UK manufacturing execs predict innovation led future

22 July 2015

Increased competition and pressure on prices are causing many manufacturers continued strife in 2015. To stay ahead of the competition, companies are turning to innovation, research by KPMG shows. The number of companies planning to spend more than 6% of revenue on innovation has increased to 41%, with many investing in the improvement of their R&D process. In terms of the R&D itself, companies are increasing their spend on developing radical product innovation as well as continuing to improve their manufacturing technology.

The manufacturing industry has for some time now existed in economic uncertainty. Many companies are forced to deal with a rapidly changing economy in which there are constant disruptions from technology, increasing price pressures, volatile input costs, intense competition and continuous innovation. To identify how manufacturers are rising to the challenge, KPMG commissioned Forbes to run a survey of 386 senior executives in six industries: Aerospace and Defence, Automotive, Conglomerates, Medical Devices, Engineering and Industrial Products and Metals. Two thirds of the organisations surveyed have revenues above the $5 billion mark.

Top 5 biggest challenges

Challenging market
In terms of the challenges identified by respondents, the major issue cited by respondents remains the increased competition on the international market and pressure on prices – at a stable 39% over the past two years. Efficiency in research and development and product development is an increasing challenge, with 30% citing it as such in 2015, up from 25% in 2014. The concern of IT systems keeping pace with business demand has fallen from 32% to 22% since 2014.

Top strategic priorities

To manage economic conditions in the wider markets, the strategic priorities of manufacturers surveyed have been changing. Sales growth decreased in importance between 2014 and 2015, down from 62% to 55%, while cost-cutting has become a significantly larger priority, with 41% indicating it as a priority in 2015, up from 28% in 2014. Developing new products has decreased in priority, dropping from 41% in 2014 to 32% in 2015. Two popular priorities in 2014, increasing cash-flow from operations (51%) and greater-speed-to-market (51%) have seen significant decreases in priority, down to 21% and 18% respectively.

Areas allocated 20 percent or more of innovation budget

The survey highlights that companies increasingly focus their technology spending patterns on the continued improvement of R&D capabilities, with 47% responding that they are moving a significant portion (more than 20%) of their technology spend into tools that catalyse the pace and value of innovation. The second biggest piece of the technology spending pie is invested in sales force management systems at 23%.

As a result of the uncertainty in the market, and with technologies providing a huge amount of possible avenues for innovation, manufacturing companies understand that investing in innovation will be key to their future success. From the survey it is clear that the need to create innovations is highly ranked by companies. Four in ten (41%) companies plan to spend 6% or more of their revenue of innovation, compared to just 24% that said they spent that amount over the past two years. The number of companies looking to invest 4-5% of revenue remains fairly stable.

Spending on innovation on the increase

Long-term radical innovation
The focus of investment in innovation has also been changing over the past years, with the focus of spending by companies is increasingly directed towards developing radical innovations (44%). Incremental innovation towards improvement in business and processes remains the area focused on by almost half (48%) of the companies. Finding new partners with whom to drive innovation comes in third at 36%.

Focus areas driving new growth and innovation

“Manufacturers must evaluate the rapidly changing innovation ecosystem and develop a strategy for how they fit into it. Everything should be on the table, from re-evaluating your internal innovation organisation design, access to partnerships with new niche disruptive innovators, utilisation of open innovation communities or a reallocation of R&D investments to new and bolder product development ideas,” explains Jeff Dobbs, Global Sector Chair of KPMG’s Industrial Manufacturing Sector. “You can’t just sit back and wait for your current strategy for innovation to start driving growth; you must begin transforming that strategy if you expect to remain competitive in the new world order of manufacturing.”


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UK manufacturing sees orders slow amid Brexit anxiety

11 April 2019

Manufacturing in the UK saw negative growth for the end of 2018, reflecting a wider slowdown in the UK economy to 0.2% for the quarter, followed by three months at the start of 2019 which saw continued softening in orders. With uncertainty still hitting the sector ahead of Brexit’s deferred deadline, the industry faces a difficult 2019.

