The Tony Blair Institute has called on the UK government to increase manufacturing’s contribution to the economy from 8 per cent of gross value added to 10 per cent by 2031, arguing that countries producing the physical infrastructure needed for artificial intelligence will be among the biggest beneficiaries of the technology’s expansion.
The think tank said the 10 per cent target should later be followed by a further goal of between 12 per cent and 14 per cent. Reaching 10 per cent would give manufacturing its highest share of UK economic output in 20 years.
In a new report, the institute said physical components required for advanced technologies including AI, quantum computing and robotics could become the main constraint on future growth.
It argued that although AI is primarily viewed as a digital technology, its development depends heavily on physical assets such as computer chips, energy infrastructure and data centres.
“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 UK is currently the world’s third-largest destination for venture capital investment, behind the United States and China. However, the report said much of that funding is directed towards software businesses.
Figures from the Startup Coalition cited by the institute showed software companies raised £19.7 billion, compared with £1.84 billion for hardware firms.
The institute warned that the imbalance could leave Britain exposed as demand for AI infrastructure grows. It said shortages of chips and energy systems, rather than computer code, could limit the amount of AI that can be developed.
Demand for AI hardware has already driven higher prices across supply chains as technology companies expand data centre capacity. Nvidia, the leading supplier of chips used to power AI systems, has been among the major beneficiaries. Gartner forecasts global semiconductor revenue will reach $1.6 trillion this year, representing a 92 per cent annual increase.
The government has set a goal of securing 5 per cent of the global AI semiconductor market. In June, it announced a £1.1 billion AI hardware programme, including £150 million to purchase next-generation inference chips from British start-ups and other companies, as well as £750 million for a national supercomputer.
The Tony Blair Institute said existing public financial institutions should play a larger role in supporting advanced manufacturing and other “hard tech” industries. It proposed directing at least 20 per cent of the National Wealth Fund’s remaining undeployed capital towards infrastructure for critical technologies.
The report said the UK faced structural difficulties in expanding advanced hardware businesses, citing relatively low manufacturing output, concentrated research funding and a financial system less suited to capital-intensive technology companies.
The government has also identified advanced manufacturing as a priority under its modern industrial strategy, with £4.3 billion committed to technology development and plans to reduce electricity costs for energy-intensive manufacturers from 2027.
