A paper written on 25th March 1993, but not originally for general publication. It is included here because it shows the author’s progress of thought on this subject and the time scale.
1 Change in Establishment View about Manufacture
Alarm about the state of British manufacturing has now gripped all but the most unreconstructed City circles, but the alarm is largely inchoate. Barely five years ago political, financial and journalistic circles maintained almost to a man that a rapid decrease in manufacturing as a proportion of the gross domestic product was in some ways “natural”, even perhaps the hallmark of an advanced economy, where Britain would once again be pointing the world towards its future. With a trade gap of £15-20 billion in prospect for the recession year of 1993, following on an accumulated deficit of over £30 billion from the previous two years, this proposition is exposed as the ridiculous viewpoint it always was. In three years then, in the depths of a demand-based recession, the average British family unit has accumulated a foreign debt of around £2,500 or 15% of its annual income. Before a remedy can be proposed it is necessary to analyse briefly why the proposition about the relative unimportance of manufacture is, and always was, so absurd, as this writer and a few, but very few, others have argued over the years.
2 The importance of Manufacture for Britain
Broadly any nation can make a living in the world from four natural resources – its land, its sea, minerals under the land or sea and its brains. For a country with nearly 60 million people, living on about 60,000 square miles of reasonably habitable and cultivatable land above 50 degrees North, having only one significant mineral resource (oil), its brains will have to provide the bulk of its income. Even a 50-100% tariff on food form tropical and subtropical regions of the world has not discouraged the population from importing a massive percentage, possibly 30%, of its food from these regions, while living and working for 48-50 weeks of the year above latitude 50o North and subject to 30-100 inches of rain per annum will ensure a massive deficit on tourism.
Oil and gas extraction contribute around 2.5% to national income – a proportion which is likely to decline. Oil and gas extraction in UK waters, and mineral extraction generally, pose a particular problem in another sense however and that is that the available price is set overwhelmingly in regions of the world where extraction is fundamentally easier, so that relatively small price shifts can close a large portion of the British industry down overnight. The coal industry poses the present example, but world price reduction of $5 per barrel would threaten half of North Sea production. There is no salvation, nor has there ever been salvation, in North Sea oil.
2.1 Britain’s dependence on brains
A major objective of national economic policy – as for any prudently managed business – must be to reduce the vulnerability of the nation’s economy to factors beyond its control even – and this is a key point – at some sacrifice of short-term advantages. For this and the preceding reasons Britain is dependent on its brains and always will be for the vast bulk of its income. Many will nod agreement and add “skills” but here it is worth recalling a phrase of King Alfred, written (in English) almost exactly 1100 years ago: “That which is done unthinkingly cannot be reckoned a skill”.
2.2 The Manufacturing Multipliers
The fundamental reason for the importance of manufacture in Britain’s economy is that via its enormous replicating ability it is overwhelmingly the vehicle for brains – German brains, Japanese brains, American brains – and potentially British brains. It is for this reason that the overwhelming majority of traded products are and will continue to be manufactures. Using data from the chemical, computing and aerospace industries certain ratios can be established which may be termed the manufacturing multipliers:
M1: One unit of design effort embodied in capital plant provides about 40 units of saleable product.
M2: One year of designer’s effort embodied in capital plant provides about 30 man-years of semi-skilled employment.
Contrary to received wisdom the values of M1 and M2 indicate that manufacture, in Britain’s geographical situation, is both the main engine of wealth and directly and indirectly will continue to be its main source of wealth creating employment.
Of course for M1 and M2 to apply at their maximum values capital must be forthcoming to embody the designers’ efforts – in a word his brains – and the capital must be managed efficiently.
