Manufacturing’s death knell has been sounded many times, but the sector is still in fairly good health, reports Ian Halstead.
Manufacturing hasn’t appeared on
the coalition government’s agenda
yet, bar suggesting that exporters
should consider the Indian market. Hopefully,
the government’s future industrial strategy
will be rather more detailed, and more
innovative, but for now it seems the majority
of smaller manufacturing businesses are
surviving largely thanks to their own efforts.
The past year has proved every bit as tough as expected.
“This time last year things really were grim,” says John Houseman, director-general of the Black Country-based Confederation of British Metalforming. “Honda had just shut down for four months, many sectors were running at 50 per cent or less of their capacity, and some companies were simply unable to survive,” he recalls.
“However, some sectors are recovering strongly. Almost all our members are doing better, and the statistics for the second quarter of 2010 indicated that manufacturing grew 1.6 per cent. Historically, anything over 1 per cent is good, so this is a stand-out performance, even from a low starting point.
“Car production is up 55 per cent on last year, and commercial vehicles are up 50 per cent, which is especially good given the large number of components still made in the West Midlands; and Jaguar and Land Rover’s sales growth is underpinning the recovery.”
Currency fluctuations have also helped, with almost three quarters of all manufactured goods destined for export markets.
“It was obviously good news to see so many orders announced at Farnborough, because Airbus and Boeing have very strong supply chains across the Midlands,” adds Houseman. “We’re also hearing positive news from some of the region’s big names. Atlas and JCB are starting to recruit again, and even suppliers to the construction industry were reporting positive numbers in the first half.”
Houseman believes recruitment may become a concern for employers, though, exacerbated by the actions of the outgoing Labour government. He says: “We warned the previous government repeatedly that, without the kind of short-working subsidies there were in Germany, France and other Continental countries, companies would have to lay off experienced people during the downturn.
“Unfortunately, Lord Mandelson and his colleagues appeared to think we were crying wolf, but now we are seeing the results of their short-sightedness.”
Many workers with years of expertise left the sector during the recession and have either found alternative employment or simply decided not to return. So there is a danger that a skills gap will develop, even in the most buoyant sectors.
It’s a view shared by Simon Griffiths, chief executive of the Manufacturing Advisory Service-West Midlands, who joined the organisation in 2009.
“When I started manufacturing was in a dire state, with volumes down 30 to 40 per cent and more in some sectors, but now volumes are coming back, to a collective sigh of relief,” he says. “We see short-time working being replaced by full-time working, and even overtime in some cases, but equally, there are still concerns about the possibility of a double-dip recession.
“We also have real worries about skill levels. People were let go, at the hightechnology end and the basic engineering end, in the later stages of their working lives and don’t want to come back. We are also paying the price for years of under-investment in apprenticeships.”
Griffiths believes that investing in training is crucial, and would also like the coalition to drop Labour’s strategy of trying to push 50 per cent of school leavers to do degrees.
“It was always an arbitrary target and doesn’t make any kind of sense in the current economic climate,” he says. “We need to focus on developing the skills that employers require, to ensure that companies have the capability to trade out of recession.”
Griffiths sites aerospace as a sector in which skills levels are higher, in general, but says that success in any sector is down to management. “Companies that do well have dynamic individuals in their teams. They don’t have to be the managing director or the finance director, but they are capable of driving the business forward.”
Another factor will be whether manufacturers are willing and able to differentiate themselves from their rivals.
“I wouldn’t want to pick a sector, but in general terms, companies that are still producing products with high labour costs, which require relatively low skills, are facing a bleak future,” adds Griffiths. “All businesses need to have a clear view on why customers buy their products; and the importance of focusing hard on diversification really can not be overestimated.”
Ian Wilson, who leads accountancy firm Grant Thornton’s national aerospace and defence sector team from Birmingham, also cites improvements in the economic climate.
“There is much less uncertainty, and people in aerospace are no longer worrying about declining build rates,” he says. “People are feeling better, but that doesn’t mean everyone is getting their cheque book out. The detail from the government’s strategic spending review in October will be crucial to the future health of the many companies in the defence industry’s supply chains.
Wilson is hoping the review will be much more about fine-tuning than “salami-slicing across lots of programmes”. He says there will be a replacement for Trident, “so for me the issue will be if we can extend the life of the present deterrent”.
Wilson believes the level of Farnborough orders is pretty good, but is keen to see how demand for the next generation of narrow-body jets plays out.
The Boeing 737 and the Airbus 320 may be the market leaders, but already face tough competition from Embraer’s E-Jets, with the Bombardier CSeries now only three years away, and China poised to enter the fray with its first narrow-body offering, the C919.
Even the Russians are looking to win a slice of the lucrative sector, despite doubts as to whether such brands as Tupolev and Ilyushin could appeal outside their core markets.
“The stakes really are so high, especially when you consider that with re-engineering work these contracts could run for 25 years,” says Wilson. “In general, the commercial aerospace sector grows by 1.5 times the rate of global GDP, so orders for the new jets will be critical to the future of the supply chains in the Midlands.
