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“So this is our plan for growth. We want the words: Made in Britain, Created in Britain, Designed in Britain, Invented in Britain’ to drive our nation forward. A Britain carried aloft by the march of the makers. That is how we will create jobs…We have put fuel into the tank of the British economy.” (UK chancellor of the exchequer May 2010)

FT7JX2 epa02987939 Britain's Chancellor of the Exchequer George Osborne visits Network Rail Ltd.'s Thameslink project at Blackfriars in London, Britain, 01 November 2011. Osborne hailed news today that the British economy grew a faster-than-forecast 0.5 percent in the third quarter as a "positive step forward."  EPA/Simon Dawson / POOL

When the Tory/Lib Dem coalition government was formed in May 2010 much was made of a commitment by it to address the chronic imbalances in the economy, in particular the much commented on 40 years of under-investment in infrastructure and manufacturing.

The nation which had been the crucible of the industrial revolution had seen manufacturing decline from 25% of its GDP in 1965 to 11% in 2010.

Britain’s acute skills shortages and yawning current account deficit provided an urgent need to invest  went the claim.

So when TATA STEEL announced last week it was putting its UK steel business up for sale with little prospect of a buyer, there were the predictable cries of “something must be done”, be it part or full nationalisation to keep a strategic industry alive, to saving community jobs, all the way to a new national “industrial plan” as advocated by the opposition Labour party.

There was also the refrain that with coal and steel all but gone now from the UK that this was incompatible with the governments’ stated aims to make Britain once again a great manufacturing nation.

We would contest this and hope to demonstrate why in this week’s South River Asset Management blog, arguing strongly that not only does Britain have an excellent manufacturing base, being based itself on high value added and highly advanced industries such as precision engineering, aerospace, biotechnology, specialised electronics and chemicals, but it is sufficiently scaled on a global basis, with the UK being number one or two across many of these industries to have an extremely attractive future.

Specifically in the blog we ask three questions.

Does the UK need its own steel industry?

Will the crisis accelerate the long argued for investment in infrastructure UK policy makers have been pressed for for years?

Where are the best growth opportunities in UK manufacturing?

We argue strongly that contrary to popular opinion Britain’s manufacturing is in rude health. We are the world’s sixth largest exporter in manufactured goods with £320bn of goods and services exported last year, of which £95bn was in manufactured goods.  Britain is competitive in many key growth sectors globally and is a leader in the world’s top three in important sectors like defence, aerospace, chemicals and electronics. We are global number three in biotechnology and pharmaceuticals. Additionally, our manufactured goods are at the high end of the value chain with profitable niches in many sub-segments.

 

Background

UK manufacturing is the third largest sector in the UK after business services and retail, accounting for 11% of GDP and 25% of our exports of £320bn per annum. 75% of all R&D comes from manufacturing and  it may surprise many that the UK is the fourth largest exporter of manufactured goods worldwide possessing best in class manufacturing across industries from aerospace to automobiles to advanced materials to specialty metals and chemicals as well as ICT and building technology.

Does the UK need a steel industry?

Much has been made among commentators in the last week since Indian owner TATA STEEL announced it was putting up its UK steel business for sale, of the dire economic consequences of closure.

The cry of “something must be done” has been the refrain from many commentators up to and including nationalisation if TATA fails to find a buyer.

But it is hard to argue Britain has any comparative advantages in making steel, having to import costly supplies of iron ore, being dependent on imported energy and having poor port facilities making the industry uneconomic even compared to the Europeans let alone the Chinese and other lower cost producers.

We would argue that it’s preferable to dedicate resources to industries where the UK does have comparative advantages such as aerospace, biotechnology, electronics and where our added value services can be exported more profitably.

In any case steel today accounts for only a very small amount of value by output with only 13m tons produced last year and the industry is losing £400m a year-hardly an advert for a great investment case.

 

Will the crisis accelerate the much needed increase in infrastructure build out?

