Transcript: Navigating the UK's Industrial Strategy

Transcript

Carl Sizer
We all know that the UK has a long and really proud manufacturing history. But what I’m really keen to understand is where is the sector headed? The recent Make UK executive survey in association with PwC highlighted that despite a number of rising costs and regulatory challenges, UK manufacturers are adapting by investing in technology, expanding into some of those new markets, and really focusing on innovation sustainability. However, that policy uncertainty and taxation increases are really posing some long-term risks to investment, with industrial leaders calling for clearer strategy from government, better infrastructure, and some tax reliefs that really helped to support that growth trajectory.

With advanced manufacturing and defence both identified as priority sectors in the new UK industrial strategy, now really is that right time to be asking about the opportunities and the challenges that face the sector. To help us find that answer, I’m really delighted to be joined by Stephen Phipson, CEO of Make UK, and Cara Haffey, Industrials and Services Leader here at PwC UK. Thank you very much for joining us guys. It’s great to have you and I’m really looking forward to our conversation. Now Stephen, let me start with you. What do you really see as those biggest opportunities for UK manufacturing right now that we should be really getting after as a nation?

Stephen Phipson
Well, first of all, what’s really clear is that we are world leading in different areas of advanced manufacturing. That’s what keeps us mostly in that top 10 global lists of manufacturing countries. We’re not manufacturing consumer goods, we’re manufacturing advanced manufactured goods. Even automobiles nowadays, cars are very sophisticated integrated systems for manufacturing. So we’ve got a real strength in that area. We’ve got a real strength in innovation. I was recently talking to a group of American businesses and they envy the innovation that comes out of the UK. In fact, their comment was, all the innovation comes from you, but we’ve got all the money, so we’re able to invest in. So frustrating. We can talk about scale up as a challenge that we’ve had for many, many years. But we are on the cusp of this transition.

I think I was very interested last week to see the publication of Carbon Budget 7 by the Climate Change Committee. And if you study that, you’ll see that up until now we’ve achieved our objectives through switching from fossil fuels to renewables, such as the wind farm production. But the next phase is about industrial transformation. The next phase are all those new technologies which we need to meet those net zero obligations. Everything from hydrogen, carbon capture, small modular reactors, more offshore floating wind farms, you name it, is all around their technologies, all of which are creating thousands of new manufacturing jobs in this country as long as we have a clear industrial strategy to take advantage of it.

I mean, you could argue that at the moment we haven’t worried too much about domestic manufacturing, but this is a fabulous opportunity to make sure that happens here in the UK. And that’s been recognised by the sector. So a lot of people participating in there, a lot of people on that transition journey, not only in their own factories, but participating in these new technologies. This is where the growth is going to come from, which is extremely positive for the sector. We just need to make sure we set the right environment to invest and to grow over the next 10 years and to be able to take advantage of it. I mean, the prize is enormous. At the moment, manufacturing is around the government statistics would say 10% of GDP. We think they can grow to 15% around these new technologies. That adds another 140 billion to GVA produced by the manufacturing sector, creates hundreds of thousands of new jobs. So we’re very optimistic about that.

The other thing that’s interesting, and you mentioned in your introduction about the short-term cost challenges, what we are seeing and what the banks are seeing is we have this regular conversation with the banks is investment increasing quite rapidly in automation and digitisation partly driven by the fact that employment costs are going up so much. So if there is a positive effect from employment costs going up and making that challenge to business it is around the fact that food and drink manufacturers of example and other people that have traditionally relied on low-cost labour and now looking at how do they implement those automation solutions and digitisation solutions to make their businesses more efficient. So in the shorter-term, that’s another good opportunity. But the longer term is all around those new technologies, I think.

Carl Sizer
Brilliant, fabulous introduction to this. And it’s very clear the size and scale of the opportunity. I guess I’m interested, Cara, from a specific areas of growth and growth in manufacturing, where do you really see those coming through?

