The UK Innovation Report 2021

Industrial Performance

Policy questions addressed in Theme 3

1. Are UK key industries becoming more or less competitive internationally?
2. How are UK industries performing in terms of productivity, value added and employment?
3. Are key industries in the UK investing enough in R&D compared to their international competitors?

What the data tells us

What the data tells us

• Pharmaceuticals, automotive, aerospace and machinery and equipment are key industries of the UK, accounting for 30.5% of the total manufacturing value added in 2018. Their productivity levels lagged behind those of leading countries.
• Aerospace and machinery and equipment became more productive on the basis that value added grew faster than employment (Chart 3.9, Chart 3.13). Automotive became more productive as value added grew while employment shrank (Chart 3.5). In contrast, productivity growth collapsed in pharmaceuticals as value added contracted at a quicker rate than that of employment (Chart 3.1).
• Trade analysis also suggests that the UK has become less competitive internationally in specific products. It joins the bottom quartile of countries ranked by trade balance in automotive and machinery and equipment products (Chart 3.7, Chart 3.15), with widening deficits since 2009. From being the fifth largest net exporter of pharmaceutical products in 2009, the UK slipped rapidly into the third quartile of countries by 2018 (Chart 3.3). Aerospace products is a bright spot in which the UK has strengthened its position to become the fourth largest net exporter in 2018 (Chart 3.11).
• Business R&D spending in the UK key industries is less than that of their international competitors (unadjusted for economy and industry size). Business R&D spending has accelerated in automotive (highest growth rate among comparator countries) (Chart 3.8), aerospace and machinery and equipment (Chart 3.12, Chart 3.16). However, it has been on the decline for pharmaceuticals (Chart 3.4). Low R&D spending contributes to overall low investment spending in the UK and hampers the capital deepening needed for labour productivity growth.

Value added, employment and productivity analysis

This figure demonstrates the relationship between value added, employment and labour productivity. The horizontal axis measures the change in employment, and the vertical axis measures the change in value added, during the period of analysis.

The graph allows for more detailed country and sector comparison (than by considering overall productivity growth rates only) by explicitly showing the drivers of productivity growth or decline.

Positive productivity growth (blue)

Productivity growth is positive if the rate of growth of value added is higher than the rate of growth of employment. Productivity is also positive when value added decreases, but employment decreases faster (i.e. the decrease in employment is proportionally greate rthan the decrease in value added).

Negative productivity growth (red)

Productivity growth is negative if the rate of growth of value added is lower than the rate of growth of employment. Productivity is also positive when value added decreases, but employment decreases slower (i.e. the decrease in employment is proportionally lower than the decrease in value added).

Zero productivity growth line

If the rate of change in value added and employment are the same (either positive or negative), productivity growth is zero.

Pharmaceuticals – value added and employment (a)

Source: UNIDO, INDSTAT 4, ISIC Revision 4. Notes: Purchasing power parity (PPP) values computed using OECD PPP indices. *Because of data unavailability, 2016 values are used for India and the UK. CAGR: Compound annual growth rate.

• The UK ranked fifteenth in the world in the production of pharmaceuticals in 2016–17 by value added in current PPP US$ terms.
• The US has sustained global leadership in the industry in the last decade, followed by India, Germany, Switzerland and France.
• With the exception of Switzerland, labour productivity growth has been weak among the top performers in the global industry.
• The productivity of the UK pharmaceuticals industry declined by almost 10% on a CAGR basis. At ~$137 in 2016–17, it was lower than the productivity levels of all comparators except India.

Pharmaceuticals – value added and employment (b)

Source: UNIDO, INDSTAT 4, ISIC Revision 4. Notes: Purchasing power parity (PPP) values computed using OECD PPP indices. Because of data unavailability, 2016 values are used for India and the UK. *Compound annual growth rate.

• The pharmaceutical industry contributed to 7.5% of manufacturing gross value added in the UK in 2018.¹
• Unlike top-performing countries, the UK has recorded negative growth rates in value added, employment and productivity.
• Korea and Singapore are fast-growing nations with niche specialisation areas.
• The pharmaceutical industry has played a central role in responding to the COVID-19 outbreak.²

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¹ Office for National Statistics.

