UK manufacturing revival masks nationwide sector-specific woes

The recent revival in the UK manufacturing sector has led to the strongest growth spell in two years. Manufacturing firms have reported strong order book volumes, prioritised working through order backlogs, and benefited from a resurgence in activity following a traditional pre-General Election investment pause. Positive sentiment and strengthening consumer demand are feeding into the strongest manufacturers’ growth expectations since March 2022. However, beneath the near-term optimism, the demand picture varies between submarkets and regions, while the cost and availability of finance as well as a raft of sector-specific hurdles continues to cause some distress across the industry.

Headline National Data Implies a Recovery with Momentum

The S&P Global UK Manufacturing PMI for July was 52.1, up from 50.9 in June, marking a more than two-year high, with three consecutive months of expansion. This widens the UK’s outperformance relative to the G4 economies since August 2020. Manufacturing output also outpaced service sector expansion. Strengthening output growth and new orders has led to the first increase in workforce levels since September 2022.

Business sentiment among manufacturers cooled slightly in July but remains optimistic, according to the latest CBI Industrial Trends Survey. The decline in total new orders over the quarter to July explains the recent moderation, following a rise in April for the first time in almost three years. Future manufacturing output expectations have pushed overall confidence well above the pre-pandemic long run average, as firms look to build inventory and increase stock levels to meet expected future demand. The outlook is supported by strengthening customer demand and positive sentiment post-General Election. The CBI survey also showed that the share of manufacturers working below capacity has fallen sharply over the last quarter, leading to a more positive outlook for both hiring and investment. Manufacturing job numbers stabilised in July, ending a 21-month sequence of monthly declines.

Investment Constraints

In the second half, manufacturers plan to invest in product and process innovation, training and retraining, and in plant and machinery, while reducing building investment. According to the CBI survey, the main constraints on investment are demand uncertainty, inadequate net return, labour shortages, and insufficient finance. Demand uncertainty contrasts with findings elsewhere but may relate to differences across submarkets and regions, while return on investment outcomes will be shaped by firms' ability to maintain margins amid rising price pressures. The UK labour market continues to show signs of gradual cooling, with vacancies falling but still above pre-pandemic levels, while unemployment is rising, according to the Office for National Statistics (ONS). As part of its push for economic growth, the government launched Skills England in late July, initially transferring the work of the Institute for Apprenticeships and Technical Education to accelerate the development of a higher skilled workforce.

Manufacturing firms’ input prices and transport costs saw a marked increase in July, reaching 18-month highs as global freight challenges linked to the Red Sea crisis push transport bills higher, according to S&P Global. While rising shipping costs pose an upside risk to inflation, they are unlikely to significantly impact overall consumer prices. Following the Bank of England’s announcement last week economists expect that they will continue their easing cycle over the coming months.

UK Car Manufacturing Industry at Risk

While the near-term outlook for the manufacturing sector is supported by above-expectations economic growth so far this year, there are pockets of distress across the industry that market participants, investors, and lenders need to be vigilant about.

In the UK car manufacturing sector, production slipped 7.6% in the first half of 2024, as manufacturers reconfigure production lines to build electric vehicles (EVs), which also slipped by an equal 7.6% over the first half, according to the Society of Motor Manufacturers and Traders (SMMT). Aston Martin exemplifies this trend, suffering deepening pre-tax losses in the second quarter due to a planned wind-down of older models as it transitions to EV production. Aston Martin’s first-half sales fell 32%, causing revenues to drop 11%, with an operating loss decline of 14%. Net debt increased to £1.2 billion, up from £846 million a year earlier. However, management is optimistic a new electric sports car launching in September will revive the company’s fortunes.

Slowing global EV demand, intense US and Chinese competition, and absent consumer incentives risk UK car makers breaching demanding UK regulations, which mandate that 22% of all sales must be fully EVs. Stellantis, which owns Vauxhall, Peugeot, Citroën, and Fiat, warned its car plants in Ellesmere Port and Luton could close unless EV demand picks up and the UK government softens EV quotas. Currently, 16% of sales are EVs, according to SMMT data.

“If this market becomes hostile for us, then we will enter an evaluation of producing elsewhere,” reportedly said Maria Grazia Davino, Stellantis managing director at a SMMT event in late July. “Stellantis production in the UK could stop. The fact is that demand is not there.” Stellantis does not want to shut UK operations but will make a decision within 12 months. In April, Stellantis CEO Carlos Tavares said, “The ZEV [zero emission vehicle] mandate promotes the self-destruction of the industry. I am not going to sell cars at a loss. If the UK is sincere about having manufacturing activity in the UK and protecting it, then something must change.”

In the first half, car production exports declined by 13.9%, with more than seven-in-10 cars made in the UK destined for customers overseas. UK carmakers are dependent on exports, particularly to the EU, which represented 55% of all exports in the first six months.

Manufacturing Woes Broaden Out

Troubles across UK manufacturing extend beyond carmakers to steel, shipbuilding, water utilities, and aerospace. In Wales, Tata Steel’s deal with the previous government, backed by a £500 million government subsidy, to replace two blast furnaces with greener and less labour-intensive electric furnaces, puts 2,800 workers’ jobs at risk. In Scotland, the Grangemouth oil refinery is at risk of closure due to unprofitability, operator PetroIneos told Bloomberg. The oil refining industry is expected to shrink in the coming years amid the transition towards clean energy and sustainability targets, which impose carbon taxes and current elevated energy costs.

Thames Water continues to struggle to avoid financial collapse under the weight of an £18 billion debt pile, with Moody’s recently downgrading some of its debt to junk status, risking fresh regulatory fines of up to 10% of company revenues. Thames Water risks running out of cash by May 2025 unless it can raise at least £2.5 billion in new equity. Its shareholders want to put Thames Water into special administration measures. In Northern Ireland, thousands of aerospace roles are uncertain as Boeing and Airbus carve up the loss-making Spirit AeroSystems, which makes wings and fuselages for Airbus A220 jets across six Belfast plants. The head of Spirit AeroSystems UK has warned the potential break-up of its Northern Ireland operations would be “extremely detrimental” to its future and the region’s aerospace industry.

Elsewhere, Dyson plans to pare back its UK workforce by 1,000 staff in response to “increasingly fierce and competitive global markets.” Dyson currently employs around 3,500 UK staff in Wiltshire, Bristol, and London. The move is part of a broader 15,000-strong global headcount reduction. Dyson relocated its headquarters to Singapore in 2019 after founder Sir James Dyson criticized the UK’s economic policies. Finally, the UK government is under pressure to authorize a rescue deal for the beleaguered Belfast shipbuilder Harland & Wolff, which requires a £200 million government loan guarantee to refinance its debt. On July 1, the company suspended its shares on London’s AIM market after failing to file its audited annual results.

If your company is experiencing operational, logistical or financial difficulties, do not hesitate to contact our team today. At BTG Advisory, we can assist manufacturing businesses with a diagnostic assessment that identifies viable cost reductions to address inefficiencies, achieve cash savings, optimise use of working capital to improve overall operational performance and cash flow generation. We can also assess company balance sheets to support viability working capital requirements with growth and investment ambitions.