Don’t write off British factories just yet

August 25, 2022

Stagnation looms for British business. New August figures show that the private sector slowed to a snail’s pace as factory output fell and the larger services sector struggled to match July.

The S&P Global/CIPS Purchasing Managers’ Index (PMI) estimate dropped to 50.9 in August from 52.1 in July, its lowest since February 2021 and close to the halfway level that is the gateway to contraction. Producers of goods are feeling the pain of staff shortages and high input prices, despite the latter having posted their lowest rise for a while.

British businesses, particularly manufacturers, seem to be more exposed than those in other economies to the longer term economic effects of recent shocks – war in Ukraine, energy costs, Brexit and Covid, not to mention political instability at home. But this exposure is not necessarily new:  UK manufacturing has for decades faced fierce competition from emerging economies in Asia, primarily China and India, which are able to produce goods more cheaply. Manufacturing’s share of the economy is around 10% today, half of what it was in 1990. Recalling more than 25 years ago the demise of Leyland DAF, when Buchler Phillips was appointed Joint Liquidator, the heavy blow of growing overseas production as it affected the workshops in the north of England has not been forgotten, particularly since more than 2,000 employees in that situation alone were made redundant as a consequence.

There may yet be ‘sunlit uplands’. Engineering and manufacturing are sectors undergoing dramatic change, which could eventually bring significant opportunities for UK businesses ready to exploit well-established strengths in electronics, chemicals, pharmaceuticals and aerospace. The industry is no longer about merely turning raw materials into physical products. Increasingly, manufacturers derive revenues from other activities which are really services, for example specialist engineering, retooling used parts or even some forms of equipment leasing.

The value chain is increasingly complex and many manufacturers are adapting, although some will need more help than others to do this during the recession that is surely coming. Technology in production – robotics, computer design and new materials – requires fewer jobs, meaning new forms of training for different skills and a need for companies, the education sector and government to work together delivering them. Encouragingly, almost 75% of R&D spend in recent years has been from manufacturers. Optimists might say manufacturing and engineering are sectors at the heart of a major realignment of the British economy. Hopefully, rumours of their deaths are greatly exaggerated.

Written by Jo Milner, Director at Buchler Phillips, the UK’s leading independent corporate recovery, restructuring and turnaround boutique firm.

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