The UK has long suffered from a trade deficit in manufactured goods, importing more than it exports. That deficit has widened considerably over the past 20 years, from £7.5bn in 1997 to £92 bn in 2018.
The manufacturing sector plays a significant role in the UK economy, providing over 2.7m jobs, making up 49% of exports, contributing 66% to R&D business expenditure and 17.41% to GDP. To aid a strong recovery for the UK post-Covid-19, key industries, such as industrial manufacturing, will need government support as we seek to rebuild the economy, creating sustainable growth and jobs for the future.
Staying ahead of the curve
The UK has become a services-based economy. 71.26% of GDP distribution was from the services sector in 2019, contributing to the lack of investment in the manufacturing sector. The UK government has become a lot more focused on identifying which industries are potentially critical in terms of national security and maintaining our competitive advantage over the longer term.
By adopting protectionist measures for certain critical industries, such as tariffs and subsidies, the UK is following the US when it comes to defence and other critical international industries of national importance. To secure the continuity of manufacturing, stay ahead of the technology curve and ensure national security going forward, there’s a growing trend towards onshoring in the supply chain and, where possible, reducing the reliance on critical suppliers from overseas.
Embracing onshoring
The most prudent management teams have sought to de-risk their businesses by looking at alternative suppliers for their raw materials and feedstock, increasingly driving for domestic supply chains. Onshoring can lower costs by insulating manufacturers from foreign currency fluctuations, labour laws and the cost of raw materials overseas. Businesses can become more agile by creating shorter supply chains and lead times. Predictable supply chains and settled inventory levels inspire confidence in times of crisis, as we become more used to preparing for disruptions. Tapping into the UK’s reputation for quality and harnessing skilled talent closer to home can also help the manufacturing industry embrace the innovation and technologies key to ensuring competitive advantage, leading to increased efficiencies and, ultimately, profitability.
Industry 4.0 technologies such as analytics, automation and robotics are changing the way factories operate, providing further opportunities to bring production back onshore and placing less emphasis on labour-intensive work overseas. The rise of additive manufacturing, for example, offers the chance to accelerate prototyping and reduce time to market, making supply chains more flexible and cost-efficient.
Academic institutions and trade bodies have a role to play in sowing the seeds that will improve the UK’s domestic capability. Sheffield University has developed a world-leading material science campus. Feeding off that, the likes of Boeing and McLaren are investing in it and creating local agile jobs.
The days of the UK manufacturing commodity, low-value products are long gone. It’s vital we stay ahead of the technology curve and at the forefront of new product development in collaboration with academia and large corporates. Providing that support, both financially and technically, is the long-term solution to ensuring the UK develops domestic capability.
The oil and gas sector was hit hard by Covid-19 and continues to be affected, as we’re also seeing with commercial aerospace. The challenge, when these companies go through deep redundancy programmes, is to mitigate against the skills which are lost and won’t return immediately when demand starts to increase again. We need to be conscious of the fact that when we finally emerge from this crisis, the world will be a very different place.
Protectionist trends
In 2017, a year after the UK voted to leave the European Union, businesses with suppliers on the continent were actively looking for alternatives based in the UK and began de-risking through stockpiling.
Unfortunately we are living in a world where the US, Europe and China are also increasing protections and rights in their local markets. We’re seeing this in the steel industry and the oil and gas sector, where various tariffs have been imposed by the US and Europe on anti-dumping of Chinese steel.
Unless the UK follows suit with similar protectionist measures, it runs the risk of falling further behind. Over the long term this can negatively impact the economy, but when other countries are taking such steps it is inevitable the UK will follow.
Some optimism going forward
While the UK has remained a dominant force in the aerospace and defence sectors, leading the way in terms of new developments for high performance applications, the pandemic has triggered a significant drop off in demand, with many supply chains de-stocking. The difficulty for critical suppliers lies in realigning their costs to remain viable businesses in the short term, while holding on to the technical skills required to take advantage of the rebound, whenever that happens.
The challenge for our clients is understanding the state of trading, turnover and profitability as we gradually ease out of the lockdown. Whilst it’s clear M&A volumes have been adversely hit in the first half of 2020, with corporates focused on weathering the current storm to ensure the viability of their businesses, there is cause for some optimism going forward. One client said they can trade at 80% of previous levels with 60% of the cost base.
One could question why it has taken a worldwide pandemic for businesses to take the efficiency measures that could have been implemented previously. For M&A volumes, while we are experiencing an increase in activity and expect a number of processes to come back to market in Q4 2020, the challenge will be to understand the value of opportunities for buyers.
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Content published by Professional Engineering does not necessarily represent the views of the Institution of Mechanical Engineers.