UK manufacturing & government focus on R&D to bridge productivity gaps

07 August 2017 Consultancy.uk

The UK manufacturing sector is facing ups and downs – while confidence has grown, uncertainty from Brexit continues to affect investment. A new study shows that R&D opportunities are subsequently on the rise, as the UK looks to innovation to combat a potentially hostile post-Brexit trade environment, with new businesses models on the horizon and the government keen to offer tax relief for R&D.

Amid falling confidence in key manufacturing regions, the government and businesses are coming under increasing pressure to invest heavily in R&D, with the hope that innovation can help bridge productivity gaps to grow the industry, in what is thought to most likely be a hostile post-Brexit scenario. A new report from consultancy RSM has found that many manufacturers exhibit uncertainty, largely as the result of Brexit negotiations. The dented mandate of the current government following June’s election, mixed with risks from a potentially hard-ball playing EU, mean that the sector could be separated from a key market soon, impacting the long-term resilience of margins, cash flow and supply chains in manufacturing.

As it stands, the report notes manufacturers’ concerns around the effect of the negotiations on the strength of the pound, the price of energy and their abilities to recruit and retain skilled workers. However, even in light of uncertainties, manufacturers appear relatively upbeat about the coming 12 months – 90% say that they expect revenue growth. Around half of respondents (54%) expect that growth to be between 1-10%, 18% expect growth to be between 11-20%, while a further 18% are projecting revenue growth in excess of 20%.

Investment plans

Investment, even in light of the uncertainties, remains a strategic priority for respondents – finds the survey. According to the study, around a quarter of the respondents are planning a transaction, in capital equipment or skills, in the coming year, while 77% of respondents say that they will be expanding overseas in the next year – with Western Europe and the US key destinations. In general the respondents say that key funding is available if required.

Commenting on the expansion plans, the authors stated, “While change can create opportunity, it can also generate risks. Manufacturers must tread carefully. The key tenets of international expansion are now more important than ever. Firms must explore all expansion options. They must take time to understand local markets and foreign regulations and, critically, how they could change.”

R&D credits

Innovation and the research and development that supports it, continues to be shown as a key driver for economic activity. The government offers various sectors and businesses the opportunity to innovate through R&D tax credits. The latest study, however, found that around 6,000 claims were made to the government initiative, for a total of around £770 million.

The consulting firm adds, however, that this implies that around 41% of manufacturers surveyed are not taking advantage of the opportunities, even while the government is set to increase R&D support. Companies, in many instances, may be missing out on credits due to believing they are ineligible, when in fact they are.

Productive effect

UK manufacturing continues to face issues around productivity – sometimes called the ‘productivity puzzle’ – which is inhibiting businesses from being competitive in an increasingly global competitive environment. Innovation, according to the paper, is one way to drive productivity gains, however, as the study highlights, 11% have formal innovation processes for the continuous improvement of processes, while 40% rely on use ‘lean thinking’ to improve working practices. A large number of respondents (52%) said that they are planning to update their business systems in the coming years, with 45% planning to do so over the coming 1 to 3 years.

Servation benefits

RSM’s analysts also considered the importance of new business models, in a period in which the global risks of excessive resource exploitation are becoming increasingly apparent. Circular economic models, which focus on higher quality, more durable and recyclable goods, offer new opportunities for businesses. One of the outcomes is servation, for which there is more focus on design, as well as additional services around repair and fitting and installation of products. Respondents appear relatively upbeat about the opportunities, with 65% of respondents expecting it to improve customer retention and 57% expecting it to increase product sales.

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