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Government failing to capitalise on successful British manufacturing

While the Coalition buckles under the strain of economic stagnation, a new Civitas report shows that supporting the electronics sector could re-energise job opportunities. Selling Circuits Short, by Stephen Clarke and Georgia Plank, reveals that the Government is ignoring the size and significance of electronics manufacturing. Supportive policies could help in Osborne's trumpeted 'coordinated push for growth'.

The LED under a bushel

The report outlines the size of the sector and its significance for British jobs and the rest of the economy. Clarke and Plank show that UK electronics production was worth £15.2 billion in 2011, and that more of the economic value in its supply-chains is captured by British workers than in comparable sectors. The result is more jobs at higher salaries than other manufacturers:

• The electronics industry, including electrical equipment, had a gross value added (GVA) of £13.8 billion in 2010, while the automotive industry added only £5.6 billion and pharmaceuticals £11.9 billion. (p. 13)
  
• 204,000 people are employed in electronics, compared to 125,000 in car manufacturing and only 40,000 in pharmaceuticals. (p. 13)

• Each job in electronics has a gross value of £68,000 compared to £45,000 in the car industry and £54,000 in aerospace. (p. 17)

• Two-thirds of gross value is captured by workers, resulting in average incomes of around £45,000 per annum. It also provides attractive profits for investors. (p. 17)

Ultimately, the importance of electronics to the industrial economy is comparable to that of the automotive, pharmaceutical and aerospace sectors and may be even greater. Yet electronics have not figured widely in the Government's plans for economic recovery. This could be partly because consumer electronics, along with well-known brands, tend to be dominated by companies in the Far East. Britain, however, is a dominant force in more specialised higher-value electronics goods, especially for medical devices, power electronics and communication systems. The market is set to expand:

Investment freeze

Despite the strength of electronics manufacturing, the report explains that recent trends are poor, with the sector contracting since 2000:

The report explains that the scarcity of finance for small, fast-growing British technology firms, while always an issue, has been exacerbated by the recession. As a result, Britain produces many innovative electronics firms but the vast majority of these fail to become world-beaters:

• Total investment by venture capital funds has fallen by approximately 50 per cent since 2003. (p. 111)
  
• The number of UK seed and early stage investments as a proportion of all venture capital investments fell from 37 per cent in 2009 to 22 per cent in 2010, creating an early stage equity gap in the UK market for small and medium enterprises seeking between £250,000 and £2 million. This is particularly damaging for electronics start-ups which often need financing that is beyond the resources of the majority of business angel investors. (p. 111)

• A lack of funding prevents the growth of many British start-ups. Whereas American firms tend to retain their independence and become global businesses, British firms are acquired by their American competitors with alarming regularity. In 2008, the government examined 45 leading British electronic systems design companies; by summer 2012, eight had been acquired by foreign competitors. (p. 112)

Questioning the knowledge economy

Clarke and Plank explain that part of the recent contraction in the industry is a result of the UK ceding ground to foreign companies in actual goods production while focusing on design of new products. As a result, the UK remains a world-leading designer of electronics but is slowly losing its manufacturing capabilities. However, this trend risks putting Britain's design advantage at risk since, in the long run, design is inextricably linked with production techniques. Despite possessing some cutting-edge manufacturing facilities, the country lacks sites capable of high-volume production.

While foreign governments value production, the British government has continued to believe that design and production can be developed separately:

• The US government recently provided cash and tax incentives worth $1.4 billion to help the firm Global Foundries build a new microchip factory near New York. (p. 100)

• China and Taiwan continue to support the construction of innovative manufacturing facilities despite making a concerted effort to develop their design skills. For both countries there is no design without production.

• At the behest of the European Commission, industry experts recently produced a report that warned of the danger of failing to invest in cutting-edge manufacturing. While Germany, France and Ireland participated, the British government failed to contribute to the study. (p. 99)

What needs to happen?

The Coalition needs to reengage with, and support, this vital industry. The Government:

• needs to develop a strategy that can support a sector containing numerous and diverse small and medium-sized businesses.

• should examine the limitations of the British venture capital industry and ought to simplify public venture capital funding by replacing the current myriad of small, often overlapping, funds with an integrated structure made up of a handful of public-private funds.

• must ensure that energy prices are internationally competitive. Lower taxes and other financial incentives should be offered to British and foreign manufacturers that are investing in cutting-edge facilities.
  

Clarke and Plank conclude:

Both ubiquitous and unobserved; electronic products are a pervasive part of life yet their presence is often taken for granted. Electronics are undervalued in the UK despite the fact that when you use your mobile, drive your car or visit the doctor you are likely to be using electronics designed or built in Britain.

Marco Pisano, Electronics Programme Manager at Intellect, the UK technology association, supported the recommendations of the report. He commented:

'Electronics is a strategic capability that any modern country must maintain and develop to play a major role in future growth markets and industries. Hence industry and government should work together in ensuring this vital, but often invisible sector is well equipped to compete and grow in the long-term.'

Derek Boyd, Chief Executive at the National Microelectronics Institute, trade association for Electronics Systems, Microelectronics and Semiconductors in the UK said that the report 'highlights many of the things we care about at NMI'.

For more information contact:

Stephen Clarke 07707 233188 (mobile), 020 7799 6677 (office)

Georgia Plank 020 7799 6677

Civitas 020 7799 6677

Notes for Editors

i. Stephen Clarke is an Economics and Industrial Policy Research Fellow at Civitas. Georgia Plank is a Research Fellow at Civitas, focusing on economic issues including financial services and manufacturing in the UK.

ii. Selling Circuits Short: Improving the prospects of the British electronics industry is available on Amazon kindle and as a PDF.

iii. Civitas is an independent social policy think tank. It has no links to any political party and its research programme receives no state funding.