Business Secretary speech on industrial strategy at Policy Exchange
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26 October 2011 - BIS
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Good afternoon. Today I would like to talk about something
that I once made my name criticizing: the role of industrial policy in
shaping the economy.
Before becoming a politician, I spent some years as a trade
economist, at the Overseas Development Institute and Chatham House, and
working for the World Bank on trade issues. During the debates amid the
great upward surge of globalisation, post war, I contributed on the
free trade side. My first book was called “Protectionism and industrial
decline”, and its title alone ought to be enough to explain where I
During a period in government, including as a special adviser
in the DTI of the late 1970s, I saw the mistakes of heavily
interventionist government; picking winners which often turned out to
be expensive lame ducks.
Now, as Business Secretary, I find myself calling for, and
indeed designing, a New Industrial Policy. So does this mean I have
changed my mind?
The answer is no. I am still strongly against mercantilism -
the idea that exports are good and imports are bad. I believe in
competition. I still believe that the best route to economic success is
through openness: the free movement of goods, services, capital and
labour - properly regulated.
There is a more sophisticated alternative to the old
industrial policy which recognises that governments play a role in the
economy, which works with the grain of markets but is not passive.
Otherwise sectoral choices are made by default. Twice in the
last three decades, Britain has enjoyed periods with a strong real
exchange rate; partly a consequence of macroeconomic policy, but partly
a consequence of a ‘Dutch disease’ problem of a dominant tradeable
sector - oil in the early 1980s; financial services in the last decade.
Weak supervision of banking and loose fiscal policy contributed to a
strong real exchange rate and in turn to a badly unbalanced and
Looking ahead rather than back, our policy of financial
discipline isn’t just an end to itself but consistent with a story of
economic rebalancing. Our clear choice of tight fiscal and loose
monetary policy has resulted in two things necessary for a balanced
recovery. Short and long-term interest rates are low, which provides a
strong incentive to invest, while a more competitive exchange rate is
supporting exports. Investment and trade are the key drivers upon which
we want to base recovery.
Moreover, while financial credibility is an essential
precondition for success, it is not sufficient. Other choices still
have to be made. One of the first decisions I took was to put
manufacturing at the centre of our long term economic vision. I did so
because it is the most important tradeable sector and, if we are to
rebalance the economy, there has to be a shift of resources to
tradeable goods and services, from debt financed private consumption
and public expenditure. There are other important traded activities too
- creative industries; professional services; teaching overseas
students; tourism - and they are also important.
But manufacturing contributes disproportionately to overall
levels of productivity as well as generating half the UK’s exports of
goods; and is responsible for much of the business R&D in this
country and thus the innovation which drives growth. So providing the
right framework of incentives and support will have a material effect
on future rates of growth.
Clearly turning the tide on manufacturing will be no easy
task. In common with other industrialised countries – including the US,
Japan, France, and Germany – the share of manufacturing in the economy
has fallen. In the UK, however, the share of manufacturing in GDP fell
to just over 10% in 2008. This was a far more precipitate fall than in
competitor countries and Germany, in particular.
It would be unwise to promise that we could somehow reverse
all the structural factors that have led to industry’s declining share
of output and employment in Western economies - technological change; a
shift in demand to services; or tough competition from low-wage
producers in Asia.
But we have allowed the pendulum to swing too far. If these
trends were so inevitable, why was Germany only overtaken (by China) as
the world’s largest exporter in 2010? Why - thanks to manufacturing -
is the market share of Germany in the emerging BRIC countries four to
five times larger than ours? Why have we even been overtaken in these
markets by France and Italy? These are not irreversible trends. And the
growing prosperity of booming Asia will itself cause some rebalancing.
In real terms, the yuan is 50% higher than in 2005. Chinese wages are
rising 20% annually: Boston Consulting Group has predicted that this
might return millions of jobs to those Western producers which are
We cannot control these forces, but we do have a role in
ensuring that the UK is in great shape to compete for manufacturing
In many areas, years of overvalued exchange rates have left us
with a very competitive manufacturing sector in these areas where price
is not a critical factor and quality and brand count for more. Despite
the misconceptions that have been allowed to flourish in recent years,
Britain is still a country that excels at making things.
Where once we led the way as innovators in textiles,
shipbuilding and iron and steel production, we now have companies
blazing a trail in frontier technologies such as new materials,
robotics, software design and some renewable energies. I have recently
visited highly successful manufacturing companies in sectors which we
seemed to have written off, like bicycles and motorbikes; casting and
forgings; machines tools, steel making and large scale car production
(which you will remember was a sad joke a generation ago). So it is
important we explode the myth that UK manufacturing is moribund.
