Invest to compete

Posted on 4 May 2011 by The Manufacturer

UK firms have to increase investment now that the economy allows it if they want to stay competitive when the market changes, Siemens' Andrew Peters warns.

The health of the manufacturing sector in the UK is influenced by a number of key factors, including export and home demand, consumer spending levels and available production capacity. As manufacturing growth has played a pivotal role in supporting the UK economy during the recent downturn (sector growth in 2010 of 3.8% compared to the overall economy growth of 2.1%), investment decisions will become a critical factor in ensuring such growth can continue as macro economic circumstances change – and they surely will.

With a weak pound currently aiding UK exports, the real impact of the government’s ‘age of austerity’ still to be felt by consumers, and continued high energy costs forcing companies to embrace efficiency measures, it is clear that UK plc needs to be mindful that such benign circumstances cannot last forever. Companies should be actively continuing the apparent recent upward trend in investment levels so that solid foundations can be laid for a sustained manufacturing- based future that can work in tandem with the powerful services sector.

Manufacturing demand in April demonstrated the first signs of a softening, according to a recent CBI survey – potentially due to the beginnings of change to some of the market circumstances outlined above. There is also clear evidence that during the recent downturn many manufacturing companies took out capacity from their production facilities and are now starting to struggle to provide their customers with products within reasonable lead times due to such capacity constraints.

However, over the past three years many companies have also developed strong balance sheets and surpluses for two main reasons – a combination of the weak pound which has served to make UK exports highly competitive and a ‘conservative’ investment approach that has seen them opt for a ‘take up the slack & wait and see’ strategy to investment. Concurrently, we have seen rising raw material and energy costs creating a demand for fuel-efficient and energy efficient machinery.

Given all these inputs what can we expect going forward and what further opportunities for the sector exist?

We have not seen such sustained growth in UK manufacturing output for many decades as that witnessed over the past couple of years. Given that global GDP growth is set to continue for at least another two years at levels of 3.5% to 4.0%, I believe the UK manufacturing base currently has a ‘once in a lifetime’ opportunity to take decisive investment steps and ‘fix the roof while the sun is shining’.

When we compare our investment levels with those of Germany, the UK has a mountain to climb with typical German levels of investment some 25 to 30 times greater than the UK. Indeed, the German economy spent some 167.4 billion euros on plant and equipment last year alone. This was an increase of 9% on 2009. We are a long way from that.

The UK government can play an important role in the encouragement of investment decisions among UK manufacturers. The lowering of corporation tax, more attractive capital allowances, a green bank and regional incentives will all help – but right at the very heart of this sits the question of an investment culture and long term planning.

It’s not uncommon for a typical contract with a company in China to be negotiated based on 25 or even 50 years timeframe. In the UK we would probably have had 10 different governments and the same number of manufacturing initiatives within this period. Many people in the manufacturing sector say that having even a five-year plan is too far out with too many unknowns or variables – but that is to miss the point. Unless you promote a mindset and culture, which are centric to the longer term, UK manufacturing PLC will always struggle on a global basis with those that take this approach – prime examples being our German counterparts and the emerging BRIC economies.

One thing is for sure. Without a more strategic and planned investment approach to help drive our UK manufacturing base towards a more productive and operationally efficient status, so that we can compete on a world stage (without the short term currency benefits), I’m afraid we run the risk of this current window of opportunity closing – never to return.

What we need is strong leadership and a real desire to take advantage of the current set of circumstances to facilitate investment in new, more efficient automation technology to ensure that current growth is sustainable and built on firm foundations.

If companies do not take this chance we will, I fear, see manufacturing revert once again to being a declining sideshow as a contributor to UK economic health – despite the best intentions of all the stakeholders with a vested interest to ensure it does not.