Manufacturing Matters: UK manufacturing stands ready to lead the recovery for the UK economy

Berwick Partners’ recently held an online forum with Stephen Phipson, CEO of Make UK, the representative voice of UK manufacturing.  Speaking to an online audience of manufacturing business leaders last week, Stephen gave a detailed account of how the manufacturing sector has been affected by the pandemic, and an insight into how the Government is responding to the needs of manufacturers to enable them to adapt and survive the current period of uncertainty.

He started the forum by reminding everyone how important manufacturing is to the UK: “UK manufacturing is vital to the UK economy, accounting for 47% of exports, 10% of GDP, 66% of R&D investment; with 15% of total investment in the UK going into the sector, and 2.7m people employed in skilled jobs.”

A summary of how specific manufacturing sectors have been affected by the pandemic:

Through regular surveys with our members, when we look back Q1 we saw a real recovery from the difficult Brexit period, and the political uncertainty with the General Election. Having come through this period, orders and economic activity began to accelerate.

Then in Q2 we experienced sudden gloom caused by the pandemic, with the balance of orders decreasing by 53%, which is unprecedented. With orders down, employment reducing, and investment grinding to a halt, we faced a bleak outlook. Normally manufacturers tend to hold on to highly skilled workers until the last minute, due to skills shortages. However, the depth of this crisis has meant significant redundancies and restructuring, despite the support of the furlough scheme.

Our manufacturing members are surveyed every two weeks to evidence what Make UK are saying to Government. This tells us that 40% of manufacturers are planning to make redundancies. There is now some working through backlogs, but there is real concern about forward order books. 61% of manufacturers have seen a reduction in orders, and 68% a reduction in short term sales outlook.

The general picture now is that the curve is starting to flatten, and we can take some heart from this. If we look at individual manufacturing sectors, there are some, of course, that fared better than others. For example, the Food & Drink industry, which employs 500,000 people, has done well. This sector saw an increase to 120% of normal sales in one month, with buying habits changed to online, and this has benefitted UK production.

The Medical Devices, Pharmaceutical, Chemicals, and Defence sectors have carried on relatively unscathed and have adapted their environments to social distancing. Firms with international footprints took lessons from other countries and applied them here in the UK – introducing ‘team bubbles’, and temperature testing, for instance. In many examples we can demonstrate that manufacturing in the UK can be resilient and adaptable.

However, even in these sectors we are seeing reductions in productivity because of ‘socially distanced’ production lines.

The worst affected industries include Automotive, which saw the lowest level of output since WWII, and Commercial Aerospace which stopped flying almost entirely – and where structural change is now happening. The downturn we have seen in the Oil & Gas sector is affecting the UK quite badly.

Supply chain resilience is now an especially key topic, as manufacturers discovered they could be missing one key component, if they were single sourcing from China or other Covid-19 affected countries for instance. There will be some strategic thinking about procurement, to no longer single source from the other side of the planet, and to shorten supply chains. This will be a debate over cost, versus resilience, versus security.

We have been working very closely with the Government, meeting cabinet ministers twice a week. They are showing flexibility and listening to suggestions to nudge things in the right direction. The job retention scheme has saved jobs; government has listened and extended it to October with tapering. This has been important for sectors like hospitality and travel, but also manufacturing.

Will there be a V-shaped recovery? It is becoming clear that the recovery will be slower than anticipated. Whilst it had a shaky start the emergency loan scheme is working, and £43b has been loaned via a variety of schemes.

There has been initial reluctance to save businesses with rescue packages. However, the ‘Project Birch’ scheme was initiated to cover those who didn’t qualify for other schemes and are of scale and strategic importance.  Celsa Steel have been the first to secure such a loan. Government has stepped in and the door is now open.

As we go into the recovery phase, what’s next from UK Treasury, and what does Make UK recommend?

We have used debt to prop up the economy, so we now see a significant amount of companies carrying a lot of debt. It is estimated that 67% of businesses that have taken out loans will not be able to repay them, and 60% may be unable to repay in the timeframes set. If you are saddled with debt where do you get your growth capital from?

There is a large project going in the background in Government focused on recapitalisation of industry. We will know very shortly what this will look like, with a formal announcement in the Autumn Budget.

Make UK have recently produced a report, recommending how the Government should assist our manufacturing markets, called ‘Responding, Resetting, Reinventing UK Manufacturing Post Covid-19’ – with a focus on digitalisation and a greener, more sustainable economy.

There are four key recommendations in the report:

1 – Recognise manufacturing as a critical sector: it accounts for 10% of GDP, but 47% of exports.  We have seen the best of the sector through the PPE response, the ventilator challenge, and increased drug production. We are starting to realise the importance of the sector for national resilience, and this is changing the Government’s perspective.

2 – Power forward with digital growth: promoting the ‘Made Smarter’ initiative, with Government to provide funding to get manufacturers to embrace digital technology and drive more efficient production.

Made Smarter and UK Research & Innovation have recently launched two funding competitions for Britain’s businesses to develop digital technologies to improve supply chain productivity and resilience, to support faster recovery from COVID-19. Technology developers or manufacturing SMEs are expected to benefit from funding up to 70% of their project costs, for projects ranging in size from £250k to £3m.

