Having just published my first analysis of the Manufacturing and Engineering sector, I wanted to share my thoughts on some of the key trends and market forces this important sector is facing.

The importance of how we trade globally in our post-Brexit world has never been in sharper focus, particularly for the Manufacturing & Engineering (M&E) sector which employs over 5.5m people* and where manufacturing alone accounts for nearly half of all UK exports**.

For many years now, we have propagated the myth that the UK “doesn’t make things anymore”. Despite the, sometimes painful, deindustrialisation of the past 50 years, in terms of manufacturing as a share of national GDP, the UK still ranks fifth in the world, with aerospace, pharmaceuticals, publishing and chemicals in particular being in a particularly healthy state. The people-intensive sweatshops of the late 19th century have long since moved east but there is still significant global consumer demand for high-quality British goods.

Nevertheless, there are many factors which are currently affecting the UK M&E sector. As well all know, the pandemic has given rise to a variety of supply-chain issues and maintaining appropriate levels of raw material, stock, and finished goods to fulfil orders is a difficult balancing act which can carry substantial working capital costs for any business – let alone a SME - if not properly managed.  

The Price Isn’t Right

Raw material commodity prices is another area where clients are paying particular attention. For example, steel prices peaked in May, up around 70% compared to the same time last year. While this ‘toppish’ price fell back slightly over the summer, it is once more creeping back to that level.  This fluctuation creates obvious uncertainty and those delivering public sector contracts tend to have to shoulder the impact of the price moves lacking, as they do, a customer upon which to pass the burden. This can be particularly painful when companies are tied into contracts delivering longer term infrastructure projects such as HS2.

Of course, contracts do increasingly include some flexibility and the potential to renegotiate should there be a ‘Material Adverse Change’. It is always worth considering the flexibility within contract terms when cost of sales has been historically volatile as a material erosion in gross margins will obviously have a direct impact on a bank balance, especially if there are high fixed costs to cover. Providing for such contingencies by including specific price flex clauses in contract terms - or indeed increasing working capital headroom - are a couple of ways in which to mitigate these risks.

Green Revolution

Net Zero (by 2050) is another interesting dynamic. This is a global issue and one which is now receiving substantial legislative support in an attempt to arrest global warming and reduce emissions. The majority of clients we speak to now have this firmly in their sights and are already on a sustainable path having introduced ‘green’ measures such as low-cost energy and process efficiency measures. At this point it is perhaps worth mentioning that the UK’s low carbon economy is now worth more than £200bn, almost four times the size of our manufacturing sector.

Of course, there is undoubtedly some way to go. Much of this will require material investment, from replacement of plant and equipment to lower energy equivalents to installation of onsite generation capability. There are currently some tax breaks on capital expenditure together with various government backed grant and loan schemes which will help encourage investments in these areas, but it is clear that this is a long-term play and a longer term investment strategy will be required.

"The drone economy alone could be worth up to £42 billion to the UK by 2030"

Source: GOV.UK

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New Opportunities

Finally, there are also scores of new and emerging technologies that could significantly enhance the UK M&E sector. For example, the UK government recently launched a consultation to consider ground-breaking technologies that will transform how we travel over the next decade***. Within this, it cites how the drone economy alone could be worth up to £42 billion to the UK by 2030 through the routine use of drones for rural deliveries, improving accessibility to rural communities while bolstering surveying, data collection and even search-and-rescue missions.

What is also worth considering is how the development of technologies such as AI and robotics by various homegrown innovators could also become a threat, being rendered obsolete by a distant global development just as the C60 cassette was decimated by the CD.

Nevertheless, for now, the headwinds are easing and the UK M&E sector is returning to some sense of normality.

Alexei Garan, Head of Business Funding, Shaw & Co

* Overview of the engineering and manufacturing sector in the UK | Prospects.ac.uk

** UK Manufacturing Statistics (themanufacturer.com)

*** Transport to unleash the UK’s potential as a world leader in future technologies - GOV.UK (www.gov.uk)

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