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Manufacturing Industry
An Overview

March 2008

Photograph of the Leylands Trucks Assembly Facility Source (External) www.leylandtrucksltd.co.uk

Introduction

With an estimated national employee workforce in 2006 of some 2.9 million, manufacturing industry provides far fewer jobs than it used to and the share of manufacturing in total employment has fallen considerably. Today, about 11% or one in nine of the employed workforce is engaged directly in Britain's manufacturing sector which generates about 14% of the nation's gross value added. Industrial job trends in Lancashire have mirrored the national pattern with decades of employment decline interspersed with only brief periods of stability. In the early 1950s more than 280,000 people or well over half the employee workforce were engaged in local manufacturing industry. By the latest count in 2006 this number had dropped to 99,000 or to just 16% of the total employee workforce. Locally the sector generates about a quarter of the sub-regions gross value added.

Manufacturing Employment Trends

Manufacturing industry has a long pedigree in Lancashire (Figure 1). In the first quarter of the 20th Century some 320,000 people were engaged in manufacturing of one sort or another, representing two-thirds of the total workforce. Three-quarters of this industrial workforce were employed by the textile industry alone (especially cotton) which dominated economic activity in many local communities to a degree scarcely imaginable today. From its zenith just before the outbreak of the First World War this industry under-went severe contraction. The 1930s in particular was a period of great distress in the Lancashire textile towns, with high unemployment and heavy outward population movement.

The Second World War was a decisive event in breaking the dominating hold of the textile and allied industries on the local economy as many new sectors of industry were introduced or greatly expanded (e.g. aerospace, munitions, engineering) as production was turned to supporting the war effort. Many of these industries and their infrastructure remained after the war and played a crucial role in the diversification of the post-war economy as the hold of textiles and other staples was rapidly eroded. Even in the early 1960s more than half of the County's insured workforce were still classified to manufacturing.

Graph showing how the number of employee jobs in manufacturing has changed over 1948 to 2006 in Lancashire, East Lancashire, Central Lancashire and North Lancashire - see text for details Source Ministry of Labour/Department of Employment/ONS - ERII Employment Records

Employment in manufacturing at its lowest level for nearly 160 years

According to the Office for National Statistics the last time that employment in manufacturing was recorded below 3 million in any published series was in the 1841 national census when the total was just under 2.5 million. By 1851 when the next census was undertaken, the number employed in manufacturing had risen to 3.6 million, some 600,000 more than the present day. At that time there were more than 1 million domestic servants and the same number of agricultural workers – out of more than 7 million workers. Textile companies and boot and shoe makers were amongst the biggest employers. There were also button manufacturers, fishhook makers, glass and bottle producers and anchor and chain makers. The general upward trend continued until 1957 when manufacturing employment in Britain peaked at 9.4 million.

The national manufacturing recession of the early 1980s marked a major discontinuity in previous employment trends and represented a radical and permanent alteration in the nature of the local economy. Over the short period 1979-1984 nearly 60,000 jobs disappeared from Lancashire manufacturing industry - a fall of more than a quarter. Whole industrial sectors virtually disappeared and much industrial capacity was scrapped. After some modest recovery in the late 1980s, the post-1990 recession and an enforced restructuring within the local defence, aerospace and vehicles industries again saw manufacturing badly hit with a further loss of 36,000 jobs (-22%). The sector then enjoyed a brief period of respite and relative stability but after peaking in 1998 employee numbers again began to ratchet downwards as industry responded to the high value of Sterling against the Euro and intense overseas low cost competition exacerbated by falling demand as world trade growth faltered. The rise of China as a major low cost manufacturer and "workshop of the world" has further compounded the difficulties of many manufacturers across a wide range of industrial sectors. Between 1998 and 2006 a further 39,300 manufacturing jobs (-28.4%) were "lost" to Lancashire, entailing, in some instances, the transfer of production capacity itself away from the county.

That there has been a strong tendency towards "de-industrialisation" in employment terms is therefore indisputable. However, to imply from this that manufacturing industry has a greatly reduced role within the wider economy is more open to question. Measured in current prices there has been a diminution in manufacturing's share of national GDP (from a peak of nearly 40% in the early 1950s to only about 14% today) but this is as much a reflection of the relative rise in the price and range of services as decline in manufacturing output. In constant price terms the value of goods produced in the UK has actually increased over the past three decades. The value of manufacturing output as a whole has risen by about a fifth in real terms since 1978 and by about 90% since the employment peak in 1957. Globally, in 2006 Britain still ranked as the 6th largest manufacturing country in the world by output behind the US, Japan, China, Germany and France. The gainers have been higher value sectors such as chemicals, pharmaceuticals, aerospace, electronics, electrical goods and high precision engineering services. The key to this lies in productivity improvements. On average, productivity growth in manufacturing over recent decades is reckoned to have been more than twice as fast as in services. The inevitable consequence is a shift of employment from the more productive manufacturing sector, where fewer workers are needed to produce a given increase in output, to service industries where more workers are needed. Some estimates suggest that fast productivity growth in manufacturing relative to services could account for as much as two-thirds of the drop in employment share in manufacturing.

