Sunday, August 28, 2005
Industry on a slow boat to China
Posted by David Smith at 11:00 AM
Category: David Smith's other articles

When the dust settles on the deal under which China’s Nanjing Automobile Corporation acquired the MG Rover factory at Longbridge, two things will be clear. One is that while there may be some car assembly at Longbridge, it will involve fewer than 2,000 workers (probably a lot fewer) and most of the components they will be screwing together will be made in China.

The other is that, whatever happens, the deal will represent a transfer of manufacturing, and in this case intellectual property, from Britain to China. The assembly lines for the Rover 25, 45 and probably the 75 will be shipped to China, as will the Powertrain engine plant.

And what is happening at Rover is representative of British manufacturing in general. Under the pressure of competition from China it is withering, and rather faster than in the countries of most of our competitors.

While German industry is undergoing a revival on the back of strong export orders, and American manufacturers have been doing well because of the growing US economy, the story in Britain appears to be one of continuous struggle.

Last week the CBI reported that manufacturing orders have dropped to their weakest in two years and that firms feel as much under the cosh as ever. Just as a glimmer of light was starting to appear on exports, a drop in domestic demand has hit them hard. It’s grim.

The statistical backdrop to this was provided by the latest official figures on the contributions of the various sectors to the nation’s economic output. These, contained in the latest input-output tables, show that manufacturing’s contribution has slumped from 20.1% in 1998 (the last time it was above 20%) to just 14.9% in the latest figures, for 2003. We do, it seems, fit Napoleon’s celebrated putdown, “a nation of shopkeepers”, rather better than any pretensions we might have to be still regarded as the workshop of the world. Retailing and wholesaling account for 15.7% of output.

More to the point, we are a nation of accountants, consultants and financial advisers. Financial and business services now provide 31.7% of Britain’s annual output, up from 27.6% in 1998 and 24% in 1992.

There is nothing new, of course, about the declining share of manufacturing. One of the iron laws of economics is that with rising prosperity and economic development the primary sector — agriculture and mining (together worth 3% of output) — is the first to decline. Then the same thing happens to the secondary sector, manufacturing.

Observers were fretting about the decline of manufacturing at the time of the Great Exhibition of 1851.

In 1960, when manufacturing was about 35% of gross domestic product, the worry, justifiably, was that competitors were overtaking us.

What has been unusual in recent years has been the speed of manufacturing’s decline — a drop of five percentage points of output share in as many years. Steve Radley, chief economist at the EEF, the engineering employers’ federation, said that at a time when other sectors have been strong, manufacturing has been hard hit by the rise of China, the strength of the pound against the euro and uncertain world markets. Even so, he expects manufacturing’s share to shrink further.

Does it matter? Could we manage without a manufacturing sector at all? In theory, yes. In practice, almost certainly no.

The relative decline of manufacturing, for a start, skews regional imbalances in Britain even further. London and southeast England has its share of manufacturing activity, but as part of a diversified economy. In too many regions in Britain the gap left by declining manufacturing has not been filled, or it has been partly filled by an expanded state. Figures earlier this year showed that in some northern regions the public sector accounts for some 60% of gross domestic product.

New projections from Experian Business Strategies, covering the period 2005-15, show a clear north-south split in growth prospects. The fastest-growing parts of Britain will be Bedfordshire, Berkshire, Buckinghamshire, Hertfordshire, inner London and Oxfordshire. The slowest growing will include large areas of Scotland, the Tees Valley and Durham, Cumbria and Merseyside.

Trade is another concern. Even in reduced circumstances manufacturing industry managed to export at the annual equivalent of £167 billion in the first half of this year. Manufacturers still account for more than half, 55%, of Britain’s total exports of goods and services. The further that manufacturing declines the bigger would be the hole at the heart of the balance of payments. Manufactured imports are running at an annual rate of £209 billion.

