Why manufacturing is winning (and what the rest can learn from it)!

Another week, another extraordinary series of meetings with companies either supplying to the manufacturing sector or actually making stuff themselves. I’ve travelled to Cannock to meet a machine tool workholding manufacturer to be told that they physically can’t take on any more orders until the end of January. One of their big clients told me a day later that they have just had their best November ever (yes ever). In fact, demand is so strong they are putting their prices up!

All the time the media drips negativity. As one of my clients put it to me, “it’s like living in a parallel universe.” So instead of regaling you ever more with these little anecdotes from the world of manufacturing which seemingly turn reality on its head, I thought I would try and assess why the sector is doing so well.

Firstly, manufacturing is lean, my god is it lean! Years of living at times hand to mouth has made the sector focus like no other. Automation and robotics have driven cost out of the production process and it doesn’t stop there. I’ve seen Pan-European marketing departments staffed by two (count them) two people. Structures so flat, they are positively pancake-like. The result is margins strong enough to absorb inflationary pressures and economic downturns without slash and burn cost-cutting.

Secondly, manufacturing is flexible. What was clear from the downturn of Q4 2008 and Q1 2009 was that workers and management now have a compact which is akin to one of our Prime Minister’s favourite phrases, namely, “we’re all in this together.” Employees and management across the board were willing to take pay cuts in order to keep their company going. The result has been that skilled workers have been retained to take advantage of any upturn.

Three, manufacturing is hungry. Years of scrapping to put food on the table has made the sector ultra-competitive. If there is a contract out there to be won, heaven and earth will be moved to get it. If necessary, business theory will be turned on its head. Years of build to order and theories of reducing finished stock in order to improve working capital are being thrown out of the window. If customers are demanding product now, then we’ll just have to reduce lead times by holding more product.

Four, manufacturers can see the upside in the current economic uncertainty, namely historically low interest rates. Money is cheap (if you can find a source) and it is being used to invest to improve and become more efficient which, in turn, improves margins and makes the sector more competitive.

Finally, manufacturing is used to being ignored by Government. There are no special favours or opt-outs here. This is a sector used to standing on its own two feet, with precious few grants and incentives available. Yes they would like reductions in VAT for capital investment but they’re not holding their breath.

In short, my view is that manufacturing can offer a roadmap for other sectors, let’s just hope it can keep it going well into 2012.

The new £50 note celebrates manufacturing - oh the irony!

The Bank of England releases its new £50 note today. The note portrays two innovators with Birmingham connections, namely Matthew Boulton and James Watt, who were instrumental in bringing the steam engine into the textile manufacturing process.

"Boulton and Watt's steam engines and their many other innovations were essential factors in the nation's industrial revolution," says Bank of England governor Sir Mervyn King. "The partnership of an innovator and an entrepreneur created exactly the kind of commercial success that we will need in this country as we rebalance our economy over the years ahead."

You'll have to forgive me for noting a certain irony with all of this. Business is facing an unprecedented squeeze on its lines of credit, which has brought investment to a standstill. The very entrepreneurs that the Governor wants to encourage can't find the cash to put into new ventures. In this environment, Boulton and Watt wouldn’t have been able to raise a penny and yet the Bank of England, the lender of last resort, puts both of them on a new note as a celebration of our entrepreneurial and manufacturing spirit.

Back in the real world, figures for the British economy released yesterday showed that manufacturing had unexpectedly slowed during October. As one client put it to me recently, "the bubble hasn't burst but it's definitely deflating and we can't find the hole."

If we carry on like this, the ultimate goal of ‘rebalancing’ our economy will recede ever further away. What can the Government do? Well, in my opinion, the Government’s role is to create the right environment to encourage companies to invest – but all too often the environment in the UK, in particular interest rates, has deterred long-term investment. The irony now is that with interest rates at historic lows the banks won’t lend business any money!

If we are to rebalance then what extra support does industry need? Well I’ll first tell you what it doesn’t need, namely grants to individual sectors of the economy or to geographically specific areas. Government cannot pick winners, if history tells us anything it’s that. I would argue for something much more subtle, such as the ability to write down capital equipment costs against tax. That would be a boost which both Boulton and Watt would support I’m sure!

For #$%*@’s sake Merv’, lighten up a bit!