Cara Haffey
Certainly the clients that I’m looking at, it follows on from what Stephen said. It’s about the green economy. So where can they play in energy transition? Where can, you know, actually we talk about, but the whole value chain and equipment that’s needed for the likes of hydrogen, for the likes of fuel, different biofuels, you know, that piece. I think we’ve also seen an increase back in this country on aerospace. So there was a time in COVID where it was all never going to happen ever again. Actually, we’ve had such a history there and we’re definitely a view to new technologies in that play as well. Defense, you know, certainly the country will be stepping up and looking at kind of actually what is the, the budget ask there between as Stephen and I were talking about before this started, the different, you know, will it be labour? Is it into equipment and how does that play to what we have?

So I’d say it’s kind of varied, but very much on the advancement, the technology side. And certainly in our firm, as you well know, we’ve been really looking at where the crossovers are. So the real technology edge of manufacturing, where energy in our energy sector and where that kind of plays across. And I would say it’s very varied and lots of kind of lots of various were different sectors that used to be very kind of down one corridor of now merging and really working together and I think that comes in for me to the ecosystem that’s needed in the industrial strategy to work out how we really get those ecosystems working well.

Carl Sizer
That concept of sector convergence and crossover is just coming through loud and clear it’s amazing and actually we were talking a little bit about energy and how that starts to play through as well. It really does all start to start to come together. Now when we did the survey six out of ten of the execs that we surveyed said that they would actually invest in response to an industrial strategy. So they really do see that need for the industrial strategy. Where do you think, Stephen, the government should really focus and get in behind making some changes so that we get that investment that everyone’s talking about?

Stephen Phipson
Well, so you’re absolutely right to say that. I have lots of discussions with corporates, particularly overseas investors in the UK actually. And we are in a competitive situation. You know, the other advanced economies have also got industrial plans or whatever other incentives like the Inflation Reduction Act was in the United States, for example, around encouraging local domestic manufacturing and how that’s going to really help them with things like the transition to a net zero economy. So what we need to see really is firstly from the government side, we’re not particularly asking for money here. The first thing is that we need to make sure that all the different strategies around the different departments, whether it’s the skills strategy, the taxation strategy, are lined up to a set of objective for the next 10 years, that we’re not going off in different directions, because that sends mixed signals to industry. It’s no point saying, let’s incentivise a particular sector if there is no skills being produced out of our education system because we are short at the moment, let alone trying to create hundreds of thousands of new jobs, as we’ve seen with some of the transitions recently.

So government needs to get aligned around a set of clear objectives, mostly around the net zero objective, and what we’re going to be doing in transitioning to some of those new technologies. We need to make early decisions about the priorities there. I mean, we’re still not clear on what we’re doing with hydrogen and carbon capture. We’ve done pilots and we need to roll out the SMR programme and all sorts of other things. We need to build out the national grid. We need to incentivise local investment so that we’ve got a lot of that manufacturing kept here in the UK. Because we never know now, do we, in this environment, what’s going to happen with international supply chains? So the plan needs to be a coherent plan, and at its heart it’s setting out the clear objectives for the next 10 years and the incentivisation programmes.

We need to make sure that we’ve got the right tax system in place that incentivises those investments. And the reason I emphasise that point, Carl, is because if you look back over the last 10 years, our investment rate in manufacturing has been one of the lowest out of the advanced economies. We need to kick-start that. There are billions of pounds worth of investment waiting to come into this country to build new manufacturing capacity for some of these new technologies, waiting for what is the clear objective? What is the next 10 years look like? And as I have to explain to ministers time and time again, the reason why it’s 10 years and the reason we supported this idea about having it outside the parliamentary cycles is that the average investment cycles in manufacturing are between 7 and 30 years. Plants are not created within 2 years and then shut down again. It’s a long-term investment. So if you’re a large company, a large international corporate, you’re looking at where the stability is or certainty is over those objectives for that investment over a longer term. So it needs to deliver that. If we do it, if we get it right, there’s an absolutely fantastic opportunity for this country.

Carl Sizer
Brilliant. And actually, you’ve talked there about opportunities, and I’d like to switch it a little bit there and think a bit about the technology side of this. We know that there’s massive changes from AI. We know adoption in the cloud on the data going into cloud is going to be significant. That does give a big opportunity, I think, for manufacturing and things that people can start looking at in a different way potential to reduce waste to change that sort of cycle and speed with which they’re actually building product. But where do you see and where do you think are the manufacturers should be thinking differently and adopting AI and technology a bit faster to get to some of those outcomes?

