Brighter mood for UK manufacturers

Mar 3 2010 By Tony Sarginson, The Journal

LIKE the rest of the economy, manufacturing has been through a tough time over the past 18 months. But more recent indicators, such as the monthly Purchasing Managers Index, suggest that the mood among manufacturers is changing.

The manufacturers’ organisation EEF released its latest quarterly survey of members on Monday and this confirmed the positive trend.

But just because things are looking brighter for manufacturing, we shouldn’t be complacent. The recession will have damaged supply chains, some companies will struggle to find the skills they need to meet increased orders, and businesses will remain vulnerable if they cannot access the additional working capital they need in the early stages of a recovery.

But the more positive figures should also serve to remind us of the major strides that manufacturers had made before the banking crisis hit. Even up to the middle of 2008, many manufacturers were reporting their best results for at least a decade, investment intentions were strong and employment expanding. These gains were achieved on the back of a fundamental rethink of what UK manufacturers needed to do to compete in world markets. The recession of the early years of the last decade had shown that too few manufacturers had the right strategies to cope with the rise in competition from countries with lower labour costs and with unfavourable movements in exchange rates.

One of the most significant changes has been a shift away from competing on costs. EEF research in 2004 showed over a third of companies aggressively cutting prices in response to low-cost competition. By 2007, this proportion had fallen to just one in eight firms.

In addition, almost half of them had considered but rejected this option, recognising that this was not a sustainable response to low-cost competition.

In contrast, nearly six in ten manufacturers had taken action to increase focus on innovation with a further 30% either planning to or considering it.

Companies also reported that they were seeking to compete by developing niche products and service offerings. Reflecting these changed priorities, more manufacturers reported that design and development rather than production and assembly would be a key source of competitive advantage in the future.

Their commitment to these strategies is illustrated by last year’s annual EEF Innovation Monitor which showed that despite the recession, manufacturers reported an increase in most forms of innovation and expected this to continue.

Our research also showed that companies were taking a longer view of investment with payback periods lengthening and were increasingly focusing on more intangible forms of investment such as research and development, design and marketing and organisational change.

This change of tack has already started to deliver results. After lagging behind the rest of the world’s major advanced economies in the 1990s, UK manufacturers were second to only the United States in improving productivity in the years before the recession.

And despite the biggest contraction in world trade since the last world war, a recent EEF survey showed that over a third of manufacturers had managed to expand their exports, with a further 16% maintaining export volumes. Indeed, some 15% recorded an increase of 10% or more in exports.

We are also starting to see some manufacturers starting to bring production back from abroad. Our most recent research showed one in seven firms doing this, in part reflecting disappointment with the cost savings and quality standards achieved by their investment abroad and concerns over getting products to market fast enough. But it also demonstrates that more manufacturers have found that they can compete from a relatively high-wage cost location like Britain.

UK manufacturing is in a good position to take advantage of the markets created by the major challenges facing the world. In the low-carbon economy, we have significant strengths in areas such as low-carbon vehicles, engine technology, nuclear power and renewable energy such as offshore wind and marine.

But in other areas such as global security, we have significant strengths in aerospace and defence and electronics, as we do in healthcare technology and pharmaceuticals to meet the challenges presented by an ageing population.

At the same time, we can’t be complacent and think we can sit back and let these markets come to us. Manufacturers will need to be alert, agile and ambitious and they will need backing from Government.

It is vital that the Government delivers on the priorities set out in our manifesto, but ultimately it is down to manufacturers to take advantage of the opportunities that are out there. In that respect we can take a lot of confidence that UK manufacturing is a very different animal from what it was even ten years ago.

Tony Sarginson is head of external affairs at EEF.