Industrial strategy: Next steps
At this difficult stage of the recovery, it must now be clear to everyone that Britain needs to build a different kind of economy. We need one…
At this difficult stage of the recovery, it must now be clear to everyone that Britain needs to build a different kind of economy. We need one that benefits from the growth of Asia, rather than finds it a threat. One that is led by business investment, not property speculation. One that spreads prosperity throughout the country, not just in one corner.
We cannot just hope it happens naturally. That is why we need a radically different approach to the choice we make in Government. In other words, we need what I would call a proper industrial policy.
I set out the basic framework for such a policy last October. Today, I want to put some more flesh on the bone by focusing on the role Government can, and should, play in relation to specific sectors, technologies, and public procurement.
But first, let me briefly reprise my argument. For people of a certain age, the cack-handed interventionism of the 1960s and 1970s still casts a baleful shadow. The intent back then was defensive: on arresting de-industrialisation and social policy goals. It was based back then on the assumption that Government Ministers and planners knew better than markets, and it led to the proliferation of unaffordable subsidies and state aids to “winners”, who often proved to be expensive losers.
Times have changed. Globalisation and the rise of BRIC countries have intensified competition. Hubris, followed by disaster, in the banking sector has destroyed the credibility of a particular growth model and an uncritical belief in self-correcting markets. And business is telling me that the UK is missing big opportunities in the global market place because we have swung too far away from industrial policy.
The Government is united around an economic strategy which attracts widespread support. The commitment to deficit reduction remains central; we can achieve little if the country isn’t credit worthy. But the only way we can escape the trap of high levels of private and public debt is through growth. Growth has to come from business investment and from internationally traded activities in open markets. Manufacturing is central to that - a point made emphatically at last week’s summit in Bristol. But manufacturing cannot carry the economy on its own with around 10-12 per cent of GDP - albeit with a much higher contribution to exports, R&D and productivity growth.
What I hear, however, from businesses is the need for a clear and confident message about how we will earn our living in future. Now, after the best part of a decade in Shell, I know enough about the difficulties of long-term planning not to be seduced into believing that we can predict economic cycles and market driven competitive forces of the future. But that experience did also teach me the importance of thinking a decade or more ahead - something that politicians are not especially good at.
But we have to get better, because a passive and short-term approach to market forces is not sufficient for creating long-term industrial capabilities. Difficult as it is, uncertain as it is, I believe we have to try to develop a strategic vision for where our future industrial capabilities should lie, and how to deliver it.
Sectors
A large part of government policy is what we call “horizontal” - in other words, not sector specific: a tax regime which encourages business investment and hard work; investment in physical infrastructure and in soft infrastructure - knowledge and education; creating a business-friendly approach to regulation; and financing arrangements which deliver capital to business. We can argue about which of these factors matters most. They are all important. But not, I think, sufficient.
This takes us to the issue of sectors. Governments have been scared off by fear of being accused of “picking winners”. That is a legitimate concern. But the Government also makes choices every single day that affect individual sectors. And there is a case for being more explicit about the choices we are making and linking them to a clearly articulated economic strategy.
I believe we need to be - and be seen to be - fully behind our best performing sectors: those with the strongest trading figures and a proven commitment to innovation. This is not straightforward - the boundaries between services and manufacturing are increasingly fuzzy and fluid, and technologies develop with disconcerting speed.
But many industries do have long gestation periods for R&D and investment. For industries in this position, what’s required is a planned, proactive approach. Successful companies like Rolls Royce have taken a contrarian stance against the short-term pressures from equity markets and the City. But industrial leadership of that kind has been rare. As a country, we have scraped by in the past - responding to crises as they occur, or waiting to see what the markets dictate - but making choices essentially by default. This can no longer be regarded as sufficient or satisfactory.
The automotive industry is emblematic of a positive, viable alternative. The Automotive Council facilitates sustained, high-level conversation among industry and government, and secures agreement on long-term strategy. It’s working on generating stronger and more competitive supply chains, higher level skills, and a commercial environment that remains an attractive proposition for automotive businesses and related industries. It is collaborative, but not a cartel. Together we are working to ensure that the UK does not miss out on growth opportunities in the future.
A generation ago the automotive sector was a bit of a joke; strikes, poor management, it appeared to be in irreversible decline. And yet the sector has been transformed. Labour relations are constructive. Companies and university research teams are working together on new technologies. The Government is helping the industry to address skills gaps by funding apprenticeship places, including higher apprenticeships at degree level.
