The future of the foundation industries is a microcosm of the bigger economic challenges facing the UK. How can we better balance the economy, spatially and sectorally? What can we do to boost our poor investment and productivity performance? And what actions can help address the UK's chronic balance of payments deficit?
Despite IPPR's new report into the sector finding average rates of investment, pay and productivity are in many cases above the economy and manufacturing average, output for the foundation industries as a whole - basic metals, fabricated metals, wood, non-metallic minerals, basic chemicals - is still almost 20% below 2008 levels. Given the difficulties the sector has experienced, one common argument is that the UK should relinquish its traditional role in producing foundation industry goods; in this view, we simply can't compete as economic power gravitates eastward and we should focus on the service sector to earn our way in the world.
However, although partly the result of increased competition from emerging markets, globalisation isn't the whole story: the foundation industries in the UK are smaller, and have contracted faster, than has been the case in other developed countries facing the same challenges.
Moreover, this isn't a perfect market: OECD analysis has shown that global investment in new steel facilities is disproportionately public sector driven as well as being concentrated in regions that are currently significant net importers of steel, suggesting geopolitics and the desire for self-sufficiency in strategic industry is shaping investment and production decisions. In other words, even if we are laissez-faire in our approach, few else are.
Letting our foundation industries decline dramatically would also reflect a broader weakness of the UK's economy: our manufacturing diversity has been lost over the last 40 years, and we remain an anomaly among advanced economies in having so few industries with revealed comparative advantage. This is a key reason for our large and longstanding trade deficit and our unbalanced economy.
For this reason, IPPR's new report, Strong Foundation Industries, argues that it is strategic national interest, not just sentiment, that should compel policy intervention. In particular, our analysis suggests the UK's foundation industry firms have the potential to supply advanced manufacturing firms, such as those in aerospace, automobiles and pharmaceuticals, to a much greater extent than they do currently. In the process, building on our areas of existing comparative advantage would be a low-risk way to diversify what we produce as a country, making us a more resilient and balanced economy in the process. Our analysis also found a link between foundation industry firms performing better when in closer proximity to key customers, further highlighting the positive effects of clustering.
To help the sector better integrate into existing strategic industrial clusters, we have set out a series of targeted, proportion interventions around finance, skills, innovation and ownership that can help put the foundation industries on a firmer footing for the future.
On finance, for example, evidence suggests more patient, long-termist forms of finance are crucial to sustaining incremental product innovation in manufacturing, something the UK's liberal market economy is poorly structured to provide. We have therefore recommended repurposing the estimated £500 million underspend of the final spending round from the Regional Growth Fund. This should target investment specifically at supporting innovation and clustering in the supply chains of strategic industry, such as aerospace, automobiles and pharmaceuticals. The focus in allocation should be on improving productivity within the sector.
To support clusters and the growth of an industrial commons, we have also set out steps to better integrate the metals and chemicals industries into the Catapult innovation network, with an emphasis on co-ordinated research activities where applied science, foundation industries and advanced manufacturing firms can align their interest and conduct joint projects. Similarly, a renewed and expanded advanced manufacturing supply chain initiative would be a step towards building a more effective industrial clusters policy.
And rather than allowing firms go bust that have a potentially viable future, the UK should introduce a 'right to buy', ensuring our industrial capacity isn't permanently lost during a period of global economic turbulence and spreading ownership in the process.
Action will of course have a cost. Yet inaction too bears a price: our analysis suggests that just a 1% fall in demand for domestic output from fabricated metals, basic metals and chemicals would reduce gross output by £2.3 billion and result in around 19,000 job losses in both affected industries and further down the supply chain, if not mitigated.
Far better would be proactive policymaking at both a national and local level to help foundation industry firms integrate into existing industrial clusters and move up the value chain in the process. Doing this will give not only the foundation industries a firmer footing, but in the process contribute to broader economic rebalancing.
Mathew Lawrence is a Research Fellow at IPPR and co-author of Strong Foundation Industries