UK’s smaller manufacturers fall between a rock and a hard place

The UK’s SME manufacturing businesses are in the crosshairs of several inter-connected macro and supply chain disruptions, casting a shadow over their near-term financial outlook and potentially posing a serious solvency risk.

The broader UK manufacturing sector level, including mid-sized and large firms, experienced a contraction in output in Q3 2023, as domestic and overseas demand weakened. This decline in demand – including both households and businesses – stems from the lagged effects of high borrowing costs, persistent macro and geopolitical uncertainty, weak conditions in international markets, and the dampening effect of price increases from a surge in energy costs, raw materials, wages, and transportation.

Consequently, after a resilient start to 2023, manufacturers output contracted for a seventh consecutive month in September, according to the S&P Global UK manufacturing index. Manufacturers and suppliers are curtailing production in response to shrinking order books as they reassess the demand for goods. Companies are prioritising cost control measures to safeguard margins and enhance cash flows, with implications for recruitment and future skills loss. Manufacturing witnessed the fifth highest number of insolvencies among UK industries in the 12 months to the end of Q3 with 1,911 cases, according to the Office of National Statistics (ONS). Elsewhere, a survey by Make UK, the manufacturing trade association, showed recruitment plans have ceased and orders are slowing at home and abroad, which has cut its forecast for growth for the full 2023 calendar year. Next year’s forecasts suggest that if there is any growth it will be limited. However, there will be some divergence between sectors.

While weaker demand for raw materials helped decrease input costs during September 2023, in part helped by a weakening pound, the recent disinflation spell may fade in the months ahead. Principally, there is a risk resurgent geopolitical tensions in the Middle East may keeping oil prices pushing higher until peace is achieved. Elsewhere, softer new orders in September reduced inventory pressures serving to heal legacy supply chain disruptions.

Prevailing macro and geopolitical uncertainties have prompted larger manufacturing businesses to defer or reduce their investment decisions and production orders. For example, in the electric vehicle (EV) market, the UK government’s recent policy announcement to extend EV implementation timetable by five years to 2035 will have implications for supplier to EV manufacturers that had previously anticipated a near-term ramp up in demand from their EV manufacturing clients. The five-year extension raises doubts over the level of demand. Consequently, many larger firms have paused production orders subject to internal reviews.

Additionally, some larger firms are undergoing on broader production modernisation to align their operations and business models with anticipated future demand, leading to further delays as supply chains and manufacturing processes undergo restructuring. Moreover, certain larger manufacturing firms have shifted their focus to shorter-term production orders and have identified overseas businesses, particularly in China and India, willing to undertake shorter duration contracts.