Se 1 | Ep 13
SMEs need financial help and an industrial strategy to support manufacturing recovery

Tata’s £4bn battery gigafactory and a £600m investment in BMW’s MINI factory headline big investments and rising orders across manufacturing in 2023. But the pincer effect of high inflation, high interest rates and high demands from recovering OEMs is putting cash pressures on SMEs. Can they get the help they need to service the recovery and benefit from it, asks Will Stirling

2023 was a year of strained recovery for the manufacturing sector. After severe component supply delays caused by fallout from the Covid-19 pandemic and the Russia-Ukraine War, 2023 edged back to normality – or a new, more expensive normal. But as the orders returned, crippling inflation and high interest rates bit hard. Tata Group delivered a wonderful present to British industry and the beleaguered Tory government when it confirmed it would invest £4bn in a new battery gigafactory in England, understood to be Somerset, with a £500m Treasury subsidy. With the near collapse of Britishvolt’s plan to build a gigafactory in Blyth and no news of the proposed West Midlands battery plant, the huge investment brings jobs and shows the UK’s viability to other volume electric vehicle battery makers. The big question: will the plant manufacture high-value battery components, or simply be a giant assembly plant for parts made abroad?

Staying with automotive, BMW announced a huge £600m investment in the MINI factory near Oxford to build electric cars. Production of two new electric MINI models is due to begin in 2026. As well as safeguarding the 4,000 jobs across Mini’s two UK sites, it was a relief to many observers who thought that post-Brexit BMW might offshore Mini production wholesale to Germany. It could be interpreted as a strong example of recent efforts, led by Germany, for easier trade arrangements between the UK and the European Union.

Sustainability and carbon reduction have returned as the number one business agenda, or number two after surviving inflation. Whatever your politics on fossil fuel and renewable energy, drilling approval of the Rosebank oilfield will also bring hundreds of jobs and a fortune in tax revenue, although the government showed ill-judged myopathy when setting a low guaranteed price for new wind power electricity prices. This meant just a few MW of new wind farm licenses were purchased in the latest offshore wind auction with Greenpeace dubbing it ‘the biggest disaster for clean energy policy in the last eight years’. Also in September, business group Make UK’s annual analysis of manufacturing numbers showed the UK is now the 8th largest manufacturing nation in the world. The media and social media went berserk, with ‘8th biggest’ setting LinkedIn alight. The UK’s margin over the new 9th placer, France, is small and the numbers are fluid, meaning while it’s cause for celebration it should not be taken as a long-term sign of ladder climbing.

The aerospace industry is recovering strongly. Global aviation capacity should exceed its 2019 record by the end of 2023, as the airline industry returns to long-run econometric trends. Passenger demand recovery as measured by ‘revenue-passenger-kilometres’ is, industry insiders say, largely due to the reopening of China’s domestic market. Aerospace business group ADS says there is now a record backlog of orders for aircraft and engines – over US$1 trillion out to 2031, meaning aircraft production is ramping up to previously unknown highs.

Airbus directly employs nearly 12,000 across all its manufacturing divisions and was on track to hire hundreds more in 2023. The company indirectly supports 79,000 jobs in the UK. “Like many in the industry, Airbus has had to navigate operational complications stemming from lagging post-Covid factors, including availability of material and skilled resources,” is what Paul McKinlay, Senior Vice President and Head of Wing Major Component Assembly, Airbus told MTD exclusively. “[However]… our supply chain is still subject to the challenges of recession, inflation, energy price volatility and of course, geopolitical tensions.

Saying that, we have progressed well across all business lines in 2023 and the demand for commercial aircraft remains strong as evidenced by more than 800 orders announced at the Paris Air Show this summer.

He adds: “Airbus continues to invest in our supply chain network, spending £3.9bn on goods and services last year in the UK with around 3,000 suppliers right across the country, 50% of which were SMEs. This gives us a solid degree of resilience in our supply chain as we execute our ramp-up on all commercial aircraft programmes (A220, A320 family, widebody family). We announced that we intend to ramp up our A320 wing production in North Wales to an unprecedented 75 aircraft per month in 2026.”

All good news, right?

