essential economics: Manufacturing Industry in the UK
Topic: Manufacturing Industry in the UK
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Students should be aware of structural changes in output and employment and some of the causes and consequences of such changes
Although manufacturing contributes £150 billion to GDP, manufacturing industry in Britain has been in relative decline for a long time. The fall in the size and contribution of the manufacturing sector is known as de-industrialisation. Does manufacturing matter? What is the future of manufacturing in the UK ?”
Britain long seems to have been polarised into two different camps on the subject of manufacturing. One says the only real jobs are factory jobs, that anybody who doesn't make something is some kind of parasite, and that the UK is shedding its manufacturing at an alarming rate. The other camp says services are the future, that factories should be converted into industrial heritage leisure centres and cafes, and that the decline of manufacturing is inevitable. Neither side is quite right. Evan Davis, BBC Economics Correspondent, July 2002
Manufacturing – the output cycle
The chart shows an index of real output for manufacturing since 1975. The sector is highly cyclical – and there has been three recessions in the last twenty five years. In each case, it takes several years for manufacturing output to recover to the levels seen before recession struck.
The chart demonstrates a slow trend rate of growth of manufacturing output. Since 1980 the index has risen from 84 to 97 – a rise of 15% over 25 years. As a result, the share of total GDP accounted for by manufacturing has declined.
Some key background facts about British manufacturing industry
British manufacturing is particularly exposed to the full gale force winds of global competition.
- Output: Manufacturing now accounts directly for only 18% of GDP – but many service sector industries also rely indirectly on the output that comes from the manufacturing sector
- Employment: There has been a long term decline in industrial employment, manufacturing now accounts for only 15% of total employment, although many of these jobs are among the best paid in the economy. Most of the job losses have been in sectors such as steel, vehicles, and other forms of heavy engineering. Manufacturing supports many service sector jobs – for every factory producing machine tools there is a demand for designers, marketing and accountancy professionals, caterers, software designers and so on.
- Exports and trade : Around 60 per cent of manufacturing output is exported overseas. But the trade deficit in finished and semi-finished manufactured goods has grown steadily wider over recent years. However the UK still runs trade surpluses in areas such as petrochemicals, aerospace, alcoholic beverages, machine tools and pharmaceuticals. There are areas of manufacturing where UK manufacturing retains a comparative advantage in the global economy
- Productivity: Manufacturing has traditionally been the sector of the economy where the biggest improvements in productivity have been made. And manufacturing accounts for nearly three quarters of total business sector research and development
Regional economy: Manufacturing industry accounts for a varying proportion of total income and output for each region of the UK . In the West Midlands the North East and Wales , industrial output is a much larger share of regional GDP than in London and the South East – the health of the manufacturing sector is therefore important for regional economic balance in the UK
Manufacturing employment
There has been a large fall in manufacturing employment. Partly this results from
- The slow growth of output
- Rising labour productivity as capital inputs have replaced labour inputs
- The out-sourcing of production to countries with lower labour costs
- Other forms of contracting out
- Rising import penetration into markets
Globalisation and manufacturing
British industry faces severe competitive pressures from globalization.
Globalisation and trade liberalisation mean companies face increasing competition from goods and services produced in lower wage economies. The UK cannot compete on low wages, nor should we want to. The future of UK manufacturing depends on raising investment, and applying science and innovation, best practice and skills to create even better products. (Source: DTI “Future of Manufacturing”, 2003)
- Production moves East: Global manufacturing is switching to the East – most noticeably in labour intensive manufacturing – this applies to emerging economies in Asia and also those in Eastern Europe
- Rising global supply: Globalisation has created an enormous supply shock for manufacturing industries in the West – in many industries it has led to structural excess capacity, pressure on prices to fall and a trend decline in the pricing power of manufacturing businesses. Profit margins have come under pressure and this affects the rate of return on capital investment
Meeting the challenge
“If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it off them with some part of the produce of our own industry employed in a way in which we have some advantage.”
Adam Smith, the Wealth of Nations
- Switch in output towards higher value-added manufacturing which is less price and cost sensitive
- Increased investment in employee skills and in research and investment - The UK is deficient in areas of medium/high skills. Our vocational skills are at the lowest levels in the EU apart from Estonia . And R&D spending as a share of GDP is too low, In the UK, just two companies, both pharmaceuticals, undertakes 25% of total R&D spend.
- Emphasis on raising productivity – according to a recent study by McKinsey (2003) manufacturing has £280 billion in capital invested - its challenge is to improve the return (profit) it gets on that investment.
- Greater focus on non-price competition – including importance of innovation and design – note the quote below from William Baumol (“The Free Market Innovation Machine”) - “Under capitalism, innovative activity - which in other types of economy is fortuitous and optional - becomes mandatory, a life and death matter for the firm."
- Increased investment in emerging manufacturing technologies – including biotechnology and nanotechnology
British manufacturing industry does have a future – but it will be radically different from what we saw in our traditional industrial heartlands of years ago. The fear that the British manufacturing sector has been allowed to decline too steeply, and that, in the medium and long term, this will constrain our ability to export to global markets, increase the wealth of the population, as fast as those countries which have retained a larger manufacturing base or those countries experiencing rapid manufacturing growth and industrialisation.
Other A2 Economics Essential Revision Notes:
| Business Objectives |
| Causes of Unemployment |
| Current Account Deficits |
| Economies of Scale & Scope |
| Globilisation & the UK |
| Manufacturing Industry in the UK |
| Phillips Curve |
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