Manufacturers can realise success during recovery

Despite being one of the hardest hit sectors during the recession, statistics suggest that UK manufacturing is on the road to recovery.

The Engineering Employers Federation (EEF) is estimating 3.8 per cent growth in manufacturing in 2010 compared with 1.1 per cent for the rest of the economy, while in May, UK manufacturing saw the fastest rate of growth in the last 15 years, according to the Office of National Statistics.

At present, almost all of the conditions for this recovery are in place. While investment in capital expenditure fell dramatically during the recession, to the point where it barely covered the depreciation of assets, a notable rebound during the last eight months has seen company profitability improve.

Better lending conditions have allowed manufacturers to re-leverage their balance sheets, while improvements to cost control and efficiency have boosted cash reserves. In addition, funding via equity issue is resuming.

Despite these favourable conditions, the reality on the ground in areas like Lancashire is not so clear cut. Like the wider economy, confidence is key and, until manufacturers can be certain of consistent demand for their products, most will play it safe.

This lack of confidence has limited sector growth in comparison to the market high of two years ago, and will continue to stifle a recovery that is likely to be complex and fragile. In addition, the impact of the Government’s efforts to redress the deficit remains to be seen.

The outlook for Lancashire’s diverse and fragmented manufacturing industry is extremely difficult to gauge, with performance varying greatly between different sub-sectors and companies in the county.

Aerospace and defence, key industries in Lancashire, have held up reasonably well throughout the downturn. The typically long lead times for large projects have meant that many of these businesses have greater visibility over their future prospects. However, question marks remain surrounding how public sector cuts will affect this sub-sector.

Specialty chemicals companies in Lancashire have also held up well in the face of challenging economic conditions.

They have strong profit margins – dealing in outputs that remain uncommoditised – and taken advantage of efficiency improvement possibilities, which have allowed many to realise growth. There is, however, considerable global competition in specialty chemicals and Lancashire manufacturers are under pressure to complete the innovation cycle more quickly than ever before.

Conversely, the bulk chemicals sub-sector in Lancashire has fared less well. As a high cost, low margin business with notably less scope for efficiency improvements compared with specialty chemicals, the recession led to a number of site closures among bulk chemicals companies. In the medium term, the sub-sector is likely to continue to struggle as a result.

Despite economic pressures, manufacturers in Lancashire have the potential to perform well, even in a slowly recovering market. Manufacturing is growing globally, and the UK is no different.

This is providing a boost to exports. Furthermore, manufacturing IPOs could return over the next two years, as investor appetite turns to traditionally profitable, stable manufacturing shares.

The manufacturing sector tracks the UK economy and, until confidence returns to both UK businesses and consumers, the manufacturing recovery in Lancashire will be fragile and drawn out.

However, by focusing on sustainable efficiency improvements, cost control and value-added customer service and support, Lancashire manufacturers can enjoy success.

Mark Stephenson
Deloitte