More than 40 companies manufacture vehicles in the UK, ranging from global volume car, van, truck and bus builders to specialist, niche marques. In all, over 3,000 companies, directly employing 135,000 people, are active in the sector, generating over £10 billion for the UK economy annually - while the related retail and service sector brings in a further £22 billion each year. On top of that, the UK’s motorsport industry brings another £6 billion to the UK economy annually.
I acknowledge that one of the better things I inherited from my predecessor was the Automotive Council. The clarity that it brings has helped foster the confidence for others to invest. Ford is putting £1.5 billion into R&D and manufacturing over the next five years, with a focus on low-carbon technologies. Similarly, Nissan is investing more than £420 million in building the electric LEAF and an associated battery factory in Sunderland, while Toyota is already producing Europe’s first mass-produced fully hybrid car and engine here in the UK. Planned new investments by Ford, Jaguar Land Rover, Nissan, Toyota, BMW and Bentley total over £3 billion.
The Government has promised £400 million over this Parliament to support the development and growth of ultra-low carbon vehicles, and the Technology Strategy Board is supporting £250 million worth of low-carbon research, development and demonstration. Supply chains are being repatriated because of dissatisfaction with offshoring, and a more supportive exchange rate. And the automotive sector will be able to bid for funding to support onshoring and growing their existing UK supply chains through the £125 million Advanced Manufacturing Supply Chain Initiative.
To suggest that the UK automotive sector is entirely back on track would be naive. Car manufacturing in the UK hit a 16-month high in January, but there’s some way to go to match production prior to the global slump. Car exports, meanwhile - and they are the UK’s number one manufactured export - are almost at an all-time high and evidence suggests that UK-manufactured cars are winning market share from others. But, there is serious over-capacity in Europe, one of the main markets.
At the same time, there’s no question that we’re heading in the right direction - as evidenced by both investment and production. Industry and Government will continue to work together so that the UK does not miss out on the growth opportunities which lie ahead.
This week, in fact, I’m again heading to the United States to talk to leading manufacturers, following on from a visit to Detroit a short while ago. I’ll be encouraging them to strengthen their base in the UK.
I’ve highlighted the automotive sector, where we have made explicit choices, though I could just as easily have chosen life sciences, which we are nurturing though closer links to the NHS and the opportunities it offers for innovation and clinical trials. I could have chosen aerospace - a major success story for the UK, through Airbus wings, Rolls Royce engines, composite research and specialist companies like Bombardier in Belfast. But it is an industry which depends on long-term horizons and government support for R&D. Indeed, we will need to reinforce the UK’s commitments in order to preserve and expand our share of work on the new generation of civil airlines. Or I could equally have chosen creative industries - a loose grouping of activities from media to music and film, from ICT to fashion and design - which have achieved an enormous amount with little government help but which are now coming together to seek supportive policies on training, financing and intellectual property rights.
Let me point to another area where I think we could - and should - do more.
Late last year, I was in Aberdeen to visit some of the companies that make up our world-leading oil and gas sector. Let’s not forget that this industry is still in the heavyweight division - employing 450,000 people, investing £13 billion last year in capital development and delivering in the order of £30 billion in 2010 in exports or import substitutes. Over the next five years, oil and gas is projected to require an additional 50,000 employees - primarily in engineering and construction, but also operations, equipment supply and technology development - potentially more if Shale gas takes off.
What was clear from my discussions in Scotland and elsewhere is that this sector - like several others - is keen for the Government to help it re-energise its supply chains, in fields such as sub-sea technology. These businesses, mainly SMEs, already employ 100,000 people - and many of the technologies they’re working on, and the specialist skills they utilise - offer low-carbon solutions and are interchangeable with the nascent green offshore industry. It is crucial that we make the most of these opportunities - coordinating the various levers of government machinery to that end.
Next month, the Climate Change and Energy minister Charles Hendry and I are to chair a meeting involving operators and supply chain firms, to see how - together - we can support this important industry. Smaller companies feel, not unfairly, that they’ve been somewhat taken for granted in recent years. I’m determined to do away with that perception and to exploit the sector’s full potential, including various spill-over benefits.
Pulling those threads together, it is clear that strategic leadership - as is now being provided by the likes of the Marine Industries Leadership Council, the Industrial Biotechnology Leadership Forum and the Aerospace Business Leaders group, which I chair - is necessary for investor confidence. It’s necessary for addressing skills gaps and for prioritising R&D spend.
These challenges require Government to align our various levers, including regulation, public spending, communication and procurement, to support specific sectors. Other countries - Germany, Korea, Singapore - do it already in a more concerted fashion, and we need to catch up.
Technologies
Another crucial lever government can use is support for technological innovation, and here too we must provide a clearer vision for how we intend to do that. The US, France, Germany and China have all responded to the global recession by investing additional resource in science and innovation, increasing the competitive pressures on the UK.
