Factories firing up for a comeback

April 9, 2024

Debating the UK’s economic future inevitably leads to questioning the strength of our industrial base: what can generate earnings outside financial and professional services, or early stage tech development?

Manufacturing’s share of the UK economy is around 10% today, half of what it was in 1990. Everyone knows that our manufacturers face perennial competition from emerging economies in Asia, primarily China and India, which are able to produce goods more cheaply. Fewer realise that well over 90% of UK manufacturers are SMEs or even microenterprises; relative to larger business in all sectors, they have poorer access to funding, skills, physical space and exporting.

Nonetheless, the tide may be turning.  According to the latest S&P Purchasing Managers Index (PMI), manufacturing output improved to a 20-month high in March, marking the end of a period of shrinking activity that started in July 2022. The PMI hit 50.3 – exceeding 50 indicates expansion – up from 45.4 in February.

Domestic demand for manufactured goods has picked up, but businesses continue to experience global difficulties that have restricted foreign orders. Conflict in the Middle East and disrupted shipping in the Red Sea remains a concern. In addition, businesses reported reduced demand from mainland Europe, notably from France, the Netherlands, Belgium and Poland.

Overall, however, the balance of 12-month expectations for output growth in over the next 12 months improved to 75.9 in March from 73.5 in February, above the average level of 72.4 since the survey began in 2012.

Manufacturing and engineering are sectors undergoing dramatic change, which can also 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 manufacturers are adapting, some quicker than others. In addition, technology in production – robotics, computer design and new materials – require 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.

The challenges of economic uncertainty, disruptive entrants to the market, regulation, staff issues and the high costs of equipment all mean that businesses in these sectors need to re-engineer themselves, in an operational or financial restructuring sense, if they want to capitalise on opportunities and protect themselves against a chill wind.  The obvious areas for attention might include:

  • Cash flow and working capital
  • Leasing and funding of production lines
  • Asset finance
  • Factory premises and their purchase or rent
  • Assessing available financial support for R&D
  • Grant application support
  • Managing exchange rate fluctuation
  • Operational efficiency
  • Invoice financing

Optimists might say manufacturing and engineering are sectors at the heart of a major realignment for the UK economy. Hopefully, rumours of their deaths are greatly exaggerated.

This article is written by Jo Milner, Managing Director at Buchler Phillips, an independent boutique firm, with an impeccable Mayfair London heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.

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