UK AI manufacturing target urged by Tony Blair Institute

The Tony Blair Institute has called on the government to raise manufacturing’s share of UK gross value added from 8 per cent to 10 per cent by 2031, arguing that the countries set to gain most from the artificial intelligence boom will be those that make the physical equipment the technology depends on.

The think tank said the 2031 goal should be followed by a “subsequent target” of 12 per cent to 14 per cent. A 10 per cent share would be a 20-year high.

Its report argued that physical inputs to frontier technologies such as AI, quantum computing and robotics would become the “key bottleneck”.

“The ultimate digital technology, the one that feels the most abstract and removed from the physical world, will make physical capital matter more than ever,” the report said. “The real winners will therefore be the countries that not only adopt AI, but create the physical things that AI depends on.”

Funding skewed towards software

The UK ranks third in the world for attracting venture capital, behind only the United States and China, but the report said investment was heavily skewed towards software. Figures from the Startup Coalition, cited in the report, put funding raised by software companies at £19.7bn, against £1.84bn for hardware firms.

The report warned that the UK’s relative weakness in hardware could pose problems. “It is the supply of chips and energy systems, not code, that currently caps how much AI can be built,” it said. “Conversely, AI is far more likely to cannibalise ‘soft’ tech and service sectors.”

Demand for AI hardware has pushed up prices across supply chains as companies race to build data centres, with Nvidia, the dominant supplier of the chips needed to power AI, among the biggest beneficiaries. Gartner, a research firm, predicts global semiconductor revenue will reach $1.6tn this year, up 92 per cent year-on-year.

The government has said it wants the UK to capture 5 per cent of the AI semiconductor market. On 8 June it set out a £1.1bn AI hardware plan, which included £150m to buy next-generation inference chips from British start-ups and other firms, alongside a £750m national supercomputer.

Where the report says the money should go

The report said the UK was “structurally disadvantaged” when it came to scaling world-leading hard technologies. Manufacturing makes up a lower share of GDP than in international rivals, it said, research and development spending is heavily concentrated in the pharmaceutical industry, and the financial ecosystem is not geared towards hard tech.

Rather than pursuing what it called “nostalgic reindustrialisation”, the institute said the government should gear existing public financial institutions, including the National Wealth Fund and the British Business Bank, towards hard tech. It argued that a minimum of 20 per cent of the National Wealth Fund’s remaining undeployed capital should be spent on infrastructure for critical technologies.

The government has separately set out an AI investment package centred on an AI growth zone in south Wales, while Carbon3.ai has announced a £1bn plan to build a sovereign AI infrastructure network of UK-owned data centres. Advanced manufacturing is one of the frontier sectors named in the government’s modern industrial strategy, which commits £4.3bn to technology development and creates a scheme to cut electricity costs for energy-intensive manufacturers from 2027.

The Tony Blair Institute acts as a think tank and policy adviser to governments around the world. It has received significant backing from Larry Ellison, the Oracle founder, who has pledged $375m to the organisation.

About the author

Jamie Young

Jamie Young is Senior Reporter at Business Matters, covering SME finance, employment law and Westminster policy since 2016. He has reported on every Budget and Autumn Statement since 2018, helped make sense of the ‘covid era’ and the bounce-back loan scheme from launch through the fraud investigations, and broke the magazine’s coverage of the 2024 late-payment reforms. He joined Business Matters straight from completing his BA in Administration from Exeter University and is NCTJ-qualified. Reach him at jyoung@cbmeg.co.uk

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