unfortunately the UK continues to battle two connected and fundamental problems. Firstly, within manufacturing we already trail Germany, Japan, the US and China in adoption of existing advanced manufacturing automation so we are starting from behind. Secondly, we continue to struggle with sticky low productivity. As the adjacent graph shows, even taking into account the relatively high productivity of our large Financial Services, Creative and Technology sectors, overall we trail our peers except Japan (which has considerable labour flexibility and protectionist problems) in terms of revenue per man hour and the gap is not closing.

The factors that are core to driving productivity gains are well known:

  •   Focus on high volume and/or high growth products and markets with barriers to competition;
  •   Easy access to the right people and skill sets;
  •   Ready access to investment;
  •   Effective infrastructure; and
  •   Limiting barriers to trade and undue legislation.

At its core the Government's announcement does attempt to address these five factors:

High value markets:

The Government has been clear in stating its focus sectors (life sciences, low-carbon vehicles, industrial digitalisation, creative industries, nuclear, smart energy technology, robotics and 5G network technology). Clear guidance is also being given that priority will go to sectors which organise themselves. This latter point is important as it increases the likelihood that funding will be used efficiently and in an avid table fashion.

Access to the right skill sets:

This is the area which is guaranteed the most press attention but can be summarised as a two-tiered strategy to support top-end R&D in target sectors while directing young school leavers towards STEM subjects or technical education to ensure they are training in areas of economic utility. Despite its simplicity in concept, this will arguably be the hardest proposal to deliver as it involves major new institutions (technical colleges across the country) and a skeptical education establishment.

Access to investment:

Through recent Government initiatives there are multiple sources of funding available to UK business from a broad range of institutions, but many of the most efficient and successful tools, including patent box and tax incentives for VCT and EIS investment have been impacted by EU legislation, while the overall funding environment has become extremely confusing for SME's. There is a substantial job to simplify access to funding.

Effective infrastructure:

The UK currently suffers from the London-centric nature of the economy and the Government is already pursuing several large projects to address this. The announcement of an additional £556m for the Northern Powerhouse project is helpful, with the investments in Goole Terminal and the growing international position of the North West in Life Sciences somewhat easier to see long-term returns on the investment in Blackpool Winter Gardens. None the less, unlocking additional transport capacity and ensuring sufficient power generation is proving highly political and slow.

Freeing trade:

In light of Brexit this is one area currently materially outside the Government's control. Brexit offers the opportunity to free business from unhelpful legislation and to directly stimulate the economy in key sectors but runs the serious risk of substantially impacting our trade with our large export partner while delaying our reaching new trade terms with other major partners. This week's announcement expresses a helpful sentiment, but that is really all it is for the moment.

Theresa May's Strategy shows the Government understands the productivity prerogative and wants to use its new and existing powers to address this now. This will only get more important as we try to sustain economic growth with lower net immigration.

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