Manufacturers up game on innovation

Posted on 24 Aug 2015 by Callum Bentley

Large companies remain the broadest innovators while sectors facing economic challenges, such as those in oil and gas supply chains, are innovating to diversify their way out of the investment downturn, according to a new report.

UK manufacturers are using innovation to deliver productivity improvements and export growth, with innovation strategies varying according to the shape, size, and sector of companies and the challenges they are facing, according to a major survey published today by EEF and Vodafone UK.

The EEF/Vodafone 2015 Innovation Monitor shows that manufacturers are highly ambitious about innovation and are investing heavily in it using specialist resources, but they also have to pull in employees, equipment and finance in from elsewhere in the business.

Despite all of this, manufacturers are not always achieving the results they need. Innovation is challenging and a lack of resources reduces chances of success.

As a result of this, for the second year running manufacturers have reported increased concern about falling behind competitors on innovation.

This reflects the broader economic situation, with the UK’s expenditure on research and innovation lagging well behind that of our key competitors. Latest data shows UK Business Expenditure on R&D (BERD) is only 1.1% of GDP, while the OECD average is 1.6% and Germany is at 2.02%.

In order to boost growth in productivity, we have already seen strong ambition from government on exports and workforce skills, this should be matched with long-term ambition on innovation.

EEF Innovation chart
EEF Innovation chart

Commenting, Lee Hopley, chief economist at EEF said: “Manufacturers continue to forge ahead into new markets at home and abroad, with investments in innovation playing a starring role in achieving this.

“However, innovation is a resource-hungry process, and manufacturers are finding that the results they achieve do not always match their ambition. Shortages of expertise, equipment and finance are holding manufacturers back.

Lee Hopley, chief economist, EEF.
Lee Hopley, chief economist, EEF.

“This matters for manufacturing, and it matters for the UK, because manufacturers are now more concerned about falling behind competitors. We’ve seen year after year that manufacturers want to do more and every additional pound invested in developing the products and services of tomorrow can help get the UK closer to its goal of have a more productive economy.

“This ambition should be matched by government to ensure the UK continues to compete on the global stage.”

Tim Hancock, head of manufacturing at Vodafone UK said: “It’s essential that we create the right environment for continuous innovation in manufacturing which is the backbone of UK industry.

“The good news is that almost all manufacturers are innovating in one form or another and with a variety of business goals, but they are doing so with decreasing diversity.  This seems to be down to an organisation’s size and access to resources which can impact the level of innovation that can be taken on without disrupting day-to-day operations.

“Despite this, it is well recognised that to keep pace with competitors both at home and globally, innovation is an essential ingredient. Improvements in other areas, such as streamlining operations to enhance productivity, maintaining full visibility of a connected supply chain and improving responsiveness can free up valuable resources that can be re-invested in innovation across a variety of areas.”

According to the survey, 94% of companies are engaged in some form of innovation, although the number saying they are engaged in three or more activities has fallen again from 43% in 2013 to 34% last year. However, while the breadth of innovation activity may have fallen, it is more focused on driving exports and developing new products (up from 59% to 64% of companies.)

The outcomes of innovations - EEF
The outcomes of innovations – EEF

More than half (52%) of companies are using innovation to develop new markets whilst a third of companies said that growing exports was a long-term business objective.

Of these over half (54% thought innovation would have a significant impact on their exports, whilst 40% thought innovation would have some impact. This focus on innovation to break into new markets is borne out by the extent to which exports to emerging markets have risen sharply in recent years.

Manufacturers are also using innovation to develop new domestic markets (27% in 2014 to 38% in 2015) while, similarly, sustaining and growing demand from existing customers remains a priority.

Over two thirds of companies (69%) said that satisfying existing clients was a driver of innovation in the last three years, once again the top reason for companies engaging in innovation. This was followed by enhancing margins which half of companies said was their top driver.

However, despite these investments in innovation there has been a further increase in the proportion of manufacturers who are concerned that their level of expenditure on innovation is not enough to keep pace with competitors, up from 19% in 2013, to 28% in this year’s survey.

The survey also highlights the extent to which the pattern of innovation is changing in response to economic factors.

The three sectors most exposed to the oil & gas supply chain have seen the increases in innovation activity as they attempt to diversify into new products, with the electrical sector leading the way.

According to the report, the main barriers to innovation are persistent – namely speed to market and overcoming technical barriers. Manufacturers are taking action themselves to overcome these barriers such as ensuring a high level of collaboration with customers, while Government support is also plays a key role in increasing the level of innovation.

Schemes such as the R&D tax credit and Knowledge Transfer Partnerships are particularly valuable, used by almost half and 1 in 5 companies respectively.