In a new series of articles, Allied Irish Bank (GB) examines the factors that will shape key sectors of British industry in 2017. For our latest instalment, we focus on the manufacturing sector.
Traditionally a European powerhouse, British manufacturing has weathered some serious storms over the past couple of decades and with globalisation eroding large segments of its customer base, the sector currently accounts for roughly 10% of the country’s economic output.
Read on to find out the key factors which we believe will shape the sector’s direction over the next 12 months, with insight from our AIB (GB) sector team.
Uncertainty over Brexit
For all sectors of industry in Britain, the uncertainty over Brexit will perhaps remain the key issue as we navigate the choppy political waters ahead. After an initial slump in the immediate aftermath of the referendum vote, British manufacturing has rallied in recent weeks - with an EEF survey in early December reporting a growth increase of 20% in the third quarter of 2016, up from -7% to +13%. This is thanks, in part, to higher exports due to the fall in the value of the pound and a stabilisation in oil prices.
However, despite a more positive outlook in the short-term, the EEF has cautioned that growth is likely to fall again in 2017 due to rising inflation. With prices continuing to fluctuate in the coming months, UK manufacturers may remain wary of investment which will have a negative impact on productivity in the sector as a whole.
Working within the North of England, AIB (GB) Regional Director, Tony Kelly, has a first-hand insight into the sector. He says: “Current market conditions can lead to opportunity and many of our manufacturing customers have benefited from a weaker sterling.”
But he notes: “With such a volatile market, it is imperative that we work with our customers to ensure that they mitigate as much risk as possible to hold them in good stead for the bumpy road ahead.”
Access to Labour
Another by-product of Brexit could be a reduction in the availability of skilled labour for British manufacturers. In fact, a survey conducted by EngineeringUK this year predicted that 587,000 skilled engineering and manufacturing workers will need to be recruited to the sector in 2017. However, with restrictions on immigration likely as we renegotiate our relationship with the EU, Britain may suffer a severe shortfall in migrant workers – heavily relied upon in the manufacturing sector. While UK immigration reached record highs in the run-up to the referendum vote, there are already signs that this is beginning to slow and a weakening pound may have a further negative impact.
Elsewhere, the introduction of the new apprenticeship scheme in Spring 2017 will be a further issue for the industry. From April 6, 2017, all employers with an annual pay bill of more than £3 million will be required to spend 0.5% of their total pay bill on the levy. A new initiative, the scheme has raised concern in some quarters, particularly amongst manufacturers who do not currently have systems in place for the structured training required for apprenticeships.
Commenting on the year ahead, Tony Kelly notes: “The majority of manufacturing clients put skills shortages at the top of their agenda. Most businesses’ agenda for government action would be to persuade the government to expand skills training for the future workforce in Secondary Schools, Higher and Further Education (FE) colleges.”
Need for Innovation
Another key issue facing British industry in the short and medium-term is a shortfall in innovation, both in terms of the type of products being produced and manufacturing processes themselves. Right now, cutting edge technology is driving productivity growth around the world - and a wealth of opportunities exist for British manufacturers who are willing to invest in new ways of doing things.
For instance, connected factory technologies realised through the Internet of Things could give owners invaluable data to help us make our factories more efficient and the rise of “cobotics” – in which robots are employed to operate in tandem with workers rather than replace them - could transform current production processes. 3D printing – also known as additive manufacturing – is another exciting area which could be explored further. Thanks to faster and more cost-effective printing techniques, the previously unwieldy technology is becoming more widely available, giving manufacturers the capability to produce high-quality prototypes in a matter of minutes.
There is certainly cause for optimism here, as innovation in the sector recently received a boost with the announcement by Science Minister Jo Johnson of six £10 million research hubs that will seek to improve manufacturing techniques in areas such as biological medicines, 3D printing and composite materials. Based at universities including Sheffield, Huddersfield, and Nottingham, the innovation hubs will draw on the expertise of 200 partners from a variety of industries. However, if the British manufacturing sector is to close the widening productivity gap, further government investment and collaboration between industry and research institutions will be required.
Referring to the recent Manufacturing and Engineering Report, Tony Kelly points out that the sector is now putting a renewed focus on Research & Development (R&D). He says: “Recent sector insight stated that there are 88% of businesses now investing in R&D. 48% of businesses completing the survey invest between 1-4%, whilst 11% invest over 10%. It is crucial for a business to continue to invest in R&D if they expect to survive and expand in the future.”
“This investment need not only be in new products or components, but also in their facilities that are improving the processes and efficiencies within their business functions.”
With exciting new trends and challenges ahead, it’s clear that the next 12 months will be a pivotal period for manufacturing in this country. In the uncertain post-Brexit environment, we’ll need to draw on all our traditional strengths of quality, innovation, and hard work.
Which factors do you think will shape British manufacturing in 2017? Let us know in the comments.
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