The financial meltdown is throwing up a complex of cost movements, volatile exchange rates, share prices and interest rates. Colin Chinery asks UK global players how they are managing
Across eastern Europe, in the old hangouts of Dracula and Vlad the Impaler, investors flee from stocks, bonds and currencies. Contagion strikes Turkey and South Africa; extreme fear stalks Russia as credit default swaps on debt rise. Wall Street stocks record the seventh biggest fall in history. And on 23 October a speech by Bank of England Governor Mervyn King sends the pound into tailspin and its biggest fall since post-Black Wednesday, 1992; 6.25 cents against the dollar, with a two to three per cent drop against a trade-weighted basket of other currencies.
Manufacturers are caught in what is essentially a meltdown of the financial banking systems, resulting in market uncertainty and general lack of confidence in the face of a threatening recession, says Ian Gerard, managing director of Vulcan SFM, a subsidiary of
Sheffield Forgemasters International.
“This has placed a large number of companies into the most unstable markets and trading levels seen for generations. Fluctuating exchange rates, increased raw material costs and energy prices make life even more difficult for manufacturing exporters like ourselves.”
Michael Kimberley, CEO Group Lotus, agrees. “Things have worsened. The dollar has swung massively against the pound and the euro, and foreign currencies in the Far East are all over the place. The global financial crisis is challenging us every single day and takes up massive manpower, knowledge and contacts.
“Even then, you have to make calculated assumptions to try and protect your company in the selling of a product. If you know exactly the volumes and revenues you are dealing with you can hedge, and to some degree, protect yourself. On the exchange market the volatility created by the global crisis is very complex and very difficult to deal with.”
But while British manufacturers suffer from increased raw material prices, they tend to be better hedged against currency movement, says EEF chief economist Steve Radley. “It doesn’t mean they are not affected by it, but they have a greater cushion than in the past. Much of the value added of a manufactured product is now dispersed
around the world.”
In foreign currency dealings, planning ahead is vital to assure certainty of cash receipts and expenditure, says Ian Gerard. “Experience over the years indicates it is better
to enter into exchange contracts and not speculate. “The ability to see out a financial storm on this global scale depends on a wide variety of factors, most of which unfortunately need to be firmly in place before the storm arrives.” And planning to survive is key, he adds: “This dictates good business practice as a matter of course in
the years which lead up to the inevitable downside of the business cycle.”
Forgemasters’ decisions have been centred on making firm choices on which market sectors to work in, researching them and targeting the businesses it wants to supply to. “And underpinning everything is the establishment of strong customer relationships.”
Likewise, sustained year-on investment in innovation in processes and materials. “This ensures that what we offer the market is the best in its class, which provides significant safeguards. We continue to invest in plant and equipment to ensure we remain competitive – and this stands true for most manufacturing companies. Important for us is the establishment of supply chains for materials.
“Our method of preparing accurate three-month rolling forecasts across all of the company divisions enables management to see what the immediate future has in
store and act accordingly.
“Unfortunately a large number of companies choose to capitalise on the good times, while order books, profits and cash flow are all buoyant – with little thought for what
might happen in six to 12 months.”
For Nissan’s manufacturing division, the global crisis is intensifying the need for plants to control cost and manage inventory levels in a universally weakening market. “What
is important is to protect the long-term sustainability of the company and take the necessary steps now to ensure we are well-positioned for strong future growth
when the market and the economy turns the corner,” says David Swerdlow of Nissan, Sunderland.
Although Nissan sales in Europe are 16 per cent up year to date on 2007, August and September saw a significant slump – chiefly through lack of customer credit and/or
cash, factors impacting the entire auto industry.
“This is unavoidable, but what is important is the action taken in the face of this slowing demand,” says Swerdlow. One example: the company’s Sunderland and Barcelona
plants are implementing non-production days between now and the end of the calendar year.
“This will reduce finished vehicle stock levels and then line speed for certain models will be adjusted to better match customer demand. And we’ll track what is an extremely volatile market very closely, with the usual monthly meetings between production and sales occurring once a week.
“Currency is just one of many volatile external factors in our business. Hedging currency is not a strategy for Nissan but an opportunity, if conditions are right. Although we try to mitigate exposure through localised sourcing etc, the impact of currency is still substantial.”
Craig Wright, CEO of leading electronics outsourcing specialist Exception – 450 employees at Tewkesbury and Calne; annual turnover of £55 million – recently returned
from a trade visit to the Far East where his business subcontracts most of its volume production.
“While we are seeing countries like China continuing to rise up the economic table, issues such as the environment and higher employee costs are real issues for businesses sourcing partners in this region,” says Wright.
“We are seeing issues such as the control of waste water and other environmental laws reducing the volume that many manufacturing plants in China can achieve. Combined with rising wage costs and recent employee benefits legislation, this rise in overheads
and reduction in capability is a concern to UK manufacturers who may need to source new reliable manufacturers in low-cost economies.”
To make matters worse, says Wright, Asian markets are seeing a slowdown as a direct result of the credit crunch. But on a positive interpretation this could start to ease
inflationary pressures over the next few months. “One of the biggest issues facing global markets is the availability of cash. Despite geographical location, banks are pulling cash out of businesses in an attempt to reduce their own exposure. This, in turn, is having a big impact on businesses that are not financed in the right way. Manufacturers have suddenly found that the bank facilities they once had are no longer there, so there is little room for overdraft extension or investment.”
With the ongoing loss of confidence in global financial markets, Wright says offshore suppliers are notably more reluctant to engage with new customers, and are spending far more time on due diligence. “As a viable gateway to low cost manufacturing, we are also seeing UK manufacturers turning to companies like ours with years of experience and a breadth of contacts that can spread risk in this inherently complex area.
“Like many sophisticated global manufacturers, we trade in multiple currencies and are naturally hedging against fluctuations to minimise our exposure in
Pound-euro movements have boosted this highly specialist UK-based manufacturing operation. “We are continuing to see a strong order book despite the vagaries of the global economy. Current exchange rates are making us more competitive and we are looking to penetrate the European market more aggressively.”
But for Kimberley, these sometimes complex global calculations contain a home-grown rogue card – the undermining of UK competitiveness. While Group Lotus manufactures cars only in Britain, it has high technology engineering bases in Detroit, Kuala Lumpur,
and Shanghai. A new plant is being developed in Saudi Arabia and Kimberley is currently in negotiations for another in India.
And in a recent shot across British bows, parent company Proton Holding’s MD Syed Zainal warned about “the very high cost base in the UK.”
“He’s absolutely right,” says Kimberley. At the time he was parachuted into Group Lotus two and a half years ago, Proton Holdings planned to switch production both of the Lotus Europa and a new model to low-cost Malaysia. But after “digging his heels in”, Kimberley secured continuing production for the Hethel, Norfolk site.
But now there is “considerable pressure on me as CEO to move operations to lower cost countries. And at the moment the UK is pricing itself out of manufacturing: full stop.
“If government looks to manufacturing – and not just the City – as a wealth creator, then British industry could be in for a re-resurgence. But there will have to be a significant reduction in the red tape and regulatory systems which are not only inhibiting growth in this country but forcing companies to relocate overseas.”
Meantime, and like a news vendor shouting yesterday’s headlines, Bank of England Governor Mervyn King says the UK economy is entering recession, with the pound facing “larger and faster” adjustments in the coming months. The start of a “long march back to boredom and stability,” hopes King.
So what lies ahead? “I want to make a profit, not be a prophet,” says Arcadia chief Sir Philip Green.
British manufacturers will buy in to that label.