A sporting chance

Honed frame defying the gloom, British manufacturing is up to the line and ready for the post-recession starter gun. But with third quarter investment down 29% year on year, there are fears it could falter someway past the first bend. A lesson of history is that it takes years for investment to recover to pre-recession levels. Repeated this time, and "there are risks to industry's long-term competitiveness," says EEF head of economic policy, Lee Hopley. With UK manufacturers tending to use retained profits for investment, Hopley says it is availability of working capital that is suffering most from the restraints associated with the credit crunch. "This will become more of an issue when demand starts to pick up and companies are paying out for raw materials, etc, in advance of payments. If the credit problem isn't fully addressed, that's where the crunch will come." Manufacturing investment's major depressants are substantial spare capacity, lower profits and doubts over the economic outlook. Tight funding availability is another. And says Howard Archer, chief UK and European economist at IHS Global Insight, with the banking sector's continuing problems and tight credit conditions – something the Bank of England is still concerned about – "there's a danger that when things do pick up and businesses are looking to boost their investment they will be unable to get the necessary finance". From the high-value innovative manufacturing perspective, the UK banking system is simply "unfit for purpose", says EEF's director of policy, Steve Radley. A stinging rebuke, and the EEF is calling for a 'bank for industry' collating the myriad national and regional funding sources – "making it all more accessible and getting a lot more bang for its buck," says Lee Hopley. Meantime, the government is committing £150m to a new venture capital fund, scaling up to £1bn over the next decade, in a move to service a significant market gap. It's a space once occupied by VCs who in the recent boom years migrated upmarket to become more like private equity houses, says Nick Brayshaw, recently retired chairman of the CBI's national manufacturing council. "There is a gap in the market for risk capital for helping entrepreneurs through the early stages of development. And interestingly that's part of the accusation that's thrown at the banks; that they should operate in that space, which traditionally is not really bank lending. "So I welcome any impetus the government can give to risk capital – which is largely unsecured lending. But it's that risk capital we need to turn ideas into reality and it's not really the job of the clearing banks to fill that space." Equity is tricky especially in this £2m-£10m gap, says Mike Deacon, managing director of Middlesex-based Asset Based Finance and Leasing, of Pinner, Middx. "With smaller value deals, there are cash-rich individuals who are prepared to stump up and look at them individually. For the bigger ones it takes a long time. There's interest, but it has to be a scaleable business. "The invoice finance side is always strong and it's been very strong throughout the recession because it's short term, secured on debt and based on trading activity. Interestingly people have decided to manage cash flow better which has been an unintended benefit. "Asset finance has dropped year on year 30% in the last two years. HMRC is intent on closing loopholes for tax and there are discussions to try and remove some of those barriers. But it's a very difficult obstacle to overcome." In a recent Deloitte/Works Management survey of more than 200 manufacturers, one in five found it 'challenging' to meet their bank's expectations and almost one in ten marked down their bank as 'unsupportive.' But with nearly one in three reporting their bank was 'very supportive' and one in five 'helpful but bureaucratic' It is a message both sweet and sour. "I think each is true," says Brayshaw. "Manufacturing is a broad church with everything from very strong globally competitive businesses which want to invest more and which banks are delighted to support, right across to those whose claims are much less compelling. Given suitable opportunities, banks I think are keen to support." Business Link advisor for the South East, John Grange agrees. "I find very few clients where funding has been an issue. The people who have good ideas, sound plans and have a good relationship with their banks are going ahead. "The key is, where is the opportunity? Where can you exploit it? Put together a credible plan and then go looking for the finance. For the people I am talking with and who have reached this position, things are looking a lot better as every week goes by." But Graeme Allinson, head of manufacturing, transport and logistics at Barclays Commercial Bank, enters a caveat. "In order to understand the needs of individual manufacturing businesses, as a bank it is crucial to see a thoroughly prepared plan to take a business forward, but we also have to make sure we understand the assumptions behind that, the flexibility around the plan – for example, if sales do not go according to plan what will be the impact on the business? "Do you have the cash available to see you through that difficult period? We have to understand how robust the thinking is, what flexibilities there are around the business model that's going to give the bank comfort if things do not go according to plan." But has 'capital investment' become encrusted with antiquated connotations? Nick Brayshaw believes so. "There's a widespread and simplistic view that