Sir Alan Rudge CBE FREng FRS - Chairman, ERA Foundation addresses over 100 Luncheon Guests at the IET, Savoy Place, London on Wednesday, 6 May 2009.

My Lords, Ladies and Gentlemen,

I hope you have enjoyed your lunch and are sitting comfortably.

In truth, my task today is to make you feel a lot less comfortable, but I hope I can do it briefly and end on a somewhat positive note.

Like many of you here today, the ERA Foundation is involved in the early stages of new innovative companies which we hope will go on to flourish into healthy growing enterprises. But for many years I have become increasingly concerned about the general decline of manufacturing industry in the UK.  You do not have to be an industry expert to observe this effect. Stand on a busy street corner and observe the traffic, look around your homes, in the shops, at your place of work, and try to find something which is made in the UK. There are a few, but you have to search hard for them.

The disappearance of many of the famous UK companies or, increasingly, their acquisition by overseas buyers has also become very evident. This particular effect has not received much study or comment since it fits within the mantra of ‘globalisation’ and must therefore be ‘a good thing’. However, as the control, strategy and key decisions of an organisation move offshore if does have an impact. Not least upon the tens of thousands of small and medium-sized supplier companies who make up a key part of our manufacturing base.

If you raised these observations with politicians, or indeed many economists, in the past (and I have) you would have been told that this is unimportant;  ‘the UK is leading the way into a post industrial society where services are king and manufacturing is no longer important’.  Indeed a well known economist dismissed my argument on the basis that he could see no particular economic advantage in manufacturing a jet engine as against the equivalent value-added in haircuts.

I did not find these answers to at all satisfying. The UK is not a self-sufficient economy… we import half our food and simple observation reveals much else besides.  Surely the scale of our internal economy is not the only issue.  How do we pay our way internationally to support the standard of living which we have been enjoying?    Have our service industries really replaced the contribution to export earnings previously made by manufacture?  If we seek a healthy sustainable economy, is it really enough to inflate the value of our homes and cut each others hair?

My colleagues on the ERA Foundation Board felt equally uneasy and at the beginning of 2008, and before the current financial crisis, we defined a number of questions and commissioned consultants at Oxford Innovation to perform the work.  Our objective was to broadly understand how the UK economy worked and the contribution of productive industry within it.

Three fact-finding reports were commissioned and a summary of the findings with our conclusions are available on the table here and on the ERAF website. This is not a formal lecture today but I would like to make a few points on the findings and our conclusions.

The data obtained are from the Office of National Statistics and we found them very disturbing. (Slide 1)  The UK’s Balance of Trade has grown rapidly worse over the past decade. The slide shows the situation from 1947 until 2007.   From a position of balance in 1997 the decline has been continuous, at an average rate of 20% annually since 2000 with an annual deficit approaching £60bn at the end of the period.
 

Slide 1
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If we examine this in more detail (Slide 2) we see that it is the imbalance in the trade of manufactured goods which is largely responsible for the trade deficit.
 

Slide 2
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While there is a growth in services (Slide 3) largely from Financial and Other Business Services, the net contribution from services is less than half the deficit in manufactured goods.  The Other Business Services surplus is virtually cancelled out by the deficit in (holiday) travel.


 

Slide 3
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Prior to the current financial crisis, Financial and Business Services comprised about one quarter of the nations GDP and one quarter of our exports.  Manufacturing by comparison had shrunk to only one seventh of the UK’s GDP but still provided about half of all our exports; three quarters of all business R&D and directly employment for around 3 million people. In terms of the balance of trade, manufacturing contributes six times as much as financial and business services per pound of GDP. We can hardly argue that manufacturing is unimportant. In this light the rapid decline in manufacturing investment over the past decade should be a cause of serious concern. (Slide 4)
 

Slide 4
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Despite the growth in service exports and direct investment earnings from abroad the UK’s balance of payments deficit has continued to grow, reaching almost £53billion in 2007. This is a picture of a country consuming more goods than it is able to pay for by means of its exports of goods and service and its earnings from overseas investments.

This being the case, we were curious to know how these huge current account deficits had been financed. Further investigations made it clear that the UK has been relying upon the sale of equity and debt assets to finance the deficit. Essentially this means that the UK is selling long term assets to fund short term consumption;  to the tune of £40 billion pounds in 2007 alone. If this capital inflow were to cease the UK could no longer finance the current account deficit.

