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The Shape of British Industry

UK Manufacturing sector poised to fill growth gap – EEF Report

British manufacturing is poised to fill the growth gap as the public sector plays a smaller role in the economy. It is well placed to respond to the Prime Minister’s call to ‘create and innovate; invest and grow’ according to a major report and survey of 300 companies published today.

However, the sector would benefit from a government strategy which helps to overcome the growth barriers that companies face and to grow the next generation of large global players. The report contains new analysis by EEF of the disparity in numbers of larger UK companies compared to those in Germany and the US.

‘The Shape of British Industry’ published by EEF, the manufacturers’ organisation in partnership with The Royal Bank of Scotland (RBS) comes ahead of the government’s forthcoming Growth White Paper and its Manufacturing Framework.

The report paints a picture of a sophisticated, successful sector which is currently growing at the fastest rate since 1994 and whose growth strategies are centred on innovation and investment. Some 76% of companies state that their growth strategies will be achieved by increasing innovation in the UK and 69% by increasing capital investment. It is also highly export driven, with exports accounting for more than half of turnover in 40% of companies and one third having production facilities outside the UK.

EEF believes these figures demonstrate the potential of manufacturing to lead private sector growth and rebalance the UK economy. While the government’s recent focus on measures to open up opportunities for smaller firms and reduce the regulatory burden they face is welcome, it is vital that its growth strategy seek to break down the barriers to growth for all sizes of companies at and at all stages of their growth.

Commenting, EEF Chief Executive, Terry Scuoler, said:

“Manufacturing is well placed to fill the growth gap as the public sector plays a smaller role in our economy and make the investments in innovation and skills that will drive our economy forward and create new jobs.

But this will only happen if there is a genuine partnership with government that helps companies of all sizes and growth stages to overcome the barriers that they currently face to growth.

“Whilst the current attention on young businesses and start ups is helpful we must not ignore the wider benefits to the economy that larger companies bring. The UK doesn’t just need a handful of larger companies over the next decade; we need hundreds of them with the scale and muscle to tackle our economic challenges. Otherwise we risk placing a speed limit on our growth potential.”

Peter Russell, Head of Manufacturing Sector, RBS Corporate and Institutional Banking, said:

“This report touches on a number of important issues that are shaping the UK’s manufacturing sector – both challenges and opportunities. What is clear is that manufacturing continues to make a significant contribution to the UK economy and is well placed to play an even greater role in a sustained economic recovery. We are committed to the sector and to providing finance in support of viable manufacturing companies that are looking to achieve the growth that will help the sector continue to thrive.”

In particular, the report shows large companies are at the heart of collaboration up and down the supply chain and driving new product development. They also make wider investments in areas such as skills that benefit the economy as whole. However, new analysis shows the UK has fewer numbers than its competitors which puts the UK economy at risk of missing out on the wide benefits they bring.

Germany has more than twice as many manufacturers with 250 or more employees. The proportion of companies with more than 250 employees is also significantly lower in the UK than in Germany – 1.2% compared to 2.1%. The disparity with the USA is even greater with firms employing 500 or more people accounting for 0.6% of manufacturing companies in the UK compared with 2.9% in the USA.

According to the survey growth-oriented companies are more likely to see finding employees with the right skills, their ability to innovate and management capability as the key barriers to growth. Those that are currently looking to maintain their current position are more likely to be held back by the availability of affordable finance and government regulation.

In addition, while many aspects of the business are viewed favourably by UK manufacturers, two fifths of companies rated the UK tax system as quite or very bad with just 18% rating it as good. More than half of companies cited regulation as an obstacle to growth. Most crucially, nearly 60% of mid size firms rated it as a barrier to growth and, a significant majority rated the UK business environment as poor in this area.

To help break down these barriers to growth, EEF has recommended a three pillar approach.

Firstly manufacturers themselves need to promote themselves and their sector at every opportunity to customers and help address skills shortages. EEF will front an industry- led campaign designed to bolster the image of manufacturing in the run up to the 2012 Olympics.

