Reports of manufacturing decline are greatly exaggerated

What should people make of the flow of news and comment about our manufacturing industry?

What should people make of the flow of news and comment about our manufacturing industry?

On the one hand, hardly a week passes without some lament about its condition. If people are not worrying about the demise of sections of the car industry they are fussing about interest rates. When the pound was exceptionally strong against the euro last year we were told that manufacturers would shift their output across the Channel; now the dollar and sterling are weaker, we are being told that the possibility of recession in the US is the gravest threat. But of course the very reason that the dollar is weaker (dragging sterling down with it) is that the US may indeed face recession.

On the other hand, when you examine what is actually happening it is hard to remain so gloomy. I have just been looking at some US Department of Labor figures and these show the UK in a surprisingly good light. Take employment in manufacturing. You might imagine that it has plunged in recent years, whereas it is actually a little higher than it was in 1992. By contrast, in France manufacturing employment is down 10 per cent and in Germany (skewed only a little by unification) it is down nearly 20 per cent. In Japan manufacturing employment is down 14 per cent.

Productivity? The government repeatedly compares UK productivity unfavourably with that of the US and much of the Continent, with some justification. But that is the flip side of maintaining employment levels. And we put on a spurt in 1999 (there are no figures yet for last year), with productivity rising more than 4 per cent, second only to the rise in the US. As for overall manufacturing output, we were better than Germany and Japan and worse than France and the US. In fact, Germany and Japan, two countries widely considered pre-eminent in manufacturing, actually showed the lowest increases in output of any of the "Group of Seven" large, developed countries since 1992. They were up 2 per cent and 4 per cent against the UK's 10 per cent and the US's 40 per cent. So what should the practical executive - in any walk of business - make of all this, aside from the fact that one shouldn't believe everything you read? Some suggestions.

The first is that excellence in manufacturing is, and will continue to be a crucial element in international competitiveness. Despite the gradual shift of both employment and output away from manufacturing and into services, the fact remains that fast-growing countries (like the US) have seen booming manufacturing sectors - and vice-versa. The second is that success at manufacturing is not only a question of increasing productivity. Manufacturing productivity can be increased by shutting down the least productive companies and sacking lots of people, but if those people are not redeployed into other jobs, then while the manufacturing sector may be more productive the whole economy is not. In fact it is probably less productive.

The third conclusion for business is that from a practical point of view productivity matters less than profit. Of course it matters more to the business, for if it is not profitable it will not survive. But it also matters at a national level. If workers can add enough value to justify their wages and deliver a profit at the end then that is fine. If they cannot, they lose their jobs - as has sadly happened in Germany and Japan. We should worry if our manufacturing were unprofitable - and some sections are - because profit is a key indicator that a company is adding value to its inputs.

But this is a backward look at statistics. Looking ahead a rather different picture seems likely to emerge, for in the last couple of months the outlook for US manufacturing has suddenly deteriorated and sections of European manufacturing are also facing sharply lower demand. As far as the UK is concerned the story is about to change from one of reasonable demand but little pricing power to one of lower demand but slightly less pressure on margins.

So the stories will be of cutbacks and closures. These will be particularly severe in manufacturing sectors where there is serious over-capacity, such as the motor industry. Cuts by GM and Ford, coupled with radical surgery (and probably a company reorganisation) at DaimlerChrysler, will feed through the suppliers, in particular the component manufacturers and the steel and chemical groups. The UK may ultimately appear quite fortunate to be less exposed to the motor trade than France or Germany, though we appear at the moment to be in the front-line for cutbacks by GM, Ford and maybe Nissan, though not Honda or Toyota. Keep your fingers crossed for Rover.

Because car plants have a high profile this reorganisation will continue to generate industrial quantities of negative news and comment, but the actual progress of the rest of our manufacturing sector may well be more encouraging. Craft manufacturing, pharmaceuticals, precision engineering - there are lots of sectors where demand may hold up very well. Export demand, thanks to the decline of sterling against both the dollar and the euro, should be relatively profitable. But as many of these companies are relatively small and their industries fragmented, they will not attract headlines.

Manufacturing in the UK over the next couple of years is likely to be a story of relative success both in maintaining employment and in increasing output. But the supposed (and to some extent real) productivity gap with the US and Europe will narrow only slowly. As a gross over-generalisation, the large companies will continue to squeeze back the size of their workforce but the small and medium-sized ones will grow. Manufacturing as a whole will ride though the downturn in quite good shape, even if that isn't what it will feel like in the big firms - or what you will read in the newspapers.