15 May 2009
Manufacturing Confidence
Good evening, ladies and gentlemen.
Thank you to the Economist Intelligence Unit for inviting me to speak here tonight.
I was especially delighted that they asked me to speak about a topic very close to my heart: “Manufacturing Confidence”. This gives me a great opportunity to present my views on the future of manufacturing, drawing on recent experience as Chairman of BAE Systems, the largest manufacturer in the UK and the third-largest defence manufacturer in the world.
However, when I sat down to work out what to share with you this evening, I quickly realised that my allotted topic, “Manufacturing Confidence”, actually has two meanings.
The more obvious is about the level of confidence felt by manufacturers. But the phrase could also mean you’re trying to create - or manufacture - confidence, in a situation where it’s currently lacking.
Well, despite chairing Britain’s biggest manufacturer, I have no intention of manufacturing anything here tonight. Certainly not a false feeling of confidence. But what I will do is offer you a stark but heartfelt view of the reality of today’s marketplace, and explain why I remain optimistic over the future of UK manufacturing.
So first, today’s reality, which is that we’re living through a tumultuous time for all businesses, characterised by massive uncertainty and plunging consumer confidence. A truly global recession. Doom and gloom on every front page, whether newspaper or website. A downward spiral with seemingly no end in sight.
Everyone is hoping for a recovery in 2010, but no one is really sure. The unspoken fear is an L-shaped recession with no upturn, like Japan in the 1990s.
In Europe and the US, even the most experienced members of the manufacturing workforce are scratching their heads, befuddled. Collectively the current working generation has no personal experience of an economic collapse of this magnitude, because the 1930s depression was well before our time.
Here at home in the UK, the outlook seems even more dire. French president Nicolas Sarkozy recently joined in, helpfully telling us that UK manufacturing was effectively dead. Merci bien, Nicholas.
Even The Economist talked in February about “Britain’s Fallen Star”, questioning whether the UK - regarded only a few years ago as a model economy for the world - could ever regain its past prominence. That article commented that in the last quarter of 2008 UK manufacturing output suffered its sharpest fall since 1974. And I thought it was banks and financial institutions that were in the worst shape!
Well, manufacturing is often cited as a bellwether of the UK economy as a whole. And there’s no doubt that UK manufacturing is in a period of flux that began well before the recent financial crisis.
However, most people don’t realise that UK manufacturing industry still contributes 13% of the country’s GDP, which is more than the financial services sector.
Despite this resilience, the seemingly relentless advance of globalisation has fuelled a widespread perception that UK manufacturing is doomed. Respected commentators, The Economist included, correctly point out that producing goods in China or India can be up to 20 times cheaper than in the UK.
Such statistics have fuelled a debate about the “Race to the bottom”, as the search for comparative advantage drives industrialised countries to relocate more and more manufacturing to Asia and developing nations elsewhere.
The logical endgame is that countries such as India and China could hold a stranglehold on the world’s manufacturing capability, especially in commoditised goods, reflecting a massive transfer of wealth and capability from the West to the rest.
This line of thinking is widespread. But I think it misses a vital point. As Thomas L. Friedman said in his book The World is Flat, "The Indians and Chinese are not racing us to the bottom. They are actually racing us to the top. What China's leaders really want is that the next generation of underwear and airplane wings not just be ‘made in China’ but also be ‘designed in China’ or, most importantly, ‘dreamed up in China.’'"
Put simply, it’s not about cornering the market in manufacturing, but in talent and Intellectual Property.
This is why the Chinese are trying to build education institutions to rival Oxford and Harvard. And why countries such as India and China are working to keep more of their top graduates at home instead of seeing them move to the West. It is also why more companies are moving their high-tech software development from the US and Europe to places like Bangalore.
What’s does all this mean for UK manufacturing? In my view, it signifies that the doom and gloom are being overdone.
To compete through and beyond this global recession, UK manufacturing, and UK businesses in general, need to focus on where and how we can compete most effectively in the global market.
And, whatever the doom-mongers say, the UK does have competitive advantages over countries like India and China. For example, we’re already a world-leading exporter of high-tech goods. In 2006, 25% of the goods exported from the UK were high-tech, compared to 22% of the USA’s exports, 15% of France’s and 11% of Germany’s. Overall, UK manufacturers contribute 75% of all business Research & Development in the economy.
What’s more, we have a first-class education system and a highly-educated work force. We have a global business culture, infrastructure and relationships. We have a legal system that is admired and applied worldwide, to support business contracts, resolve conflicts, and protect intellectual property. And we have a history of entrepreneurial growth and innovation, plus a high-tech infrastructure base.
