The UK Economy and the 4th Industrial Revolution
Strong foundations, confident change*
Liam Fox MP
Thursday 9th May 2019
When Winston Churchill won the Nobel prize in 1953, he was unable to attend the ceremony in person and his speech was read in Stockholm, in December of that year by Lady Churchill. It spoke of his fears for the future and the anxiety that events were spiralling beyond his grasp. ‘The power of man’, he wrote:
… has grown in every sphere except over himself. Never in the field of action have events seemed so harshly to dwarf personalities. Rarely in history have brutal facts so dominated thought or has such a widespread, individual virtue found so dim a collective focus. The fearful question confronts us; have our problems got beyond our control? Undoubtedly we are passing through a phase where this may be so.
In an era where the most bloody war in history had torn the world apart and been replaced by a cold war with the new threat of nuclear war, such sentiments and the note of pessimism were understandable.
We are fortunate to live in a very different era. Our living standards exceed anything that could have been imagined even in the 1950s. We saw off the political threat of communism from the East. We have lived in peace in Europe and North America for over 70 years and we have seen a billion people lifted out of abject poverty in the last 25 years alone as a result of global free trade and a capitalist economic system. Churchill would have seen his most optimistic expectations realised.
So why is it that so many people seem to be inconsolably pessimistic about this country’s future?
Why the pessimism?
Undoubtedly for some, Britain’s exit from the European Union is of great concern, especially those who have been unable to reconcile themselves to the democratic will expressed in the 2016 referendum. They seem to believe that Britain cannot have an optimistic, prosperous and secure future without being subsumed into the supranational entity that the EU represents. Others believe that the era of globalisation may not work for us or that the challenge of rapidly changing technology is a threat to the social stability and economic predictability that we have taken for granted for many years.
What is this Britain that the pessimists describe or fear? Are we retreating from the world stage, abdicating our international influence or embracing protectionist concepts of economic nationalism?
No we are not. We are not surrendering our permanent seat on the UN Security Council or leaving the G7 or G20. We are at the very heart of NATO. We remain in the Organization for Security and Cooperation in Europe, the OECD, the World Trade Organization, the International Monetary Fund and the World Bank. We are not abandoning the Commonwealth where we hold a pivotal influence. Our special relationship with the United States holds firm. And not only do we support the WTO but we will soon take up our independent seat for the first time in over four decades.
Yet still the voices of pessimism take on an almost “end of days” tone. Some may think it is irrelevant but it matters because it damages at home and abroad. As David Grinspoon, the American astrobiologist put it, in a different context, in his book, Earth in human hands, ‘Pessimism if it becomes a habit can reinforce a narrative of unstoppable decline. If there is nothing we can do, that releases us from our obligations’.
Not only is such pessimism unfounded and both defeatist and self-defeating, but there is every reason for the UK to be confident and optimistic about the future. Change is coming a-plenty but it is something we should embrace, not fear.
The UK Economy – strong Foundations for success
Start with a reality check about the state of the UK economy and its comparative international performance.
- UK unemployment is at a 45-year low. The rate of 3.9% compares with 7.9% for the Eurozone, 8.8% for France and 14.5% for Spain.
- The Bank of England has recently upgraded the forecast for UK growth this year from 1.2% to 1.5%.
- The European Union has downgraded growth for the Eurozone to 1.2% and Germany to 0.5%.
- Last year UK exports of goods and services rose to a new record of £634.1 billion. In fact, £1.7 trillion had been added to our export performance since the EU referendum.
What did the UK sell?
In 2018, over £50 billion worth of mechanical machinery, £33 billion worth of cars, £29 billion worth of electrical machinery and £25 billion worth of medicinal and pharmaceutical products was sold by this country. The UK also sold £286.7 billion in services, including financial services.
So much for those who say Britain doesn’t make anything anymore.
Britain’s real global performance has been stellar in its, foreign direct investment profile. Last year the UK attracted more venture capital investment than anywhere else in Europe, with £6.3 billion. It is not just tech where inward investment has been booming. According to UNCTAD, while global Foreign Direct Investment flows decreased by 19% globally in 2018 and by 73% in continental Europe, FDI to the UK increased by 20%.
All this, as some of the media repeatedly say, despite Brexit. So why is it that overseas investors ignore the defeatism of so much of the metropolitan liberal commentariat? Last year, Britain was the third top global destination and the top European destination for foreign direct investment.
Repeated surveys from Deloitte, EY and others paint an interesting and, more importantly, consistent picture about why investment comes to Britain. The list bears examination because it points to why there is every reason to be optimistic about our economic future.
The first reason given is our legal system. English law – impartial, respected and well understood, not least due to its replication in so many other parts of the world. It is one of our most precious assets as a nation, yet not always connected with the success of our investment.
Next comes the flexibility and skill of our workforce combined with the attractiveness of UK labour law. As an international businessman explained recently, ‘If I want to employ someone in the UK at £15,000 per year it will cost me £18,000 and if it doesn’t work we can part company. In Germany it will cost me £20,000 and if we decide to part ways I will have to pay a year’s salary. In France it will cost me £24,000 and I will have to keep them however poor their performance. That is why investment comes to Britain. That is why your unemployment rate is half that of the Eurozone’.
