Makers' mark: why UK PLC is on the march

Despite decades of decline, Britain is still the world's ninth largest manufacturing power. Russell Lynch reports on our enduring success

China has a huge appetite for Rolls-Royce

A boastful boss of a major Western company once waxed lyrical about his firm's brilliance in a lengthy speech met with enthusiastic applause at an international conference. Then the boss of a Chinese rival quietly took his place at the podium. He looked around the room, cleared his throat and announced: "We can do everything he can, for 40 per cent less."

Click here to see 'Factories 2012: A snapshot of the British industry' graphic

The anecdote – related by the economist Dambisa Moyo in her recent study of nascent Chinese supremacy, How the West Was Lost – underlines the uphill struggle faced by British manufacturers fighting unsuccessfully to stem the tide against their low-cost rivals.

More recently, the Chancellor, George Osborne, pinned hopes on manufacturers to drag the UK out of its present malaise with a call for a Britain "borne aloft by the march of the makers". Unfortunately, no sooner was the soundbite out of his mouth than the debt crisis in the eurozone – still our biggest export market, accounting for some 40 per cent of sales – began biting hard. In the first three months of this year, when the country's double-dip recession was confirmed, our manufacturers were stagnant rather than propelling us towards the promised land of recovery.

From world-leading companies such as GlaxoSmithKline in pharmaceuticals, BAE Systems in defence technology and Burberry in fashion, "Made in Britain" is still a label to be proud of, but there is less of it around than there used to be. It looks strange that the Chancellor should even have bothered putting his eggs in the manufacturing basket when the figures paint a stark picture of its declining significance to Britain.

In 1980, manufacturing employed 6.3 million people, accounting for 23 per cent of the workforce. By the end of last year this had shrank by around two-thirds to 2.3 million, representing 7.5 per cent of British employees. The nation's manufacturing base was hollowed out first under Margaret Thatcher and then under Tony Blair as New Labour was bewitched by the financial sector and the pursuit of a service-led economy. Manufacturing's share of the UK economy overall, 23 per cent in 1980, has dwindled to just 10 per cent.

But it's not all bad news, as industry cheerleaders are keen to highlight. The UK's industrial base may be little more than a 10th of the size of China's, but we are still the world's ninth-largest manufacturer, according to the EEF manufacturers' trade body. And there's still plenty of stuff we do well. Go back to China, for example, and a grand old British name like Rolls-Royce. We might not be able to compete any more in low-cost manufacturing, but our new global economic overlords still wants to buy our cars.

Demand for Rolls-Royces in China, which had more than a million millionaires in 2011, is such that it overtook the US as the firm's biggest market in 2011. Last year the firm could barely keep up with demand for its Phantom Dragon, costing $1.2m (£770,000). Rolls-Royce sold out of the model in two months.

In May, Britain made 141,146 cars, the highest number in eight years, with vast numbers finding their way to the world's second-largest economy. The story of the last decade may be the quadrupling of Chinese imports to the UK – £31.5bn last year – but less remarked upon is that our exports to China jumped more than six times to £9.3bn during the same period. There is some ground for optimism.

Tim Bradshaw, the CBI's head of industrial policy and innovation, reckons cars could take a big chunk out of Britain's trade deficit, which stood at more than £10bn in April: "At the moment sales of higher-end cars to China are worth about £2bn a year, but at the current rate of growth that could be up to £8-9bn by 2020. So just on cars to China alone we could eliminate a quarter of our trade deficit."

There are other things we do well, Mr Bradshaw adds. "It's not just the likes of Jaguar, Land Rover and Bentley. We are also pretty good at some of the more basic manufacturing, including chemical production. They may not be complex products but there are complex processes involved in making them. The UK accounts for around 5 per cent of the global market share in pharmaceuticals, chemicals and plastics manufacturing."

China is also losing its in-built advantage on labour costs which tempted so many firms to shift production there. China's rate of wage inflation is such that, five or 10 years down the line, they will be be less competitive on wages. Aeronautics is another UK strength. The Airbus A380 – at £254m a pop – is 54 per cent UK-made by value, if Rolls-Royce's Trent 900 engines are included.

The Chancellor has set a target of doubling the UK's total exports – £487bn last year – to £1trn by 2020. Peter Russell, Royal Bank of Scotland's head of manufacturing who works with a host of British firms, calls this target "wildly ambitious" because sluggish Europe remains by far our biggest export market, "and that is not likely to change in the near term".

Mr Russell also warns of a "real demographic challenge" with 30 per cent of the UK's stronger manufacturing workforce set to retire over the next 10 years. But British firms are pursuing more opportunities in the Bric economies as well as the Middle East.

Britain may not a have a future as the workshop of the world – but we can be a hi-tech brains trust leading the way on innovation, Mr Russell says. So maybe Mr Osborne's "march of the makers" could bear fruit if we can make the things that China and other emergent economies want over the next decade.

He concludes: "I don't think we're ever returning to the status of being a top five manufacturer in the world: our role is being more technical and smart. It is about value-creation and making sure that our manufacturers get more than their fair share."