Some of the rest of the employment fall can be explained by the way official figures tend to exaggerate de-industrialisation. The last major change to a revised Standard Industrial Classification (SIC,1992), for example, resulted in national manufacturing employment estimates being reduced by approximately 10% compared with the previous classification. Also, growth in manufacturing over the past couple of decades may have been under-stated because of the increased use of "out-sourcing" or buying in of many service activities previously undertaken in-house and which formed part of the manufacturing headcount.

Manufacturing Businesses

According to information provided on VAT-registered businesses by the Dept for Business, Enterprise & regulatory Reform (BERR) there were 3,810 VAT-registered manufacturing businesses in Lancashire at the start of 2007, equivalent to 9.3% of the area's total registered stock. As in the case of employment, this is a rather higher representation than in the UK at large where manufacturing businesses made up 7.8% of the stock. Over the past decade and a half the number of manufacturing businesses in Lancashire has fallen by about 300 or by 7.2%, a slightly larger reduction than in the UK (Figure 2). However, the structure and composition of this stock is far from static: in 2006, for example, 220 new Lancashire manufacturing businesses were registered, equivalent to 5.5% of the existing stock whilst 240 businesses were removed from the VAT register – some 5.8% of the stock.

Graph showing how the number of businesses in manufacturing has changed over 1994 to 2007 in Lancashire and the United Kingdom - see text for details Source BERR - VAT Registrations and De-registrations

The fortunes of manufacturing over the past decade or so have been such that de-registrations in Lancashire have exceeded new registrations in all but one year. The pattern locally has been one in which the rate of new manufacturing business formation has been, consistently below the national average. On the other hand, the sub-region enjoys a slightly more favourable manufacturing business survival rate with, on average, 92.4% of businesses in existence at the start of each year still trading at the end of twelve months. The latter is presumably a reflection of the greater maturity of a large slice of Lancashire manufacturing relative to the UK.

The Annual Business Inquiry (ABI) which gives estimates of "local units" with employees provides an alternative measure of the size of the manufacturing business stock. These will include companies with turnover below the VAT registration threshold as well as local branch plants of larger enterprises that have their VAT-registration lodged elsewhere. In total in 2006 there were over 4,300 local manufacturing units or "establishments" in Lancashire, 2.6% of the national stock. The great bulk of these are small – 85% employ fewer than 25 people and 58% have less than 5 employees. The larger employers, with 300 or more employees on the payroll make up less than 0.9% of the total manufacturing stock though provide for about a third of the manufacturing workforce. Statistically, the average size of manufacturing establishment in Lancashire is just 23 employees, slightly larger than the UK average of 18 employees.

Effectively, the size structure of Lancashire manufacturing industry today is not greatly different from that nationally. This represents a remarkable transformation from the position a generation ago when the Lancashire economy was dominated by manufacturing industry and by very large and vertically integrated manufacturing enterprises many employing thousands of people. Whilst statistically it is not possible to be too precise, 25 years ago the average manufacturing company in Lancashire probably employed 100 people or more whilst larger companies (300+ in today's terms) comprised as much as 5% or more of the total stock, employing perhaps three-quarters of the total manufacturing workforce.

Map showing the approximate distribution of manufacturing establishments in Lancashire - see text for details Source ONS - Annual Business Inquiry

Manufacturing industry generally continues to be dominated by full-time male employees (Table 2). These account for more than three-quarters of the employee workforce. Less than 2% of manufacturing male workers are employed on a part-time basis (i.e. fewer than 39 hours per week). Female employees account for under a quarter of the workforce – a far lower proportion than evident in the service sectors of the economy, but again, most females hold full-time positions.

Out-Sourcing

Industry has always bought-in non-industrial services to supplement its industrial processes. These have included many basic services and charges such as rents, insurance premiums, bank charges, professional services, telephones, plant hire, transport, and so forth. Over the past couple of decades the process towards specialisation and contracting out has accelerated as many companies have re-focused their activities on so-called "core functions". There has been an increased tendency to contract-out other specialist services such as cleaning, information technology, security, catering, distribution and logistics and various technical services previously provided in-house. Large numbers of jobs previously allocated to manufacturing have, as a consequence, simply been re-classified as part of the service sector and represent a transfer rather than "lost" manufacturing jobs or "new" service jobs per se.

This out-sourcing pattern has been in evidence in Lancashire. In 1980 local manufacturing industry bought in approximately £530m of non-industrial services, equivalent to 14% of its net production. Subsequently, and although subject to cyclical swings, the trend was upwards. By the end of the 1990s purchases of non-industrial services had risen to over £1bn per annum, an increase in real terms of some £425m or 80% and accounted for more than a fifth of net output. This trend has undoubtedly continued subsequently. Not all these non-industrial services will have been purchased from within Lancashire itself, though as rapid employment growth in such activities as business services would imply, undoubtedly local service companies will have benefited substantially.

