West Midlands Manufacturing 1997-2009: why did it take such a big hit?
Many readers will be aware of the oft-cited figure that over a million jobs were lost in manufacturing under the last Labour government. A number of factors came together to accelerate and extend a 'natural' process of deindustrialisation so that even 'healthy' manufacturing activities were lost.
I've been arguing for ages, for example, that the over-valuation of sterling over the late 1990s and early 2000s hammered our export sectors - and put a huge dent in our automotive and transport clusters here in the midlands. In so doing it seriously unbalanced our economy and contributed to the later problems experienced when financial services went belly up.
Take this comment from a piece I penned for the Policy Studies journal in 2003:
"...even the most sophisticated regional cluster policy can run into the constraints and incompatibilities of national-level policy. Two incompatibilities or tensions are obvious from a West Midlands' perspective. The first is the policy stance towards the exchange rate. The volatility of sterling was a key factor in BMW's decision to withdraw from Rover, and in the broader malaise of the manufacturing sector since 1997. By mid 1999 the Sterling effective exchange rate was overvalued by around 20% (Church, 1999). This exacerbated Rover's problems, making exports difficult at a time when the company was trying to re-orientate sales towards export markets, and undermined BMW's investment programme... This volatility has made conditions for the regions' manufacturers extremely difficult and has accelerated the shift to sourcing overseas and/or in euros to pass the exchange rate risk on to suppliers. Cluster policies and more general development goals in a manufacturing-orientated region can be undermined by such major exchange rate fluctuations".
('Globalisation, Clusters and Cluster Policies', Policy Studies, issue 2/3, 2003)
Some interesting regional statistics have just been published which seem to back up that argument (they were covered by Peter Plisner and Patrick Burns on the BBC's Sunday Politics West Midlands show yesterday). In fact, manufacturing in the West Midlands declined over 1997-2009 at a faster rate than any other region in the UK.
New figures from the Office for National Statistics show a fall in manufacturing 'Gross Value Added' (or GVA - one measure of the value of output) of some 23% in this period, against a 12% fall in the North East, a 10% fall in the North West, a 5% fall in Yorks and Humber, a 7% fall in the East Midlands, and just a 1.7% fall in the South East.
That 23% reduction in GVA is 'nominal', so when we also factor in inflation over 1997 to 2009 then the real loss in the value of manufacturing output in the region probably adds up to something like 40%.
In case you wonder why this over-valuation had such an impact here, it's because the west midlands has always been a trading region. Formerly the 'workshop of the world', the region has always exported a wide range of manufactured outputs, from cars to pottery.
And the huge over-valuation of sterling (estimated at around 20% over-valued by the year 2000) hammered our auto and transport clusters in particular. Think, for example, of the run down and loss of MG Rover, Peugeot, LDV, GEC-Alsthom, Massey-Ferguson, and Jaguar Browns Lane.
Both MG Rover and Peugeot produced around 250,000 cars at their peak in this period, so the loss of just these two plants alone took out half-a-million units in capacity (UK car output peaked at 1.99 million in 1999 and even after the last two years of growth, it grew to just 1.35 million last year). Factor in the impact on the supply chain and you can see why this region took such a hit.
Of course, 2009 was an especially bad year and with car output that year down to 1 million units - with JLR affected badly during the downturn - then the 'end year' of the ONS run of statistics looks especially bad. Since then we've seen a rapid manufacturing bounceback during 2010 and the first part of 2011, with the output drop of some 15% during the recession clawed back and jobs created (however, that recovery then petered out and went into reverse late last year).
More support for exporters is essential now, I think, as an extended period of exchange rate over-valuation - as we saw in the 1980s and again in the late 1990s/early 2000s - means that exporters leave overseas markets. They then face a 'sunk cost' of getting back into those markets when the exchange rate is competitive again. A period of under-valuation may be needed to help them do that, or in the absence of that, support from the government.
It was interesting that Ian Austin MP yesterday recognised that Labour should have done more to support manufacturing. He's right. In fact, I'd go as far as arguing that the last Labour government didn't really have an effective industrial policy until Mandelson arrived back on the scene late under the Brown government. Before that the focus at the national level was pretty much purely on financial services.
Of course, a lot of good work was done by organisations such as Accelerate and MAS at the regional level in diversifying and upgrading the local auto and transport clusters. Nevertheless, that local and regional work wasn't nearly enough when faced with a massively over-valued exchange rate and national level neglect.
All in all these new figures do highlight the importance of backing what we have left. For starters, that calls for a serious industrial policy, greater attention to skills, a big effort locally to upgrade firms with a medium GVA (30K to 80k per worker), access to patient long-term finance, and support for exporters if the 'march of the makers' is really going to get going again.
