The UK manufacturing sector ended 2009 on a positive footing, according to encouraging figures from the seasonally adjusted CIPS/Markit Purchasing Managers’ Index (PMI), which reached a twenty-five month high of 54.1 in December, up sharply from 51.8 in November. The average reading for Q4 2009 as a whole was the highest since the final quarter of 2007.
The latest EEF Manufacturing Advantage report paints an equally optimistic picture for the UK manufacturing sector and suggests that companies are continuing to evaluate where best to locate their manufacturing activities. The trend continues – albeit at a trickle - to re-locate manufacturing operations, previously contracted to overseas firms, back home. About one in seven companies have brought production back to the UK from abroad in the last two years.
The headline PMI from the Chartered Institute of Purchasing & Supply (CIPS) provides a single figure indication of operating conditions in the manufacturing sector, and is calculated using data collected on new orders, production, employment, supplier performance and stocks of purchases. Manufacturing production increased for the seventh consecutive month and at the fastest pace since November 2007. Output rose at consumer and intermediate goods producers, but fell in the investment goods sector.
Supporting the latest increase in total output was a further gain in incoming new business. New orders rose at the strongest pace for twenty-nine months in December, CIPS reveals, and manufacturers are linking these higher levels of new work to improving market conditions and customers deciding to rebuild stocks. On the downside, this latest increase was mainly focused on the domestic market, as growth of new export orders was only slight.
CIPS chief executive, David Noble said that despite operating against one of the toughest economic backdrops ever witnessed, 2009 saw the UK manufacturing sector slowly regain its footing and end the year in comparatively strong shape. “However, the troubles of the downturn are still close to hand and firms are keeping a beady eye on all activities,” he warns. ”In particular, purchasing managers said new order growth was dependent mainly on domestic demand, while the capital goods sector continued to suffer from falling production levels. Although a hike in commodity prices pushed up costs, competition is rife, which meant firms were able to increase output charges only slightly. Interestingly, while larger firms continued to shed jobs, some SMEs actually hired new staff - in line with rising client demand.”
Rob Dobson, senior economist at Markit Economics believes the December PMI data signal a positive end to a tumultuous year for UK manufacturers. “The latest release sees the headline PMI rising to its highest level for over two years following robust growth in both production and new orders,” he says. ”The consumer and intermediate sectors are faring well, so is domestic demand, but lacklustre capital spending and subdued export performance are proving to be a drag on the industry as a whole. The outlook is somewhat clouded given the uncertainty of the timing of fiscal and monetary stimuli withdrawal but the momentum and broad-base of the recovery should hopefully aid sustainability."
Meanwhile, the EEF/BDO report, in seeking to explain the encouraging trend that could see something of a revival in UK manufacturing, gives three main reasons for companies returning their manufacturing operation back to the UK.
Firstly, cost savings have not met expectations. Cost savings are achievable, says the report, but lower labour costs may no be enough to balance out rising transport and freight costs as well as the less tangible costs associated with increased supply chain management and monitoring.
Secondly, desired quality levels were sometimes unattainable. The best place to manufacture certain products may not always be in low-cost emerging economies; products that rely on quality often need to be manufactured in high-value locations such as the UK, suggests the report.
Thirdly, time to market was often compromised. Proximity to customers can be vitally important and there may be a case to locate production at a number of key international sites in order to achieve this – whether they offer low-cost production or not.
Another factor identified in this latest report concerns the security of intellectual property (IP). Most innovation takes place in the developed economies – “designed in the UK, manufactured in China” is a not uncommon feature of product faceplates these days. However, underlying IP protection concerns remain, and this will deter some from locating higher-value manufacturing functions in low-cost economies.
That aside, the report does caution against being too dismissive of low-cost economies simply from the standpoint of IP security. Conducting innovation in markets other than the domestic one will allow manufacturers to develop products targeted at specific markets in a timely manner.
According to the EEF/BDO report’s authors, locating both production and innovation in other countries can enhance a firm’s ability to sell into those markets, and the opportunity to tap into the home market of emerging economies should not be underestimated.
Les Hunt
Editor