Decline in Manufacturing in the UK

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©atlasclubbed.com

Over the past 40 years manufacturing in the UK has seen a severe decline. Its share of GDP has fallen from 30% to 11% and employment has dropped from 9.5million to 2.8 million.

One of the major contributing factors to this has been the growth of finance in the UK. Over the same period finance has grown substantially, now contributing around 70% of GDP in the UK. But with the growth of finance has come the emergence of other certain factors and personalities of the City.

Short-termism

The City has long been criticised for having a short-term view on making profits and satisfying shareholders (the extent to which this is true can be debated), as a result the UK has seen a number of results occur.

  • Money moving abroad

One factor is that the financial sector has ignored domestic investments and moved finances abroad where there is a higher rate of return. The effect of this has been a reduction in long-term home investment in manufacturing, and as a result of this lack of investment we have seen manufacturing companies lack money to fund R&D and innovate their firms – and are therefore outcompeted on the world stage.

  • ‘Inorganic Growth’

Short-termism has also brought a period of high compensation packages for managers who produce quick growth to shareholders. This has resulted in a major increase in Mergers and Acquisition activity, which has in turn causes funds to be diverted from long-term investment and start-ups that could benefit manufacturing. Mergers and Acquisitions have low historical evidence of providing higher profits to the firms involved and often end in failure (this too can be argued to a much greater extent, but would require a separate blog post).

It can also be argued that another contributor to the decline in manufacturing has been a lack of Government Policy. With the government focusing policy on the growth of the City and directing funds towards the service sector we have seen a decline in investment and government policy for manufacturing.

Solutions?

  • Since the financial crisis this situation has changed, the government has started to identify the imbalances we have in the UK economy and is working on a couple policies to promote manufacturing; such as enterprise zones and a national investment bank (article FT.com).
  • The government is also in a fantastic position to make some real change in the culture of the financial sector, as it owns a majority stake in RBS and Lloyds TSB/HBOS. The government could help curb the short-term bonus culture in the UK and set regulations on minimum investment requirements in UK manufacturing firms. The banks would still make profits, but they would be in the long run as manufacturing picks up and long-term growth trends kick in.
  • Finally the government could introduce a strong wave of Industrial policy. I don’t suggest that they pick winners and losers, but they could certainly support British industry more and help the firms compete on a global stage. One example of where the UK government has failed on this front has been when they granted a contract to build trains to Germany-based Siemens, rather then UK-based Bombardier (An article by the Telegraph explains how industrial policy might be implemented in the UK).

So although finance has, by part, had a negative effect on manufacturing in the UK, the government should assess some of it’s policies towards the manufacturing sector and do more to support a flagging sector of the economy.

North America has a similar financial sector to us, but their manufacturing sector is performing significantly better then ours; maybe we could learn a lesson from our friends over the pond?

Ed

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