Professor David Bailey works at Coventry University Business School
Older/Newer
« Solar, So Good | Can you sell your mother's apple pie to China ? »
8 Comments
Leave a comment
Business authors
David Bailey - Prof David Bailey, Coventry University Business School
My postings |
My feed
Stuart Pemble - Construction Lawyer, Mills & Reeve
My postings |
My feed
John Clancy - Birmingham City Councillor and director of mediafuturesalert.com and justliteracy.com
My postings |
My feed
John Samuels - Professor of Business Finance, Birmingham Business School
My postings |
My feed
Chris Tomlinson - Chris Tomlinson is the founder of social media and online PR agency Friend (frienddigital.com)
My postings |
My feed
Andrew Whitehead - Senior partner at law firm SGH Martineau, leading the firm's Energy & Climate Change practice.
My postings |
My feed
Keith Gabriel - A Birmingham-based PR Account Manager
My postings |
My feed
Beverley Nielsen - Lecturer, Design Management, at the Birmingham Institute of Art & Design, BCU
My postings |
My feed
Mike Loftus - Director of News from the Future Ltd. Writing on the trials of setting up your own business
My postings | My feed
Richard Halstead - Midlands region director for EEF, the manufacturers organisation.
My postings | My feed
Karl Edge - partner at KPMG in Birmingham, specialising in automotive, manufacturing and house building sectors.
My postings | My feed
Peter Owen - Managing director for construction firm Willmott Dixon Midlands.
My postings | My feed
Doug Mahoney - International Trade Director at UK Trade & Investment in the West Midlands.
My postings | My feed
Dr Steven McCabe - director of research degrees for Birmingham City Business School.
My postings | My feed
Francis Greene - Professor of Small Business and Entrepreneurship, at the University of Birmingham.
My postings
Alan Gilmour - Director at Cogent Elliott, experienced in marketing, brand development and customer relationship management.
My postings
Latest Birmingham Post News blog
Birmingham Post staff and guest bloggers from the midlands give you their opinions on local and national news.
Latest Birmingham Post Lifestyle blog
Birmingham Post staff and guest bloggers from the midlands give you the lowdown on what's happening in your region and some musings on culture in the UK and beyond.
Latest Birmingham Post Science blog
Birmingham Post staff and guest bloggers from Birmingham and the midlands inform and entertain on all science matters.
Latest Birmingham Post Sport blog
Birmingham Post staff and guest bloggers from Birmingham and the midlands inform and entertain on all sporting matters.
Quick, the horse has bolted so close the gate. Well not quite that bad, but getting it back will be tough.
People can still support UK industry by buying local product more. The VW brand is eyeing up #1 spot in the UK without needing to build a factory in the UK. They have worked out they don't need to. Nissan build so many cars in Britain and are being well supported in the UK too, but think about such things before you spend your 'hard earned'.
Prof Bailey, I'm always amazed by your theories and technical explanations.
The fact of the matter is that some of our manufacturing declined and went out of business because they thought that they had a God given right to exist. They did not for various reasons invest in their businesses, and in many cases they produced poor quality and overpriced goods. The demand for their products diminished and they went out of business. Sadly, some state industries also fell away as they weren't part of the political agenda and considered "fashionable".
As for Rover, regardless of what the exchange rate was set at, there was no longer a sufficient demand for their cars. Do you think that the Germans, French, Italians, etc wanted to buy Rover cars? Rover cars were cheaply built, poor quality and poor value. And they were even overpriced in the UK! You can't charge premium prices for a second rate product. Rover for too many years had relied on their brand name and "Britishness" to sell their cars, and in the end people saw through it and were no longer willing to buy them in sufficient numbers. The "Phoenix Four" knew this and that's why they behaved like they did and ensured that they did okay out of it. And BMW, who are a profitable company that produces quality products which are in demand all over the world, were correct to get out of Rover when they did. It had nothing to do with the exchange rate, they knew Rover was finished without massive investment, which could not be justified or recouped and could have sent BMW into financial ruin.
Your exchange rate theory also doesn't add up in that how do you explain that some of our UK manufacturers have come through the same period and are doing very well for themselves, in both the UK markets and abroad?
As I've said on your previous blog (http://blogs.birminghampost.net/business/2012/01/the-austerity-debate-the-other.html) it is not the Governments responsibility to "prop-up" failing businesses. The Governments duty is to create the conditions for ALL businesses to sustainably grow. And by this I mean that the Government should have invested in the education system to maintain the high standards to produce talented youngsters, ensured investment in all the transport network so that it was fit for purpose, ensured low levels of personal taxation so individuals had money in their pockets to spend, ensured low levels of company taxation so that they could reinvest into their own business, ensured that fuel which is an essential of everyday life and not a luxury is reasonably priced, etc. None of this happened, but instead we had tax after tax after tax, and then reckless wasteful Government spending of these tax revenues on short term schemes, vanity projects and an inflated public sector! Public money should always be spent intelligently to achieve value for money and results. And all of the public should benefit and just a few individuals with vested interests.