”Walking around Farnborough, it was clear that many thousands of companies are in the aerospace sector, but most have turnovers of less than £10m and perform relatively simple precision engineering tasks.”
Wilson predicts that more alliances will be struck, and possibly even acquisitions, among the aircraft manufacturers. He also thinks that increasing commercial pressures will lead to significant consolidation by suppliers, to reduce overheads and become more competitive.
Another route forward for the manufacturing industry could be virtual networks that follow the example of MAN. The network comprises ten independent small businesses that share the same brand, website and promotional material. Their combined turnover is about £60m, and the combined workforce runs to 600 people.
Remarkably, especially for a venture in the notoriously suspicious metals industry, each company shares details about its customers, passes on leads to the others and holds monthly peer review sessions with the managing directors of other companies in the network.
Dave Spears, who chairs MAN and is also managing director of Brandauer Precision Pressings in Birmingham, says the catalyst for the alliance was the regional development agency (RDA) Advantage West Midlands (AWM).
“Five years ago AWM noticed that in South Wales, a group of automotive suppliers was working closely together under the local RDA, with external marketing support, and decided to replicate the model,” he says. “We thought ten would be a decent number for a network, so each business would have a different core process, and invited 35 companies to join, helped by the same strategic marketing people who were involved in Wales.
“At the first meeting though, there was a lot of distrust and only five companies – Alucast, Barkley Plastics, Brandauer, FW Cables and Westley Engineering – went for it. We then recruited to fill the gaps.
Five more members were found – Advanced Chemical Etching, Excalibur Engineering, PP Electrical Systems, Note UK and Wrekin Circuits – and every one remains in place today, although the alliance now operates independently.
“For the first two years MAN was funded by AWM and heavily skewed towards companies in the automotive sector, but we broke free in the third year and made it a more general offering,” says Spears.
“All the companies are non-competing, so we just took our top ten or 15 customers and put them into a central database. There is lots of inter-trading; and the sharing of best practice and marketing budgets have been major benefits.
“At Farnborough, for example, a tiny booth cost £10,000 for seven days, which would have been prohibitive for one company, but we could split the cost ten ways.”
Ironically, the South Wales alliance failed because the members were competing for the same orders, but MAN has been so successful that it has a long waiting list of companies wanting to join.
“We are all different companies, not least in terms of turnover, where the largest probably does £20m, and the smallest between £1m and £2m, but the model works because none of us are trying to diversify into each other’s core markets,” adds Spears.
“We believe this network could be replicated, perhaps by companies in the environmental sector or in medical technologies. We’re also just about to start work on our first project involving all ten members working for the same client, and we’ve waited five years for this moment.”
External alliances offer one way to prosper in a volatile economic climate, but at the larger end of the corporate scale internal restructuring is an option.
Morgan Crucible – one of the biggest names on the Midlands manufacturing scene, issued a buoyant trading update at the end of July. The company also announced that its technical ceramics division was merging with its thermal counterpart, to become Morgan Ceramics.
Marketing director Keith Parker, who is based at the group’s site in Stourport-on- Severn, says the decision was taken for all the right reasons.
“This is bringing together two very good and successful businesses under a new brand to get even more out of them,” he says. “Our manufacturing sites are run as autonomous units, and there isn’t a significant amount of duplication, especially on the sales side.
“However, we see the merger as offering the chance to move more thermal ceramics products into some of our Asian sites. I think by Christmas we will be well on the way to having most of our plans in place but if there is streamlining it will be slight.”
As the trading statement revealed, Morgan Crucible’s performance was impressive throughout its global operations, which Parker attributes to the success of a strategic review which began in 2002.
“We decided to avoid markets that suffered with the economy, such as the automotive sector, and focus on ones that, although cyclical, were so for non-economic reasons, notably medical and aerospace,” he says. “When we saw the recession coming in the third quarter of 2008 we began to take action to preserve cash and reduce costs. Our orders were reduced, but there didn’t appear to be a downturn in the medicine and IT data storage markets.
“Some of our rivals’ revenue fell by between 30 per cent and 70 per cent, but year-on-year we were down only 15 per cent, when currency fluctuations were accounted for, and we have stayed in profit, thanks to the earlier strategic shift.
”In the first half of 2010 all our markets have progressed well, and the only area not to see a return has been medical devices, although in other areas of medicine, such as scanners, the market looks strong. We‘ve always had high levels of customer retention, and their loyalty has helped.”
Also in: September 2010
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Here’s to the future
The theme of this month’s issue is innovation. Our Bright Sparks feature (p28 of Midlands Business Insider September 2010) is always popular as it highlights some of the inventions from companies in the region that could have real legs in a commercial sense. The success of TV programmes such as Dragons’ Den demonstrates there is a real interest in the people who spend much of their time searching for that ‘eureka moment’.
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Taking baby steps
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