2.3 The Principal Reason for British Failure in Manufacture
While much attention has for 20 years or more been focussed on labour productivity, there is abundant evidence that it is capital inefficiency in both senses – the embodiment of brains in the initial investment and the subsequent management of that investment – which is the most important factor distinguishing British manufacturing industry disadvantageously from its chief rivals. Because funds available for reinvestment are particularly sensitive to capital efficiency, practically the whole of the shrinkage of British manufacture relative to its principal competitors can be attributed to this feature which is today the responsibility solely of corporate management. That there are baneful influences in Anglo-Saxon capitalism bearing down on British managements is indeed true, but will singular and outstanding exceptions, British corporate managements are composed of men whose mentality is that of traders – people who are happiest when buying other companies’ technology (i.e. their brains) and markets, using money borrowed from banks and shareholders – rather than applying themselves to the hard graft of thinking, analysing and developing their own technology and products. While there are many examples to choose from, that of BMW is one of the most instructive. Here is a company which 30 years ago was about the size Jaguar is today, whose subsequent organic growth to about half a million vehicles per annum owes nothing to City-type expertise, but everything to the services of a dedicated and determined management, schooled in the technology of car design and manufacture.
2.4 Scale of the Failure in Manufacturing
Overall the hard fact must be faced that by and large the leadership of British industry has in the last 30 years or so, with as I have said outstanding exceptions – pharmaceuticals and chemicals among them – been a gigantic failure. It has allowed itself to be expelled from whole areas of manufacture – machine tools, printers, copiers, plastics machinery, instrumentation, electromechanical gear of all descriptions, heavy trucks, most domestic equipment, heave construction equipment and a whole host of everyday items.
To answer those who say market losses were inevitable, it is worth reflecting that if Britain had the same share of world manufacturing as France has (about 7%) it would have a trade surplus bigger than its current deficit and unemployment well below a million. It is a significant commentary on political attitudes that reference is always made to Britain’s share of world manufacturing trade (about 8.5%), but it is total manufacturing that counts.
Because the source of failure on the current scale is attributable to the corporate management class, heavily influenced by the financial system, and because something so entrenched will neither be changed overnight, nor even be inclined to recognise its own failings, the best that can be expected from it over the next ten years or so is to hold on to Britain’s existing world manufacturing market share (4%). Even this objective will require a major shift in attitudes among those presently in control. The significance of Japanese investment is that it injects just the required change of attitude, but the injection is essentially that – a projection of Japanese corporate attitudes, not a change in British ones. However at best this will, for the reasons given above, only keep Britain in permanent trading deficit – which will have to be paid for eventually by the gradual realisation of its overseas assets (basically the 1980s’ oil revenues) or the progressive sale of domestic assets (chiefly companies and real estate as found on the West Coast of the USA and Canada) or both. Just as serious a consequence will be the institutionalising of massive (around 10%) unemployment (the present levels is about 15% of genuine jobs).
3 Radical Change
It is the view of this paper that such a prospect for a great country is not to be contemplated, that the threat to our survival as a nation is greater than any in our long history, and that being so, every current belief, shibboleth, alliance, relationship, commitment, practice, must be subjected to the stringent test: “Does it help or hinder us in our fight for industrial survival?” and if it hinder us, it must be discarded or bypassed. Everything, but everything, must be subordinated to winning the industrial war.
3.1 A National Objective for Manufacturing Expansion
Wars are won by setting difficult but attainable objectives. This paper proposes that over an eight year period manufacturing industry should be expanded by 35% net. This would bring manufacturing’s direct share of GDP to about 30%, broadly the figure which applies to Germany.
This would add £50 billion to GDP directly and via the multiplier add another £50-100 billion in total. It would require at current manufacturing technology, additional investment of around £120 billion, or about £15 billion per annum. This corresponds to an approximate doubling of current levels of manufacturing investment. It represents however a mere £500 per insured adult per annum and should be compared with the nearly £2,000 per insured adult per annum which Germany is paying (or rather not paying) for bringing former East Germany up to West German levels.
At current technologies the additional employment in manufacturing industry would be about 0.8 million, which merely replaces the loss in the last six years. Further employment of 1-1.2 million would be created in the services supplying the new manufacturing industries, making 1.8-2.0 million all told. In essence the main part of our chronic unemployment problem would be solved.