Economies are, of course, always in a state of flux. The 10 industries identified by the Office for National Statistics (ONS) as having declined most sharply — man-made fibres, non-ferrous metals, insulated wire and cable, leather goods, textile fibres, clothing and fur, footwear, knitted goods, iron and steel and coal extraction — mainly belong to another age.

But these are not necessarily being replaced by the kind of activities we need to develop to compete in the future. Michael Saunders of Citigroup makes the point that in the period 1992-97 there was a clear shift in manufacturing to high-technology activity. In the period since then, however, high-technology manufacturing has declined at a faster rate than its medium and low-tech equivalents.

Britain is still doing well when it comes to knowledge-intensive services. The ONS’s list of the top 10 expanding areas — computer services, other business services, insurance and pension funds, recreational services, owning and dealing in property, letting of dwellings, market research and management consultancy, construction, hotels and catering, and retailing — is fairly healthy, although at least two are reflections of the long housing boom.

The question is whether we can compete in high value-added activities in the future. In manufacturing that battle appears to have been lost. In services that will depend, as Saunders notes, on Labour’s success in keeping Britain competitive when it comes to taxes, regulation and labour-market flexibility. Sadly, that battle may be being lost too.

PS: Do we gain as a nation from having Peter Mandelson represent us in trade negotiations? For years, since Brussels acquired “competence” over trade, we have endured successive European trade commissioners playing the Common Agricultural Policy card to block trade liberalisation.

Now, thanks to a “glitch” in import controls on Chinese clothes — designed to protect producers in Italy, Greece and Portugal — Britain faces a winter shortage of bras, jumpers and other items. What will we do without Datang, known as Sock City, which makes a third of the world’s socks? This is not just a question for shoppers. Could clothing shortages push up prices and send inflation even further above the 2% target? After all, falling clothing prices have been one of the factors bearing down on inflation in recent years.

John Butler, UK economist at HSBC, in a report “The Blip before the Dip”, thinks inflation will peak at 2.7% later this year (from 2.3% now) before dropping back below the 2% target next year. Not much, if any, of that will be due to higher clothing prices, as retailers will either be allowed to bring forward imports from next year’s quotas or source in other, mainly Asian, countries.

Mind you, I would not be surprised to see some retailers trying to capitalise on the “buy now while stocks last” story. They need all the help they can get.

From The Sunday Times, August 28 2005

Comments

It’s interesting that Mr. Saunders’ view on what’s needed to keep Britain competitive includes two factors controlled by government, taxes and regulation, but doesn’t include interest rates.

Surely it’s obvious that adjusting interest rates cannot solve all Britain’s economic problems. Isn’t it time to accept that conflicting objectives such as helping manufacturers export and discouraging excessive consumer borrowing need tax changes, not rate changes?

The media have been too soft in not holding Gordon Brown to account for his failure to use taxes to meet growth objectives. Creating wealth is as important as eradicating poverty. So how is it that Mervyn King holds an economic press conference every quarter but not Gordon Brown? Has Gordon refused or have the media just not challenged him?

And if services are so important to the UK, how is it that Peter Mandelson can keep Chinese imports out of Europe but he can’t allow UK service companies to trade across Europe? Don’t Belgians have the same right to cheap pet insurance as the British?

But there is one answer to all Britain’s economic problems: build lots of houses - hundreds of thousands of spacious, light, efficient family homes. Tear up the Green Belt rules, tax failure to develop brown-field sites and put builders under the control of architects, not council planners. It’s time - bring on the bulldozers.

Posted by: David Sandiford at August 28, 2005 11:00 AM

Just a thought: those Chinese goods stuck at the docks are probably the retailers’ autumn ‘new lines’ that they want on the shelves for the start of the new season – traditionally, September. Retailers usually raise prices in September because of the new stock. But what will happen this year? Will the new lines not arrive and retailers will have to keep summer stock at low prices? Or will retailers have a limited amount of autumn stock and decide to jack up prices accordingly? This could play havoc with the inflation figures.

Posted by: David Sandiford at August 30, 2005 10:45 AM