The next factors are the stability of the regulatory environment and the attractiveness of the taxation system in the UK. Investment is an increasingly competitive environment in the era of globalisation and those who seek arbitrary intervention in our regulatory framework and who would raise tax to punitive levels will only succeed in lowering investment and raising unemployment.
Remember that every single period of Labour government has ended with more people out of work than it started.
Next comes access to innovation and, in particular, collaboration with the UK’s universities. It is a remarkable feat that this country, with under 13% of the European population and under 1% of the global population, are able to provide 7 out the top 10 European universities and four out of the global top 10. It is striking that the UK is the second destination in the world for inbound students, with more than 500,000, according to the latest figures.
Then come two attributes that we may seldom think about. The first is language and the second is time. It is one of our great natural advantages to speak English, the accepted language of business. While it is true that only 379m speak English as a first language compared to 460m for Spanish, what is more instructive is to look at the number who are learning English as a second language. In Europe, in upper secondary education, 94% were studying English, compared to around 22% Spanish, 17% German and 16% French. This is a gift to British businesses as they operate around the world yet perhaps not fully understood or exploited.
What is clear is the contribution that education makes to our export performance. The latest figures valued education exports at £19.9 billion.
How does that compare with other industries? The total for insurance and pension services from the UK was £18.8 billion. Whisky exports were just £5 billion.
Likewise is the time zone in which we live, allowing us to trade with Asia in the morning and the US in the afternoon, one of the many factors why London is such an attractive place for investment and why, along with the depth of professional infrastructure, regulatory framework and worldwide reputation for innovation, the City remains the globally pre-eminent financial centre.
The penultimate factor to mention is the protection the UK affords to Intellectual property. Our IP protection is regularly cited to me around the world as the global gold standard and is a major factor in the number of start-ups occurring in this country.
The UK’s ultimate strength – a liberal market economy
What is the common thread that runs through all these different factors? It is that none of them are dependent on our membership of the European Union. That is not to downplay the size of the EU as an export market. It is, and will remain hugely important to UK business which is why a good deal with the EU is so valuable. Nor is it to understate the importance of European supply chains in our manufacturing process although it is worth noting that we incorporate more, and an increasing proportion of, non-EU than EU content into our exports.
Which leads to the final reason that may make the UK an attractive destination for investment. Many investors tell me that while they understand the UK environment well, they do not yet know how the EU27 will develop politically and economically without the UK’s free market influence.
As long as we maintain an open, liberal, market economy with relatively benign tax and regulatory environments, our economic fundamentals will remain strong and our country an attractive one. That is why issues such as Brexit are not nearly so worrying to investors as the potential election of a hard Left, anti-wealth, high borrowing and irresponsibly spending Labour government.
On the issue of globalisation and the challenges and opportunities of the globalised economic environment which have considered elsewhere and in respect of which my book Rising Tides contends:
… It is important for us to remember that we are not simply passengers on a globalization conveyor belt but are able to influence its direction and destination. Some will say that the forces we are dealing with are too great – an easy way to abdicate our responsibilities at home and abroad… But the challenge is to ensure that our value systems survive…The intellectual debate surrounding liberty and freedom has been the dynamic which has propelled much of our social, political and economic progress and, through our relationship with the rest of the world, shaped much of the direction of global thinking… enlightenment philosophers such as John Locke, Benjamin Franklin and David Hume shaped the political and philosophical discourse of the day, and are shaping it still.
Adam Smith’s ‘invisible hand’ still provides the foundation and assumptions on which our economic system is based and operates…”
Our ability to shape the world around us extends far beyond economics or trade or institutions and into the treasure of values, philosophies and beliefs that we all too often forget yet which have been one of our greatest global contributions.
To turn to the third of the reasons given for pessimism about our future – the pace and extent of technological change and its potential economic and societal impacts.
Take two practical examples which I believe indicate the potential for this country to influence what has been described as the fourth Industrial Revolution: first, the future for the automobile industry and how it might affect the UK and, secondly, the great leap in tech that 5G may represent.
The UK is the fourth largest car producer in Europe. It is a highly productive sector, employing 186,000 people directly in vehicle manufacturing and a further 238,000 in the supply chain, supporting highly skilled, well-paid jobs across the country. Half of all UK automotive exports go to the European Union and I am pleased that the Department for International trade has a strong track record of success in this segment.
The automotive industry is changing in ways that are transforming our understanding of mobility. These changes are facilitated by new technology and driven by consumer demands for a mobility experience that is connected, automated and sustainable. At the same time, the rapid emergence of technology as a market driver has left many of Europe’s established players scrambling to match the agility of Silicon Valley newcomers and China’s dominance in the key enabler – battery technology. European players are responding by investing in technologies that map the priorities of the UK industrial strategy.
The fact that these are also emerging strengths of the UK automotive industry means that Britain has a new opportunity to influence and profit from the next generation mobility ecosystem. Nowhere is this clearer than in Eastern Europe and Germany. British companies have developed new technical capabilities in the UK automotive supply chain management and many are looking to continental supply chains for growth. The Department for International trade is working to encourage this shift.
