Manufacturers need 20:20 vision
James Thwaites picks through the implications of the pre-Brexit data and insights for UK manufacturing, finding answers in innovation, technology and “super-cycles”.
While reviewing the Q1 release of manufacturing competitiveness and output surveys from MakeUK (formerly EEF) and KPMG, the gap between confusion and clarity seems as wide as it ever has been. Should we press the panic button when pressed by these types of negative headlines?:
The Government’s £30,000 salary threshold risks decimating manufacturing’s labour force.
Any current output stability is only the result of stockpiling.
Over half of manufacturers are thinking of moving their UK operations offshore, rising to two thirds for automotive players.
Only 9% have developed New EU business, indicating geographical growth problems.
Over half, 56%, have stockpiled leading to cashflow issues.
Over half, 51%, have had cost increases due to supply chain adjustments
Embrace the middle-ground view
As senior managers, we may be initially inclined towards pursuing short term strategies aimed at de-risking workforce issues, cost cutting and cash preservation. However, I encourage you to embrace the middle-ground view while considering the role market cycles have played since 2008 alongside the role of innovation in creating an optimistic future.
While confidence and output indicators both point downwards, manufacturing outlook remains steady, with orders marginally up since Q4 2018. Crucially, employment and investment intentions are both picking up, and it is expected that we will see green shoots during 2020 even with the looming risk of Brexit.
On a personal level, I gain longer-term clarity from the “super-cycle” phenomenon, which since 2008, has been influenced by global macro-economic drivers including financial liquidity, increased oil and gas exports, China and India domestic market growth, commodity pricing and the renewables sector. This complexity has led to approximate 3-year market demand cycles fluctuations, noticeable in 2011, 2015 and 2017 with troughs in between.
Driven by cash constraints following the 2008 crash, 2011 peaked due to forced investment from years of de-stocking. Then there was the US oil and gas upsurge leading to a 2015 peak (prior to a price crash). A global commodity price up-switch, driven by the mundane such as renewed viability of commodity mining and the exotic such as demand for metals used in rechargeable batteries, led to a new surge from Q4 2016 onwards which is sustaining (for now).
Although the expectation is for manufacturing output to decline by 0.3% in 2019 against the previous year, prices and margins are up in Q1 with 50% of manufacturers embracing next-gen technology to boost growth and productivity. In the “super-cycle” context, are we not due another slight dip anyway, only this time, with one of the potential triggers, Brexit, right on our doorstep?
So what is manufacturing doing about it?
Firstly, let’s get the people problem out of the way. The number one issue in recent decades has always been talent and skills and it is not going away any time soon. When I worked for MakeUK some years ago, I recall a conversation in the North East with Gateshead College when both Nissan and Siemens, major local employers, put out adverts several years ago for around 50 electrical engineers each to support the energy and automotive sector. At the time there were probably not 100 available in the whole of England! In the West Midlands, when JLR was full steam ahead, they seemed to be recruiting every available engineer and the West Midlands components supply chain visibly wobbled.
But while skills and talent have always been an issue for UK industry, manufacturing strategy and investment initiatives are now being played out to a different tune.
Innovation strategies dominate
By aggregating KMPG data on the most important strategies to achieve growth in the next three years, innovation dominates with a huge 78% focusing of those surveyed focusing on New Product Development and leverage of new technology. This contrasts with around half looking at external strategies such as M&A, JV’s/Strategic Alliances and Outsourcing. Manufacturers are looking at their own capacity to innovate.
The pursuit of innovation drives value, increases margins, levers automated productivity gains, and CEOs know this adds up to future proofing an enterprise.
And the good news doesn’t just stop there. UK’s Senior Leaders appear to have caught onto this ‘big time’. Quoting KMPGs latest, competitiveness report,
“Of those manufacturers that do have digitalisation strategies in place, nearly half (46%) said these are led from the top. Over half (55%) of companies with implemented or planned digitalisation strategies have a clear view as to how these can benefit their performance, and 47% have the measures in place to evaluate success” (KPMG, 2019)
For post-Brexit manufacturing, knowledge will indeed become power.