The Governor of the Bank of England, Mervyn King, has been a little ray of sunshine recently. Two weeks ago he told us that the current economic crisis was the “worst ever” which is quite something considering what the world went through after the 1930 Crash. Today I notice he is telling us that “time is running out to save the world from economic crisis.”I’ve no doubt that what Merv’ is actually doing is trying to coax Messrs Merkel, Sarkozy and Lagarde to pull their finger out and sort the Eurozone crisis but the message he is sending to the High Street and to business confidence is highly negative.

I am not for a moment suggesting that Merv' shouldn't tell it like it is but we must not lose sight of the fact that his opinions can move markets and consumer sentiment. Yes there is a sovereign debt crisis in the Eurozone but we also have a demand crisis at home. In other words business and consumers in the UK are so worried about economic apocalypse that they are holding onto every bit of spare cash they have and not spending.

To be fair, our current Prime Minister tried to talk it up during his speech at the Conservative Party Conference a few weeks ago although his oratory never reached the heights of Franklin Delano Roosevelt’s call to arms during the Great Depression ("we have nothing to fear but fear itself").

I seriously doubt whether Merv’s new found fondness for a soundbite is helping. At the moment he is talking it down when he needs to be talking it up. His problem is that his every utterance is amplified by the media and the most negative spin possible is put on any economic story.

Take yesterday’s retail sales figures for example which showed an unexpectedly good September for the High Street. The Guardian headline summed up the current problem, “Retail sales bounce in September but summer slowdown alarms experts.”

So come on Merv’ lighten up a bit!

Dinner with an American Friend

At the risk of sounding like a stuck record (now there’s an analogy that will pass the iPod generation by) I feel compelled to return to a favourite current hobby horse, namely the divergence between economic reality, particularly in the manufacturing sector, and economic reporting.

I had the good fortune of being able to catch up with the President of one of my clients’ North American operations at a dinner on Tuesday evening in Hannover. He was in Europe to promote his new valve body production machine at a German trade show and was in good form covering a range of topics.

We started with business performance. “How are things at the moment?” I asked.

“Great,” he replied, “we’ve taken on 200 extra employees this year already.”

Noting the slightly sceptical look on my face he went on: “I know, it’s like there’s a parallel universe between what is actually going on and what the media are saying!”

Well yes quite, I’ve certainly read enough in the Washington Post or New York Times to suggest that the American economy is shrinking at an alarming rate. “Oh I tell my guys not to read any of that stuff. You wouldn’t get out of bed of a morning if you took them seriously.”

He offered as an example, recent reporting of the American version of our Purchasing Manager’s Index. “The Index had fallen from 65 to 55 and it was reported as if the world had fallen in, but 55 is still growth!”

However, my American friend did concede that wider economic problems outside of manufacturing could make life difficult for Obama in 2012. “He’s going to find it awfully difficult to get re-elected because of problems in the wider economy. The big advantage he has is that the Republicans can’t find anyone to rival his political charisma that is also electable. If they do find someone then he’s in real trouble.”

UK Manufacturing - reports of its death are greatly exaggerated!

Britain's manufacturers have been left untouched by the recent turmoil in the world's financial markets, and expect healthy order books to be translated into higher factory output over the coming months, according to the CBI. The latest monthly snapshot of industry found companies in upbeat mood, with increased demand and the steep upward price pressures from earlier in 2011 on the wane.

Hang on, hang on, hang on – let’s just rewind a minute here!

Am I going mad or are the CBI findings a direct contradiction of the recent surveys by BDO and the CIPD? My recollection is that both organisations said a drop in business confidence was largely due to a ‘fragile’ manufacturing sector. In fact I distinctly recall that BDO partner Peter Hemington was all over my TV telling me that said the UK's economic recovery continued to falter and that “the rapid decline of the manufacturing sector, championed as the key to a rebalancing of the UK economy, is alarming."

Now, I’m going to say it again and I’m genuinely not making this up. I have one multi-national manufacturing client who has just had the best half year sales figures in nearly four years. I have another that is a global manufacturer of engineering components that has had to tell the sales force to stop selling, so worried are they about being able to meet demand. I have another well-known manufacturing client who is looking for new premises because the company has outgrown its current site and it is physically impossible to put on any more than three eight hour shifts in a single day!