SMEs squeezed as production rates ramp-up

The flipside of much higher production rates is pressure applied to SMEs in the supply chain – including MTD’s readers. “In the supply chain, surviving the Covid-induced downturn was difficult; but as always predicted, for many smaller businesses surviving the upswing, with all the cash demands that brings, is at least as tough,” says industry veteran Andrew Churchill, of JJ Churchill in Market Bosworth. “Having cut employment during the downturn, a fifth of suppliers are now reporting vacancies and they have difficulty recruiting. There are currently 90,000 vacancies in the UK manufacturing sector.” He adds: “This, together with the much higher borrowing costs, higher energy bills, escalating raw material costs and often deferred capex investment means that many of the aerospace primes’ suppliers will be the weak link when it comes to delivering the rate ramp-up.” It’s a sadly familiar trend – the boom-bust cycle of the industry, while arguably far smoother today than the giddy 1980s-2010s, means SMEs struggle to grow into mid-sized companies with the critical mass and diversification to survive a big downturn without shedding staff and expertise.

Despite the high vacancies, manufacturing created a lot of jobs in 2023. BAE Systems is on track to hire more than 2,600 new apprentices and graduates in 2023, a 43% increase on the careers intake in 2022. Manufacturing in the UK still employs 2.6 million people, which has remained reassuringly static for several years. It could be higher if the labour market was blessed with the skills and experience many engineering companies need. 2023 was disappointing for many companies and industry advocates who desperately want an industrial strategy with a long-term, 10+ year horizon. This elusive strategy, and a minister for manufacturing, have been heavily campaigned for on social media by people including Andrea Rodney, Managing Director at Hone-All Precision in Leighton Buzzard. Sadly, and staggeringly, the government “still fails to recognise the damage that the lack of a cogent long-term industrial strategy does to sector investment. The UK is the only major economy not to consider this as important,” Andrew Churchill says.

In the automotive industry, all the numbers are up, up, up on 2022 – and praise the Lord. In August, the latest month with complete numbers, total car manufacturing was up nearly 12% on 2022 (to date), and car exports were up 14.4%. Commercial vehicles up 14.4% on 2022 to August, and exports were up 23%. Over 450,00 cars were built here in the first six months of 2023 (Source: all the SMMT). As reported in October, the rapid expansion of clean energy, electric cars and heat pumps means that energy-related CO2 emissions are likely to peak by 2025, according to the International Energy Agency.

Lies, damned lies, and statistics. One can always find numbers to support your argument – or discredit it. While recovery is still the watchword for 2023, some numbers tell a different story.

Figures and news from automotive, aerospace, medical and oil & gas sectors support the upswing. But the number of companies trading in manufacturing, across all sub-sectors, has fallen in 2023 since 2021 by 3% or 4,265 companies. That’s a lot of firms to lose in two years. The biggest category for insolvencies: “Manufacture of fabricated metal products; except machinery and equipment. This is down 15% or a whopping 4,195 companies. It doesn’t quite match the message of record order books in aerospace (aircraft and engines) and the storming return in automotive as seen above, as well as the high growth in electric vehicles – 23.2% of all new cars in the UK are either electric or plug-in hybrid,” says ZapMap.

The curate’s egg: Manufacturing in 2024

So will 2024 fare better than 2023?

Paul McKinlay emphasises Airbus’ strong pipeline, as it ramps up to 75 aircraft per month. “In being clear and communicative with our supply chain network about this pace, we’re laying the groundwork for ensuring quality performance and missing parts reduction.” But he adds: “However, the challenges we’ve seen in 2023 are likely to bleed into 2024. We need to see greater support for our UK SMEs partners, giving them the financial security they need to scale operations. That’s how the UK will be able to drive competitiveness over the next decade.”

Andrew Churchill’s 2024 glass is half-full, as he concludes: “Despite the ‘curate’s-egg’ that UK manufacturing represents, I remain optimistic. For the first time in six years, we have climbed the world ranking of manufacturing nations from 9th to 8th – overtaking France, 41% of all UK R&D is from the manufacturing sector and our goods account for an amazing 49% of total UK exports. Just think what we could achieve with a long-term industrial strategy, affordable and secure industrial energy, a full review of the Apprenticeship Levy and a clear path to helping manufacturers de-carbonise!”

Just think…. Are you listening Sir Keir Starmer?