Growing pains – Solutions for barriers to growth

Posted on 4 Mar 2011 by The Manufacturer

With the findings from the Government’s Advanced Manufacturing Growth Review due imminently, ahead of next month’s Budget, Mark Young finds that manufacturers are facing myriad barriers to climbing higher up the growth curve.

‘Growth ’ can surely stake a claim as the biggest business buzzword of the year so far. Government is focusing much of its efforts on private sector growth, principally to help close the budget deficit and mop up the hundreds of thousands of jobs that will be lost in the public sector over several years.

Whitehall released a list of actions for how that growth can be achieved in November through its paper ‘The Path to Strong, Sustainable and Balanced Growth’, which focussed mainly on creating the right business environment in terms of taxation, collaborations between academia and business, and cutting red tape. A week later, in place of a longawaited Manufacturing Framework which was dropped at the last minute, a Growth Review Framework for Advanced Manufacturing was launched and business and stakeholders were invited to have their say on what each government department should focus on to remove the barriers. That was followed by a behind-closed-doors manufacturing summit in January where Business Secretary Vince Cable and Deputy Prime Minister Nick Clegg hosted 100 manufacturing delegates to debate the best structure of a strategy. The results of the Growth Review are imminent.

Companies want to grow regardless of the political or economic need. And, while there are barriers to growth, manufacturing is on an upward trajectory. The February Purchasing Managers’ Index from the Chartered Institute of Purchasing and Supply, an index based on new orders, output, delivery times, employment and inventory, was 62 – a series record high. Any reading above 50 denotes growth.

Recent figures from the Manufacturing Technologies Association show orders for new equipment rising steadily over the last few months, a good sign that companies are increasing capacity and capability. And although Jonathan Lee, chairman of Jonathan Lee Recruitment, recently warned that manufacturing is likely to stage a “largely jobless recovery”, companies in high tech sectors are more optimistic.

In its recent High Tech Manufacturing Index Report, based on a survey of 400 UK manufacturing executives, General Electric said that 95% of companies will look to hire or maintain current staffing levels this year with 48% looking to swell their payroll by an average of 12%. A third of respondents to a Barclays Corporate job creation survey in February said they will be looking to hire full time permanent staff this year but 62% said they don’t expect the private sector to be able to fully compensate for the reduction in public sector headcount.

Inflation is rising, though, and this could impact negatively on manufacturers, especially on higher prices to key inputs like steel, food and energy. “The hackles of the hawks on the Bank of England’s Monetary Policy Committee will no doubt be raised,” said Rob Dobson, senior economist at research firm Markit and author of the PMI report.

However, as recently as December, a report by EEF said that the cost of raw materials was fairly low on the list of the biggest barriers cited by companies looking to grow.

People-related issues were much more prevalent, including finding employees with right skills, communication with customers and suppliers, and management capability.

On an individual company level, manufacturers are achieving growth in multiple ways, though they are ready with examples of the challenges and obstacles they’ve faced along the way. Here are a few examples from UK SMEs:


Barriers to growth – Construction industry hit by recession
Solution – Realign business to enter renewables sector

Warwickshire-based aluminium walling fabricator and installer Alumet decided to move into the renewable technology market as a stabilising response to the volatility of its main industry, construction.

The construction market for Alumet is still strong but the company lost a couple of public sector contracts during the recession, which produced a £6m gap in its order book to fill. It saw that its operation could easily be realigned to also serve the renewables market; specifically, manufacturing the mounting systems for photovoltaic (PV) solar panels and installing the panels themselves as well as solar thermal and air source heat pumps. Consequently, the diversification play could be worth £30m for Alumet this year, supplying to its existing commercial customers, as well as residential homes.

“There are 26 million homes in the UK, a third of which could be in line for a retrofit of solar panels with government funding [Feed-In Tariffs], so we quickly realised what a lucrative market this could be,” says Lee Summers, co-director of Alumet Renewable Technologies, formed in January 2010.

Mr Summers says that one of the biggest problems encountered in this venture is finding appropriately skilled employees. “The universities have been somewhat short-sighted in recent years and there are now very few electrical engineering graduates coming through,” he says. “There are fewer still, if any, with specific knowledge of the [PV] technologies we are working with. We’ve had to invest heavily in training the people we’ve brought in but we are in the process of establishing partnership programmes with Coventry University and the University of Warwick to get the right skills on their engineering agendas.” Alumet now has a dedicated team of 14 engineers to install the PV products and is confident that its university collaboration will mean it is not short of relevant talent as the business grows.

