MANUFACTURING: A new chapter

The slow post-war decline of the UK’s manufacturing sector was showing signs of stabilising, but uncertainty surrounding Brexit negotiations has led to a wobble in the sector. Graham Buck spoke to the industry about its prospects

Ten years on from the global financial crisis, the UK’s manufacturing sector is undoubtedly leaner, but is it any meaner? A GMB union report shows that in 2007, the UK supported 3.5m permanent and temporary manufacturing jobs – more than 12 per cent of British employment. In 2016 those figures had declined to 2.9m and 9.2 per cent respectively.

“Uncertainty [surrounding] the government’s approach to Brexit is harming UK manufacturing and delaying important business investment decisions that will provide high quality jobs in the years to come,” says GMB national secretary, Jude Brimble.

The report was just days old when Rolls-Royce announced job cuts of 4,600 jobs worldwide – 3,000 of which from its UK operations. Meanwhile, Airbus warned that the ongoing dithering with Brexit negotiations meant it was reviewing the future of its British operations. The Society of Motor Manufacturers (SMMT) added to the pressure on the government, reporting investment in the UK automotive industry in the first half of 2018 slumped to £347m, from £647m in the same period in 2017.

While sterling’s weakness in the two years since the EU referendum has shored up manufacturing activity and export order books, some recent data suggests it’s only a temporary benefit. After last winter’s Beast from the East disrupted business, an anticipated recovery in April failed to materialise; output fell by 1.4 per cent.

Employers are also alarmed by the impact of Brexit uncertainty on manufacturing investment.
Last month the Confederation of British Industry’s (CBI) outgoing president, Paul Drechsler, warned: “If we do not have a customs union, there are sectors of manufacturing society in the UK which risk becoming extinct.”

He added that “hundreds of millions” had been diverted by Britain’s pharmaceutical and finance companies into ensuring business continuity should a potential ‘worst-case’ post-Brexit scenario becomes a reality.

To offset the gloom, the CBI’s most recent industrial trends survey offers more upbeat news. Manufacturers reported healthier order books in Q2, exports remained well above average while the majority of sectors recorded growth, led by mechanical engineering and food, drink and tobacco.

Tom Hunt, underwriting manager for QBE’s European operations, suggests that a weak pound hasn’t been the only contributory factor. “Relatively buoyant conditions for UK manufacturing since the 2016 referendum have correlated with those for manufacturers across the EU and numerous countries worldwide,” he reports. “To some extent, therefore, a case can be made that favourable conditions seen in the UK also required similar conditions to exist within the EU – our closest trading partner – and worldwide.

“Moreover, the UK’s core downstream industries such as construction, automotive, aerospace and infrastructure have provided a stable and predictable flow of orders in recent years meaning capacity has been utilised to higher levels and manufacturers have been able to invest in plant/efficiencies and – to some extent – forecast more accurately. Much of this may be about to change however.”

An emerging threat comes from the US-China trade dispute that threatens to escalate from tit-for-tat to all-out war could easily bring that progress to a halt. The vulnerability of the UK’s remaining steel industry to tariffs on European producers has already underlined the potential collateral damage.

Meanwhile, business banking market researcher East & Partners reports that UK businesses are seeking trade with new markets beyond Europe, evidenced by their reduced use of the euro for international trade this year. The decline, along with small increases in their use of the US dollar and Chinese renminbi contrasted with a sharp rise in the use of other currencies, which rose nearly 25 per cent.

“While uncertainty continues with Brexit negotiations, UK business isn’t waiting and is already trading more [actively] beyond the EU,” said Simon Kleine, East and Partners Europe business lead. “Their usage and forecasts of currencies, as we head towards 2019, show they are starting to trade more widely and are looking to increase it.”

Germany’s example

UK manufacturers’ association the EEF – formerly the Engineering Employers’ Federation – also offered more reassuring news in its Q2 Manufacturing Outlook, produced with BDO. Although recruitment and investment plans have eased since 2017, they remain positive.

