Tata choosing to build an electric vehicle battery plant in the UK will give a much-needed boost to a declining car industry and help secure its long-term future. Sectors should take the lead and draft their own plans for growth with clear asks for government that are aligned to expected outcomes, writes Thomas Aubrey on the latest ONS labour productivity data.
In June 2023, the Society of Motor Manufacturers and Traders (SMMT) which represents the UK automotive sector, published its Manifesto for Growth. The industry needs a growth plan. The gross value-added of the industry shrunk by 37% between 2016 and 2022, and the relative decline in the competitiveness of the UK automotive sector is apparent. In the post-Brexit years 2016-2019 the value-added of the global automotive sector grew by 8% but declined in the UK by 12%. Meanwhile, the move towards net zero will bring both threats and opportunities to the sector.
The SMMT strategy is a good starting point but it lacks a detailed plan outlining what UK firms are going to do to address the opportunities (such as the Tata decision to invest in a UK battery plant thanks in part to a £500m subsidy), and what the specific ask is from government. One of the document’s recommendations is to set up an all-party, cross-Whitehall transformation strategy “that supercharges UK competitiveness” indicating that such a strategy does not yet exist. However, the people who know how to grow the automotive companies of the future are more likely to be managers working in firms across the UK rather than civil servants in Whitehall.
Sectors should therefore take the lead and draft their own plans for growth with clear asks for government aligned to expected outcomes. For example, the SMMT recommends government to “Deliver a modern border and customs framework that facilitates smooth, cost-effective trade, supported by trade and export services and funding.” But there is nothing specific about what a renegotiated Trade and Cooperation Agreement (TCA) with the European Union should include to benefit the UK auto sector. Once an actual strategy has been drafted and agreed, government and industry need to work closely together to ensure the actions get implemented. Opposition political parties should be included in the conversation – the issue is important enough to need political consensus.
Sectoral plans
The development of sectoral strategies has been central to the success of the post-war German economy where trade associations have provided the impetus for sector-wide collaboration including technology transfer, the provision of training, as well as problem identification and cooperative problem solving which might result in cost and risk sharing – even with rivals. In addition, nearly all of Germany’s companies belong to both sectoral and regional trade associations.
In 2018, the German Council of Economic Experts restated its ordoliberal[1], decentralised approach to industrial policy arguing that to be successful, Germany “should refrain from a guiding industrial policy which sees it as a state task is to identify future markets and technologies as strategically important. It is unlikely that policymakers have sufficient knowledge and understanding of future technological developments or changes in demand to make this a meaningful long-term strategy. If the government is concerned about sustainable progress, it should rather rely on the decentralised knowledge and the individual actions of various actors of the national economy.”
Detailed sectoral plans have on occasion been developed by UK firms. During the 1960s, the British Aircraft Corporation (BAC) developed a strategy with key suppliers to enable the UK to become a global leader in the wide-bodied, medium-haul commercial aircraft sector with the BAC Three-Eleven. The project was intended to create over 60,000 high value-added jobs, and provide a major positive contribution to Britain’s balance of payments. The specific ask by BAC for launch support was rejected by the Heath Administration in 1970, partly because prior to this detailed plan the UK aerospace sector had received large amounts of government support including for Concorde, most of which was poorly spent. Yet the decision by the Heath government not to support the BAC Three-Eleven resulted in the UK aerospace sector being about half the size than it would have been – with lost revenues in the region of over $400bn (Freschi 2006). The collapse of the project ultimately paved the way for Airbus to enter the market and dominate the global civil aerospace market along with Boeing.
Whose plan?
It is not just the automotive sector that needs to work out its own detailed plan for the future with specific policy actions. Judging by the ongoing poor productivity figures, other sectors should also be engaging in serious strategic thinking. Between Q1 2019 and Q1 2023 private sector labour productivity, excluding real estate activities, grew by 2.3% or 0.6% a year. This is an improvement on the period 2010 to 2019 when it grew at just 0.2% a year, but still significantly lower than 1997 to 2006 when it grew at 1.7% a year.
A breakdown of the economy by broad sector indicates that nearly half of the private sector economy is now growing, while close to a third is stagnant and roughly a quarter is declining. Crucially, the declining portion of the economy includes Mining & Quarrying (North Sea Oil & Gas) and Manufacturing, both of which have a high value-added per hour compared to the whole economy at £45.04 per hour.
On the positive side, Financial Services, Information & Communication, and the Electricity sector, which all have high value-added per hour, continue to grow. The question is whether these sectors could grow much faster if they take the initiative to draft forward-looking plans, engage with government, and successfully implement them?
Table 1: Sectoral productivity disaggregation Q1 2019 – Q1 2023[2]
When looking at the more detailed industry level, the two fastest growing sectors are electricity supply and computer programming. As noted last quarter, the boost to electricity labour productivity has come from a shakeout of the number of suppliers. This suggests that improved regulation of the market could potentially boost labour productivity, alongside the development of sustainable low-cost energy solutions.
Table 2: Subsector disaggregation Q1 2019 – Q1 2023
Source: ONS
Access to cheap energy supplies has always been an important driver of productivity. During the eighteenth century when wages in England were high, it was the abundance of cheap coal that led to innovation in the use of machines. If energy costs had been higher, it is plausible these innovations would not have happened. The challenge for countries seeking to move towards cheap, low-carbon energy, is that a significant proportion of technologies are still at the demonstration or prototype phase.
The Government has put forward a vision for a low carbon energy future, along with some ambitious targets and high level delivery timelines. The vision focuses on nuclear energy including small modular reactor technologies, a consultation on the best way to support hydrogen, a focus on reducing development time for extending the transmission network, support to develop floating offshore wind, and the establishment of a solar taskforce. While these building blocks may well prove useful, the lack of a detailed delivery plan is a hindrance in delivering on the vision.
This is in part deliberate as the Government cannot provide that level of detail, and they have stated they want the vision “to retain the flexibility to adapt to changing circumstances, develop market frameworks that incentivise a low-cost, reliable system and provide the opportunity for innovation to develop new approaches and drive down costs.” Nevertheless, while it is perfectly sensible to embed this vision with some flexibility, the lack of an accompanying plan driven by the sector does not bode well in terms of achieving outcomes.
Afterall, whose plan is it anyway? Sector plans developed by industry, supported by government with specific asks, and delivered in partnership could well deliver faster levels of growth. But this would require a mindset change for industry to take the lead. Given that productivity takes place in firms – the private sector is in a much better place to start tackling the issue of growth than the corridors of Whitehall.
[1] Ordoliberalism is opposed to the concentration of both private and public power and had some influence in the formation of West Germany. For further detail see Aubrey 2022
[2] The sectoral disaggregation uses GEAD (Generalized Exactly Additive Decomposition) based on Tang & Wang 2004. The ‘within’ effect is productivity growth in activities within the sector, the ‘between’ effect measures the reallocation of labour between sectors.
The views and opinions expressed in this post are those of the author(s) and not necessarily those of the Bennett Institute for Public Policy.
