Exactly three years since the first Covid lockdown, the UK is the last of the G7 economies to recover to pre-pandemic levels. Brexit and war in Ukraine have hiked input prices, not least energy and raw materials, for several UK manufacturers that were allowed to continue operating while other sectors closed or worked from home. Staff shortages have compounded the woe.
This exposure is not necessarily new: UK manufacturing has for decades faced fierce competition from emerging economies in Asia, primarily China and India, which are able to produce goods more cheaply. Manufacturing’s share of the economy is around 9% today, less than half of what it was in 1990. Recalling almost 30 years ago the demise of Leyland DAF, when Buchler Phillips was appointed Joint Liquidator, the heavy blow of growing overseas production as it affected the workshops in the north of England has not been forgotten, particularly since more than 2,000 employees in that situation alone were made redundant as a consequence.
There may yet be what Churchill called ‘sunlit uplands’. Engineering and manufacturing are sectors undergoing dramatic change, which could eventually bring significant opportunities for UK businesses ready to exploit well-established strengths in electronics, chemicals, pharmaceuticals and aerospace. The industry is no longer about merely turning raw materials into physical products. Increasingly, manufacturers derive revenues from other activities which are really services, for example specialist engineering, retooling used parts or even some forms of equipment leasing.
The newly launched 2023 UK Innovation Report highlights that while R&D investment as percentage of UK GDP is on target, in this respect the UK remains well behind countries such as Germany, the US and South Korea. The same goes for being equipped with the right graduates: although science, technology, engineering, and mathematics (STEM) graduates in the UK accounted for 41% of total graduates – above countries such as France and Canada, and similar to the US – the share of graduates in the specific disciplines of engineering, manufacturing and construction represented only 9% of graduates, significantly below comparator countries such as Germany (26%) and Korea (21%).
The increased complexity of the value chain means that many manufacturers will need help adapting, and the education sector and government will have to work more closely to deliver necessary skills. Encouragingly, almost 75% of the R&D spend that is rising as a proportion of GDP has, of late, been from manufacturers. Optimists might say manufacturing and engineering are sectors at the heart of a major realignment of the British economy. Hopefully, rumours of their deaths are greatly exaggerated.
Written by David Buchler, Chairman at Buchler Phillips, UK based independent boutique firm with an impeccable Mayfair heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.