sees investment within manufacturing as simply buying more machinery, and I don't believe this is the issue any more. Manufacturing now is a more complex science than purely investment in fixed plant, with more investment proportionately going into areas like R&D, product design, skills training, marketing, servicing and distribution. I think manufacturing has moved into another phase." The future is going to be different to the past, argues Grange: "It can be bright, but it will be different. We should be asking ourselves what will our customers need in 2010, not what they needed in 2008." The successful solution now might not be to invest in capital equipment, he argues. "It might be to invest in R&D, supply chain management, prototyping, sub-contracting, outsourcing. It might even be to change the structure of your business – still in the black box, as it were, making money in similar ways, but within the black box you have different skills. The issue is what do you need in your business to exploit the opportunities out there?" The challenge for British manufacturing, says Allinson, "is to maximise the opportunities a prolonged period of sterling weakness offers, offering larger margins against both the US dollar and the euro. It must also be the ambition of UK manufacturing to use sterling's weakness as a once-in-a-decade opportunity to really drive market share around the world. As Europe appears to be picking up now this feels like the right time for this push, not least because the UK is the only country in the industrialised world that is still in recession. America seems to be coming out of recession while China this year is showing growth in excess of 8%, which is phenomenal. "For manufacturers that have managed to pull through the recession in a position of relative strength, now is the time to take advantage of sterling's weakness, now is the time to invest in your business – now is the time to grow. While recent ONS and PMI statistics suggest UK manufacturing is at present struggling to generate momentum, at Barclays we still view the sector as one with great potential for growth coming out of the downturn." Yet funding and sources remain a particular challenge for many SMEs. So where should they turn for best advice? "I'm a great fan of the Manufacturing Advisory Service, the EEF and the CBI," says Nick Brayshaw, "and all of these in their own way can help. And I would turn to word of mouth and the illuminati in the region. I think there's a theme here we need to encourage. We have a manufacturing community that is thousands upon thousands of smaller businesses across the UK. And the more they can work with their neighbours, partners and competitors and start to help each other and create a community of self interest, the better. That would be enormously helpful – and funding is one of those aspects. " For John Grange, unsurprisingly, it's talk to your Business Link advisor: "People like me have our own knowledge and access to finance specialists who will give sound and impartial advice. They might say go to your bank, but it could be that the best solution is a business angels route, acquisition, asset leasing and finance… there are a lot of left field, curved ball options. "Knock on our door and say 'this is what I'm trying to do, where do you think I should go, who do you think can help us take this forward?' It can be both a sanity check and a means of getting you to the end point as quickly as possible. It can also help you exploit options you might not be aware of. The beauty of Business Link is that it's free and it's impartial. And we understand what the RDAs are doing and there are funds available through them particularly targeted at growth." And what of 2010? While the UK recession has bottomed out, it's quite another thing to say that a significant sustainable recovery is nailed on, says Howard Archer. "I don't think it is, and we could well see a relapse early in 2010 though maybe not a return to contraction. We are forecasting growth of only about 1% in 2010. Recovery will be very gradual and prone to relapses, and to many people it will not feel like recovery for some time to come." "I think there's going to be a W-shaped recession," says Mike Deacon. "At the moment, we've had an artificial, phoney recovery because VAT came down, there were fiscal measures to defer tax payments and this all disappears now. The public sector has got a massive deficit, interest rates are low, and the government has issued lots of gilts. When rates go up every 1% there's £20bn in interest to pay on top of what you are paying now. "If rates go up 4 or 5% over the next two years – which is possible if we get an emergence from recession into a mild inflation – then I think you'll find that the government will have a really big problem. And with rising unemployment, the outflow of benefit dependency payments will increase while tax revenues diminish and interest rates go up. That's the paradigm we face. The government's got a cleft stick." A shallow climb out of recession; slow, fragile and uncertain? "I think that's right, and it's also heavily sector biased," says Nick Brayshaw. "I'm an optimist. At the end of 2009, British manufacturing was by definition globally competitive. It's withstood the full force of the emergence of the low-cost economies and pretty well everything else that anyone could throw at it. I think manufacturing is well positioned for the next decade." And over the next 12 months? "A few percentage points higher than it is now. On the road to recovery but perhaps it will be a rocky road."