UK manufacturing and global finance

The phrase ‘British Industry’ is usually used in a doom laden article lamenting the ‘decline’ since the magnificent days when we were the workshop of the world.

This really annoys me.

You see, it’s just plain wrong. The fact is that our manufacturing sector has actually grown significantly in the last 60 years, how many of you knew that? Just looking at my chosen industry, the UK exports over a million cars a year, Jaguar Land Rover brought in over a billion pounds into the UK economy last year alone, I call that pretty successfully actually.

Are we being fed anti-manufacturing propaganda?

Consider this: When the Pound is high against other currencies we imports are cheap and our companies can’t export competitively, so we import more than export and the balance of payments shifts the wrong way. The terminology that the financial sector use to describe the value of the Pound is biased in their favour. They call it ‘Strong’ when in fact it would be more accurate to describe it as ‘Expensive’. When the Pound is lower against other currencies we can export fantastically well and shift the balance of payments in our favour, but they describe this situation as ‘weak’ when it should be called ‘cheap’.

 

There was a program on the BBC recently where that bloke from Dragons Den wobbled on about how the UK was still great as a world manufacturing force. But even his argument was deeply and obviously flawed. To summarize my understanding of it; there are three stages in getting a product to market: Design, manufacture and sales/marketing.

Their logic analysed the potential profit margin for each stage and suggested that design and sales had high margins, but manufacturing had only a slim profit margin. Which is usually true, but misses some fundamental points.

Firstly, in my experience, as soon as you divorce design from manufacturing you get worse products, quality suffers and there are more niggling problems to be sorted when a new product goes into production. This is because understanding how a product is made is vital to design. A typical problem I see a lot of is where a component cannot be removed for service because no room was allowed for a mechanics arm to get in. There are some cars where the engine has to be removed to change the spark plugs for instance. But even during manufacture if a component is troublesome to fit then it will be fitted badly, it’s really very simple. Just walking down the production line and seeing what happens is vital if the design is going to be right first time.

 

This separation of skills is running deeper all the time, not just here but world wide. A designer of engines must have excellent Computer Aided Design skills for sure, but this has to be backed up by a fundamental understanding of how engine work to avoid making silly mistakes that look good on the screen.

Personally I think the industry would be better off if every ‘designer’ had to build and race a kit car before they were considered for a job. Shame that’s not practical.

Another problem with ‘outsourcing’ production is that all the expertise generated from the immense amount of work needed to get a new product into production is also outsourced. This flow of essential knowledge away from the design can only leave the design facility weaker and the production facility stronger.

A good case study is the relation the UK has with China, some very effective partnerships have been set up where a product is designed and sold in the UK but made much more cheaply (due to the afore mentioned cost of the Pound) in China. But it strikes me that as China develops, all this product knowledge is building and it is an obvious step for them to eventually benefit from the design stage profit margin themselves and cut us out of the loop. Thinking that we will remain the best place for design when all the knowledge and experience is building elsewhere is tragically naive. China has a huge number of very talented designers so it can only be a matter of time before this element is taken from us too.

So this would just leave us with just the sales function, selling foreign products to ourselves. I fail to see how this can generate a net wealth in the UK. And the fact is that with an ever increasing percentage of sales being done over the internet even this function could be largely handled overseas.

In that TV program they suggested that it was a cunning idea to concentrate on the design and sales sector and outsource the manufacturing, demonstrating successful UK companies that have done just this. But then they said that although this model works very well already, it will have to work even better due to the poor balance of payments caused by all the imports! That would be the imports of the stuff we don’t manufacture here then? Rather a fundamental flaw wouldn’t you say?

 

My fear is that ‘finance people’ just don’t get it, they don’t understand the real world, they have built this fantasy world of virtual money that we all now have to depend on and it has no real substance. It can crumble just because of people getting a bit worried, sound companies can be destroyed due to share holder confidence collapsing without any material change in the way the company works. That is just plain wrong, where people work hard and well but loose their jobs for no real reason is morally wrong.

However, I also think it is wrong to suggest the complete opposite where the UK handles all three stages exclusively and has no involvement with other countries, after all we need to export and to trade with other countries to get raw materials that we simply don’t have. And besides, I rather like a cosmopolitan marketplace.

The fact is that the marketplace is now global, and all the better for it. As the total market size has dramatically expanded a number of UK companies have enjoyed greater sales volumes, the audience for our products is immense now. And also foreign investment in the UK by companies such as Nissan, Honda and Tata, has allowed expansion that was unthinkable when the companies could only draw on a UK fund.

 

But as the expansion is filled this current bonanza will settle out and eventually recede, more players will enter the market to serve the greater audience and competition will get every bit as hard as it was a few years ago.

European super-cars are being gobbled up by the new wealthy legions in the east, but as there is just as much engineering talent over there it wont be long before there are just as many Chinese and Indian super-car manufacturers too.

 

So the bonanza should be enjoyed, but we must plan for a harder future and get our manufacturing base in good shape to the tough competition to come. And part of this equation is ensuring the Pound is cheap enough to make our country viable.

I hope that there will be room enough for all countries to compete successfully, only those that have failed to adjust to the new reality will fail. It is up to us to ensure we are ready and fit for the fight.