The UK needs bigger manufacturing companies and structural changes to fully reap the benefits of the economic recovery and for the sector to grow stronger and more competitive, says a new report by EEF and RBS.
The shape of British Industry, a report based on a survey of 300 manufacturers researched by EEF and the Royal Bank of Scotland, highlights how the manufacturing sector has proved resilient during the recession and identifies the main issues it needs to tackle in the future.
Peter Russell, head of manufacturing sector, RBS Corporate and Institutional Banking, said, Manufacturing continues to make a significant contribution to the UK economy and is well placed to play an even greater role in a sustained economic recovery.
We are committed to the sector and to providing finance in support of viable manufacturing companies that are looking to achieve the growth that will help the sector continue to thrive.”
Manufacturing recovered from the economic downturn more quickly than in the past, concentrating on innovation rather than on competition with low-cost economies. Many companies base their strategies on developing new products and on export, a plan that is only achieveable when investments are turned into innovation.
According to the EEF report, three-quarters of companies plan to increase innovation and more than two-thirds to raise capital investment in order to meet their goals. This focus highlights an interest in collaboration with suppliers and customers, and a continuous attention to R&D.
The industry is also interconnected with the global economy, with one in three manufacturers having production facilities outside the UK and export being an enormous source of revenue for most companies. However, outsourcing has not always proved the best solution: initially drawn to other countries by the prospect of saving money, 14% of manufacturers have moved production back to the UK in 2009.
The reasons for this being higher than expected costs, poor quality product and the inability to get products to market quickly enough.
Lee Hopley, EEF’s chief economist, said, “This reports gives us many reasons for confidence and optimism. Manufacturing has a lot of good things to say about itself, but we cannot take growth for granted. There are a number of challenges to overcome.”
The key to ensuring future growth appears to be the size of companies. Large manufacturers (those with more than 250 employees) drive collaboration in the sector, make investments benefiting entire industries and have the scale to invest in new opportunities. They can easily sustain supply chains, while attracting new investment.
The UK’s largest manufacturers represent only 1% of the companies in the sector, but they account for half of employment and two-thirds of turnover. In order to become bigger players, SMEs need to develop strong growth strategies for the future, but the uncertainty of the recovery and the experiences of the recession make many small and medium sized companies cautious.
EEF urges Government to intervene by making access to finance easier for SMEs (they need start-up capital to build factories and buy machineries), by reforming the tax system and by bringing stability in the regulatory system (which is seen as an obstacle to growth by three in five manufacturers).
Terry Scuoler, EEF chief executive, said, “While the current attention on young businesses and start ups is helpful, we must not ignore the wider benefits to the economy that larger companies bring.
The UK doesn’t just need a handful of larger companies over the next decade; we need hundreds of them with the scale and muscle to tackle our economic challenges. Otherwise we risk placing a speed limit on our growth potential.”