3.2 How the objective can be achieved
3.2.1 Human Resources
At current technologies and wage levels an investment of £15 billion per annum over eight years requires about 120,000 qualified people to design, construct and subsequently run it. This is about half of the current membership of the major engineering institutions. However only 50% of engineering graduates enter industry. That is about 15,000 per year who do not. Thus contrary to received opinion there is a vast pool of inexperienced, but qualified engineering professionals in the country, and it is probable that a disproportionate number of the ablest have entered accountancy and finance which at the end of the day create nothing. In addition there are probably 100,000 qualified and experienced engineers in the prime of life, eking out a living as consultants, advisors to government quangos, reluctant teachers and refugees in the further and higher education sectors. In addition the country is awash with unemployed time-served experienced mechanical craftsmen of all descriptions, many of them from defence-related industries under the threat of further large-scale closures and redundancies. In short there is no lack of human resources for the envisaged expansion.
3.2.2 Creation of new firms from scratch
Just as in another emergency Kitchener raised his New Armies in 1915-16, so we must create a New Army of firms from scratch, using the human resources defined above. Members of the existing corporate establishment (with outstanding exceptions) must not be, repeat not be part of this venture. (The outstanding British (Australian actually) general of the First World War, John Monash, was an engineer by profession, and even Haig recognised that officers from the non-military field performed on average better than those from the traditional military caste.)
Taking the average manufacturing firm as having the following characteristics: £20 million capital, £20 million turnover, £10 million added value, a staff of 200 of which 10 are engineers and 10 other professionals, we need to create at this scale about 1,500 firms per annum. Of course over time many of these will grow so the need to seed will reduce.
3.2.3 Market targets for the new firms
These should be based on a detailed expansion of the list given in 2.4 of the markets from which Britain has largely or entirely been expelled. The business schools should be called on to donate 50% of their staff time to doing a real job of work, namely to producing, industry by industry, sector by sector, a market plan for British manufacturing firms at the £10 to £50 million per annum turnover level. Before any firm is set up this essential staff work must be completed. Included within this will be the need to define sales networks for both recapturing the home market and capturing overseas markets. To support the national objective of £15 billion additional manufacturing product, approximately 5,000 man years of effort will be needed, but there is bags of resource for this – to be found not only in the business schools, but among the mass of technical research degree takers which have at best only peripheral scientific, let alone commercial, relevance.
3.2.4 Paradigm for the creation of new firms
The central enabling step is the establishment of several Manufacturing Institutes with a mission defined by broad categories of industry. The unique feature would be both the scale – each would be responsible for about £1 billion of new output per annum – and the fact that they would be a combined business and teaching establishment. They would have responsibility for launching the new firms. Instead of doing artificial case studies, students – who would be qualified engineers and scientists of any age – would be the managers and directors of actual new firms, starting not at the one or two man scale, but at the 50-100 employee scale. Each Institute would also be the home of a General Staff for its industry sector, assembling and commissioning the market plans referred to in 3.2.3. This general staff would not be made up of failed members of the present corporate establishment, but would be staffed by people having two essential qualities: an absolute dedication to reconquering lost markets and the technical knowledge of the manufacturing processes to achieve this.
The leaders of the new firms would bid for a given market segment on the basis of their personal qualities, not their access to finance, which would come through the Institutes. They would be paid a good salary together with shares, which if the firm reached the £10 million per annum added value, would make them paper millionaires. Restrictions on selling out would be imposed. Mistakes would be made, but the release of youthful energy targeted by the experience and dedication of older people would rejuvenate the whole nation.
3.2.5 Where would the cash come from?
We are talking of £500 per annum per insured person, about the sum spent on foreign holidays, about two thirds of that currently spent on support of the unemployed. If implemented, this plan would make the DTI and regional aid largely redundant, releasing about one third of the required cash. My proposal is that the money should come initially from a combination of %0% savings on the DTI/regional aid and a savings levy in the form of industrial credits – at the rate of one penny on basic tax rates, five pence on higher rates, the restoration of a new 60% top rate, plus 50% on merchant bank profits – which could be encashed at some future date. This would give the general public a stake in the success of the plan. Individuals could nominate which manufacturing institute they preferred – machine tools, plastics machinery, textiles – whatever. Because the focus would be initially at least on conquering the lost home market, credit holders would have a built-in incentive to buy British and to know precisely where to address their complaints if the quality were not good enough – but it will be; I have no doubt of that.