Birmingham’s vast canal network helped power its industrial past, but the city and wider West Midlands region are looking to the digital economy for future prosperity. (Photo by Justin Tallis/AFP via Getty Images)

The city of Birmingham is famous for industry and invention. It is the birthplace of such delicacies as Cadbury’s chocolate and powdered custard, and was the engine of the UK’s Industrial Revolution.

With its factories and extensive canal system (which is longer than the canal system of Venice) goods were able to move efficiently in and out of this major city, situated right in the middle of England, leading to a concentration of industry in the region.

Today the West Midlands remains a hub for the country’s automotive and aerospace sectors. Its manufacturing strength meant that for the year ending December 2019 the West Midlands accounted for 9.1% of all exports from the UK, behind only London (12.7%) and the south east (13.4%). Only the cities of London and Manchester attracted more foreign direct investment (FDI) projects in 2019 than Birmingham, according to EY.

Yet despite such strengths, there are clear reasons for concern for the city and the wider region.

A recent report from government initiative Midlands Engine highlighted how under-investment in local infrastructure and research and development, as well as an inability to retain graduates in the area, all contributed to the wider Midlands region having a productivity deficit of £76bn compared with the UK average.

The twin headwinds of Brexit and Covid-19 now pose further acute challenges for Birmingham, particular its retail and manufacturing sectors given current and future restrictions on the movement of goods and people.

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According to Midlands Engine, the West Midlands will be harder hit than any other UK region from Covid-19, with the regional economy expected to contact by 10.6% in 2020.

While difficult months lie ahead, Birmingham is attempting, through a number of government-led initiatives, to rebuild its economy through investments in emerging technologies. The success of this plan depends on upgrading the region’s connectivity, both digital and physical.

The challenges facing Birmingham

Even as the West Midlands was projecting a sunny future for the wider Midlands region in late November, it was difficult to keep dark clouds from creeping into the picture.

Starting on 24 November 2020, the Midlands UK Forum for Growth event brought the public and private sectors together to highlight the strengths of the wider region in a changing world. Yet on the last day of the conference, it was announced that Birmingham would be placed in the highest tier of the UK government’s new coronavirus restrictions.

The restrictions will keep all but essential retail outlets closed over the crucial Christmas period, just as the half-finished £700m Paradise Redevelopment Scheme is creating extensive new office and retail units in the city centre amid a pandemic that has seen many people transition to shopping and working from home. Meanwhile, in August 2020, John Lewis confirmed it would be closing its anchor tenant store in the city’s Bullring shopping centre.

While lockdown rules continue to batter retail businesses, Brexit poses an existential threat to the UK’s automotive sector. As the home of Jaguar Land Rover, the West Midlands region manufactures 40% of all cars exported from the UK, and 55% of all UK car exports went to the EU in 2019.

Engineering company Rolls-Royce has long been associated with the region, moving in 2013 from a factory in Birmingham to a new facility in Solihull that produces engine control systems for aircraft. In June 2020, the company confirmed that it was cutting 175 roles at the Solihull facility as part of a wider job cull in response to the Covid-19-inflicted downturn for the airline industry.

Paul Forrest, head of research at West Midlands Economic Forum, says both the automotive and aerospace sectors were in decline even before 2020.

“The global aerospace sector was coming to the end of a roughly 18-year period of growth… demand among the four biggest aircraft manufacturers saw a significant drop towards the end of 2018,” he says.

Another move to have a great potential impact on the automotive industry in the UK came in November 2020 when the government announced that it was bringing forward its ban on the sale of petrol and diesel cars ten years from 2040 to 2030. The scheme is intended to accelerate the adoption of electric vehicles (EVs).

Jaguar Land Rover announced in 2019 that it would build EVs at its plant in Castle Bromwich, the batteries of which would be manufactured at Hams Hall in Warwickshire, and the engines at a plant near Wolverhampton.

While such commitments to the West Midlands will retain jobs, Forrest says a wider move to EVs will have “a big impact on the precision components sector within the West Midlands because the number of components that go into electric cars is far less than with a combustion engine”.

Investing in digital industries in the West Midlands

Forrest estimates that given there are so many struggling industries in the region, this, combined with the economic shutdown caused by the coronavirus, means “unemployment in parts of the West Midlands could go up to about 15% in the next year. We are going to need to reskill those people and put them back into other areas of the economy”.

One area of growth for Birmingham and the West Midlands could be in fostering green technologies. Of the 55,000 graduates each year from the West Midlands’ nine universities, about 30% will have studied engineering, technology, science or mathematics-related subjects.

The West Midlands Growth Company says that of the 132 active projects in the regional investment pipeline, 104 are led by overseas companies. The most active sector is IT, electronics and communications, accounting for 43 of the pipeline projects.

“The West Midlands is a lot more than just manufacturing,” says Dan Storer, chief investment officer for West Midlands Growth Company. “We have a scale of operations underpinning our innovation capability to support future technologies such as batteries and electric motors. We have got the supply chains, we have got the academic know-how, and the government gets it.”

Energy Launchpad, a government-backed not-for-profit business accelerator scheme, selected 18 SMEs in October 2020 to take part in an ‘innovator challenge’ to commercialise products and services to help reduce carbon emissions for infrastructure and energy networks in the West Midlands.

Sir John Peace, a former chairman of both Burberry and Standard Chartered, is chair of the Midlands Engine initiative. He says the wider region is busy creating a unified approach to the sector: “Midlands Engine is pulling together universities right across the Midlands, small and large-scale businesses, local councils, LEPs, and combined authorities to create an integrated energy strategy.”

A Department for International Trade initiative to help boost FDI in emerging industries selected the region for support in developing data-driven healthcare technologies and autonomous vehicles. The West Midlands was also selected in 2018 as the test bed for 5G roll-out, with Birmingham, Coventry and Wolverhampton all part of the trial.

