One of the most encouraging pieces of UK economic news last week came not from the usual round of official data but from the results of a company, Rolls-Royce. It was the aero-engine company, of course, not the car bit which is now part of BMW - though that has some intriguing economic lessons to teach too.
The story was simply that the company produced better-than- expected profits and the shares shot up. They have not yet reached their pre-11 September highs (see first graph) but they have performed extremely well over the past year.
The overall outlook for the world aircraft industry has not particularly improved over the past 12 months, so the earlier collapse of the share price was a bit of an overreaction to the industry's previous malaise. Indeed, the two main airframe manufacturers, Boeing and Airbus, are having quite a tricky time, although for rather different reasons. But what has happened is that the professional investment community has at last cottoned on to the fact that it is perfectly possible to make money in a British manufacturing industry even in a difficult market environment.
Many people quite rightly ponder how UK manufacturing industry can prosper against competition from low-wage China and, increasingly, India too. The Rolls-Royce success story points to two aspects of manufacturing where it is possible to compete.
One might be called "craft manufacturing", that is manufacturing where products are individually assembled and where a high element of skill is involved not just in the design but also in the production. The other is the attaching of service to a product.
Craft manufacturing is quite different to production line manufacturing. A production line for a medium-technology product can be located more or less anywhere in the world and the people making the product do not need to know anything about its use. Most of the added value is in the design and marketing, not the manufacture.
My most recent experience of that is ski boots. I bought a pair last week in Canada and the label proudly proclaimed they had been styled in Italy. Underneath, however, was a little stamp saying they were made in Estonia - a country not noted for tough downhill skiing since its highest point is 1,043 feet above sea level.
In the case of aircraft engines, by contrast, the product needs to be put together by people who know a lot about it. So they will tend to be made in advanced, developed countries. It would be perfectly possible to build an engine manufacturing plant in Estonia and it would probably be fine. But detaching manufacturing from design and development has risks. Further, one of the key elements in Rolls-Royce aircraft engines is that they tend to retain a high performance over their whole lives. You only know how well an engine has performed after it has been in service for a decade or more. …