“Producers of mechanical equipment and electronics continue to do well and many companies are reporting strong demand from overseas,” reports Francesco Arcangeli, an economist at EEF. Before Airbus’ recent warning, the outlook for aerospace was also looking good.

“It’s impossible for the UK to go back to the position of 30–40 years ago, or for the country to match Germany, but there’s good reason to believe that manufacturing will continue to represent around 10 per cent of the British economy and this figure is stabilising.”

Arcangeli suggests the methodology in the GMB report was “a little flawed”.

“There has indeed been a loss of manufacturing jobs in the past decade, but the majority occurred in the two years after the 2008 crisis. Since then the trend has been a flatlining rather than decline and in the past year has been much improved – a point that most reports overlooked.”

UK manufacturing has nonetheless felt pressure from emerging economies and the shift of many manufacturing activities to lower-cost locations, says Tom Lawton, national head of manufacturing at accountancy and business advisory firm BDO, who notes that China, in turn, is now being undercut by cheaper competitors. “Although British manufacturers have tended to look closer to home, many opting to transfer production to Eastern Europe rather than Asia, as evidenced by Jaguar Land Rover’s decision to move work from the West Midlands to Slovakia,” he adds.

Lawton notes that Germany offers an example close to home of a highly successful manufacturing economy, helped by its Fraunhofer network of technical institutes that unite researchers and manufacturers. It’s an idea that Britain has aimed to replicate via the network of Catapult centres established by Innovate UK.

“Unfortunately we haven’t been as good as Germany in developing long-term planning and industrial strategy that works to a programme of 20 years or more,” he says. “Theresa May made some terrific pronouncements on industrial policy on entering Downing Street, but her attention has understandably since been diverted.

“In addition, feedback suggests that with the advent of the fourth industrial revolution – aka Industry 4.0 – our skills shortage is particularly acute as suitably qualified individuals will be needed within just five years.”

However, Sjaak Schouteren, a partner within the European cyber team at JLT Specialty, is hopeful that industry can rise to the challenge and has already seen much innovation within manufacturing.

“Where these companies used to run on operational technologies like supervisory control and data acquisition (SCADA), industrial control systems (ICS) or distributed control system (DCS), they are now looking at how to safely incorporate the industrial Internet of Things (IoT).

“We see a lot of organisations boosting their growth and success using connected devices and integration; by combining the manufacturing process with their need to drive data into every component of the organisation. Manufacturing companies are looking increasingly at the benefits of IT/OT integration and the industrial IoT. They continue to connect networks that operate at very different levels and means of security.”

Supply chain focus

Brexit uncertainties have focused attention on tackling supply chain risk, which was already steadily moving up the agenda for manufacturers, says Simon Gallimore, manufacturing industry UK lead for AIG.

“While the needle is moving in the right direction in terms of awareness, there’s still some way to go,” he reports. “In our work with manufacturers over the years, we have found that the many do not have a clear understanding of their supply chains, nor an enterprise-wide approach to managing these risks.

“Unfortunately, there’s no silver bullet to guarantee business continuity. Until recently there has been a limited ability in the market to properly quantify supply chain risks and subsequent contingent business interruption due to a lack of tools and processes both in the insurance industry and on the client side.”

The weakness of the post-Brexit pound has also proved to be a double-edged sword for the food and drink manufacturing sector, currently hit by production difficulties caused by northern Europe’s most acute shortage of carbon dioxide (CO2) in 40 years. Supplies of the gas, used in everything from food packaging to putting the fizz in drinks to food packaging, arose as several plants closed for maintenance just as demand was escalating.

Darren Seward, sector lead for hospitality and food/drink at NFU Mutual, says Brexit has pushed up the price of imported goods, often forcing food and drink manufacturers to improve supply efficiencies, reduce margins or increase their own prices in efforts to maintain quality.

“In attempts to offset rising import costs, the industry is sourcing more goods produced in Britain,” says Seward, which he regards as a “huge opportunity” for British craft breweries, distilleries and even vineyards.

This article was published in the July 2018 issue of CIR Magazine.

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