The UK government has set up the Automotive Transformation Fund to support auto companies transitioning to zero carbon. As part of this effort, UK regions are competing to be the location of the country’s first EV battery ‘gigafactory’, with the West Midlands likely to have a strong bid given its automotive and manufacturing base.

“Zero-carbon transformation and levelling up are mutually dependent,” says Storer. “There is a journey the whole country has got to go on, but the West Midlands already has world-class assets when it comes to scaling-up green technologies”.

Moving up to Industry 4.0

Forrest of the West Midlands Economic Forum says traditional industries face challenging times, but the region could adapt to become a hub for companies using the internet of things to provide specialist services to manufacturers.

“There are a number of manufacturing enterprises that are very close to transforming themselves into Industry 4.0,” says Forrest. “A lot of manufacturing is concentrated outside of Birmingham, with the city acting as a service sector economy. That is where the real growth in Birmingham is going to come from.”

Forrest calls for what Germans refer to as ‘connected industries’ – service sector enterprises that are wholly or partially dependent on the manufacturing sector. These types of services used to sit within manufacturing companies but have been outsourced and now account for between 8% and 10% of the local economy.

One innovative services provider that sees opportunities in the West Midlands is Spanish company Iomob, which provides solutions for mobility-as-a-service. The goal of such solutions is to create integrated transport networks, where users can travel through a region via different modes of transport, all via a unified digital platform.

The West Midlands is one of the government’s future transport zones, which will see it investigate how to create efficient multimodal transport networks, and the region is also being used as a test site for autonomous vehicles.

Adrian Ulisse, chief business officer and president of Iomob UK, says that with commuter volumes likely to remain depressed in 2021, it should be an ideal time to trial and introduce transport solutions that at a busier time may have “broken the system”.

“[The West Midlands has] got the manufacturing aspect, urban density, and a number of different cities to work with… it is a great sandbox in which to innovate,” he says.

Barcelona-based Iomob is looking to hire and invest in the West Midlands because “there are a number of government-funded projects but also commercial businesses that are looking to innovate and provide services here”, he adds.

Why investment is needed in transport in Birmingham

This high level of focus on transport is hardly surprising given the inefficiencies of Birmingham’s existing network.

Research published in 2019 by the Open Data Institute Leeds studied the bus and tram services in Birmingham and the West Midlands. It found that although the city had a population (as defined by the OECD) of 1.9 million, its effective population at rush hour was just 0.9 million due to congestion.

Open Data Institute Leeds predicted that just by making buses as reliable at rush hour as they are off-peak, the effective population would grow to 1.3 million, increasing GDP per capita for the region by 7%.

While improvements to local bus and tram routes could make an outsized impact, most media attention is focused on a much bigger and controversial infrastructure project affecting the region. Birmingham will be the central hub of the High Speed 2 (HS2) rail network, due to run from London in the south to Manchester and Leeds in the north.

Midlands Economic Forum (MEC) conducted an independent assessment of the costs of HS2 in 2019. Although the project had an original cost estimate of £30bn, MEC estimates that constructing the three phases of the main route will require £107bn in investment, while connections from HS2 terminals to local rail services adds a further £43bn.

Alhough construction has already begun on Phase 1, rumours abound that due to spiralling costs and stressed public finances, Phase 2b, running from the West Midlands, through the East Midlands and on to Leeds, could yet be scrapped.

While Forrest warns the project could become “the biggest white elephant in history”, Sir John Peace is adamant that the full project is essential to the economic growth of the region.

“I am going to defend the prime minister [Boris Johnson],” says Peace, “He has consistently said HS2 will be built in its entirety and I believe him… The chancellor [Rishi Sunak] is confronting a very difficult problem and its absolutely right to look at these things under a microscope to make sure we get real value for money. But do I think it should be cancelled? Absolutely not.”

The Commonwealth Games and Birmingham’s levelling up

HS2 is also important because it is part of the UK government’s stated ‘levelling up’ objective: to reduce the country’s economic dependence on London by boosting the economies of other areas of the country.

While the government’s plans have been curtailed by the need to prop up the economy during the Covid-19 pandemic, the chancellor’s recent spending review promised more funding for infrastructure and green initiatives outside the capital.

“We need a clear vision for how to grow the economy, and it has to grow because we can’t go back to austerity,” says Peace.

While a devolution of powers to regions is a stated aim of the levelling up agenda, as evidenced by the creation of bodies such as the Midlands Engine and initiatives such as ‘freeport’ economic zones, central government will play a pivotal role in creating the condition for investment to be attracted.

Peace says: “What the government can do is give certainty. It has got to be very clear in its policy. Business needs confidence, and clarity and certainty. And if it has got those things, I am finding a lot of interest from investors.”

HSBC opened its new UK headquarters in Birmingham in November in what is hoped will be the first of a wave of major financial and professional services companies migrating from London.

Meanwhile, in 2022, Birmingham will host the Commonwealth Games, which will be an opportunity to promote the city to a global audience.

“The Commonwealth Games will be a lynchpin event as part of the recovery process,” says Storer. “If you look at the legacy for a city such as Manchester, the way it transformed how the city is perceived and its infrastructure was incredible.”

Birmingham and the wider Midlands region have a strong story to tell about their industrial past and bold ambitions to be a hub for future UK industries, despite the economic challenges ahead. Peace says: “As the government comes to level up the economy, with a clear wish and vision to build back stronger, better and greener, I can’t think of a part of the UK better placed to lead that particular drive for economic growth and prosperity.”

For more of Investment Monitor’s coverage of the UK’s cities, read through our Future of British Cities series: