Manufacturers – with the possible exception of those in the offshore sector – have been severely tested by the post-Lehman economic turmoil.
There’s nothing new in that – it’s in the nature of economic downturns to put businesses through the wringer and drive the weakest to the wall. This recession was different in that it prompted a long, hard look at the very nature of the British economy. Our economic model, with its reliance on services, particularly in finance, was found wanting.
The new incoming coalition voiced these concerns and declared its aim of rebalancing the economy away from financial services and towards manufacturing – especially exports.
This is music to the ears in the North East which has a long manufacturing tradition and is one of the few UK regions with a positive balance of payments, exporting about £12bn a year of goods and services.
It seems that our manufacturers are taking up that challenge. In these pages we profile Newton Aycliffe manufacturer Ebac, which has not only added to its products range but which is going to begin manufacturing washing machines alongside other electrical consumer goods. This was a sector believed to have been abandoned by British industry for good and it is heartening to see Ebac moving back in. The ability to think big and to take bold strategic decisions seems to be key in successful innovation.
We also look at Washington pump maker Grundfos, which two or three years ago made the decision to shift emphasis towards producing more value added products and fully integrated solutions where it will have a greater competitive edge.
Similarly, glazing specialist Fendor, also in Washington, took the strategic decision to move into new markets when it saw only a limited future in concentrating on its traditional fire glazing business. As with Ebac and Grundfos, taking such a strategic decision paid off for the company which is now making headway in new markets.
Such examples are encouraging but while the region’s manufacturing sector may be able to think big on occasion, there’s still the danger that it is not thinking big enough.
Joanna Shields started her career in Silicon Valley and was on the management teams of both Facebook and Google. She is now chief executive of Tech City, a technology cluster in London’s East End. She recently addressed the Institute of Directors on the subject of innovation and raised questions which ought to give all UK businesses food for thought.
She pointed out that incremental innovation in tough times is all very well – it ensures that products will be better and cheaper and gives predictable returns.
“However,’’ she added, “what it doesn’t offer is a guarantee that a start-up won’t create something completely different, or even radical, that changes the business landscape forever.’’ She cited a few examples of such `creative disruption’.
At its peak Eastman/Kodak had employed 140,000 people and had 90% market share and, as recently as 2005, had been generating US$6bn in revenue from the digital photography and services market. But, on 19 January 2012 in Rochester, New York, the company filed for Chapter 11 bankruptcy, after 125 years in business. Meanwhile, on the other side of the country, in San Francisco, Instagram, the photo-sharing application was celebrating its runaway success, having been downloaded 30 million times. Within weeks, it was bought by Facebook for US$1bn, which was pretty impressive for a company that had been founded just 18 months earlier and had only 13 employees. Shields said: “…if logic had prevailed this great company, Kodak, should have played a prominent role in the new way we are sharing our lives and experiences on social networks. Yet 140,000 people working diligently and with the best intentions watched from the sidelines as 13 people sparked a new revolution.’’
She went on: “The new wave of creative disruption that is changing almost every industry that we know is making one thing clear: what brought you here to a position of market leadership will not be enough to secure your place in the future.
“So it is important that you ask yourselves, `Are we too focussed in incremental innovation? Are we spending too much time refining, optimising, reducing cost to increase margins – and if so, what else might we be missing?’
She went on to argue that information has become a commodity with everything being available at the click of a mouse. What matters now is how information is used. Shields described how 15-year-old Jack Andraka invented a new test for pancreatic cancer that costs 2p, takes five minutes to run and is 100% accurate and he did so using information from free online scientific journals.
This kind of disruption is occurring in sector after sector: music and film have been revolutionised and even raising capital can be done through peer-to-peer lending structures such as Kickstarter. What effect will 3D printing have on manufacturing?
Shields believes open platforms is the key to the future, creating value by providing tools that allow people to participate in markets that are otherwise centralised and closed. Google, for example, was not the first search engine, but it took off when it opened up its search platform to let people bid for key words and Facebook opened up its network to be translated by users and then opened up its platform to developers.
In the UK GloxoSmithKline believes bionics and bio-electrical medicine will open up a whole new front in the fight against disease but instead of focussing all research internally it has created a £50m venture capital fund to invest in companies that pioneer bio-electric medicines and technology. Barclays has launched a product called Pingit, Europe’s first person-to-person service for sending and receiving money using a mobile phone. Even the government is getting in on the open platform act. In 2011 it set up the Open Data Institute offering the public access to thousands of data sets from across various departments, ranging from traffic statistics to crime figures.
So what should businesses do?
“Well,’’ said Shields, “large organisations can start by moving away from closed models and internally focussed innovation and promote a model that ensures creativity and collaboration.
“To do this you need to think of your company as an open platform for enabling your employees, your customers, your suppliers, and perhaps even your competitors, the ability to create new products and services that customers want before they even know they want them.’’
In this issue of BQ2 we profile Dyer Engineering whose ambition is to move towards such an open platform model, eventually giving customers access to its Enterprise Resource Planning system to allow them to track and monitor their own orders and projects.
However, a priority for Dyer is to recruit and train the next generation of engineers and in that they will be in competition with every other manufacturer in the country. Sadly, in those pre-Lehman days, when manufacturing in the UK was regarded almost as a historical curiosity, engineering was not encouraged as a career. As a consequence, according to research by recruitment specialist Ranstad CPE, by 2050, we will face a shortage of 36,800 qualified engineers. A report this year by the Social Market Foundation think tank said that the government’s ambition to shift the economy away from financial services is “inconceivable’’ due to a shortage of home-grown graduates in science, technology, engineering and maths.
It calculated that industry is already 40,000 short of the number of Stem graduates it needs every year. If that isn’t depressing enough, a recent OECD report on education standards puts the dunce’s cap firmly on our head, behind almost every other advanced nation in the world. Those aged 16 to 24 in England came 22nd out of 24 for literacy and 21st for numeracy. As Elizabeth Truss, under secretary of state for education and childcare, said: that’s the price you pay when you make qualifications in cake decorating `equivalent’ to a physics GCSE.
Thankfully, as we show elsewhere in these pages, some manufacturers, such as Ford, are stepping up to the plate as far as manufacturing training goes. There is much to celebrate in manufacturing’s record in innovation, particularly in the North East. Our businesses are embracing change, making courageous decisions and marching in step with the latest thinking in this digitised knowledge economy.
But, ultimately the ability to innovate will depend on an educated workforce and in this, as in so much else – and despite the heroic efforts of the Fords of this world - industry is dependent on the decisions and actions of government, which – on manufacturing – has talked the talk; can it walk the walk?