Manufacturing was once the core of British industry but in recent years the sector has experienced a turbulent time, struggling to make significant productivity gains. In 2008, like the rest of the global economy, manufacturing came in for a hard time during the financial crisis.
Between the first quarter of 2008 and the third quarter of 2009, manufacturing output fell by 13%. The period was characterised by loss of market share, negative profits, redundancies, reduced product quality, industrial action and the collapse of former industry giants. Now, with the UK economy exhibiting a return to growth, manufacturing might look forward to a resurgence.
In the years following the 2008 recession, UK manufacturing got back to its feet slowly. It wasn’t until 2016 that UK manufacturers could feel a little more positive despite a slump in the steel and energy markets, and exports impacted by an ongoing slowdown in China’s economic growth. The sector recouped market share and showed a return to profitability. Recruitment in the industry was up and ‘brand UK’ became, once again, synonymous with quality. Only now has the sector once again reached pre-recession numbers as it currently accounts for 44% of all UK exports and £150bn of national economic output1.
This year, UK manufacturing has found itself at a critical crossroad. The sector is poised to see a slowdown, after many years of solid growth. Many global economic factors are playing a role in the slowdown such as raw material prices, exchange rates, market uncertainty and recruiting and retaining workers. Productivity in the UK continues to be behind the levels of competitors across Europe and the world. There is also the added pressure looming of Brexit as the UK looks to exit the European Union. It’s important that firms look at transforming their operations to avoid falling further behind. In countries across the world, particularly Malaysia, Vietnam and Indonesia there are now modern and efficient manufacturing facilities with the capability of delivering high-quality products at a low cost. The UK has been sheltered from this while part of the EU, but this may not be the case after Brexit.
Although it is too early for anyone to know the impact the Brexit will have, there are concerns that the UK’s exit from Europe will continue to affect the Sterling and employers ability to recruit a skilled workforce.
It could be many years before there is clarity on EU trade deals and even longer for deals with other countries, although it is hoped that trading relationships can be negotiated and implemented quickly. With the US at least, there are positive indications that a deal with the UK is a priority, although President Trump’s calls for protectionism could lead to new risks. All in all, the world is an uncertain place at the moment for UK manufacturers.
With the obstacles that British manufacturing currently faces, the sector may not look like a shrewd investment. Despite these risks, however, British manufacturing still has fantastic potential, and with a general slowdown in manufacturing growth presently, valuations may come down to a level that is attractive to private equity buyers. While the industrial manufacturing sector, on the whole, remains risk averse and unwilling to spend, private equity houses may look to use their operational expertise to drive growth and value.
Experts believe manufacturing companies supplying the automotive, aerospace and building products industries will be especially attractive to buyers. Private equity houses increasingly want visibility deep into their supply chains: They want connectivity tools that provide insight into production levels, inventory, capacity, quality levels and order status from all their suppliers as well as innovative, patented technology and a relatively stable track record. Business owners would do well to focus on these tools to help increase the enterprise value of their assets.
Since the start of 2016, private equity firms have already been buying manufacturing assets. January 2016 saw SEA Equity purchase Dycem, a manufacturer of non-slip and contaminate-controlled flooring used in hospitals and aerospace and CI Capital also complete the acquisition of Ravena Welding Supply and Hereford Welding Supply. Capital for Business and Sage Capital also recently completed a management buy-out of DIT-MCO International Corp, a manufacturer of wire testing systems for aircraft. As recent activity attests to, there is a great opportunity in the current marketplace; and with potentially low valuations due to the current economic and political climate, private equity firms may yet play a crucial role in seeing UK manufacturing return to its former glory.