The Future of Manufacturing

Following on from our article last month about Industry 4.0 and how the manufacturing industry has some catching up to do, we now look at how our decision to leave the EU may further damage the manufacturing sector. What was the climate like before Brexit and how will it affect the future of the industry as a whole?

The recent EU referendum result has caused much controversy across the country, with many company owners and workers becoming more and more concerned about the effects this national change might have on their businesses. Following on from the new Prime Minister, Theresa May’s appointment, along with the uncertainty of the future decision to be made on the continued membership of the European Union – which will take place within the next two years – business owners and UK manufacturers in particular have been left with their own worries of how such an exit could cause problems for their companies and employees.

Approximately 185,000 EU nationals work in the UK manufacturing sector and, according to The Manufacturer’s Organisation (EEF), 50% of the UK’s exports go to the EU, while just 15% of the £11 billion the EU invests in innovation each year actually ends up in the UK.

The UK manufacturing sector – at least the majority of those within it – had a lot to say about the possibility of coming out of the EU, strongly supporting the ‘remain’ campaigners by arguing how important Union membership is from a manufacturing business point of view. As a whole, there are very little business leaders and owners within the manufacturing sector who believe that there will be any kind of gain from Brexit, and vice versa, but at the moment it’s too soon to tell whether this is the case or not.

One of the main concerns the UK manufacturers have on this topic is that the decreasing level of trade access to the European market will affect the production of manufacturing. A recent survey conducted by Markit/CIPS back in May – over a month before the all-important vote took place – showed that foreign demands for goods from UK factories fell for the fifth month in a row due to the fact that customers were not willing to commit to any kind of financial investment. What was frightening for businesses was that these figures have continued to drop months ahead of the referendum, so what kind of near-future problems will this pose for businesses now the vote has favoured Britain to leave the European Union?

Over 400 businesses took part in this survey, and of these, 27% stated that ‘potential’ Brexit was having damaging effects on business, while 8% said it was having a strongly damaging impact. In addition, back in 2014 the UK gained more Foreign Direct Investment trade than any other European country, which has pretty much been the case in recent years too, however this is likely to decrease during the current uncertainty period following the outcome of the referendum. In the eyes of a large amount of investors, the UK’s access and communication with the European Union is a crucial part of their investments, which could also become the cause of damaged relationships between investors and UK manufacturers. Another possible issue is the requirements surrounding cross-border trading. The current requirements are likely to be changed to new and, potentially more complex and confusing requirements.

As well as concerns surrounding the decreasing amount of trade, there is also a large amount of worry around the safety of jobs. The EU is Britain’s largest trading partner (over 50% of the UK’s exports go to the EU), and where so much produce was exported from UK factories to the EU, a large amount of jobs will be going down the drain. A representative from the Trade Union Centre (TUC) spoke about the likelihood of lost jobs post-referendum: “What’s absolutely clear is that jobs would go. And not just any old jobs, we’d be losing high-pay, high-skilled and high-productivity jobs. We’d lose manufacturing jobs that pay £100 a week more than service sector equivalents. These are good jobs in the regions outside of London that need them the most.” He continues: “Our manufacturing sector, still battered and bruised by the recession, would be hit hard, and inequalities between regions would get even wider. That’s why leading firms such as Airbus UK and BMW Mini have come out so strongly against Brexit.” Jobs have been cut for the last five months, although the pace of job losses has slowed down since May, emphasising the uncertainty surrounding this subject for businesses everywhere.

Sussex Business Times got in contact with Moore Stephens – one of the world’s major accounting and business advisory networks – who conducted their own survey back in November and December 2015 in an attempt to gather information surrounding businesses and their views on how they think their companies will grow (or fail), along with their individual worries and concerns for the rest of 2016 and upcoming years.

Moore Stephens’ latest annual survey showed that a large amount of manufacturing businesses had a reasonably tough year last year, with just under a third of OMBs in this sector stating that their businesses had performed better than expected, and as a result, along with the conclusion of the referendum, they are less confident about the success of their businesses in 2016. During their survey, Moore Stephens analysed over 400 results – 74 of these from businesses in the manufacturing and engineering industry. They found that one of the main reasons business owners in the manufacturing sector were disappointed by their business’ performance last year was due to European conflict – a factor which is bound to soar this year following on from the recent vote. In addition, the rising costs of materials and a decrease in demand for products and services also added to their list of unfortunate reasons, alongside the unhelpful weather (which is, unfortunately very frequent and ongoing for UK businesses), and competition with cheap Chinese products. In the wake of – let’s face it – at least 7 year’s worth of legislation drafting and renegotiating, competition with China is also unfortunately highly likely to soar above record. On the other hand, the manufacturing OMBs who lapped up more success during 2015 stated that their reasons behind this were down to larger contract wins, a focus on cost control and efficiencies, and high-quality customer service – an element to business that all companies will benefit from.

Only 50% of manufacturing OMBs are confident about hitting their financial targets in 2016, in comparison to 68% in other business sectors, suggesting that the manufacturing and engineering industries are likely to be hit harder than any other sector. Additionally, 61% of manufacturing OMBs are confident about their general outlook for this year, in comparison to 77% of all surveyed business owners. Survey participants listed the main reasons they are not so optimistic about their business in 2016, including shortages of skilled workers, poor economic conditions, delays to defence contracts and increased competition.

We’ve all experienced the difficulties that come with fluctuating, or bad exchange rates – especially since 23^rd June. OMBs in the manufacturing sector, as the survey showed, see exchange rate fluctuations as a large risk factor for the rest of 2016 and for years to come. Over half of those surveyed (53%) made this point, over double the amount of OMBs across other sectors of business. As well as this, just under a quarter of the business owners surveyed stated technological change was also a damning factor, which explains why 72% said they would be investing in new technology and IT equipment.

So how did manufacturing OMBs foresee that they were going to overcome these issues? The resulting list of strategies that manufacturing OMBs are likely or sure to take on during 2016 include: staff training (90%), and expanding UK customer base (85%). Staff training was at the top of their agenda, with expansion close behind – this was rather than aiming for more trade from other European countries, which seems like a sensible aim in hindsight. New production techniques and the launching of new products and services were also suggested, along with changes in business strategy and cost reduction. It is also clear to see that some businesses, in desperation, are prepared for a loss in order to make a gain, with 16% of businesses stating that they are likely to downsize their business, despite the fact that will almost certainly lead to other, more small-scale, personal issues for workers, such as loss of jobs. Additionally, just under half of the surveyed manufacturing OMBs said they are intent on restructuring their supply chains during this year, possibly as a way of negotiating better terms and decreased costs and, although this could result in a small loss of suppliers, it is likely to build stronger relationships between the chosen suppliers. By strengthening these relationships, businesses will reduce the risk of failed or unsuccessful supplies and related problems caused by this issue. We will see over the next two years whether our decision in June may have deeply affected any relationships we currently have, and equally if it revives or ignites better relationships elsewhere.

Overall, the effects of Brexit on the manufacturing industry and general businesses alike is still unknown, with some businesses expecting trade levels to drop, while others feel they are likely to find new and even better opportunities outside the European Union and, ultimately, all businesses and workers can do at this moment in time is be prepared to make changes to their companies and workforce. Contrary to what the survey by Moore Stephens found, unemployment levels across the board seem to be at an all time low. However, there are warnings that our vote to leave the EU may still have its surprises, downfalls and even crises in store for us yet, with the impact still not making itself known. For now, we can only wait out the storm.