Manufacturing Today

The long-term contraction in employment notwithstanding, there is little question that manufacturing industry remains a powerful force within Lancashire. It has been steadily re-inventing itself into a much more higher value, flexible and dynamic sector, responding to global forces and learning how to build businesses that cannot easily be transplanted overseas. Such companies have moved away from trying to compete on price with volume production or commodity products towards a more knowledge intensive and often less price sensitive "niche" manufacturing, focusing more on providing quality and long-term customer services.

Also of some importance, the weighting of high technology industry within the manufacturing sector has also increased enormously over the past couple of decades, notably, though not exclusively, in aerospace and advanced engineering. Such industry is noted for its knowledge intensity and typically has high capital investment and productivity characteristics paying well-above average wages and salaries to its workforce. Today nearly one in five of Lancashire's manufacturing workforce – more than double the 8% share in Great Britain at large – are employed in high technology industry sectors.

Strong evidence of the steady transformation in local manufacturing is provided by a number of key economic indicators, most especially by the key measure of productivity (GVA per head). For decades productivity in Lancashire manufacturing seriously lagged behind the rest of the UK with a persistent "productivity gap" well in excess of 10% spread across a wide range of sectors. However, since around 2000 local manufacturing productivity has risen rapidly to an all-time high to above the UK average. In part this is attributable to structural changes, notably the much reduced weighting of the older and more traditional and lower value sectors like textiles, clothing and footwear that hitherto acted as a "drag" on productivity levels. This process is also a measure of the extent to which many companies have re-engineered their products and business processes and of how far the high technology/advanced manufacturing sectors have taken up the baton of growth within Lancashire. The process has been aided by much improved investment expenditure which on a per head basis is comparable to the UK. These factors together have contributed to a reduction in unit labour wage costs in terms of their share of GVA to a level below the UK average providing the sub-region with some additional competitive advantage.

Still accounting for more than a quarter of local gross value added (GVA) it continues both directly and indirectly to dominate economic activity and wealth creation in the County and perceptions of what is happening within the wider economy to an unusually high degree. Even though job numbers have diminished greatly, Lancashire still has a larger manufacturing workforce than any other shire county in the UK. In 2006 some 16% of all local employees were still engaged in manufacturing (rising to 24% or more than double the national average in the East Lancashire sub-region) compared with a share of less than 11% nationally.

Indeed, there are few other UK areas of comparable geographical size that continue to retain such a degree of strength in manufacturing industry. No less than ten of the fourteen local district authorities have manufacturing employee job shares above both the national and North West averages (Figure 4).

Bar chart showing the percentage of employee jobs that are in manufacturing in Lancashire and its local authorities - see text for details Source ONS - Annual Business Inquiry

Figure 5 and Table 3 illustrate the distribution of manufacturing employee workplaces across the Lancashire sub-region in terms of their share of total employees in each ward in a range that extends from zero in a handful of wards to over 76%. The continuing importance of manufacturing across a large swathe of East Lancashire is apparent but generally the highest proportions of manufacturing employees are to be found in those wards which either contain some very large plant operations or which have important concentrations on industrial estates and employment areas, typically on urban fringes. The lowest proportions are typically found within predominately residential/suburban areas.

Map showing percentage of employee jobs that are in manufacturing for all of Lancashire's wards - see text for details Source ONS - Annual Business Inquiry

As well as providing direct and often highly visible and reasonably well-paid jobs, manufacturing is also a major generator of jobs in the rest of the economy. Industrial companies are often the leading edge customers for all sorts of services and the major source of innovation and technical progress (about 80% of commercial R&D is undertaken by manufacturing industry) which in turn also feeds into service providers. Indeed, many of the employment roles previously categorised as "manufacturing" are now being registered as "service" sector jobs due to the increased trend towards outsourcing and the use of contract labour taken together with a change in the nature of work undertaken in manufacturing companies themselves. Huge growth in logistics and distribution services has also developed on the back of changes in supply chain management. Much of manufacturing's payments in wages and salaries, purchases and even capital investment flow back into local communities. This provides further employment and business opportunities for all manner of support industries. Every production industry job in Lancashire probably carries at least another one on its back in one way or another.

It is clearly wrong to argue that the production of tangible objects is somehow superior to the provision of services. Indeed, since objects are desired because of the services they can provide, it is arguable that the primary purpose of economic activity is to supply services of various kinds. Moreover, in statistical terms and as demonstrated above by the out-sourcing process that has taken place in many manufacturing companies, the definition between the two activities of "manufacturing" and "services" is becoming ever more blurred. Many manufacturers incorporate services within their products and sometimes these are a more profitable proposition that the manufacturing itself. Equally, there are service sectors such as many wholesalers who incorporate manufacturing "finishing" operations. Most products today are a bundle of different processes, some of them manufacturing, some of them services, and the way in which this bundle is tied together varies with industries and over time. That said there are many pragmatic reasons for believing that it remains vital to have a strong and competitive manufacturing sector to provide the dynamism for growth. Services will likely continue to provide and create most of the new jobs but manufacturing, even if shorn of many of its jobs as its productivity continues to rise, must continue to generate much of the wealth upon which Lancashire's and much of the nation's future prosperity will depend.

This page was compiled by Peter Kivell .

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