British Industry's Darwinian Fast

The industrial base has, since 2007, offset poor fundementals with higher productivity to produce about the same amount of value. We may well have run out of fat to trim.

For the first time since the Industrial Revolution, Britain is outside the top ten manufacturing nations. A recent report by the trade body MakeUK puts Britain in twelfth place, behind the likes of Italy, France, Russia, Taiwan, and Mexico.

MakeUK

This is not surprising. Britain’s relative lack of industrial competitiveness, from a strong sterling to a lack of floorspace to high energy costs, is well documented. Our production industry output is 94% what it was in 2019. Broadly, manufacturing has not grown since 2007.

But there is the argument that, given how hard it is to be a manufacturer in Britain, we have actually enjoyed a significant productivity boom. The Economist penned an article in 2023 suggesting that British manufacturing was actually in fine fettle, as evidenced by the improved gross value added per manufacturing worker compared to the rest of the world.

This appears to be true. From 2007 to 2022, Britain’s gross value added (GVA) in manufacturing went from £186 billion to £204 billion. This is effective stagnation, unprecedented historically. But the number of workers went down from 3 million to 2.5 million. As a result, the GVA per worker increased nearly 30% from £62,000 to £80,000.

British manufacturing employment, GVA, and GVA per person. 2007 to 2021

This is higher than the GVA growth rates for every major competitor. Ultimately, while other countries have increased automation while growing their workforces, investments, and revenues, the British manufacturing base has gone on a 15-year fast, cutting employment markedly to maintain about the same level of revenue.

The manufacturing operations that have survived the last 15 years are competitive in the face of major challenges. Britain has a strong currency, few tariffs, very high energy costs, prohibitive planning regulations, low rates of capital investment, and a lack of automation. Compared to Japan, Korea, China, or Germany, our industrial base is Darwinian.

British car and engine manufacturing has held up pretty well despite taking a downturn. British Pharma was buoyed by AstraZeneca’s renaissance under Pascal Soriot. It is tempting to look at this higher GVA per capita and argue we have enjoyed a revolution in productivity. The problem is, had we discovered a way to greatly improve production, we should have enjoyed a windfall in new investment, leading to more jobs and revenues. This has not been the case. Rather, we have shaken all the slack out of British industry.

The problem is that while British manufacturing is optimized to turnover £200 billion a year with very little investment in established sectors, it is poorly equipped to enter new industries with high capex barriers to entry or compete in subsidy-heavy industrial strategies, which are very much in vogue at this time.

This bodes ill in the longterm. For example, Britain’s second-largest goods export after cars are intermediate mechanical generators (meaning turbines and engines). A good portion of these are the 1.6 million internal combustion engines produced yearly. Worth around £35 billion in annual exports, this industry is directly threatened by electrification, for which Britain is woefully unprepared. While subsidies for gigafactories might be tempting, the energy-intensive nature of battery manufacturing and the glut of cheap EVs from China will make a profitable domestic EV business very challenging.

Since 2007, Britain’s industrial base has lost all its baggage and a great deal of its capacity in the process. Higher productivity has allowed it to stay pretty much still. But if the MakeUK table is anything to go by, we are about to switch from relative decline to actual decay.