The fact of the matter is (and I’m going to keep on banging on about this until somebody listens) manufacturing in the UK is buoyant and it is not just due to advantageous exchange rates because the first two companies I mentioned are predominantly selling into the UK from their UK sites.

And just in case anybody thinks that it’s just my clients, I saw Juergen Maier, managing director of the Siemens UK Industry Sector on Channel 4 News a few nights ago and he said the same thing!

So, I would like to issue a standing invitation to anyone in the media or anyone consultant, trade body or purveyor of statistics, who thinks that a: we don’t manufacture anything in this country or b: thinks that manufacturing in the UK is just about assembly (that would be you Mr Hemington) or c: thinks that manufacturing output is going into freefall, to visit any one of the three companies mentioned above and find out exactly what is going on at the coalface.

We look forward to meeting you!

Global Economics: time to learn mandarin!

It was difficult to know how to react to the downgrade in US debt from its traditional AAA rating. My first reaction was to scoff at the idea that one of the ratings agencies could have the sheer nerve to do it, this is after all the same people who gave AAA ratings to stacks of sub-prime Mezzanine Credit Default Obligations.

As Paul Krugman put it in yesterday’s New York Times, “America’s large budget deficit is, after all, primarily the result of the economic slump that followed the 2008 financial crisis. And S&P…. played a major role in causing that crisis, by giving AAA ratings to mortgage-backed assets that have since turned into toxic waste.” Thank you Paul.

However, in fairness to S&P, who issued the downgrade, there is a very important point at the heart of their statement namely, "the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges". In other words, America is currently ungovernable at precisely the time when strong leadership is needed, witness the negotiations over raising the debt ceiling.

What was striking about much of my weekend reading was the extent to which the American public still view their debt problems in isolation, which can be easily solved by cutting taxes to stimulate growth, raising taxes to increase receipts to the Treasury or cutting Government spending. In all the discussions I read on the New York Times or Washington Post websites there was barely a mention of the sovereign debt problems in Europe or the potential implications of a US default or continued subdued economic performance.

Which leads me to ask two searching questions to which I do not have answers. Firstly, how can the dollar continue as the international reserve currency (the foreign currency which is held by central banks and other major financial institutions as a means to pay off international debt obligations) when it is clearly so politically and, as a result economically, dysfunctional?

Secondly, is this the moment when America begins to wake up and realise that it is unlikely to be top dog much longer and what effect will that have on the American psyche?

Certainly the rhetoric over the last few weeks has been extraordinary with Putin accusing the US of living "like a parasite" on the global economy and of being a threat to the worldwide financial markets. Rarely, if ever, has America been scolded in such terms.

However the real threat to America comes from China which is due to overtake the US as the world’s largest GDP sometime in 2016. As a client of mine put it last week, “the Chinese idea of an economic slowdown is GDP growth of 7-8 per cent, which is our idea of a boom.”

I don’t know where the rapidly unfolding events of the last few weeks will take us. Only one thing is certain, it’s too late for me, but I’m seriously considering getting my two children to learn mandarin!

UK Economy: these numbers are bad!

Well, there is no hiding from this. Today's numbers just released by the Office of National Statistics for the UK economy in the second quarter of 2011 are dire.

I’m all for being optimistic, but there is no escaping that the economy is flatlining. Economic activity increased by 0.2 per cent in the second quarter of 2011, following an increase of 0.5 per cent in the first quarter of 2011. In other words, it’s going backwards.

Total services output increased by 0.5 per cent in the second quarter compared with an increase of 0.9 per cent in the previous quarter (again backwards). The largest contribution to the growth in this quarter was from business services and finance with 0.7 per cent growth.

Transport, storage and communication increased by 1.1 per cent, compared with an increase of 2.5 per cent previously. The story is the same with distribution, hotels and restaurants which increased by 0.3 per cent, compared with an increase of 0.9 per cent.

The one bit of light is construction output which increased by 0.5 per cent in the second quarter, compared with a decrease of 3.4 per cent in the previous quarter.

From a personal point of view (in fact anybody involved in manufacturing PR or engineering PR should be worried) the bullish manufacturing statistics of the last few months appear to have stalled. Manufacturing decreased by 0.3 per cent compared with an increase of 0.7 per cent in the previous quarter.

