Yesterday I had a brilliant visit to the Rolls Royce aero engines plant in Derby. Factory visits are always fascinating, and this was particularly so. It’s of course a superb company, and its qualities manifested themselves in all kinds of ways: the focus of the conversations on the long term, on 2020 and 2025; the superb apprenticeship and management training programmes, now being provided for companies in the supply chain as well as Rolls Royce itself; the fact that everyone I spoke to from apprentices to top execs talked about their bit of the business in a way that was consistent and fitted into the same overall strategic picture. Above all, of course, the engines. Amazing technology, so complex, highly dependent on research, long-term investment, IP and skilled people. It was interesting to hear the emphasis on ideas and skills, and on services provided with the product, in a manufacturing company.
A Rolls Royce engine – one of the big ones
There have been a couple of excellent books recently on the areas of strength in UK manufacturing – [amazon_link id=”0349123780″ target=”_blank” ]Made in Britain[/amazon_link] by Evan Davis and [amazon_link id=”0300117779″ target=”_blank” ]The New Industrial Revolution[/amazon_link] by Peter Marsh (the latter is speaking at the Festival of Economics in Bristol on 24 November). (See also the excellent TV programmes by Evan D, Built in Britain, which turned to infrastructure.) Given that I also recently heard about the potential for a significant revival of the Lancashire textiles industry (to which I have an emotional attachment), I do tend to agree with these two authors in believing that our manufacturing industry still has areas of strength.
[amazon_image id=”0300117779″ link=”true” target=”_blank” size=”medium” ]The New Industrial Revolution: Consumers, Globalization and the End of Mass Production[/amazon_image]
However, I think there are two big worries. One is about investment in skills: we have had far too few industrial apprenticeships for too long, and although this is improving slowly, it will take many years to rebuild a sufficiently large skill base. There is also still too much of a presumption that university is better than an apprenticeship – I would disagree with this priority on academic or cognitive skills.
The second is the gap between the superb big companies like Rolls Royce and small, albeit vigorous, manufacturers. The UK needs the middle rank of companies that can feasibly supply the biggest ones – the small ones just can’t deliver on an appropriate scale, can’t afford to invest either in basic R&D or even product development, can’t take on more than one or two apprentices. A lasting manufacturing revival will need to look again at the long-standing barriers that are stopping successful small companies from growing above a certain size.
Diane,
In the last paragraph you mention the “long-standing barriers that are stopping successful small companies from growing above a certain size”. What do you think these are? (Planning restrictions? Skills shortages? Access to finance?) There is less work on firm dynamics in the UK that is comparable to John Haltiwanger’s work on the US so it’s not clear what is really preventing growth. John van Reenen’s work does suggest that management quality may be an issue, and some surveys suggest that many business people start “lifestyle businesses” rather than aiming for scale.
I guess what I am asking is what you think the balance is of things exogenous to the firm that limit scale (and may be easier for policy to affect) and those that affect the production function more directly (and may be harder, though not impossible, to shift). I would be grateful for your thoughts.
Access to finance is often cited (esp. in comparisons with Germany) and while anecdotes don’t amount to data, as a consultant the recurrent question that comes up with successful small manufacturers is “to expand, we need to finance this capital investment – any ideas where the money might come from?” From this I conclude that there is a significant gap in the British business finance landscape.
The financing gap has been an issue since the Macmillan Report, and is clearly real – so there’s an interesting question as to why policymakers have never felt the need to address this known market failure. Absent detailed research, my sense from talking a lot to businesses over a couple of decades is that there are several discontinuities faced by a growing firm – it isn’t possible to scale up incrementally. They include finance – how to borrow a sum in between the bank and the bond markets. But also training – how to move from training one young person on the job to a scheme that will produce 20 a year; market intelligence – how to go from selling £5m worth of goods to finding an addressable market that will support £20m or £50 a year turnover. To make it harder still, there are large economies of scale in advanced manufacturing so a medium-sized firm will have much higher unit costs than a bigger competitor. It seems to me that if thought about like this there are several areas for useful policy intervention.
Great points.
Scary to think that the finance question has been going so long. That covers a number of philosophical eras in British government – so fixing the problem must violate something deep in our social thinking.
That’s a very interesting observation. I’ll need to think about that.
Great points. Thanks for replying.