Robin Johnson – partner and diversified industrials specialist, Eversheds LLP, explains why the oil price depreciation is bad news for the UK Government, and what it might mean to industry in the long-term.
Results coming out of the US for multinational industrials for the Q2 2015 show a worrying trend that is yet to be fully understood outside of analysts in the big banks.
They don’t make good reading and the effect over the coming months and year will be felt in the UK and Europe, leading potentially to even greater medium-term austerity
Time and time again the message is that the strong dollar is hurting companies and reducing overseas revenues, and therefore future capital expenditure and investment is being reviewed or delayed.
Price is also putting investment by oil producers on hold – both in terms of new build and the aftermarket, with that producer investment the lifeblood of companies supplying valves; seals; hydraulics; connectors, and test /flow equipment for projects across Europe, Asia and the Middle East .
There is over-capacity and pricing on projects is often at suicidal levels, with any projects commissioned on much shorter timetables.
So what does this mean globally?
- Industrials are likely to be selling non-core assets and reduce costs wherever possible. With buyers of these assets unlikely to be US-based, this could be Asia’s opportunity or diversification out of the Middle East. But will they have a different risk perspective, or will pricing be significantly lower?
- Where will industrials invest in order to find growth? Can Western Europe survive the latest downturn or will the social policies of Western Europe finally cause corporates to seriously look at alternative markets such as Africa or the MIDDLE East? Could this be the dawn of African investment in low-cost Northern African countries – much heralded, but not yet followed through due to political and religious instability?
- Can those Maghreb or West African governments take advantage of their low cost economies by up-skilling or supporting up-skilling via grants from banks or governmental/institutional agencies? Could this help solve the migrant issue in Southern Europe?
- What will the unions say – will they resist or realise that times are changing and another industrial downturn so soon after the financial crisis requires different relationships and approaches. For Scotland, in particular, this could be a disaster as investment dries up in the North Sea.
- Some will say the oil price dip and the strong dollar is temporary – a cycle; but in each cycle there are changes and the new norm could be a movement from old expensive unionised European economies to new regions whether in Europe, Asia or Africa. Could this result in a move by trained and skilled industrial labour forces to new regions leaving Europe to be a post-industrial society?
- Do global industrials need to revisit their diversification strategies including a review of produce sales to traditional industrial OEMs, and look to new technologies such as health where post-industrial communities will focus their attentions and monies?
- Even with rationalisation, cost and capacity reduction, lower energy prices due to the oil devaluation may cause US industrials to retrench – as so often happens in times of economic or political uncertainty – and focus on the home market rather than EMEA.
- While the oil price devaluation is good news for European consumers and reduces energy costs for manufacturers, oil price depreciation is bad news in the long term for growth and investment.
- The strength of the US dollar means less investment overseas as the cost of ROI is dramatically increased. A strong dollar should create opportunities for local investment in Europe by Europeans, but this isn’t being seen – and may never be seen in the medium-term due to the longstanding shift of global monies and power out of Europe to the US.
- The recovery seen in the UK via quantitative easing – and yet to be seen in Europe as its QE program started later – will be short-lived.
- The up-skilling and apprenticeship programme introduced in the UK may ironically result in over capacity of skilled labour or labour demographically in the wrong place, meaning a net emigration of skilled labour.
The immediate future?
- US industrials will not be investing in EMEA at least in traditional markets.
- There will be reductions in force increasing unemployment in the permanent skilled industrial workforce.
- Contracts and investment will be delayed as long as possible putting pressure on maintaining capacity which drive business elsewhere, in particular to the US.
- Diversification must become the mantra.
- Value “creation” will come from divestments, assuming there are buyers.
- Manufacturing will get its old bad reputation back as talk of a post-industrial society resurfaces.
- Short term R&D will be shelved as profits are reduced – also a bad part of the cycle.
- A cycle or permanent change.
- Can industrial manufacturing move to new regions?
- Will there really be a move of skilled labour to new regions or instead will skilled labour become disillusioned?
- Will Asia, and in particular China, invest in European industrial capacity, and if so, on what basis and with what governmental or European Commission assurances?
- When the US comes back – and it’s inevitable it will – in what shape will it return? Will it be via advanced manufacturing models and less reliance on blue collared workforces?
- Will the factory of the future model of automation and artificial intelligence so often trumpeted but so rarely seen finally breakthrough?
Whatever happens, the medium-term industrial outlook in Europe is perhaps bleaker than even 2009/10. We may only now be seeing the real effect of the financial crisis and consequences of quantitative easing.
The UK Government needs to maintain a strong framework of an industrial strategy around the Northern Powerhouse and investment in infrastructure, skills and training. It mustn’t allow itself to get distracted by Europe, English devolution or ideological opposition to European social policies.