There is little doubt that a combination of restrictive planning laws, a poor transport system and  old and decaying infrastructure have held back certain investments.   Complaint is often made that this hampers capital investment and makes investment decisions by large companies harder to justify.

A recent OECD study of infrastructure in the UK found that “infrastructure in the UK has suffered from under-investment, compared with some competitor countries, since the 1980s. This is partly attributable to insufficient long-term planning by successive governments.”

The Chancellor announced the formation of an independent National Infrastructure Commission, which was created on 5 October 2015, with Lord Adonis as its Chairman.

We argue that the current steel crisis will accelerate reform, upping tax breaks for investment and bring forward important projects such as HS2 and Crossrail 2, the London super sewer and the Sheffield-Manchester tunnel scheme, part of the much vaunted “Northern powerhouse” the government wishes to build, overall contributing to a £35bn investment in the next five years.

Where are the best growth opportunities in UK manufacturing?

Aerospace technology-Britain is global number two with £25bn of revenues and £11bn of exports.

For example over a quarter of the value of Boeing’s 787 “Dreamliner” comes from UK manufacturers and the country boasts leading exporters like ROLLS ROYCE.

Automobile industry-Britain is global number ten with £64bn of revenues and £34bn of exports, Britain produced 1.6m cars in 2015 exporting 77% of them.  Significantly nearly half of this production was exported outside the EU.  JAGUAR LAND ROVER is a key example of a highly successful exporter.

Biotechnology and pharmaceuticals-Britain is global number three with £25bn of revenues and exports of £12bn, the UK pharmaceutical industry is one of the country’s most successful industries, with companies like ASTRA and GLAXO at the vanguard.

Chemicals-Britain is global number five with £55bn of revenues and £43bn of exports. Companies like CRODA, MORGAN ADVANCED MATERIALS and SYNTHOMER are key examples.

Defence-Britain is global number two with £24bn of revenues and £20bn of exports.  BAE is an example of a highly successful global player.

Electronics-Britain is global number four with £74bn of revenues and £30bn of exports. Companies like ARM HOLDINGS are examples of successful companies here.

In addition to this impressive list, Britain and British companies are investing heavily in environmental technology platforms, renewable energy platforms and electric and hydrogen based platforms for transport solutions and she is also a big exporter of food products.

 

The last word

We conclude that headline grabbing events like the closure of coal mines and steel plants in fact hide the considerable success of UK manufacturing. Not only is Britain’s manufacturing high quality it is global in scale across many growth industries, is investing heavily in manufacturing in many important segments. The leadership position across many and varied industries is impressive as its level of technical knowhow and ability to convert it into pounds dollars and euros.

And finally, one possible solution to the problems at Port Talbot could be to exploit the mining deposits rich in tin in Cornwall. As recently as the early 1900’s this part of Britain was the world’s largest tin mining region and with the commodity becoming highly sought after in new applications in electronics and the growth of batteries in electric vehicles in which it is used (the price recently hit $20,000 a ton) one idea our mining team has here at South River Asset Management could be to mine it using more modern techniques and refit the smelter at Port Talbot to smelt it.

Tin is actually a highly prized industrial metal, that is actually quite rare, and most of the world is predicting a longer term global deficit in the stuff, it is produced only a few countries and is a largely unsubstitutable component in most of the worlds electronics, historically, DRC, Nigeria, and a few others, including Cornwall. Reviving our tin mining industry and refitting the steel smelter to smelt tin is a long term sustainable business possibility.

As a nation Britain above all benefits from the ingenuity of its people.  With significant population growth and an ever higher level of technical skills needed in the workforce,  government policy needs to possess a high level of ingenuity too as it looks to encourage the revival of some of the great regions and towns where manufacturing was such a feature in the past.   In this regard the news that Aston Martin is opening a plant, in south Wales ironically, is a classic example and we would expect many more developments like this as Britain lives up to George Osborne’s claim.  However it’s not so much a “march of the makers” in the traditional sense but a “march of the “high value added technology companies of the future” in which Britain has extremely promising positions across many industrial sectors and in which it has leading international positions that can be monetised.

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