Taking the long view

This time last year, the Works Management Outlook Survey could hardly have been more upbeat. Respondents were beside themselves with delight at the way manufacturing was faring. Optimism was at an all time high. Business confidence was buoyant. Order books bulged. Investment was unstinting. Wallets were full to overflowing. Our headline summed up the jaunty mood – 'Forward into broad, sunlit uplands'. Following 2013's party atmosphere, it would be natural to assume that a thumping hangover would follow, reality would bite and feet would return firmly to the ground. In fact, despite a slew of recent reports pointing to a slow down in the pace of growth in manufacturing (although, significantly, not to the growth itself), our latest survey is just as encouraging as last year's. Indeed, 80% of respondents report a fatter order book in 2014 than a year earlier with just a fifth saying 2014 has been disappointing or poor. The same proportion of respondents as last year – a thundering 85% – are optimistic about business prospects for the coming year and 77% intend to grow their business by 10% or more in 2015. Another important signal of business confidence is the number of people employed and, here too, the tidings are excellent. An overwhelming 84.3% of respondents maintained or increased their staffing levels with around a third (32.3%) boosting staff numbers by 6 to 15%. Limiting headcount growth Even more encouragingly, 45.6% of firms plan to recruit in the coming 12 months, although most of these (18.4%) will limit their headcount growth to between 1 and 5%. Perhaps this reflects the innate caution of a manufacturing sector that is keen to grow, but not to overreach itself. Investment intentions also offer useful clues to how confident the sector is and these are positive as well. More than half our survey respondents intend to increase their overall investment in 2015 compared with this year and a further 40.5% intend to maintain it at current levels. Production line machinery will see most of the money, with almost three quarters (73.4%) planning to invest in this area. Reflecting a pressing need to upskill their workforce, 60.1% of those polled plan to spend on staff training. On top of this, a recognition of the importance of – and commitment to – continuous improvement manifests itself in the 35.4% of respondents who plan to spend their hard-earned cash on visual management, andon boards and lean manufacturing kit. The amount of money spent on plant and premises in 2014 varied, but it's encouraging that 11% of our survey respondents had enough faith in the future to spend £0.5 million to £1m during the course of the year. So what's responsible for the sector's apparent continuing good cheer? Perhaps part of the answer lies in export performance over the past year and its prospects for the future. Two thirds of those who responded to our survey (62.1%) are proactive when it comes to exports, actively targeting overseas sales. This has clearly paid off – almost half of those polled (49.1%) increased their export orders in 2014. Predictably, most of the extra orders came from relatively close to home in Europe (62.3%), with 33.8% coming from Asia and 31.2% from North America. Other overseas sales came from the Middle East (18.2%), South America and Africa (7.8% each), and Russia (5.2%). Russia's imposition of sanctions on the EU following the West's reaction to the Ukraine crisis has inevitably hit manufacturers' ability to export to that country. However, a third (32.1%) of our survey respondents still believe the main driver of a boom in orders over the last year was exports (24.5% from Europe and 7.6% from Brazil, Russia, India and China). Indeed, exports remain a big focus for many. When asked why they were optimistic about the future, close to a third of those polled (30.6%) predictably said it was because they had confidence in their products' ability to eclipse those of competitors. If we discount this as hubris, the next most important reason for optimism was export order growth at almost a fifth of respondents (18.7%). Taking steam out of growth Admittedly, there are some indications that this confidence in sales from abroad may not be sustained, a fact recognised by CBI economics director Rain Newton-Smith. She said last month: "It's disappointing that a sluggish exports market has taken some of the steam out of manufacturing growth, which was going from strength to strength throughout most of this year. "However, growth in orders and output is expected to continue, albeit with expectations moderating, and domestic orders have continued to rise at a healthy pace." Indeed, half (50.9%) of our survey respondents point to domestic orders as the main driver for their growth over the past year. This confirms a finding from last year's survey that the number one priority for manufacturers would be increasing sales at home. And so it should be – almost two fifths (38.9%) of those reporting a decline in business over the past year blame it on a fall in domestic orders. Of course, arresting this decline demands a clear business strategy and, thankfully, the vast majority of our survey respondents (90.4%) claim to have one. This, however, begs an obvious question – how on earth will the other 9.6% survive, let alone thrive, without a viable business plan? Most of those that do have a strategy in place base it on a two to five year time horizon, a sensible period in an increasingly turbulent world. However, that hasn't prevented 12% from drawing up a plan that looks six to 20 years ahead. How can they be so confident of their ability to predict the future? Do they possess a crystal ball? It's a generally accepted management maxim that if you're not growing as a business then you're dying. Strange then that a significant minority of our respondents – 5.8% – expect their business either to shrink over the next five years, or to stay the same. What are they in business for? Surely, this depressing lack of ambition will do little more than hasten their demise? More encouragingly, almost a third (28.9%) of businesses intend to grow by between one and two-fifths and 16% by up to a quarter. A further third (32%) of our go-getting respondents have truly ambitious growth targets of 25 to 50%. Two thirds (66.4%) of those with growth plans will fund them via cash reserves with around 20% expecting to finance their expansion with a bank loan. Other funding sources include asset finance, grant and third party equity investment. Overall, then, UK manufacturing remains upbeat, a sentiment reinforced by a report from the Office of National Statistics published last month which revealed that the sector's productivity has risen by around 2.8% a year since 1948 compared with just 1.5% in the service industry. The ONS' chief economist, Joe Grice, said: "Manufacturing industry... is becoming more productive despite a steady fall in the number of people employed and broadly stable capital stock, and economic downturns in the 1970s, early 1990s and, notably, 2008-9." So much for the opportunities then, but what about the threats to manufacturers over the coming year? The biggest by far is perceived to be international competition which worries 32.9% of those polled and is beyond the ability of domestic manufacturers to control, except by strengthening their own businesses, of course. The next biggest perceived threat is a dearth of skilled staff, which was cited by two fifths (19.6%) of those we polled. The skills shortage is a perennial problem that clearly demands effective government intervention. But the form of that intervention is critically important. Constant political change over the past three decades has damaged the UK's skills system, with politicians from every party promising to take action to close the skills gap, but failing to do so effectively. A failure to learn from the past Stable, long-term planning is the key to success, according to City & Guilds (C&G) Group chairman Sir John Armitt. Launching a C&G report on skills last month, he said: "They say that insanity is doing the same thing over and over again and expecting different results. It would be madness to ignore the evidence of three decades of skills and employment policy – yet our politicians have failed to learn from the past." Having scrutinised the policies of successive administrations on skills and employment, C&G has recommended that the government implement better long-term planning for skills policy that is linked to long-term economic forecasts, and better checks and balances to remove the risk of politics influencing policy decisions. Easy to say, of course, but, given the way our political system operates, far more difficult to achieve. On the subject of politics, our survey asked which general election result would be best for UK manufacturing. Reflecting the current cynicism about politics, almost half our respondents (49%) said it would make no difference which party won. However, the vast majority of the remainder (40%) are true blue, hoping for a Conservative victory. A measly 2.6% want a Labour win and 0.7% plump for UKIP. Significantly, there is not a single vote for the Liberal Democrats in our survey. The best thing the government could do to help businesses grow is to reduce energy prices, according to almost a third (29.3%) of respondents with the same proportion asking that Whitehall publicly praise UK manufacturing and promote it as a viable career choice. Tax breaks and higher capital allowances are demanded by 22.9%. WM will be hosting a roundtable discussion with frontline manufacturers to debate the findings of our Outlook research in depth. If you would like to join it, e-mail ivallely@findlay.co.uk