² Life Sciences COVID-19 Response Group (2020). Life Sciences Recovery Roadmap; Kapoor et al (2020). Flexible Manufacturing: The Future State of Drug Product Development and Commercialization in the Pharmaceutical Industry. J. Pharm. Innov.

Pharmaceuticals – trade balance

Source: UN Comtrade. Notes: Trade balance is based on gross exports and gross imports of goods at HS 1992 2-Digit level. Global ranking excludes Afghanistan, the Cayman Islands, Chad, the Cook Islands, FS Micronesia, Guinea-Bissau, Haiti, Iraq, Wallis and Futuna Islands, Mauritania, Libya, State of Palestinian and Tuvalu.

• The UK has suffered from a rapid loss in trade competitiveness in pharmaceutical products from the perspective of trade balance.
• The UK was the fifth largest net exporter of pharmaceutical products in 2009, with a surplus of ~$10B, placing it among the top quartile of countries according to trade balance.
• Since 2014 the UK has recorded deficits in pharmaceutical products trade in all years except 2015. Its trade deficit widened to ~$126M in 2018, placing it among the third quartile of countries according to trade balance.
• The wider deficits were a combination of a dip in exports between 2009 and 2018 (CAGR: -0.2%) and an increase in imports (CAGR: 4.3%).
• Top performers alongside the UK in 2009 – with the exception of Israel, which was overtaken by Singapore – retained their spots among the top 10 by 2018, notwithstanding the change in their ranking.

Pharmaceuticals – business spending on R&D

Source: OECD Research and Development Statistics; Make UK Sector Bulletin: Pharma. Notes: Compound annual growth rates for countries are based on data for the first and last available years within the 2008–2016 range.

• In 2018 the pharmaceutical industry accounted for almost 17.8% of overall business R&D expenditure in the UK.¹
• However, the same decline experienced by the sector in terms of GVA and productivity also affected R&D expenditure.
• The sector spent 3% less in 2018 than it did in 2008.¹
• Research and development is fundamental to pharmaceutical companies that rely on the discovery of new drugs to achieve growth.
• It takes on average between 12 and 15 years and £1B for a new medicine to go through the necessary procedures before it can be prescribed by doctors.
• Patents play a key role in the pharmaceutical industry: the expiration of patents, while good for consumers, can result in weaker industry performance when firms experience sharp declines in revenue. This phenomenon is known as the “patent cliff”.
  

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  ¹ Office for National Statistics.

Automotive – value added and employment (a)

Source: UNIDO, INDSTAT 2 2020, ISIC Revision 3. Notes: Purchasing power parity (PPP) values computed using OECD PPP indices. Data refers to ISIC 34 motor vehicles, trailers, semitrailers. CAGR: Compound annual growth rate.

• In 2018 the UK ranked seventh in the world automotive industry in value added terms.
• China has become the global leader in the automotive industry in terms of value added, surpassing the US, Japan and Germany. However, employment levels have reduced (at an annual rate of 1.4%).
• From 2005 to 2018 UK automotive productivity has grown at higher rates than among other world leaders (8% annually).
• The productivity of the UK automotive industry grew by 8.3% – outpacing the sixth largest countries in automotive production – on a CAGR basis. With value added per employee of $171 in 2018, the UK was the third most productive – after the US and Korea – and more productive than Japan and Germany.

Aerospace – trade balance

Source: UN Comtrade. Notes: Trade balance is based on gross exports and gross imports of goods at HS 1992 2-Digit level. Global ranking excludes Afghanistan, the Cayman Islands, Chad, the Cook Islands, FS Micronesia, Guinea-Bissau, Haiti, Iraq, Wallis and Futuna Islands, Mauritania, Libya, State of Palestinian and Tuvalu.

• The UK has become increasingly competitive in aerospace products trade from the perspective of trade balance. Its position improved from being the twenty-third largest net exporter in 2009 to the fourth largest in 2018, with the surplus widening by 100.9% per year from ~$15M to ~$8B.
• The UK achieved growth rates of 111% in exports of aerospace products and 122% in imports, respectively, the highest among comparator countries.
• France, Germany, Brazil, Italy, Canada, Spain and Israel were among the top 10 countries by net exports in aerospace products for both 2009 and 2018, despite the change in their respective ranking.
• The US was the largest net exporter, with a surplus of ~$108B in 2018, in sharp contrast to its ranking at 196th with a deficit of ~10B in 2009. This was achieved on the back of strong growth in exports (2009–18 CAGR 37%)1, with modest growth in imports (6%).