We have outstanding manufacturing companies, both large and
small. I have enormous confidence in British industry’s ability to lift
the British economy so I am backing our “makers”. British companies are
building global reputations in sectors such as pharmaceuticals; the
automotive industries - and not just Formula 1; chemicals; aerospace;
off-shore oil and gas supply industries, among others.
There are big new industrial investments taking place, even in
these difficult times. Airbus has opened its new £400m factory in
Broughton, North Wales in the past fortnight. Jaguar Land Rover is
investing £355m in a new engine plant in Wolverhampton. BMW is
ploughing £500m into its UK production operation. Nissan has chosen to
design, develop and make the next-generation Qashqai here because of
its success in Sunderland. The Thai company SSI is reopening the blast
furnace at Teesside.
But in other areas, we have allowed our latent capacity to
wither. When I visit some often superb, manufacturing plants the
machine tools are usually Italian, Japanese, German or Swiss – rarely
British. When visiting Dubai Ports at the London Gateway, I was
saddened to see no British-made cranes at that important development.
The skills and capacity have just gone.
A perspective of revival and recovery enables us to look at
industry in a new way. Traditional distinctions between manufacturing
and services are breaking down. Manufacturers increasingly rely on
sleek design, sophisticated IT or ingenious marketing as an integral
component of success. At the same time, companies selling leisure
services such as computer games, film making or music recording need
hi-tech equipment to reach consumers. Today, over half of all
industrial value added comes from intangibles, in particular from the
intellectual property protected by patents and copyright.
When we think of a brilliantly successful company like ARM
designing semiconductors, or Autonomy, now part of Hewlett Packard,
where does manufacturing stop and services start? Last week I met the
owners of Henry the vacuum cleaner, Numatic International Ltd; made –
manufactured - in Britain. But the company sell mainly on its brand,
not on its manufacturing costs. My constituency, Twickenham, is these
days an important part of British shipbuilding because of the computer
based design work we do.
Another new dimension to manufacturing is the growth of global
supply chains, contributing a component or an associated service rather
than making the finished product. In order to choose to base operations
in the UK, multinationals need to know that they will have local firms
of the quality needed to supply parts in a totally reliable way. This
is what the Mittelstand offers to Siemens, Bosch
and BMW in Germany. In the UK, years of underinvestment - and arguably
neglect from government- has seen a decreasing proportion of the supply
chain locally sourced, and a persistent trade deficit.
So where does government have a legitimate, and necessary role
in helping the UK revive manufacturing in its modern forms? I would
start with innovation and technological leadership. Markets supported
by intellectual property rights can take us a long way. But innovation
does not occur in a vacuum. A knowledge economy needs people with the
right training and education to develop technologies and apply them. We
have some of the best universities in the world, a strong record in
scientific discovery and some outstanding entrepreneurs. We need to
keep it that way, which is why we agreed a good settlement for the
science budget – and why, also, I am determined to keep the borders
open for bright people looking to come here to study, research, and
innovate. The recently announced funding for graphene development and
to enhance our e- infrastructure is part of that commitment.
But in the UK there has been a bigger gap between scientific
theory and business innovation than in, for example, Germany.
Supporting the industries of the future requires addressing some of the
market failures involved. That needs a subtle approach, in order to
avoid interventions that fall victim to political favouritism or
commercial vested interests and to insist on a proper appraisal of
costs and benefits.
That is why I have given such support to arms-length bodies
such as the Technology Strategy Board, and the Technology Innovation
Centres that it will oversee. These Centres will identify and support
core technologies, smoothing the path from original academic research
to commercially viable application. There is often a market failure in
the innovation phase of new technologies. Revolutionary technologies
are often too risky, or simply too complex or resource intensive, for
an individual company to make the necessary investment.
The TICs will provide university researchers and businesses
with facilities to collaborate to build prototypes, use large-scale
clean rooms or develop virtual environments to support product design.
This approach builds on the German Fraunhofer model and has been
recommended by James Dyson and Hermann Hauser.
A fortnight ago, I announced £140m funding over the next six
years for the first of these centres- for high value manufacturing.
Comprising a network of seven facilities, the manufacturing TIC will
help advance concepts in the fields of photovoltaics, biochemicals and
composites, to give a few examples. Separate TICS are planned focusing
on cell therapy and offshore renewable energy. Others will follow. This
is a down payment on a new approach to the support of innovation.
The second pillar of our new industrial policy comprises the
carefully managed use of limited public sector seed capital to leverage
in private investment. The £1.4bn Regional Growth Fund is providing
direct government support as a necessary catalyst for projects with the
potential to ramp up investment enterprise, in areas of the country
where there has been a historic reliance on the public sector for jobs.