Germany is Europe’s leading automotive manufacturer and with a turnover of €423 billion, it accounts for a third of global automotive R&D spending. The importance of the sector to German manufacturing means that disruption in the industry represents nothing less than a national challenge.
Given that the industry will change more in the next 10 years than it has in the last hundred and that the technology that will drive the transformation – connected, autonomous, shared and electric – lies mainly with suppliers and, there will be a shift of power within the industry from manufacturers to supply chain. This global phenomenon is accentuated here in Europe.
This is where the golden opportunity lies for UK business. The ties between the German and UK automotive industry run deep. Leading global players are headquartered in Germany and have significant existing manufacturing ties to the UK. Volkswagen in Crewe, BMW in Goodwood and Oxford, and Ford in Dagenham. Daimler EMG F1, Opel, Bosch, Continental, Brose and Webasto also have significant UK presence. Germany’s interest in UK companies and the UK as a location is growing. Young UK automotive tech companies such as AGM batteries, Trustonic, the Floow, Street drone, and Zircotec are already working with German manufacturer supported by the Department for International trade. This is translating into new investment from companies like Porsche, BMW and Hoffer powertrain. Indeed, Volkswagen’s CEO, Herbert Diess, recently said that the German automotive industry had a 50% chance of survival.
The centre of gravity is not only moving from production to suppliers, but geographically eastwards in Europe. As vehicle manufacturing in Europe moves eastward, the value of production in countries like Slovakia, Hungary, Romania, Poland and Serbia increases in line with the sophistication of the models manufactured. Audi and Porsche produce premium models in the region while Audi and BMW are opening EV plants that will produce 150,000 cars a year. The presence in Central Europe of so many OEMs creates a strong market in the supply chain or aftermarket.
DITs work to support Overseas Direct Investment (ODI) has been increasing to take advantage of this in Slovakia, Hungary, Bulgaria and Serbia. For some UK companies export is the route to the future, for others it is investment overseas. What is clear, however, is that there will be considerable demand for the innovation, skills and investment that the UK has to offer in the future.
A similar pattern can be found in the opportunities around the shift in technological capability that will be associated with the 5G revolution. As technologies connect, value will lie in innovation that crosses traditional boundaries. This may be particularly important for UK trade with Europe.
UK tech – based export and investment has proved most resilient to the dampening effects of Brexit and the UK tech ecosystem equips this country to play a leading role in the 5G world. 5G will lead to a boom in data use and data use intensity correlates directly with per capita GDP growth.
It will hasten the trend away from wire, fibre and Wi-Fi to mobile data. Where 4G supports around 4000 devices per square kilometre, 5G can support up to 1 million devices.
In Europe, the UK is leading the way with substantial investment in 5G testbeds – an extensive network of catapult centres bringing industry and academia together to address problems at scale, investing in longer-term challenges through funding research in areas such as quantum communications. As a consequence, the UK hosted more tech start-ups and greater investment in new tech business in 2018 than Germany and France combined.
In general, we can expect to see 5G shift innovation South and East in Europe where faster systems will combine with lower labour costs to produce more efficient products and services. So central Europe is likely to become a focus for British Process Outsourcing (BPO), a process that has already begun.
Additionally, early 5G commercial wins are likely to be in the technologies that transform cities. In Italy and the Benelux countries, the UK’s focus on smart cities has opened new opportunities for small, specialist UK companies to take part in national and regional projects.
We are engaging with the early adopters in central Europe through Smart City projects in Warsaw, Budapest and Prague, utilising role models such as Leeds in telemedicine and Bristol in urban mobility. We have been working with major German companies such as Siemens in business to business matchmaking, hosting and promoting similar events with Airbus, Audi and others in AI, computer vision and machine learning. Our DIT France team has focused on technology FDI, working with seven IT clusters and 20 tech hubs within “France Tech” and with centres of excellence in Paris, Lyon, Bordeaux and Lille to foster start-up collaboration.
These things matter. They are an antidote to the corrosive pessimism that, for some, masquerades as a narrative of contemporary Britain.
By contrast these examples are based on evidence and empirical data rather than representing downbeat propaganda.
There is a world beyond Europe and there will be a time beyond Brexit and the UK must be ready to face the challenges, grasp the opportunities and reap the rewards that the coming year will bring. Change is not optional – it is inevitable. The lesson from the natural world is that adaptation is necessary for survival. This country has the talent, the ingenuity and the experience as an outward -looking nation to navigate the fourth Industrial Revolution as well as, if not better than, many of our competitor nations.
*This is the edited text of Politeia’s Spring Address, delivered by Liam Fox on 8 May 2019.
The Rt. Hon. Dr Liam Fox MP is the Secretary of State for International Trade and President of the Board of Trade. During his distinguished parliamentary career, he has served as the Secretary of State for Defence and Shadow Foreign Secretary. Amongst his Politeia publications are The Armed Forces, NATO and the EU: What Should the UK’s Role Be? (2010) and Let Freedom Prevail! (2005).