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¹ This was particularly strong in the exports of commercial aerospace products to China, which accounted for 12% of total industry exports in 2017 (SpaceNews, 11 July 2018).

Aerospace – business spending on R&D

Source: OECD Research and Development Statistics; Make UK Sector Bulletin: Automotive. Notes: Compound annual growth rates for countries are based on data for the first and last available years within the 2009–2017 range. For BERD expenditure growth, the base year for the US is 2008.

• In 2018 the aerospace industry accounted for 6.8% of overall business R&D in the UK.
• It is the fourth largest contributor to business R&D after pharmaceuticals, automotive and computer programming and information service activities.
• UK aerospace R&D grew by 3.9% (CAGR) between 2009 and 2016, outpacing growth rates in Italy and France.
• Business spending on R&D underpins most of the technological advances in the UK aerospace industry.

Machinery and equipment – value added and employment (a)

Source: UNIDO,INDSTAT 2 2020, ISIC Revision 3. Notes: Purchasing power parity (PPP) values computed using OECD PPP indices. CAGR: Compound annual growth rate.

• The UK ranks eighth in the world in the production of machinery and equipment in value added terms.
• China has become a world leader in the production of machinery and equipment, showing the largest increase in value added from 2005 to 2018.
• Germany showed the largest growth in employment in the same period.
• China, the UK and Italy have observed the largest increases in value added per employee.
• The productivity of the UK machinery and equipment industry grew by 4.3% – the second highest after China – on a CAGR basis. With value added per employee of ~$104 in 2018, the UK was less productive than the US, Korea, Japan, Germany and Italy.

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Note: Manufacture of machinery and equipment includes: manufacture of machinery, pumps, compressors, lifting and handling equipment, machine tools and domestic appliances, among others.

Machinery and equipment – trade balance

Source: UN Comtrade. Notes: Trade balance is based on gross exports and gross imports of goods at HS 1992 2-Digit level. Global ranking excludes Afghanistan, the Cayman Islands, Chad, the Cook Islands, FS Micronesia, Guinea-Bissau, Haiti, Iraq, Wallis and Futuna Islands, Mauritania, Libya, State of Palestinian and Tuvalu.

• The UK has not been competitive (and increasingly so) in machinery and equipment products trade. It is consistently in the bottom quartile of countries according to trade balance, with the deficit widening by 14.1% per year from ~$15B in 2009 to ~49B in 2018.
• The terms of trade have also deteriorated, from $0.82 in exports for every $1 in imports in 2009 to $0.67 in exports for every $1 in imports in 2018.
• China, Korea, Germany, Taiwan, Japan, Italy, Singapore and Malaysia were among the top 10 countries according to net exports of machine and equipment products for both 2009 and 2018.
• They were joined by the Czech Republic and Vietnam in 2018, while the Netherlands and Hungary fell out of the top 10.

Machinery and equipment – business spending on R&D

Source: OECD Research and Development Statistics; Make UK Sector Bulletin: Mechanical Equipment. Notes: Compound annual growth rates for countries are based on data for the first and last available years within the 2009–2017 range.

• In 2018 the machinery industry accounted for 4.1% of overall business R&D in the UK.
• UK machinery R&D grew by 2.3% (CAGR) between 2009 and 2017, trailing all countries except France.
• The machinery industry tends to be bigger than the manufacturing average, in terms of both turnover and employment.
• With size comes opportunities for scale, greater diversification and (at least the perception of) stability – all of which have supported the machinery industry through its cyclical fluctuations.
• 43% of the demand for products made by the machinery industry came from overseas consumers and their investments – making the industry one of the most export-intensive in UK manufacturing.
• In 2014, 7.4% of mechanical equipment firms in the UK were foreign-owned – higher than the UK total manufacturing average, at just 3%.
• Foreign-owned firms were 37% more productive than domestic firms, and they helped to contribute to the industry’s considerable R&D expenditure.