And you still haven’t answered my previous question about how much money our RDA provided to “support” SME’s and manufacturing, when the money was available to develop a sustainable long term private sector economy?
This country is in a mess, and it is NOT our current crop of public leaders and officials that are going to get us out of this mess. As they are the ones that have been around for the last 20 years with their tired outdated ideas!
Scrutineer, yes it's a complex issue but you seem unaware of the imapct of exchange rate over-valuation on the manufacturing base.
Leave aside the fact that BMW should never have been allowed to buy Rover, but please note that when BMW did buy Rover the exchange rate was DM 2.30 to £1 and it has said it was planning on a turn-around strategy for rover with the exchange rate in the range 2.70 to 2.80 DM - when they withdrew the DM equivalent (of the euro rate) was 3.20.
You're not serious, surely, in suggesting this wasn't a big factor at play here?????
Good evening Prof Bailey.
In answer to your question, no I'm not suggesting the exchange rate wasn't a factor at all, and so I do agree with you that it was obviously a factor. However, I am suggesting that it was not as BIG a factor as you suggest.
An incompetent, short term and apathetic approach by the management of many of the companies that have gone out of business is much more to blame for their demise than the exchange rates.
And I'm intrigued to know why you feel that BMW should never have been allowed to buy Rover Group? I think it would be fairer and more accurate for you to actually suggest that the Phoenix Four should never have been allowed to take the reins after BMW. After all, the Phoenix Four were the last "managers" of the Rover "business" before it went bust, so surely they are more to blame than BMW? And didn't BMW kindly leave the Phoenix Four with £427 million to help them along with the "business"? In my opinion BMW behaved honourably throughout.
So does that mean you also think that Tata Motors should not have been allowed to buy JLR? Or is that okay with you, and by what rationale?
Finally, I can't help but notice that you still haven't answered my question about our RDA? I'm bemused by this, as is it not the case that you were a fan of our RDA and for the use of public money to "support" our manufacturing? Let me know if you want me to give you the answer as to how much public money they gave to our regions SME's.
I will finish by saying that I do respect you for arguing your case, even though in my opinion your line of reasoning is incorrect.
Regards, Srutineer.
Scrutneer, well let's agree to disagree.
Tata was good fit for JLR as they had deep pockets, take a hands off approach to management in subsidiaries, and could open up new emerging markets. Plus the alternative was likely to be private equity investors with no guarantee of long term investment or commitment.
BMW was NOT a good fit for Rover as at the time it was a small player and it had no experience in making small front wheel drive space efficient cars and Rover was highly dependent on Honda for such designs. The latter link was severed post takeover, leaving Rover struggling to bring cars to market.
If a foreign owner was needed then VW would have fitted better as it could have extended its platform sharing strategy to Rover, as has worked successfully with Seat, Skoda, Audi, VW...
btw, the exchange rate hit for Rover was actually huge - BMW management put it at around £700 million in evidence to the Hosue of Commons Select Ctte investigating the pull out in 2000. That was a critical factor in their decision to pull out.
Interesting post. I hadn't appreciated that manufacturing had declined so massively during the New Labour period. I was well aware of the damage done to the region's economy during the recession in the early 80s. How do these two periods compare in terms of impact?
Do you seriously believe a turnaround in the long-term manufacturing prospects of the UK is now likely/possible? Surely, with our economy now more dependant upon the financial and services sectors than ever before, it will be even less likely that a UK govt will pursue policies that help nurture industry.
Surely the reality is that the UK took a strategic (and obviously misguided) decision in the early 80s to abandon manufacturing. Our political system, which is massively over-centralised and favours investment in the capital city over the rest of country could have been designed to bring about regional decline. I agree that Lord Mandelson perhaps understood some of the issues facing British manufacturing, but as you say he arrived on the scene late in the day and achieved little.
What evidence can you provide that beyond warm words this current govt is likely to deliver a 'serious industrial policy'?
The benefit is that you don't have to worry about any of the upkeep anymore. The landscaping, house cleaning, and meals are all covered. You can just worry about enjoying your retirement Senior Care Facility, Colorado Assisted Living Placement Locator Services, retirement communities, home, seniorcare, Denver, Colorado State, Fort Collins, Ft., Springs, Elder, Alzheimers, Dementia, Adults at the hiking trails, in the swimming pool, or on the nearby golf courses.
Great info. Lucky me I discovered your website by chance (stumbleupon).
I've book marked it for later!