With manufacturers promised a long-awaited recovery this year, Edward Machin meets BDO’s Tom Lawton to discuss how credit lines, the Eurozone, increased growth and an upcoming general election are set to affect the sector in 2010.
We are, it is fair to say, starting the decade from a position of some considerable difficulty. GDP down by 6%, exports by 10%, widespread redundancies and an impact on manufacturing that only began to return to any degree of normality in the final quarter of 2009.
Confirms Tom Lawton, head of manufacturing, BDO, “The recession of 2009 was so devastating in its impact that even signs of bottoming out were treated as good news, especially within our sector.
However, we are currently at the point where things are very slowly improving, and I am delighted to report that we expect similar gains to continue throughout the year.” “As such, both the sector and economy at large will begin to reclaim a degree of confidence as the year progresses — not necessarily because of their overly sparkling performances, but due to the fact that maintaining a steady ship can actually be considered a success in current conditions.” With growth is predicted at approximately 0.9% for the sector in the upcoming year, “2010 will be far from smooth sailing for manufacturers and trade in general,” says Lawton.
“However, given that the emerging economies have not suffered to quite the same degree as Western markets, we see the UK pick-up being driven by those companies who are largely export-driven.” “That being said, while considerable attention is being paid to China’s capacity to kick-start growth, it should not be forgotten that the Eurozone is still where we do the majority of our business.
The German economy, for example, in which manufacturing performed considerably worse as a sector than the UK, appears to be slowly recovering — which we believe will have a positive knock-on effect for manufacturing on these shores.” Furthermore, at the macro level global trading will, says Lawton, “Play a potentially decisive role in the pick-up, with continued expansion from overseas markets and exchange rates being broadly beneficial to UK manufacturing. While weaker sterling undoubtedly assists exporters, it also forces importers to rethink their supply chains — the result being that British goods are re-introduced into the orderbooks, thus further accelerating any return to health.” Having conducted research with EEF into the prospects for manufacturing in 2010, BDO identify three sectors which are expected to see an upturn and, conversely, three which may face continuing difficulties.
A year to remember?
1 Mechanical equipment — Machine tools manufacturers, supported by the emerging economies and increased operating capabilities, can expect an improved year, says Lawton. “Investment through 2009 was particularly low, and while it won’t be a bonanza year by any means, we do expect it to return, albeit slowly.”
2 Electronics — While not necessarily relating to the entire sector, areas such as equipment for processing controls are expected to see a pick-up, says Lawton. “Although the majority of global electronics are manufactured in Asia, we see that a good percentage of their components are being manufactured in the UK. As such, the emerging economies internal pick-up will mean that electronics are set for a relatively healthy year.”
3 Metal products — BDO expect those working in the metal trade, especially steel providers and stockholders, to have a slightly better year in 2010, the caveat being that this is largely down to their having such a dire 2009. “Because it simply cannot perform any worse, we’re bound to see a pick up in the sector — a negative positivism, if you will,” says Lawton.
A year to forget?
1 Automotive — Perhaps unsurprisingly, vehicle producers will continue to struggle in 2010, says Lawton, “The only qualification being that things may not quite hit the devastating lows of last year. Compounding problems such as weakened consumer confidence and lack of available credit, however, is the sector’s fundamental imbalance — too much supply and not enough demand, nevermore so than in the European and American marketplaces.”
2 Aerospace and defence — While the sector enjoyed a relatively healthy order book in 2009, it is nonetheless set for a difficult year. This is largely because, says Lawton, “It took a while for the airline industry to close down or revisit its requirements, and we therefore expect a significant impact on the order books over the coming quarters.”
3 Heavy industries — Given their connection to the automotive and aerospace sectors, manufacturers working in casting and heavy engineering will suffer from a trickle down effect in the supply chain. “Although the outlook is marginally less perilous than 2009, confidence levels in the heavy industries will still be very low, with few signs of growth,” says Lawton.
Ultimately, says Lawton, “We must remember that the UK has a world-class core manufacturing base which is used to dealing with very difficult trading conditions across successive downturns.
The characteristics that have enabled companies to be successful in the world market — R&D, innovation, first-rate service and responsiveness, among others — remain intact, coupled with the fact that the government appears to be visibly supportive of the manufacturing sector and its position at the forefront of the UK economy going forward.” However, with a general election less than five months away, what sense does Lawton have of such a focus remaining in place? “Clearly there exists anxiety as to what the election’s outcome will mean for reducing public debt and, more specifically, how this will impact manufacturers,” he says. As such, “While confidence is significantly better than it was six months ago, this political uncertainty will continue to increase any sense of fragility pervading the sector.”
Don’t bank on it
While Lawton sees 2010 as an encouraging year for manufacturers, the question of bank lending remains a particular note of caution. “Although not wishing to rehash, by now, well-trodden ground, one wouldn’t be churlish in saying that access to credit was particularly difficult for some manufacturers in 2009,” he argues. “That said, we see the banks trying to continue their support to customers; perhaps not being overly aggressive in seeking to win new business or extend credit lines, but funding has remained in place for the majority of businesses.” “While the engine of growth that is an increasing of debt could certainly be more pronounced, given that the sector’s KPIs took a battering in 2009, the key question remains whether the banks and credit insurers will recognise such revised metrics with their lending in 2010 and beyond. Using 2008 scoreboards demonstrates that most companies are not performing as they were and, as such, we are entering a particularly interesting period as the economy returns to growth in the first two quarters. Very simply, as manufacturers demand more support for the working capital, will it be made available to them?”
The following twelve months will no doubt answer these questions, and more. Somewhat paradoxically, however, the recovery cycle offers increased potential for corporate failures, with growth struggling to be managed by the underlying funding. While accepting the potential knock-on effects of any such reduction in credit, Lawton assures that, “We have probably seen the worst of the storm, and although that is not to say that things will be wholly trouble-free from here on in, manufacturers can — and should — be cautiously optimistic in their outlook for 2010.
With UK growth increasing, both the emerging and Eurozone economies experiencing improved performance and the promise of continued governmental investment in the sector, expectations of a more encouraging year can rightly be made. The upcoming quarters will be not be without their difficulties; it would be naïve to think otherwise. Nonetheless, having weathered the worst economic conditions in living memory, manufacturers have every right to congratulate themselves. With the resilience of British manufacturing at the front of our minds, we wish you every success for 2010.”