3 – Encourage and reward investment in the Green economy: industrial efficiency is a key part of any Zero Carbon ambition, and the UK needs more ‘Green’ initiatives, and simpler more transparent schemes. We think Carbon Capture and Storage, and CCS cluster facilities, have a major part to play in this area. As does Hydrogen as a source of energy.

Whilst we are very strong in battery manufacturing – it will be tough to catch up with Germany and China in the current battery technology space. We need another leap similar to the one from coal to natural gas, and this could be the leap to Hydrogen energy in the UK.

4 – Skills agenda: where do we redeploy our highly skilled engineers who may lose their jobs through the current restructuring, that we are seeing in our large blue-chip engineering groups? And how should Government assist with the redeployment of this talent? There is a major concern that the number of new apprentice starts in September have seen a 50% reduction. Government needs to step in and make sure that retention schemes become about skills retention and boosting digital capabilities.

Stephen then interacted with our audience, in a very broad question & answer session:

Given the importance of the aerospace sector to the UK, should Government be doing more to step in – as we have seen from other governments in France and Germany?

Specific sectoral support has typically been shied away from in the UK. Lots of manufacturers supply to more than one industry so it is difficult to develop a targeted sector plan. Government funded assistance should really be focused on R&D or technology investment. We should take some lessons from Europe and do something to help manufacturing as well, but the answers are not there yet.

Are Make UK seeing any good initiatives from similar bodies in Europe, and can we copy them?

Germany and France have all got support embedded in their structures, such as short-time working practices. Flexibility of labour is different in the UK, with it being harder to lose people in Europe. I agree with the Unions that Government should think about our labour laws, short-time working and protection for workers. We need national programmes to ensure national resilience.

What is the Government’s view on supporting national champions?

It is important to Government that economic activity happens in the UK irrespective of ownership. For instance, in the Automotive sector – the planned scrappage scheme will support the purchase of more fuel-efficient vehicles. Government would get VAT returns, and this could stimulate demand.

How do we introduce more skills into the manufacturing sector?

This could be through engineering degrees that also develop digital skills, and through increased funding for further education. We need to ensure there is the right provision for apprenticeships – cash flows for the apprenticeship levy have been problematic. We are likely to see announcements to go even further with support.

How will Make UK lobby and support the adoption of new technology so that we benefit from Industry 4.0?

Make UK often host the commission for Department for Business, Energy and Industrial Strategy (BEIS). Through this interaction we can promote such schemes as the Made Smarter initiative led by Jurgen Maier, the former CEO of Siemens UK.

We need to move forward with complete funding; £20m has been spent of the £450m that is allocated. Pilot studies have been undertaken looking at technology diffusion at low cost – such as collaborative robotics, and dispelling myths in companies about digitalisation. We need to talk about it alongside the Green debate – this is part of the solution for zero net carbon.

What are Make UK’s infrastructure priorities?

We are very supportive of HS2, particularly because it frees up freight capacity to move things around. Our biggest trading port is Heathrow, and HS2 will help expand capacity and train links into Heathrow for freight. We also need the latest broadband network infrastructure; this is vital for manufacturing.

How do we make the most of the UK’s R&D capability? For instance, should there be changes to Government processes and the way in which competitions are run?

UK Research & Innovation has seen a lot of transformation and additional funding in recent years. In many areas we are world leading – especially in our universities; the challenge has always been how to scale up emerging technology, and how to commercialise it.

Government is looking for ideas to provide funding in the right way and is receptive to ideas of how best to do it to avoid the ‘valley of death’ as a business goes from small to large. Some of our best ideas have been funded from abroad during scale-up. This can pose security issues, require a change in culture, and can focus attention on how we do this domestically.

What are your views on the Energy white paper? Do we have the necessary integrated approach?

Our energy prices are up-to 50% higher than Germany and France, making sectors like steel production difficult. After the exit from the EU we can set our own carbon tariffs, and there is a lot of thought going into this. When we refresh our Industrial Strategy, this will be part of it.

The Government has made a commitment to be net zero carbon by 2050, which will require extracting 175m tonnes of carbon per annum, which we cannot do without Carbon Capture and Storage. This will help make our industrial energy prices more competitive, like our consumer energy prices are, compared to our peers in Europe. These are political decisions that need to be made, to make sure we are competitive and achieve net zero carbon goals as well.

What is the guidance on the return to the workplace? We are losing efficiency and innovation with not having our people together.

The Government are relying on companies to do their own risk assessment, and determine whether or not you can open fully, using the guidance on processes such as ‘working in bubbles’.

The manufacturing sector has a long history of complying with regulation, and so Government trusts the sector to put the right procedures in place. Ultimately, they are happy for people to go back. The challenge now is how do you measure productivity for home workers? We are likely to see an office space crisis as employees decide to opt to work from home in the future.

What are views on UK wages for the foreseeable future?

We think they will be flat over the next year, with some increase possible at the lower end (apprentices). But until we are clear of this current dip, expect nothing at all until at least next year.

The summary from Stephen was that UK manufacturing stands ready to lead the recovery for the UK economy, but it is vital that the UK Government continues to listen to its manufacturing base, and organisations like Make UK, to retain jobs and skills.

For more information please contact Jonathan Burke, Head of the Manufacturing and Engineering practice at Berwick Partners.