Cara Haffey
I think certainly the examples I’ve seen really recently that excite me are actually in the engineering design for manufacturer like in the design phase even and the engineering because actually you can do with AI so many different more scenario planning quickly and therefore to go to Stephen’s point it doesn’t you know the investment cycle to me then comes down I’m not sure we’re going to get it to be kind of six months but it feels like actually it doesn’t need to be the length of time we’ve had before if you can get that quicker and you know we’ve seen that even from the Chinese and how they’ve done automotive they don’t see it as like right actually it’s a 10 year thing you know they’ve got it down to three years and really changed things.

So I think that whole technology mindset of kind of starting with a truly blank sheet of paper, how would you come at this now rather than all the history that we have? So I think that for me has been really fascinating to see. And I think for, you know, to Stephen’s earlier point, I think technology, I feel like we’ve been talking a lot about it. We talked about industry four, industry five. And I think at points in time, we’ve made it sound like a huge, big system change. What I’ve seen in our own clients is if they do small projects, really see how it can like break it down, see what effect it can have, then they’re much more likely in my industry to kind of go, right, okay, I’ve proven it now, proven in a small, do a prototype, then move on. And I suppose now that feels really obvious to me because that is the way they do it for themselves. But I think we did start in that big piece.

Stephen Phipson
Just to build on Cara’s points there, I mean, we’re seeing a rapid adoption of digital twins, for example, using exactly what you’re talking about, creating things in the digital space and then before you cut metal you’ve proven out the design and you design their production areas. But two other interesting AI applications that are coming up very regularly now would be preventative maintenance. We’ve seen some very large factories in the UK now adopting AI in their preventative maintenance systems which are absolutely fascinating. They’re able to predict when downtime’s going to happen on the production line, they’re able to reconfigure, send in service text change parts and redesign the production line or without human intervention using AI and really improving their productivity through doing that.

And the other thing that’s really interesting to me is that one of the mitigations towards all the supply chain disruption is using AI now to map out their supply chains properly and then how to quickly flex and reconfigure and we started to learn that I think a lot during the pandemic but that’s accelerated enormously now and people are really focused on using AI to adapt and adopt their supply chain. So really interesting to build on other examples.

Carl Sizer
And actually your point on supply chain is where I wanted to go next actually because obviously there’s been a fair few shifts over the years in how trade cycles have worked and the relationship the UK has with global trade. What do you see now as some of those shifts that you have seen and what do you foresee happening as we move forward or things that manufacturing organisations need to be doing to be ready?

Stephen Phipson
There’s a few things really. One is, and many people don’t like talking about this, but we do have to work on our relationship with the EU. It’s still massively important to the manufacturing sector. The 47%-ish of the exports of the country are manufacturing goods. Half of that is going to the EU still. And they’re not finished goods. It’s intermediary products. It’s products in the supply chain backwards and forwards to the EU. And we put up lots and lots of barriers to that trade. So we welcome the government’s point about resetting that relationship and our part is contributing as to what things we need to reset to make sure that works. Also, we’re slightly drifting in terms of regulation and compliance at the moment. So, you know, we’re falling behind a little bit some of the changes in Europe and that gap, that passive, we call that passive divergence. It’s not done by design. That worries a lot of manufacturers because they can’t set up two production lines. I mean, they’ve got to do one standard. So the EU relationship really, really important to work on that. So the more we can encourage government to do that and to try to take down those barriers and to try to make that trade easy.

In fact, I think the recent changes in the outlook on the defence industry and working together with Europe on defence might be a catalyst to help us get closer on some of those trade. Not saying we should reverse Brexit or anything like that, but we just need to get the commercial side of it, that relationship working a lot more efficiently than we could. Of course 20% of our exports go to United States as a single biggest country. We are exported I mean on top of the list would be luxury cars and pharmaceuticals from the UK to the US as well as lots of electronic goods but they’re the top items. So, we need to be working very closely on that relationship.

