The perfect storm or the perfect opportunity?

The UK manufacturing sector has faced ongoing pressures for several years now, some of which we have previously discussed in a number of articles. Whilst analysis of and outlook for the sector remains challenging, there are opportunities for growth and the sector continues to demonstrate its resilience and innovative approach, at times outperforming the rest of the UK economy.  As at April 2024, the sector as a whole:

• contributed over £518bn to UK GDP, which equates to 23.1% of total UK GDP;
• supported 7.3m jobs directly and across the supply chain and communities it operates in, equating to 22.4% of the UK’s total; 
• was responsible for 47% of all R&D investment and over 15% of business investment; and
• accounted for 34.5% of all UK goods and services exports 

Navigating such turbulent times requires manufacturers to adopt strategic measures in order to mitigate these issues and ensure long-term sustainability. Below, we consider some of the issues facing manufacturers and the options available to them.

Declining Orders

As recently reported in the Guardian and by Forvis Mazars, UK manufacturers have reported a slowdown in both domestic and export orders, with new orders falling at the fastest rate since February 2024. This trend is mirrored by continental counterparts, with similar declines noted in France, Germany and Austria especially. The contraction in orders for manufacturers was also reflected in the Lloyds Bank Sector Tracker for October 2024 which showed that the areas of manufacturing that saw the biggest contraction in orders were for household products, chemicals and technology equipment. Some areas of manufacturing have, however, shown signs of ‘bucking the trend’ with Lloyds Bank reporting in July 2024 that food and drink manufactures saw the strongest growth in demand and the second fastest increase in output in May 2024.

An option – albeit one not necessarily open to all – to mitigate declining orders is to consider diversifying the markets in which you operate. Expanding into new markets can help manufacturers to reduce their dependence upon a single region or country, and by exploring opportunities in emerging markets tap into new customer bases. Having a diverse market coverage also provides a buffer of sorts against potential geopolitical or trade disruption.

The political instabilities that have dominated headlines in recent days and weeks, however, including the recent collapse of the Barnier-led minority government in France, the short-lived declaration of martial law in the Republic of Korea and the surrounding protests, recent uprising in Syria and recent unrest between Mozambique and South Africa, may make entering new markets less appealing.

Supply Chain Disruptions and Geopolitical Tension 

Manufacturers have had to contend with disruption to global supply chains since the start of the pandemic. Conflicts and tensions globally, often in key logistical areas, have caused costly delays or detours, whilst disruption to ports in the US, strikes, and blockages to key transit routes such as (in recent years) the Suez Canal have only added further to costs.

A resilient supply chain is essential for the mitigation of global disruption. Diversification is key and can allow for the establishment of contingency plans for critical resources or components. Collaborating closely with a wide range of suppliers can also help with the identification of possible risks, issues and disruptions. These complex supply chains may not, however, always be the answer given the rise in protectionism (on which we comment further below) and businesses may well wish to consider reshoring supply chains (or at least seek local alternatives) to mitigate exposure and increase resilience in this respect.  The Labour Government’s Industrial strategy and its focus on six key manufacturing subsectors - aerospace, artificial intelligence, automotive, defence, energy and life sciences – together with the approach to local “clusters” (building on the successes of the HVM Catapult centres such as the Manufacturing Technology Centre in Coventry, the Advanced Manufacturing Research Centre, the UK Atomic Energy Authority and the Offshore Renewable Energy Catapult, together with the Crick Institute in London and Whittle Laboratory in Cambridge and bodies such as ARIA and the DSTL) should assist with this and create opportunities for manufacturers as a result.

In addition, the Made Smarter programme – an industry-led review of how UK manufacturing industries can prosper through digital tools and innovation – continues to assist businesses to progress.

Costs

1. Some Stress Factors

Cost considerations are naturally at the forefront of almost all businesses’ thoughts. The recent budget from the new Labour government has not had a positive effect on this, with many manufacturers reporting that the additional national insurance contributions and increased minimum wage only add to the financial burden that they face at an already difficult time. Indeed, some factory owners report job cuts and reduced investment, noted in the Guardian article referred to above, both due to the abovementioned declining orders and the continuing flat economic outlook.

A further consideration are tariffs imposed on imported goods. We have already seen an increase in the tariff imposed by Canada on UK-manufactured cars and it has been reported that US-President elect Donald Trump plans to bring in a variety of tariffs on goods when he returns to the White House in 2025. The extent of a tariff, what is applies to and how it is applied are all factors that need to be carefully considered. Indeed, as Air Cargo Week recently reported, complex supply chains and obtaining components from one country and assembling them in another may not be the answer to the problem of tariffs.  

Operational efficiency is crucial for ensuring cost-effectiveness and remaining competitive in the market. Automation and advanced manufacturing technologies can help, as can the adoption of lean manufacturing principles (to minimise waste, optimise the use of resources, and often improve green credentials into the bargain). Innovation is key, and embracing digital transformation and industry 4.0 technologies can help to manage processes, identify cost-savings, and improve efficiency. 

2. The Positives

There are two immediate positives on the costs front: firstly, the reduction in the Bank of England base rate and secondly the reduction in inflation. 

A reduction in the base rate is (for the most part) welcome news for borrowers and should reduce the cost of serving debt, with the governor of the Bank of England signalling when the latest rate cut that further rate cuts may be coming. 

A reduction in inflation is also welcome, strengthening the value of the money available to be spent both by business and consumers alike and it would be hoped give consumers the confidence that they are getting value for money. 

A further positive, as reported by Lloyds Bank in November 2024, was that UK food and drinks manufacturers had seen the slowest rate of input costs rise since March 2024 and that this in turn had slowed the rate of price increases for this sector’s products (which can only help with keeping inflation under control).

Of course, these positives are to be tempered by the indication from the Bank of England that whilst further cuts in the base rate are coming they would only fall gradually going forward, suggesting that we are unlikely to see rates at the levels seen in for example 2021. Inflation was however back above the 2 per cent target for the year to October 2024, having been below 2 per cent for the year to September 2024 and the Bank of England has warned that some of the recent budget policies may push inflation higher. 

What to do if you’re facing financial difficulty

Many businesses can find themselves in a distressed or financially problematic situation. Crucial to obtaining a positive outcome for you and your business is seeking immediate, professional and expert assistance and advice at the first signs of financial difficulty.

It can be tempting to view problems as a blip. Delaying seeking professional and expert assistance and advice can have serious consequences both for a business as well as its directors.

Our solicitors can help and advise on a variety of issues where business are facing financial difficulties including cash-flow and improving recoveries and directors duties during times of financial difficulty.  

Our solicitors can also advise on your corporate and commercial needs, from finance to contracts, commercial disputes, and employment matters. Our teams are experts in the manufacturing sector, and work with our clients to make a real difference to their businesses.

We have and continue to advise businesses and directors during difficult periods, providing guidance on duties and courses of action, and helping to safeguard jobs and livelihoods.

For more information on how we can help you and your business, please our website here.