The gearing is high, as it should be. The aim is to facilitate new
private investment not displace it.
There is also a market failure where it is not possible to
fund high risk but potentially profitable projects. This is the reason
we are capitalising the Green Investment Bank with £3bn from next year.
The novelty of low carbon technologies and the uncertainty
over the long-term future of these nascent markets means many projects
would not get off the ground without some, pump priming government
I recognise that these interventions need to be depoliticised
and rigorously appraised - to produce value for money and to minimise
dead weight (investment which would have occurred in any event).
A third pillar of our strategy is a focus on skills, centred
on apprenticeships. Despite the incredibly tough fiscal backdrop, we
have managed to finance a sustained investment in training, where it
delivers clear social benefits in terms of delivering a more skilled
workforce. There is a systematic problem that the private sector will
often under-invest in training since the benefits may accrue to
competitors. That is why we offer 50:50 funding. Provisional figures
show that over 326,000 Apprenticeships were started in the first nine
months of the 2010/11 academic year, a record in modern times,
including many in manufacturing or SMEs. We are looking at how to build
on the success of the Apprenticeship brand by ensuring that they are
employer demand driven, focussing on advanced skills and sectors, and
age groups with the highest social returns.
The fourth pillar is our work with major manufacturers to
rebuild their supply chains, which have suffered from the hollowing out
of industry. Sectors such as automotive and aerospace have an appetite
for increasing UK-based suppliers – a trend reinforced by the
competitive exchange rate and the disruption to supplies following the
Japanese earthquake and Tsunami. So we are collaborating with industry
to identify demand that firms here could meet. Decisions of this kind
are necessarily commercial in character, but we increasingly recognise
that there are externalities involved: leading manufacturers will be
more likely to invest in UK suppliers if there is a wider commitment to
supply chain reinvestment.
Planned new UK manufacturing investments and increased
appetite for UK supply create new business opportunities, so my
Department is looking at how government can support UK supply chains
across a number of sectors critical for future growth. We are taking a
flexible approach, looking at what might be done in terms of skills and
management development; and targeted support for capital investment and
R&D.I will be able to say more over the coming months.
We also recognise that in some sectors we should not rely on
established networks of business relationships. New internet based
technologies are necessarily disruptive and break up existing systems.
There can be no more one size fits all approach. But finally, there is
scope for the government to recalibrate its approach towards public
procurement to boost support for UK industry and its supply chains.
Currently, the regime is underscored by considerations of cost and EU
competition rules. These are sound principles - but applying them too
narrowly risks neglecting wider economic considerations and the
benefits of maintaining a competitive supplier base.
To be clear: I am not advocating a lurch towards protectionist
procurement or breaking international rules. But recent controversies
over procurement have raised real questions over the best way to
balance short term cost considerations with longer term value for money
and industrial competitiveness. To be frank, we have been too tactical
Let’s not forget, either, that a resurgence of UK
manufacturing depends not just on industrial policy but on broader
policies that support business. For this reason, we are devoting a lot
of energy to implementing a range of supply-side reforms needed to
build and maintain business confidence.
A broad policy requirement is a tax regime for manufacturing
which is ‘competitive’ since new investment in manufacturing is
potentially footloose. The Government’s action to improve the
competitiveness and stability of the UK tax system and cut corporation
tax year on year is part of the response. A particular sensitivity is
the potential impact of environmental taxation which inadvertently
risks ‘carbon leakage’ if energy intensive industries like steel,
chemicals and ceramics were to migrate, losing the UK products but
emitting carbon elsewhere. That is why the government is committed to
reducing the cumulative impact of energy and climate change policies
for these industries, as our competitors, such as Germany and France,
It is crucial for British industry that we promote the UK as
an open economy, welcoming inward investment and promoting exports
through active trade diplomacy, especially in the big emerging markets.
Where Britain has fallen behind is in the export performance of SMEs,
and that failing is being addressed by providing more varied export
finance facilities and support, with an expanded role for UKTI.
We are, in addition, dismantling unnecessary barriers that
stymie growth and hold back investment. The planning regime is being
liberalised and regulation and bureaucracy, the bane of businesses
large and small, is being cut back.
And we must continue efforts to generate more bank lending and
equity. Access to finance remains a key issue. For innovative and
growing manufacturing companies there is a gap in equity finance which
the new Business Growth Fund is designed to address.
The work happening on all these fronts is critical if we are
to achieve our aim of rebalancing the economy from domestic consumption
to trade and investment; towards tradeable goods and services,
Our new industrial policy is still a work in progress, and there is
substantial room to develop it in scope and scale in future. I am
confident that world-class manufacturing will once again be at the
heart of our economy.
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