A Podmore Review – Manufacturing Posted on March 23, 2012 Manufacturing our future: building a balanced economy on a secure manufacturing base, the Engineering Employers Federation, July 2009, downloadable, for free. Over the past ten years, our trade deficit has more than tripled, from £22 billion in 1998 to over £92 billion in 2008. We need a long-term vision for reducing the trade deficit and restoring the public finances to health by diversifying the economy and strengthening manufacturing. Sporadic or uncertain order flows from the government limit businesses’ ability to plan for investment in capital equipment, innovation and skills. For example, lack of either a long-term strategy or a steady order flow from the government in the rail industry has eroded its skills base and held back innovation. Government must work with the private sector to fund long-term investment in energy supply. Against the background of ageing power plants, a stream of reviews, consultations and white papers between 1997 and 2006 failed to reach clarity on the future of nuclear power. Governments have vacillated between ambivalence, scepticism and tentative backing, resulting in minimal private sector interest in building new plants here. We must meet our energy needs with a combination of renewable sources, nuclear power and fossil fuels. Building and maintaining this capacity will provide opportunities for manufacturers. Government needs to tackle the planning system, which continues to hold back development in a number of areas. Failure to do so will affect environmentally-focused growth areas, including the development of facilities for recycling and waste treatment. Although the size of the personal car market is likely to shrink, replacing existing stock with green vehicles will create long-term markets in hybrids, fuel cells and batteries. The Chinese government has already committed $1.5 billion to boost innovation in electric and hybrid vehicles. The coalition government should commit to buying only electric or low-emission vehicles for its car fleet. We need significant infrastructure investment, including schools, hospitals, utilities and transport, as well as new home builds and urban regeneration. Government has failed to encourage long-term investment in infrastructure. We need to put finance to work for the real economy, to focus on real investments, not on exotic financial products, and on long-term relationships, not short-term gains. The Turner Review summed up the result of over-reliance on financial services: “growth in the relative size of financial services within the overall economy … [saw] … activities internal to the banking system growing far more rapidly than end services to the real economy … [and] increased the potential impact of financial instability on the real economy.” The financial system must return to its core function of getting credit to businesses and consumers efficiently. London needs to remain a world-class financial centre; the economy will gain if it does. Today, small and growing manufacturers – those with fewer than 250 employees and less than £10 million in turnover – still struggle to find medium- to long-term finance to match their investment needs. The venture capital market for start-up and developing companies has also dried up. Any form of lending entails risk, and extending credit to a small business is one of the riskiest activities a bank can undertake. However, continued capital investment is the only way that manufacturing companies can remain competitive in a high-labour cost economy. Growing smaller manufacturing companies will require spin-outs and start-ups to have greater access to industry, government and financial sector support in order to overcome the financing and management issues of developing new technologies and growing businesses. So we specifically recommend creating a new Bank for Industry – a bank capable of financing medium- to long-term industrial investments and providing venture capital financing. The new Bank for Industry could be financed through the profits the UK makes as the government sells off its stakes in bailed-out UK banks. (Of course, the EU would try to stop us creating such a bank.) The Industrial and Commercial Finance Corporation (ICFC) was set up in 1945 by the Bank of England and the major British banks to provide long-term investment funding for smaller businesses. It was created because the banking and financial system systematically ignored the needs of manufacturing. Our tax system fails to recognise either the importance of capital investment to manufacturing or the advanced technologies and short lives of modern machinery. Manufacturers replace their equipment, on average, every eight years. Yet recent changes to the tax system mean that it can take a business up to 29 years to reflect the full cost of that investment. Constraining manufacturers’ ability to reinvest in capital equipment erodes their competitive advantage, forcing them to compete on labour costs – a battle we cannot win. Government failures have actively discouraged long-term investment in skills, innovation and modern machinery. A roller coaster ride of reforms, consultations and reviews has only added to uncertainty without addressing core problems. The lack of a long-term economic strategy makes it impossible for government to prioritise its investment in skills, innovation and infrastructure. We must give greater priority to promoting exports. While attracting foreign investment will remain important, reducing the trade deficit is an urgent priority. This means reducing our reliance on imports. So we must encourage new and existing domestic capacity in key sectors and technologies through public procurement and departmental industrial strategies.