Perhaps most importantly, we have a history of accomplishing great things without significant resources or a large population. In other words, a history of winning worldwide purely through “know-how”, this is our real competitive advantage and we need to protect it with all our capacity!
Given these strengths, I believe that UK manufacturers can compete and win in the future in high-tech and high valued-added manufacturing - sectors where the differentiators are the high performance and quality created by skilled designers and technicians.
This success could come in areas of technology where the UK has already set the pace, ranging from pharmaceuticals to unmanned aircraft, from silicon design to Bluetooth and from fuel cells to plastic electronics. Or it could be on the new frontiers, such as information and communication technology, cyber security, biotechnology, new sources of energy, and nanotechnology.
This point was brought home to me in January of this year, when I had lunch with a group of young business leaders at the British Ambassador’s Residence in Muscat, Oman. One of Omanis there told me: “If I need something built that is highly technical or requires high quality, I will hire a British firm. If I have a low-tech project to be done at the lowest cost, I will hire a Chinese firm. British firms should not even try to compete solely on cost.”
However, we cannot be complacent. To keep competing and winning through our “know how”, the UK needs to invest right now in the capabilities it will need in the future.
This requires a concerted and sustained effort to fund and inspire our young people to be future leaders in science, technology, engineering, and maths. Only this will enable our upcoming generation to see the fun and excitement of a career in engineering and manufacturing, and to appreciate the value it can add to their community, the UK, and the world.
To achieve this, we in the UK must collectively stop worrying about the march of economic history, and accept the inevitability of a globalised world with a level playing field. And we need to start preparing ourselves to compete on that playing-field, by applying our strengths in ways that create long-term wealth for the UK economy.
Most importantly, we need to invest in our youth, so that our children and grandchildren can achieve global success in tomorrow’s highly competitive world.
I’m glad to say that last month brought evidence that the Government supports this view with the announcement by the Department for Business, Enterprise and Regulatory Reform of a new competitiveness strategy entitled ‘New Industry, New Jobs’.
The strategy was then backed up in the Budget with a £750 million strategic investment fund, targeted at improving skills in key areas such as low-carbon business innovation, strengthening the UK’s capabilities in R&D and innovation, and industrialising the resulting innovations in commercially successful ways.
The overarching objective - which I fully support - is to ensure the UK emerges from the downturn in a stronger position to drive economic growth in an open global market.
However, as Peter Mandelson has said, this should not be the remit only of BERR. I would agree with him that, it should be the job of all Government Departments to see industrial policy in a wider, strategic way, matching the Government’s influence to the strategic needs of UK business.
As Lord Mandelson has made clear, this means the Government making smarter, more strategic procurement decisions, recognising its powerful role in shaping the market. Procurement should encourage innovation, thereby helping to drive new technologies, skills and processes.
All of this aligns closely with what we in industry are trying to do. The key is making sure that the Government does what it says it will do – and we will support them in doing it, because we think the case is unarguable.
Why? Well, take a study by Oxford Economic Forecasting, showing that it makes sense to invest in defence, where 39% of jobs require at least NVQ level 4 qualifications – twice as many as in construction. The research also identifies Aerospace as one of the most R&D-intensive sectors in the UK economy, with an economy-wide social return on aerospace R&D of around 70 per cent – well ahead of manufacturing as a whole.
In fact, investment in Research & Technology in defence has traditionally driven innovation not just within the defence sector, but across many other industries. Investment in defence also drives exports, which are key to future economic growth.
The message is clear. The UK’s competitive edge is at its greatest in highly-skilled industries with a proven track record of developing new technologies and taking these innovations into the wider market, including through exports. Defence and aerospace is just such a sector.
To the Government, I would say this: short term stimulus measures have a role to play in fostering recovery. But investment in the highly-skilled industries that will drive innovation and exports over the long term is even more important. As the Prime Minister said this morning, the UK’s continued investment in Eurofighter Typhoon will, “create new jobs in advanced manufacturing that Britain needs to emerge stronger and fitter from this global downturn.” I couldn’t have put it better myself.
Before I finish, I’d like to leave you with the words of Rajesh Rao, a young Indian entrepreneur who started an electronic-game company in Bangalore. Today his business owns the rights to Charlie Chaplin's image for mobile computer games.
In a recent conversation with Thomas L. Friedman, Rao commented that instead of complaining about outsourcing to places like India and China, “Americans and Western Europeans would be better off thinking about how you can raise your bar - and raise yourselves into doing something better.”
That’s what everyone in UK industry should be striving to do. And I know we certainly are, at BAE Systems.
Thank you.
