Saturday, July 10, 2010

We Don't Make Anything Anymore

On the starting grid

You know how our problem is that we don't make anything anymore? How most of our manufacturing base has already been exported to China, and that the government should damned well do something before the rest joins it?

Well, Tyler's local area is bucking the trend. Just down the road, McLaren Automotive is opening a brand new factory to build its brand new road-going sports car, the snappily named MP4-12C. If the car is a success, it's reckoned it will create thousands of new jobs.

Which is brilliant. Especially since it gives us some key pointers to the future of British manufacturing.

First of all, the McLaren sports car is no family runabout. It will be priced north of £150 grand, and BOM's motoring correspondent says it will be pitched at the same high-rolling market segment as the Ferrari 458 Italia and Lamborghini Gallardo. Production is planned to be just 1000-2000 pa (street value £150-£300m).

This is manufacturing focused on high-tech luxury goods, aimed at emulating the kind of global success achieved by the resurgent Rolls Royce, and capitalising on Britain's F1 heritage of speed and engineering excellence (oh yes). Critically, it is a high value-added product that will not be competing primarily on price and volume.

Second, it's happening in the already prosperous, and already crowded, Greater South East. The GSE's advantages of geography and skilled motivated workforce seem to have been critical, as presumably they were in BMW's decision to locate their new RR factory in genteel Goodwood, rather than our old friend Hull. As we've blogged many times, to get any new business up to Hull, you have to offer something even more compelling - much lower taxes.

Third, most of the new jobs - by a ratio of 2-to-1 - will come not in the factory itself, but from the spill-overs into the local economy (shops, healthcare, schools, etc etc). Just like the City, our world-beating manufacturers are the bed-rock that holds everything else up. Which is why we should praise and value them, not devise new ways of dragging them down.

Fourth, the real value added at McLaren will not be bashing metal. Indeed much of the actual bashing (or carbon fibre shaping as it is today) will be done elsewhere, often abroad. No the real value-added lies in the design, the management of the production process - especially quality control - and the marketing. Not, it must be said, areas in which British Austin Allegro manufacturing has always excelled.

And that's why we shouldn't necessarily be concerned by the long decline in UK manufacturing production as measured. To the extent we are exporting the commodity, low value-added, end of manufacturing we're not losing that much.

As you probably know, although China has become a major exporter, many of its products are manufactured under contract for western companies, using many imported components, and the percentage of value-added retained by China is quite small (it has been famously estimated that of the $150 cost of a Chinese assembled Apple iPod, only $4 actually goes to the Chinese).

And finally, that long looong decline in British manufacturing... the one we hear so much about... er... just a minute... where's it gone?

When you look up the actual stats, you get rather a shock. Because setting aside the current downturn, by 2007 UK manufacturing had reached the highest level of output in its entire history - even back when we were the workshop of the world. Here's the chart (the ONS stats only go back to 1948):


WTF?

Well, some industries, like textiles, have indeed seen a very pronounced decline. But others have delivered big growth. For example, Britain's world-beating pharmaceutical industry has driven an elevenfold production increase in the chemical and artificial fibres sector since 1948.

The fact is that when people talk about the problem with manufacturing, they're not really talking about output at all - they're talking about employment. Since 1950, despite the increase in output, employment in manufacturing has fallen from over 8m down to less than 3m - a big fall, especially when you remember that many of those job losses have been concentrated in particular regions.

But in truth, for Britain, high employment manufacturing is a thing of the past. Massive productivity growth - A GOOD THING THAT'S MADE US ALL RICHER - combined with globalisation, has blown these jobs away.

And instead of crying over the past, we need to find ways of rewarding the likes of McLaren for setting up in Hull instead of Woking (or better yet, get Merc to set up in Hull instead of Hungary). State direction won't do it. State subsidies are expensive and distortionary. The only real course is lower taxes and less regulation - just as we've blogged many times.

Yes, it would be much better to cut tax and regulation right across the country. But the pressing priority has to be some action in places like Hull.

What McLaren shows is that Britain can still attract manufacturing investment. We can still make things. And we can still create real jobs outside the financial sector.

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