I liked the language around an economic deal rather than an FTA perhaps and we need to see what that looks like but that’s that’s an area focus for us. And then on the finished product side of manufacturing. The whole of the sort of Asia area has always been a great opportunity for UK and the British brand goes down very well there. So we welcome any support governments doing on those sorts of markets. But we shouldn’t lose sight that actually a lot of businesses about proximity in manufacturing and local supply chains are actually the ones that you want to focus on.

Carl Sizer
Brilliant, thank you. And thinking then to the cost agenda and some of the challenges, right, certainly again in the survey, 92% expected employment costs arrived. I mean, to be honest, I was surprised it wasn’t 100% because it feels like that is very much the direction of travel. That’s going to flow through quite clearly. But have you got a sense, what do you think businesses, manufacturers can start doing in response to that?

Cara Haffey
I think the survey that we’ve done with Make UK in collaboration for a number of years now has continued to talk about automation and digitalisation.

And unfortunately, I think the kind of the positive that will come for employment costs is that people are just going to get on with that now. And we’re definitely seeing that in my clients. There’s projects going on that I probably wouldn’t have thought we’re going to come. Yeah, there’s a real balance here. You know, what is the right answer? How do you balance employment and keeping people productively busy alongside automation? So it’s certainly a kind of cerebral question as well as a kind of practical and productivity one. But I think that’s happening now. The costs just can’t be ignored. You put that alongside energy costs and everything else in the supply chain. You know as you say 92% was actually a good number.

Stephen Phipson
For this year for this year it’s certainly going to end up with flat manufacturing output as people focus on it I don’t expect we’re going to see mass redundance or anything like that but people are certainly not rehiring when people are leaving they’re managing that very carefully. To give you an idea on averages and averages are never the right answer because everyone’s different but the average salary in the manufacturing sector in the UK is about £38,000 at the moment and it adds about £1,000 per employee of cost because the changes in the thresholds. And for many small businesses, that’s their margin. So it’s very tough this year. It means there’s been a slowdown in investment this year. People are sort of looking at all these alternatives now as to what we can do. It has driven, though, things in certain sectors, this automation point. And the other point we’ve seen digitalisation programmes like Made Smarter. If we see that, we’ve run a few pilots with government funding pilots around the country. We’ve seen a 47% improvement in efficiency in the small companies that have adopted digital technology and the challenge now is to get that out as a national programme which the government has committed to so again we need to remind them to start delivering on that big programme and get everybody on board that’s what we need to do.

Carl Sizer
Brilliant and actually you touched, you actually Cara, touched on energy as a challenge here for organisation and it has definitely gone up the agenda. I mean when I go across the UK everyone is talking about that alongside the skills agenda you’ve got the two that seem to play together. And we obviously did our Energy Survey recently as well alongside you guys doing the Make UK report and that came up with a very clear statistic that after a number of years of energy demand sort of being on a downward trend as people have got more efficient with some of the technology aspects flowing in actually we’re really starting to see that rise and businesses are now expecting that to continue over the foreseeable future.

And so not only if we got energy demand growing, we’ve also got price volatility of energy really being something that people are finding hard to manage. And of course with price volatility in energy it makes projects somewhat uncertain as to whether or not they are viable much like the tax rises. If I’ve got uncertainty on the pricing side of energy where do I quite frame that. So I guess I’m interested Stephen in just some of the conversations you’ve had around that particular topic and where you think manufacturers are starting to focus and put their efforts?

Stephen Phipson
It is as you say right at the top of the priority list. I characterise it as there are three things that are in the discussion at all time. First is skills, lack of skills. What are we doing about skills agenda, particularly vocational skills, energy costs and access to finance? They are the three things that every manufacturer talks about in one form or another, which are absolutely vital. On energy, the current situation is particularly our energy intensive industries, steel making, chemicals, glass. We find ourselves at the moment in the situation where on average we’re about 50% more expensive than Europe as a place to manufacture and 120% more expensive than United States. It’s a massive difference if energy is a large part of your cost of sales.

