Brompton Bicycle shows British manufacturing how to shift up a gear LONDON (Reuters) - Loan refusal letters and retailers' rejections frame the walls of the Brompton Bicycle factory, a reminder of the obstacles the firm has overcome to establish itself as the UK's top bike-maker, selling 45,000 a year around the world. Brompton's success lies partly in its cool - the company cashed in on a trendy 'Made in Britain' tag, and the fact that its bikes fold up lends the label a geeky chic as well as popular practicality. But beneath the image lies a carefully-constructed business strategy that reveals not only the level of innovation required for UK manufacturing firms to succeed, but also the number of bumps in the road many of them still face. Britain's 1.5 trillion pound ($2.5 trillion) economy is among the developed world's fastest-growing thanks to a recovery in consumer spending last year. But its manufacturing sector, a tenth of gross domestic output, has been hollowed out since its post-war boom. From the world's number two exporter in 1948, the UK fell to No. 8 in 2007 before the financial crisis and fierce competition from countries like China bumped it down further to 11th position in 2012, according to World Trade Organisation figures. The crisis in the euro zone, destination for around half of Britain's exports, has held back growth in recent years. But home-grown problems such as a lack of innovation on the factory floor and a shortage of staffing resources are longer-term factors at the core of the country's manufacturing malaise. "The problem is you can't get the brains," Brompton's managing director Will Butler-Adams told Reuters on a quick tour of his busy factory. That's the problem for the UK. We have the capability - we don't have the engineers. When Butler-Adams joined Brompton in 2002 the firm founded by inventor Andrew Ritchie was selling just 6,000 bikes a year, held back by a lack of skilled craftsmen, a disorganized production line and a reluctance to outsource non-essential and time-consuming work. For the forthright engineering graduate - talked into the job by Brompton chairman Tim Guinness during a coach journey when they met as strangers - it was clear Brompton's promise could only be met by tapping overseas markets, restructuring its factory floor and training more specialized staff. The difficulties experienced by Brompton in finding the right staff - filling one design engineer post took three years and concluded in a protracted visa wrangle to hire a Chinese national - illustrate how a very basic need has become a major headache for UK manufacturing firms. A 2013 survey by the Confederation of British Industry found that almost 41 percent of firms were forecasting a shortage of UK workers with requisite science and engineering skills for the next three years. The sector suffers an image problem, said Verity O'Keefe, policy adviser at manufacturers lobby group EEF. There's a perception issue. Young people perceive it to be about blue overalls, working on greasy engines and actually it's a lot more than that," she said, adding that students are also rejecting engineering apprenticeships in favor of careers in higher-paid sectors such as financial services. The shortage has been exacerbated by a government drive to cut net migration to below 100,000 per year by 2015 - a tactic to win votes from an austerity-weary public worried about their jobs amid high levels of immigration. This tightening of visa rules - including scrapping a scheme allowing British-educated foreign students to work in the country for up to two years without a sponsor - has reduced the number of non-EU migrants entering Britain by 24 percent over the 2006-2012 period, government data showed. While Brompton has solved some visa problems by appealing directly to the government, it has also worked around the issue by investing in staff training - building a workforce of home-grown specialist engineering craftspeople. Foreign students are a good thing, but it can't be the only thing... We need committed British talent, people who are going to be here for their entire career to support seismic change in the British economy," Butler-Adams said. Brompton's search for staff has got less difficult as its brand has got trendier, attracting fans such as director Guy Ritchie and actor Hugh Jackman. "The majority of small engineering businesses are doing small, clever, innovative things but they are not glamorous, not in the public eye...They won't have the same advantages that we have," said Butler-Adams. Brompton proudly assembles each of its bikes - which start retailing at about 800 pounds - from 1,200 parts, in its tiny west London factory. Today it is a scene of organisation and efficiency where uniformed staff work alongside machines in areas designed for optimum production. Tasks include soldering frames and assembling bike parts, using state-of-the art, bespoke robotics that are also designed to help guard Brompton's design from copycats. It's a tight operation that is a far cry from 2002's production line when "one could easily sweep up two pounds worth of kit" in waste, according to Butler-Adams. "We've been investing heavily in...really producing good, efficient manufacturing processes," says the 39-year-old, who rides a Brompton model saved from one of the rejection bins. We outsourced the stuff that was non-core, but the stuff that was core, we lavish love and attention and engineering on. That investment, he says, is now helping the firm compete with rivals that have not developed their production processes but farmed work out to manufacturers in India and China in order to save money, only to be hit by a rise in staff and production costs as those countries' economic growth took off. Brompton, which makes more than 70 percent of its sales from 43 overseas markets, is now looking to win customers from California-based Dahon and Taiwan-headquartered Tern, which make their folding bikes in Asia on a mass scale. It is also chasing export sales in many other new markets. The British government gives companies help to boost exports, providing market research and hosting events at embassies to meet potential partners. But British lawmakers think it could do more. A recent report by the Public Accounts Committee found the UK was not performing as well as Germany, France and Italy, and could miss its target of doubling the value of exports to an annual 1 trillion pounds by 2020. However, manufacturers could do more themselves, and shouldn't underestimate the potential for their product, says Butler-Adams, who spent four days cycling around Shanghai to test how bike-friendly the city was before setting up a new store there. He also plans to fly to Turkey and the UAE this year to find new distributors. If you can just get businesses to take time out and think, the market's there. People love British brands. In Japan, Brompton's biggest market outside the UK, Koji Uezawa, a bikeshop worker in downtown Tokyo, agrees. Brompton is a big hit with middle-aged commuters there, Uezawa says. There are other folding bikes, but this one has a nice squarish shape... They fold up the smallest and people think they're kind of cute. Back in London, Brompton expects profit to grow 38 percent to 3.3 million pounds this year. The company is now seeking a new London site for its rapidly-expanding business and plans to roll out a Brompton bike hire scheme across Britain similar to one organized by the Mayor of London for the city's commuters. It also plans to make the U.S. - where cycling in cities such as New York, Austin and Portland is growing in popularity - its biggest market within four years. "We're making 45,000 bikes in the world, but... we haven't really started," Butler-Adams said. Additional reporting by Elaine Lies in TOKYO; Editing by Sophie Walker