Credit Management September 2023

SECTOR FOCUS
Making Better
When the manufacturing sector is facing multiple
headwinds, how do businesses invest and grow?
AUTHOR – Gareth Anderson
BANKS and the lending
community have a vital
role to play in supporting
the UK’s economic recovery,
and this is especially
true in the manufacturing
sector. They need to continue to innovate
and adapt products to match the needs of
established small- to medium-sized enterprises
(SMEs) and deliver levels of service
and support to ensure customers maximise
the leverage available to them.
This support requires not only a proximity
to the customers they serve, but
also being able to demonstrate a deep understanding
of the challenges their customers
face. And the UK manufacturing
sector currently faces a number of headwinds
that show no immediate signs of
abating.
Heading backwards
The Purchasing Managers’ Index (PMI),
compiled by S&P Global, gives a monthly
figure to gauge the overall health of the
economy by analysing GDP, inflation,
exports, capacity utilisation, employment
and inventories. Any score above 50.0
shows an economy in positive health;
under 50.0, and the economy is effectively
heading backwards.
Whereas the composite PMI score was
positive (at 54.0), manufacturing was in
the negative (47.1). Of greater concern,
is that 47.1 represents a drop from the
previous month (47.8) and trails a period
of continual decline. It means that based
on such vital measurements as new
orders, output, employment, supplier
delivery times, and stock of items
purchased, the manufacturing sector is
contracting. (Source – Markit/CIPS UK
Manufacturing Purchasing Managers’
Index May 2023).
The statistics lay bare the pressures
that manufacturers are under. Weaker
demand combined with mounting costs
are creating a near perfect storm, and
the economy is staring down the barrel
of stagflation brought about by rising
prices, a stubborn inflation rate and only
sluggish growth. A full recession may
be avoidable, but with expected growth
only just hovering above 0.1 percent, it
wouldn’t take much of a shock for the
economy to go into reverse. Pressures on
costs – not least the rising cost of energy –
There will be those
manufacturers, for
example, who have
yet to really think
about investing
in more energy
efficient processes
or buildings, and
the positive impact
this can have on
their bottom line.
are joined by other challenges conspiring
to make a difficult situation worse. Whilst
wholesale energy prices have come down
from their peak in the summer, many
businesses still find themselves paying
considerably more for their electricity
and gas than they were two years ago.
Raw material supply challenges are
also continuing, with a shift away from
low-cost global supply chains towards
regional and cluster-focused supply
chains driven by the need for greater
reliability: companies are near shoring,
bringing manufacturing closer to the
point of demand and localising supply.
Vicious circle
As manufacturers adapt their supply
chains, the competition for resources
and raw materials has intensified, and
some materials continue to be in short
supply. Resource shortages naturally
push up prices and creates something of
a vicious circle, obliging manufactures
to secondary source where possible
and find alternative suppliers. This is
easier said than done, however, and in
some industries – especially those that
are tightly regulated – it is not a simple
case of swapping out one material or
product for another. There are also
investments required in re-tooling and
the re-engineering of processes that
result.
Global uncertainty has also brought
about cost inflation. In the short term,
this impact can only be mitigated through
‘quick win’ productivity improvements
or price increases. In the longer term,
customers and consumers may have to
accept that higher supply chain costs are
a necessity to achieve greater reliability;
and this will likely translate into higher
prices.
In the UK, growth will depend on the
long-term impact of Brexit and future
trade agreements, as well as having the
right incentives in place. Lead times have
slowed between the UK and mainland
Europe since Brexit, making the UK a less
attractive place to locate manufacturing.
Those who do manufacture are frustrated
by barriers and frictions that increase
their cost to trade, making it harder to
export the good they make, and import
the materials they need to keep the
production lines rolling.
Brave | Curious | Resilient / www.cicm.com / September 2023 / PAGE 12