Despite a perpetually changing economic landscape, manufacturing remains a keystone industry in the UK. Optimism in the industry has been riding high in recent years, reflecting the perceived potential of automotive technologies, but last year saw a slight dip in business performance, ahead of what seems set to be a turbulent period for British manufacturing. Ordinarily, the sector might have expected to recover its footing relatively quickly, but with the looming spectre of Brexit making the economy’s future completely uncertain, this has not been the case.

The uncertainties of Brexit have continued to create headaches for companies on both sides of the channel. As contingency planning continues, new analysis from BDO and the Make UK explores how manufacturing – a segment likely to be hard hit by Brexit – has fared in the final quarter of 2018.

Output balance stable

Manufacturing remains a key industry in the UK, generating around 10% of total economic output and supporting around 2.7 million jobs. Yet while the industry has seen a number of years of strong optimism as well as demand, Brexit is set to throw a spanner in the works, with a range of manufacturing companies leaving the UK, or considering it. Indeed, UK manufacturing’s output currently sits at a 15-month low as the industry anticipates a cliff edge Brexit.

In terms of growth for various parts of the UK economy, a slowdown was noted in the final quarter of 2018 compared to Q4 2017. Manufacturing, in particular, saw growth declines coming in at almost -1%, with a similar trend in production. Construction saw a sharp contraction, falling 2 percentage points to below 0% growth in December 2018. Only services managed to have positive % growth in the final quarter. The final quarter as a whole saw growth of 0.2% in the UK economy – the lowest level in six years.

Output across most sectors in the industry remains positive, with the percentage balance of change in output at 22%. The result is the tension quarter of positive percentage balance of change, with stagnation on the final quarter of 2018. The firm is projecting a slight softening of output going into Q2 2019. The firm notes that there is some stockpiling taking place, with orders and outputs unaligned going into 2019.

Order balance remains positive but dips further

While there is a broadly positive picture for output, the firm does note considerable differences between subsectors. Basic metals for instance, saw a net 24% fall to -18% over the past three months. Metal production is also seeing relatively poor performance as demand from the automotive industry enters a period of acute uncertainty. However, most industries are to see improved output on balance, with rubber & plastic increasing from a net 11% to net 56%.

Export trade

Having been buoyed by the lowered value of the pound, UK export orders are up slightly on the previous quarter, but remain well below the most recent peak in Q3 2018. Domestic orders were relatively strong, with a year between the most recent peaks for the segment. However, Q2 2019 looks to see domestic orders fall sharply, to half Q1’s result, while export orders too are set to see declines.

The decline reflects a decrease in basic metals, possibly a reflection of changes affecting the auto industry. Meanwhile, export orders are down due to Brexit cross-border uncertainty – the effect of the sterling devaluation unable to continue to buoy the market. Basic metals and metal products are both in negative territory for the coming three months.

Investment and employment intentions

UK employment figures reached new milestones, with total unemployment down to 3.9% while participation rates hit record highs. Employment planning continues to be in net positive territory, with a net positive balance of 22% in Q1 2019. The coming months are projected to see a slight dip, again, largely resultant from uncertainties around Brexit. Basic metals is the sector most likely to see a negative trend, reflecting the expected decline in orders.

Investment intentions meanwhile continue to be in positive territory. However, again, the now acute uncertainty about Brexit – the UK government has boxed itself into a corner – mean that confidence around investment could wane rapidly.

Commenting on the wider economy, Peter Hemington, a Partner at BDO, said, “Manufacturing firms have been ramping up their preparations for a disorderly Brexit, in large part through the stockpiling of imported goods. This has had the effect of inflating activity levels… It’s too late to do anything about this now.  But a disorderly Brexit would be far worse than the current relatively mild slowdown, possibly disastrously so… We are concerned it looks more likely than ever that we will exit the EU without a deal.”