By Professor David Bailey
19th February 2026

Why making things still matters, and what Britain must do next.

Manufacturing rarely dominates political debate in Britain. It is often treated as something slightly old-fashioned, something we used to do rather than something that shapes our future. That assumption is wrong. Manufacturing remains central to the UK’s economy, to its regions, and to its long-term prosperity. This is not an argument rooted in nostalgia for the past, but in competitiveness, resilience and economic reality.

Manufacturing accounts for around ten per cent of UK GDP, roughly £220 billion a year. On the surface, that can sound modest, but it hides manufacturing’s true economic importance. The sector delivers around forty to forty-five per cent of UK exports and accounts for roughly two-thirds of private-sector research and development. It supports between 2.6 and 2.7 million direct jobs, with wages typically ten to fifteen per cent higher than the national median. 

Manufacturing is also deeply place-based. In large parts of the Midlands, the North West, Wales, the South West and Scotland, it makes up fifteen to twenty per cent or more of local economic output. When manufacturing declines, the damage is not limited to factory jobs. Skills pipelines weaken, supplier networks fragment, innovation capacity erodes and regional resilience suffers. The services linked to manufacturing, such as engineering, design, logistics and digital systems, are tightly bound to it. When manufacturing goes, those services often follow. Evidence from regional research is clear: productivity growth in manufacturing is rooted in local ecosystems. Place matters.

The current state of UK manufacturing is best described as ‘resilient but constrained’. The sector is not collapsing, but nor is it thriving. Output remains below the trajectory that might have been expected before the financial crisis, productivity growth has been modest and investment remains volatile. Performance varies sharply across the sector. 

Advanced manufacturing areas such as aerospace, pharmaceuticals and defence remain globally competitive and export-oriented. By contrast, automotive manufacturing is under intense pressure. Output is close to a seventy-year low, squeezed by the cost of electrification, the capital needed to build battery supply chains and inconsistent policy signals. The transition to electric vehicles will happen, but whether the UK captures enough of the value chain to benefit remains an open question. 

Energy-intensive industries including steel, chemicals, ceramics and glass continue to underpin the economy, yet face electricity prices that are structurally much higher than those of their international competitors. For many of these firms, this is an existential challenge. 

Small and medium-sized manufacturers, which form the backbone of the sector, face rising wage bills, higher National Insurance costs, volatile input prices, limited access to long-term capital and growing regulatory complexity. Margins are tight, risk tolerance is low and investment decisions are often delayed.

Three pressures increasingly shape manufacturing decisions. 

Trade has changed. Industrial policy has returned internationally and it has returned with force. The United States and the European Union are subsidising domestic production at scale, while China continues to use industrial policy aggressively to drive growth. At the same time, UK firms face ongoing post-Brexit friction when exporting to the EU. For businesses operating on thin margins, even small frictions can make the difference between exporting and pulling back altogether. Many smaller firms have already chosen the latter. 

Supply chains are also being re-engineered. Resilience now competes directly with cost, as just-in-time models give way to just-in-case approaches. Firms are holding more inventory, building redundancy into supply chains and tying up more capital on their balance sheets. Alongside this sits cumulative cost pressure. Wages, energy prices, borrowing costs and taxation are each manageable in isolation, but together they weigh heavily on competitiveness.

Productivity remains a central challenge. UK manufacturing productivity compares well with the wider economy but still lags behind leading industrial nations in key segments. This is not about a lack of effort or engineering talent. The UK has strong frontier firms, but the problem lies in how productivity improvements spread through the sector. Productivity gains diffuse through supplier networks, shared labour markets, local institutions and stable investment environments. Once again, place matters. Strong manufacturing ecosystems enable diffusion; weak ones hold it back.

Despite these challenges, the coming decade presents real opportunities. The transition to net zero will drive tens of billions of pounds of investment into energy systems, including offshore and onshore wind, electricity grids, hydrogen, nuclear power and energy storage. The critical question is whether the UK manufactures the equipment that underpins this transition or imports it. 

Nuclear power, including small modular reactors, offers the chance to build high-value supply chains, but only if energy, defence and industrial strategies are aligned and delivered at scale. Defence spending is rising structurally across Europe, creating further industrial opportunities.  Digital and AI-enabled manufacturing has the potential to transform cost structures and productivity, but only if firms have the confidence, capital and leadership to invest for the long term. Short-term programmes and pilot schemes will not be enough.

From the perspective of businesses making real investment decisions, industrial strategy must deliver three things. Predictability is essential, because manufacturing investments are made over ten to twenty years and policy volatility destroys confidence. Competitive input costs are critical, with energy playing a decisive role. If UK industrial electricity prices remain structurally uncompetitive, capital will flow elsewhere for rational economic reasons. Patient capital is also vital. Manufacturing requires high upfront investment, long payback periods and steady returns, yet UK finance often struggles to align with these realities.

What is missing is not strategy but execution, scale and a genuinely place-based approach. 

Clusters work, and the evidence for this is overwhelming. Skills providers, universities, anchor firms, small businesses and infrastructure must be developed together over time. Short-term funding competitions undermine this logic. Greater devolution over skills, innovation and investment support is needed, alongside a recognition that different places face different challenges. 

Energy and industrial policy must also be aligned. Running climate policy and industrial policy on separate tracks has left domestic production exposed to high energy costs. That approach is not working and needs urgent correction. 

Finally, support for industry must operate at sufficient scale and with long-term certainty. Technology adoption and digital transition funding should be predictable, not episodic, and the level of support available in the UK still falls well short of what competitors offer.

This is ultimately a moment for leadership. Government policy matters, but so does business leadership. Automation cannot be deferred indefinitely, skills investment cannot wait, supply-chain collaboration cannot be optional and export ambition must remain central. The global economy is more competitive, more strategic and more politicised than it has been for decades. Other nations are aligning state power, finance and industry to secure their manufacturing base. 

The UK has the talent, engineering capability and research strength to compete. The real question is not whether Britain can succeed in manufacturing, but whether it chooses to create the conditions that make success possible. Manufacturing helped build Britain’s past prosperity. It can help underpin its future, but only if it is treated not as a residual sector, but as a national strategic priority.

Professor David Bailey is Professor of Business Economics at the Birmingham Business School.