Supporting the industries of the future requires addressing some of the market failures involved - especially in the innovation phase. Government has a legitimate and important role in making choices and supporting core technologies, smoothing the path from original academic research to commercially viable application. Revolutionary technologies are often too risky, or simply too complex or resource intensive, for an individual company to make the necessary investment. Specifically, markets do not work well where there are high failure rates - the proof of concept issue - and where technologies need to be proven to operate effectively in real operating environments: hence the need for large scale demonstrators. For Government, there is a significant role here.
This role involves a willingness to make choices about the technology areas where we believe the UK should have a world class capability. The Catapult Centres network will bridge industry and academia to support businesses developing and commercialising new technologies. The first Catapult, in high-value manufacturing, is now fully operational, and we are investing £140 million over six years to support its work. 2012 will see us create Catapults in offshore renewables - which I launched in Glasgow a fortnight ago - as well as cell therapy, satellite applications and the connected digital economy. Two further technology areas will be announced soon, with the full network completed and fully operational in 2013. By committing to invest in each Catapult Centre for 5 years, through the Technology Strategy Board, we’re transmitting a clear signal of intent.
We are also building on the legacy of support for science bequeathed by Lord Sainsbury and others - maintaining, in difficult circumstances, the £4.6 billion ring-fenced science and research budget, much of which goes to fundamental research. And since December 2010, we’ve delivered a £495 million increase in capital funding.
And we have committed £50m to a graphene research facility in the UK, positioning us to be the global leader in applications using the thinnest and strongest material ever discovered.
So our response to this challenge is not insignificant. And measures such as those I have mentioned are necessary to improve confidence among business and investors.
Procurement
There is a connecting thread between sectors and technologies around the need for strategic, long-term thinking about supply chains, and in particular the role played by public procurement. Even in sectors where government is a minor customer, the manner in which the public sector procures has important symbolic value - as a “first mover”, for instance.
That’s why, for example, we set out in November’s Autumn Statement that the Government - starting this April - would produce public procurement pipelines for each industry sector, to be updated twice a year.
This work is already underway in construction. Despite more than 300,000 job losses in construction over the past three years, there are still almost 2.7 million people working in the sector, both company employees and the self-employed. Students of the 1930s will know that construction was an important ingredient in our national recovery.
By publishing a forward pipeline of public infrastructure projects we are providing certainty and enabling investment, and clarifying the national requirement for new zero-carbon homes from 2016. The latter will reduce costs on house builders, but will still require innovation from the sector and better integration of existing and emerging green technologies.
Public sector spending shapes markets and influences supply chains, whether we like it to or not. In the past, we haven’t fully considered this. We have been too transactional, short-termist, risk averse and costly in implementing European Union procurement rules. By contrast, there is evidence that our key competitors in Europe, to varying degrees, view procurement as an integral part of their industrial strategy.
This government will change this unnecessary emphasis on formalism and legalism. We believe Government should be a responsible customer, developing a collaborative and considered long-term relationship with our supply chain. We will work with industry to identify future areas of need and align our various levers to address these gaps to ensure future growth.
For example, the National Infrastructure Plan identified 40 priority projects for government. Looking across the range of projects, it is clear that there will be demand for tunnelling capability to deliver these costs effectively. Crossrail have already launched a tunnelling academy to upskill workers and this approach is one we could look to replicate in other sectors. There are some really big opportunities on the horizon, including High Speed Rail and other innovations in the transport sector, and we need to help UK companies position themselves to be able to compete effectively for these contracts, strengthening their supply chains, and removing the obstacles that might otherwise weaken our case. Which is why Justine Greening and I will jointly chair a Rail Sector Roundtable to help maximise the sector’s ability to compete effectively for lucrative contracts.
Other priorities include greater transparency of procurement pipelines for the country’s future energy needs. The Franco-British Summit and Rolls-Royce- Areva partnership, signed on February 17th have given impetus to the nuclear sector, and I welcome the Prime Minister’s statement that he wants the majority of the content of new nuclear builds to be manufactured, supplied and engineered by British companies.
I do not pretend that this is easy. As we currently see in defence procurement, there are conflicting pressures to buy strategically from UK firms, but also to save money by buying the cheapest equipment off-the-shelf from overseas.
Conclusion
But through sector-specific policy; clear choices around technologies; extracting the full value of the government’s role as the country’s largest customer: these are key elements of a modern, relevant industrial policy. There is obviously room to develop its scope and scale, for it is central to our plan for economic recovery and rebalancing.
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