September 2012 manufacturer confidence is up according to the CBI. Between August and September 2012 the overall UK economic sentiment index, as published by the European Commission, increased by 0.4 points to 91.9. More UK manufacturers thought that output would rise over the next three months than thought it would fall – the difference was 7% of firms. This is up from 0% of firms in August 2012.
The manufacturing sector has for the last 50 years, decreased as a percentage of GDP, to today at around 10.8% of our £GBP 1.4 tn economy. That is, manufacturing is worth £GBP145 bn (2011, Source: ONS), having been worth £GBP170 bn or 15% of GDP in 2001. The number of people employed in the segment has also tracked downwards to around 2.5 million, a little under 10% of the workforce (Source: The Economist World Figures 2013). Our trade balance is now around £100 bn – negative. But the overall real product of the manufacturing segment has underperformed services. And within manufacturing, the higher IPR, greater design, higher research spend type of manufacturing, that we identified as ‘HVM’ 10 years ago, is what we wish to discuss and promote at the 10th Annual High Value Manufacturing Conference at Murray Edwards College, Cambridge University on 14 November 2012.
Most people would say that a £GBP145 bn sector is a very interesting one! And this figure does not take into account the services revenues that are generated from it. It also doesn’t mention how much of this is exports, a high percentage, and thus is extremely important and health giving to our economy.
We have said for some time that this sector is an important one for the British economy. This remains so. What are the trends in business model and sectoral strengths? What is the value of a government-sponsored industrial strategy?
If you ask manufacturers, or “HVM” company leaders, they will tend to be in one of two camps. There are those who actively seek the R&D grants and for startups, “matched funding” that sometimes enables them to make the investments necessary to get the business going or grow, where without them, it seems impossible. And there are those who don’t want government “help” and feel that it tends to get in the way, creating more hoops to jump through, which tend to be artificial hoops that the business doesn’t align with.
For example, former RDAs would offer investment or matched funding if they could point to sufficient “innovation” measured by patents or some completely subjective and vague measure. So the company attempting to extract those investments or matched funds has to spend time framing their offerings in these terms, rather than focusing on core business innovation and getting routes to market sorted out. Typically, the process of filling out extremely onerous forms involves detailed costings, plans, forecasts which tend not to be asked for in the formats or sensible level of detail that the company actually holds them in. Thus, the government wastes more time of the entrepreneurs, and more money in the people processing these applications and monitoring progress. All that is friction. Public consumption in the UK is now at 23% of GDP. Investment (spending) uses up a further 15%. 18.5% of the workforce works for the government. (Source: The Economist). Diverting to HVM or subsidising green interests is effectively taxation without representation. The money from taxpayers is being invested in particular individuals and their companies, under the “management” of government, and indeed in government itself.
The private sector is creative, innovative and competitive and finds ways of expanding without the assistance or intervention of government and all within the government’s thrall.
The recent Funding for Lending is another intervention of government. We hear that it will take 18 months to set up and begin lending. It doesn’t appear to provide anything that solves the problems of lending that the banks themselves have been experiencing. How is it that the government lenders know better? Or are they lending at greater risk, to ventures that are less likely to succeed? Is the process more bureaucratic but less rigorous? Since the government led Funding for Lending amount appears to be about 10% of the funds available for bank lending, this is the tip of the iceberg. Will banks be more likely to follow on lending once the government has pioneered by lending to those unlendable enterprises?
What tends to happen when the government leaves things alone, is that good businesses find a way. And investors find ways to invest money in businesses. Crowdfunding is an example of this. Private sector companies have set up online mechanisms that allow a large number of investors or lenders to provide the needed funds to the entrepreneurs, so that they obtain a fair market valuation and funds, quickly and without so much bureaucracy. They also as a windfall, learn about how a sample of people feel about their value proposition and business idea.
Fundamentally, thinking of HVM again, it boils down to whether we feel that the government can effectively support a particular sector, and whether we feel that is morally right. When the government ‘helps’ it is redistributing taxpayer’s funds from general monies collected into the particular, in this case, of HVM companies. When the government leaves sectors alone, the parts of those sectors that are healthy, survive and thrive and those that are not, do not. Those released from it, are able to regroup and do something else that is healthy. And all the time, the government is shrinking in scope and cost, and increasing in transparency and decreasing in corruption, the business landscape for those healthy companies is improving, and they have less friction on them, making the space of companies that are healthy larger, as the friction decreases. Further, as the government scope and cost decreases, so do the levels of tax, and, ideally, the tax code becomes simpler and fairer. This way, the country becomes more competitive on an international basis, and one sees more and more foreign direct investment and this enriches the landscape for and number of those companies doing business from Britain.
It is therefore in this reversal against government spending, interference and complexity, freer markets, that, like a number of sectors, the sector of HVM could really thrive in the UK. HVM entrepreneurs will get on with it, without primary regard to the public sector, but they will be focused simply on growing their businesses through selling products to their customers.
Join a world-class line-up of keynote speakers all day at the 10th Anniversary High Value Manufacturing Conference 2012 in Cambridge on 14 November via http://www.hvm-uk.com