According to a recent survey by PwC, the UK manufacturing sector is emerging from the recession stronger and leaner than ever. PwC found that leading manufacturing businesses were not only able to improve working capital by up to 15% in the recession, but also to improve gross margins by 1.5% through cost saving initiatives.
Steve Ellis, business recovery partner at PwC in Leeds, said:
“Although UK manufacturing has just experienced one of its worst periods of decline and turmoil, the majority of the companies we spoke to used it as an opportunity to carry out radical restructuring, cost reduction, improve agility and flexibility, renegotiate contracts and pension liabilities.
“Potential acquisitions or divestitures are actively being evaluated in order to strengthen market position and take advantage of opportunities such as acquisitions of strategically valuable distressed assets in the market.
“Businesses which have shown resilience and stability during the recession and emerged leaner and more efficient may now find themselves as potential takeover targets, in particular by overseas conglomerates looking to benefit from weak sterling and gain from recovery upside opportunities.”
Specifically the PwC survey finds that companies have become more efficient by:
- Preparing for a range of potential outcomes through robust scenario planning for up to 10%, 20% and 30% declines in revenue;
- Aligning incentives to cash and working capital performance to ensure they were ‘top-of-the-mind’ within management teams;
- Realigning their manufacturing base including accelerating the shift of either manufacturing plants and/or commodity products to Lower Cost Countries (LCCs) or temporarily in-sourcing product to fill excess capacity and retain skilled workforce;
- Reducing headcount, averaging 10% across companies reviewed;
- Directing the product mix towards markets more resilient to cycle and downturn (and increasing prices in these markets);
- Multi-skilling the workforce to increase flexibility, improve utilisation and avoid losing skilled resources.
Steve Ellis, business recovery partner at PwC in Leeds, said:
“The UK manufacturing sector weathered the recession well and used it as an opportunity to refresh and refocus. Indeed many UK manufacturers burst out of the blocks in the first half of 2010 driven by a return to strong growth in emerging markets, a recovering Eurozone and supply chain restocking. For UK exporters the weak pound has provided a further much-needed lift.
“Eurozone recovery is faltering and sterling has started to appreciate against the Euro, making the recovery appear more vulnerable than recent results would indicate. There are often more involuntary liquidations in an upturn as companies seek orders and growth without being properly prepared.”
As the UK manufacturing sector emerges from recession PwC urges manufacturing companies to:
- Offer ‘solutions’ rather than just products such as full systems, installation and service offerings;
- Rationalise the product portfolio even further by discontinuing ‘dead wood’, commoditised and low / negative margin products;
- Increase prices in more resilient markets like repair and maintenance, value-added services, brand leaders;
- Shift towards markets more resilient to cycle and downturn for instance military, repair & maintenance, services;
- Invest in intellectual property (IP) and R&D to focus portfolios on differentiated, high-technology and high-value products;
- Bolt-on acquisitions of good and/or complementary products to increase portfolio value.
Steve Ellis, business recovery partner at PwC in Leeds, concluded:
“Coming out of the recession, manufacturing businesses are more focussed, cost effective and clear on the markets, products, people and manufacturing strategies, with improved reporting and
metrics to help manage the dynamics of the business.
“However, with the possibility of a ‘double dip’ recession still looming and continued uncertainty remaining there is a real opportunity for businesses to ensure they have robust detailed plans in place to cope with both upturn and downturn scenarios.”