The aforementioned Feed in Tariff solar panel funding scheme is currently under review, though, because the Department for Energy and Climate Change is concerned that with funding for solar panels available up to 5MW, all of the funds could be sucked up by energy companies selling electricity to the grid. “This shouldn’t affect us too much but we have to wait to see what gets agreed before we properly define our strategy,” says Summers. “You could say this was a lack of foresight on the last government’s behalf but the figures have not been a secret and they’ve only just been questioned.” There is also the small matter of money. “We’re lucky that as a successful company with ambitions for growth that we have the facilities to make this project happen,” says Summers. “With the training, office space conversion, purchase of transport equipment and the new production machinery we’re talking about hundreds of thousands of pounds.”



Barrier to growth – Difficulty in breaking into a mature automotive supply chain

Solution – Take advantage of the burgeoning Chinese car market.

Established a joint venture to make automatic transmissions cheaper than US imports

Transmissions specialist Antonov, also based in Warwickshire, recently decided to move into manufacture. The company spent the last 20 years designing gearbox systems which were licensed to automotive component producers.

But Antonov won’t be making product in the UK; the company found that the major car OEMs have too much invested in their existing supply chains to upset the applecart.

Instead, Antonov entered into a 50-50 joint venture with Chinese company Landai and is building a factory in the region of Chongqing – China’s West Midlands, in automotive terms, with a population of 32 million. It will build automatic transmissions to supply the rapidly expanding Chinese car market which is already the biggest in the world. At the moment there is a split of around 80/20 manual to automatic cars in China; in five years, research suggests that ratio will be reversed. And currently there are no major manufacturers of automatic transmissions in the country. At around $1,500 dollars per unit to buy from the US, to be placed in cars worth an average of around $8,000, importing is too costly.

In China the joint venture will build Antonov’s design, the TX6 – a dual shaft, six-speed automatic transmission system that is as narrow as possible to make it space efficient for use in front wheel drive cars. Antonov is also applying this technology to the development of multi-speed traction motor transmissions for electric cars.

Destined for the UK and US, it is likely to license out the design for manufacture but in China, with the foothold it has secured, it has a strong position to build and supply directly to car makers when the electric car market in China grows.

“This is about spotting opportunities and taking advantage of them,” said a spokesperson for Antonov. “There is a gap in the market in China for supplying automatic transmissions. Once the supply chain is established in China there will be the same problems [for others] trying to break in as there are in the West, so it’s vital that we got in early. For the electric gearbox, we’re a small firm in Warwickshire with 40 employees but we’re getting interest from all over the world – we must be doing something right.”


Barrier to growth – Difficulty obtaining grants and government support

Solution – Battle on!

Southampton-based hydrogen generation experts Htogo has developed a new system for commercial vehicles, from small vans to HGVs, which creates controlled amounts of hydrogen and adds it to the diesel combustion process, making the fuel burn quicker and more efficiently. It has received a lot of interest from fleet operators for retro-fits and OEMs.

Company director Paul O’Neill and his three business partners have spent about £300,000 of their own money developing the technology and, despite the clear environmental benefits, have had little luck obtaining help from government and support agencies.

“We are not very good at grants applications,” says Mr O’Neill. “I’ve applied for Carbon Trust grants and others in the past and we haven’t got them. It’s a real mystery. We know this technology can save thousands of tonnes of CO2 emissions and it reduces fuel consumption massively.” He says that as well the distraction of having to fill out the forms, some grants require that you can’t start work on the project until the grant has been awarded, or not, as the case may be. “That process can take months,” says O’Neill. “That’s ludicrous in a commercial environment.” To rub salt into the wound, O’Neill says he’s often been left with no explanation as to why his application has been rejected.

“Talking to government is an absolute maze,” he says. “There should be someone within it whose job it is to really fight businesses’ corner and demystify the options.

There should be a mock application procedure with feedback afterwards, like with school exams. At the moment you only get one bite of the apple.”

He says that while he and his partners have been in a position to fund their own project, there are many who can’t and their innovations could be wasted as a result. “You’re looking at five figures just to get fully patented.” Getting the product in front of automotive customers is also difficult. “It’s a very schizophrenic situation,” says O’Neill. “On one hand they really want to believe you, on the other they are sceptical because there have been any number of different products that have come and gone over the years but they’ve mostly only worked on a short term basis or they’ve interfered with other aspects of the normal running of the vehicle.” O’Neill is now confident that the product is well on the road to being fully tested, reliable, safe and environmentally and cost-effective. He hopes to see full scale production begin next year, with all components suppliers already identified and premises ready for assembly in Southampton.

Diversification to tap the green economy, offshore joint ventures and entrepreneurial belligerence are three ways in which companies can overcome barriers to growth. But with inflation rising, and now interest rates likely to rise, and public sector cuts set to suppress consumer spending, other challenges to growth await manufacturing. Will the findings of the Growth Review provide the systemic solutions that are needed, or will manufacturers face further growing pains?