Think about the transition at the moment only 20% of British industry is electrified. The electrification programme, which is now the big push under the new carbon budget, requires an enormous amount of investment to convert to electricity. And actually it’s got to be competitive. So we have seen the effect of investment programmes going to other European countries and not coming here purely because of the energy costs. Now I do know that the government is really focused on this point and they are really determined to find some way that we can make industrial strategy, industrial, not industrial strategy, but industrial energy costs more competitive than they are at the moment.
We do have the supercharger arrangement for the energy intensives. It doesn’t quite go far enough. But we do need to work on it. But it is a priority, and we want to see this as part of the industrial strategy. So in our discussions with the government, this forms one of those top three priorities.

Carl Sizer
Brilliant. And Cara, obviously, a lot of this is coming off the back of AI and other technologies flowing in very energy hungry. Is there anything you’ve seen that manufacturers could be doing in thinking about how to offset some of those additional costs and how that could play through?

Cara Haffey
Yeah, it’s an interesting one. I think it’s come up in our survey. It doesn’t come up in my, I feel like kind of I’m the one bringing it into the boardroom. I don’t think that certainly that the piece of kind of, you know, if you’re typing anything to AI. How much is that for water? How much is it for electricity? I don’t know that it’s totally on our levels of kind of what people are really understanding. But it was so interesting that it came up there in terms of actually where people can see the cost rising on technology for the future. I sort of hope it doesn’t stop people going into it. But at the minute, to me, it’s a balance. I don’t have an answer, really.

Stephen Phipson
It comes back to that point about digitisation, where we need to get people to adopt digital technology because the 47% improvement in efficiency is largely down to energy. So one where you can mitigate it is becoming more efficient.

Carl Sizer
So, and I guess then just sort of flowing that forward onto a couple of other areas that play into this and the net zero agenda, which I do think we just need to address, not least given, there’s a clear change. Right, the narrative around it, where the government is going to go and the competing pressures that there are on these topics. What’s your sense, Stephen, of where the manufacturing industry is with respect to net zero and where they’ll go?

Stephen Phipson
Well, a lot of companies are actually working hard. We see a lot of companies doing sustainability now in their factories. We have good examples now of new plant, new factories being off-grid with their own renewable energy sources. A lot of investments gone into that. This electrification process everyone understands it. It’s very interesting the manufacturers the more you talk to them. I think it’s driven by this energy cost efficiency thing as well. So they can start to see some of these net zero changes that need to happen as part of that.

Again we have to come back to make sure we got the right incentives in place. We used to have the industrial energy transformation fund but we need to see that accelerated out much more than it is than it has been in the past. We also need to see the business rate system rewarding you for investing in green technologies and not penalising you if you put things if you improve your factory. And again that’s a discussion that’s going on with treasury at the moment.

So again back to that industrial strategy point we need to make sure everything’s aligned to encourage much, much more investment in it. But I would say right now it’s a really interesting topic and there’s some great evangelistic manufacturers out there that are keen to show you what they’ve done in their factory about improving it.

Cara Haffey
Yeah I supposed to build on that. I think I hope and I sort of still feel that net zero is top of the agenda. I think that’s not just on a climate change view. I think where you can make that with efficiency, with cost, then funny enough, engineers and manufacturers love that. So if it’s kind of going towards all of it, which I think a lot of it can. And I think there’s enough, the key thing that manufacturers do to their credit is think long term and actually that long term view of energy costs and what you do need to do now to invest for the future rather than just watch it tick up is something that I do think our sector and industry does really get.

Carl Sizer
Well, look, with that positive note and that way of thinking about net zero, and I’m really hopeful that will stay the same as well. Thank you both very much, really interesting insights. And it’s really clear that there is a huge opportunity here for the manufacturers. There’s some competing challenges for them to really try and address, but that technology, AI productivity piece is something to really get behind.

So hopefully, you know, with those opportunities and with the opportunity for growth and innovation, as we move forward, I think it’s critical that the industry leaders really continue to invest in that technology. They explore the new markets that are really there. They focus and prioritise around sustainability.
But I think in working together, working with government, get the supportive policies, I think there’s a massive opportunity for a prosperous future for UK manufacturing but it’s going to need work and it’s going to need focus. Hopefully you’ve enjoyed today, thank you very much for joining and we’ll be back soon.