This result led us to examine the scale of foreign ownership of UK industry. In 2007 foreign owned companies were responsible for 40% of all sales made by manufacturers in the UK. What was particular striking was the rapid rate of increase in foreign ownership over the period 2000-2007. In terms of Gross Value Added the contribution of foreign owned manufacturers increased from 25 to 38% in this period. The increase of foreign ownership was also evident in other sectors of the economy – for example from 50-70% in mining and quarrying; 13-46% in electricity, gas and water-supply companies.

These acquisitions of UK companies by foreign buyers have contributed to the asset sales required to finance the current account deficit. Whether this increasing degree of foreign ownership is desirable I will leave for another debate, but selling long term assets to finance short term consumption cannot be a sustainable base for the UK economy.

Our reaction to these studies is one of deep concern. The UK’s balance of trade deficit has become so great that it is unlikely that it can be compensated by the growth of exportable services or sustainable financial inflows.  While the devaluation of the pound will help to create a more favourable environment for exports it also increases import costs and implies a lowering of the standard of living in the UK. Clearly the underlying issue of our trade deficit must be addressed.

Despite its decline, manufacturing contributes one half of all UK exports and is still the leading contributor to the balance of trade. We are compelled to conclude that manufacturing matters and that strengthening and expanding our manufacturing base still offers the most realistic route toward a balanced and sustainable economy.

If we accept this conclusion the issue then becomes one of identifying solutions. Specific initiatives by Government have a place, but only if they are scaled realistically and form part of a more general solution. A few tens of millions scattered about in high profile initiatives will not do the trick. 

 Let me offer you my Greenhouse Analogy. If a few plants in a greenhouse wither and die then it is appropriate to investigate the health of the individual plants. However, if most of the plants in the greenhouse are not flourishing then it is time to examine the greenhouse. We suspect that the UK’s fundamental problems are much closer to the greenhouse than the plants.  In keeping with this we are seeking to identify and understand the key elements needed to create an environment in which manufacturing can flourish.

We have a fourth study in progress with this as its objective. There have been other studies of course, but I hope our independent and unbiased approach may be able to bring something to the party. My time is almost up but let me finish with these observations.

In simple terms the UK has not been paying its way for the past decade. We have to stop deluding ourselves that Britain is leading the way into a post-industrial society where manufacturing is unimportant and where we can pay our way by means of services alone.  The experience of the past decade has clearly demonstrated that we cannot and the anti-manufacturing culture which has prevailed here has been very damaging. It is important that this is widely understood and accepted.

If we refuse to accept that we have a problem there will be no demand for solutions. The time has come to clear away the smoke and mirrors, acknowledge that our economy is seriously out of balance and get on and do something about it.

My message today is this: To the many of you who have influence in any relevant quarter, please examine the facts, avoid delusion, ignore the platitudes, accept the problem and take some appropriate action.  As a minimum all of us can provide support and encouragement to those actively pursuing realistic solutions.  Industrial renaissance is a difficult challenge but it is still achievable and it remains the most effective way of closing the trade gap and restoring the UK’s fortunes in the medium term. Without it, the continued decline of the UK is assured.

The current financial crisis has at least removed the illusion that financial services are the answer to all our ills. However, the current fiscal disaster may so dominate the present that we forget that the underlying problems were there before the crisis. We are weaker now because of our neglect of them and we will undoubtedly return to an even worse situation unless we tackle the problem of our trade deficit with great urgency.

Above all we can start to reverse the negative culture on manufacturing and productive industry in general. Why would anyone want to invest their career or their money in a manufacturing business if they are constantly being informed that manufacturing is the past, old hat, dying, and the future lays elsewhere.  But for the UK the chips are down and it really is a case of ‘export or die’. Expanding our productive industrial base, from the start ups to the major businesses must become a major mission for the next generation, Government and people alike.

The ERA Foundation will try to play its part in providing information and supporting and helping initiatives which lead to this end. If you have contributions to make to our Greenhouse Report or would like to receive it when complete, then please contact David Clark, myself or any of my colleagues on the ERA Foundation Board. There is much to be done … So lets get on with it.