Secondly, EEF recommends government should provide an internationally competitive and stable framework on tax, regulation and skills which includes the following:

  • Deliver on its commitment to reduce red tape. In addition to its ‘one in one out’ policy it should introduce seven year sun-setting reviews with business on regulatory burdens
  • Provide clarity on which environmental, business and personal tax reforms it will seek over the next five years
  • Improving access to finance through greater competition between banks, alternatives to equity finance and a restructuring of government backed scheme
  • Ensure that any changes to the takeover rules strike a balance between minimising barriers to investment which is the lifeblood of the sector and ensuring M&A activity works in the best interests of the UK economy
  • Continue in the encouraging direction it is currently heading to implement a simpler and demand-led skills training system

Finally, it should target and co-ordinate support to catalyse growth:

  • Ensure that the new powers that Local Enterprise Partnerships have to borrow against future revenues (Tax Increment Finance) are used to grow and attract to compete for businesses in their area.
  • Target support at high growth sectors and to build on industry strengths.
  • The recent investment in port infrastructure was a good example which produced resulting private sector investment in low carbon technologies. New nuclear, electric cars and high speed rail are other examples of where support should be targeted.
  • Scrap the target for 25% of public sector contracts to go to SMEs procurement and focus on making these contracts more accessible by improving the skills of government procurers.
  • Ensure that the proposed Growth Hubs provide a single source of access to support that helps high growth companies realise their potential

Source: EEF, November 2010

 

Manufacturing recovery not over but its ‘lustre has been lost’.Manufacturers’ optimism is being dampened by concern over euro stability and austerity cuts, according to a new piece of research published today

 Global manufacturers’ optimism has fallen again as the nascent global economic recovery appears to have lost its momentum, according to a global business outlook report from KPMG and Markit Economics, based on a survey of senior executives in large companies in the US, Western Europe and Asia Pacific.

However, despite the survey indicating a lesser degree of positive sentiment within UK manufacturers (net balance of 49% down from 57%), six in ten UK manufacturers expect to increase their business activity next year largely due to export demand and a weakening pound. Along with this, a third of UK manufacturers intend to recruit staff in the next 12 months (36 percent – the highest figure since the beginning of 2006).

This appears, on the face on it, to be an encouraging response from manufacturers and should lift market confidence but waning global optimism and cuts in public spending in the UK are expected to loom over the sector in the coming year, says KPMG. Consequently, this could lead to a more cautious approach and a greater focus on flexibility in the manufacturing sector than before.

KPMG’s UK head of diversified industrials Gautam Dalal (pictured) said: “UK Manufacturers should tread with caution as they enter 2011. In the UK, manufacturers’ previous optimism is expected be dampened by the threat of cuts in the public sector, and the Euro crisis which is likely to increase uncertainty in businesses in the coming year.

“Looking ahead a year or two, we expect that many UK manufacturers will shift their planning horizons to shorter periods. For tomorrow’s manufacturer, flexibility is everything; they need to be able to react to changing market conditions quickly.

“In order to increase their flexibility, UK manufacturers may need to look at bringing their supply chains closer to home to secure supply, maintain output in challenging times, and allow shorter turnaround periods. As a result, manufacturers’ supply chains are likely to become more important and the most successful companies will likely be those who build adaptability and flexibility into them.”

On the inventory front, UK manufacturers’ inventories as a proportion of output are set to fall at a sharper rate in the coming year than was predicted in June. This may also be an indicator of a drive to be more flexible in operating models, with shorter time horizons of weeks rather than months – the need for flexibility being a lesson learnt from the recent financial crisis.

UK manufacturers need to be mindful of the need for ‘learning and innovation’ which will be key to maintaining a place at the table in the global market place. An encouraging sign by manufacturers is their intention to increase both capital expenditure and R&D spending over the coming year.

Dalal believes the recent crisis has firmly reminded Europe of the need to keep its manufacturing base. “It would be foolish to try to survive in the modern world on the back of a service-based economy alone and I think we’re likely to see governments acting accordingly to rebalance their economies with this in mind.

“Overall the trend seems to be that while UK manufacturers are being more cautious, especially given the Euro crisis and public sector budget cuts – things are nevertheless still pointing in a positive direction with increased exports, increased recruitment, increased R&D and increased capital expenditure. Confidence may be weaker than before – but it is not weak per se. The recovery has not ended – but it has lost some of its gloss and lustre.”

Source: Ken Hurst, Works Management , November 2010

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