Where do we go from here? The Chancellor is adamant that there is no Plan B but as one client said to me recently, “as soon as he admits there is a Plan B then Plan A is dead.” What is clear is that the increase in VAT, petrol prices and fear over hefty increases in domestic gas and electricity prices have all given the UK consumer a fright and we are reigning in our spending. In my opinion, there has also been too much talk of austerity measures and comparisons with Greece etal (yes our debt is of a similar size but our economy is six times bigger!).

The Chancellor has taken a gamble. The lesson of the Great Depression was that stagnant economies need to be inflated, which in turn brings more receipts back into the Treasury. Instead he has chosen to take money out of the economy at a critical time.

On such decisions careers are made and lost.

PS: there is a political angle to all of this as well. Today’s numbers play right into Ed Balls’ rhetoric that the Chancellor is in ‘growth denial’. Expect to see Ed all over the news today as he hammers home this point which, on the basis of these numbers, is likely to gain some traction.

MPC Member: “We need to talk this up now”

Not my words but the words of one member of the Monetary Policy Committee to a client of mine a few weeks ago. The man in question, Andrew Sentance, is concerned that, despite all the ingredients being in place for economic recovery, we will manage to snatch defeat from the jaws of victory.

And he should be concerned if you look at today’s business pages dominated by the financial crisis (sorry ‘contagion’ must remember to be more hyperbolic) in Ireland.

However, it is noticeable that the negative news bias is increasingly bearing no relation to company and market performance. The FTSE 100 has moved up nearly 1,000 points since July and today’s company results show enormous progress across a swathe of sectors. EasyJet has seen profits triple in the last six months. ITV has seen revenues rise by 16 per cent due to an advertising recovery (yes you read that right, an advertising recovery!). Luxury fashion brand Burberry has reported a 49 per cent rise in first half profits. British Land reported a 4.2 per cent rise in net asset value.

These are all very positive results in sectors, namely luxury goods, air travel, property and advertising which have been, excuse my language, mullered in recent years.

So in my self-appointed role as the guardian of economic optimism, we need to heed Andrew Sentance’s words and start talking this up!

Could the media talk us into a double-dip?

What is the biggest worry for business at the moment? Lack of bank lending? Austerity measures? Public sector cost-cutting? Well the answer is none of the above, at least amongst senior management at a number of firms I have talked to over the last few weeks.

Apparently, the biggest fear at the moment is the media. How so? Well there are concerns that media negativity about the state of the economy will hit consumer and business confidence, sending us into an economic tailspin when things for many are actually going quite well at the moment. The word from two UK manufacturers I have spoken to recently is of strong sales, good pipeline and increasing confidence. The feeling is that the both business and the public in general have held back investing for long enough and are now dipping into their pockets once again. Of course this isn’t true of all sectors (the cuts to the school building programme were another knife in the back of the construction sector) but it is clear that consumer and business confidence are in reasonable health, which is good in the circumstances.

However, confidence is fragile. I vividly remember having dinner with David Smith, economics editor of the Sunday Times a few years ago (namedropper, moi?) and he readily admitted that there is a bad news bias which can easily affect both business and consumers. Therefore, at times like this I think we should all use our own judgment rather than just rely on the headlines. Smith famously has his skip test to gauge economic activity (ie. consumer confidence is directly related to the number of skips in his road from people undergoing house renovations) while I look out for new cars on driveways, and ‘sold’ signs in front of houses. At present both of these indicators are positive, at least where I live.

My gut feeling is that we will weather this (Friday’s GDP figures were another welcome boost) as most businesses are now very lean and we have stored-up demand due to the fact that nobody has spent anything over the last few years. Barring major shocks, this should be enough to see the private sector through.

The public sector is another matter entirely. As one client put it to me a few weeks ago, “I think they are going to feel some of the pain the private sector felt 12 months ago.”

The Ghost of Iain Macleod

The publication of the Bank of England’s quarterly inflation report was sobering reading yesterday. A 3.7% rise in inflation prompted the usual exchange of letters between the Chancellor and the Governor of the Bank. The fear must now be that interest rates, the traditional if blunt instrument way of controlling prices and spending in this country, will have to rise.

My view all along has been that the pump priming of the economy, with historically low interest rates and quantitative easing, was likely to see a return of inflation sooner or later which could lead to an interest rate rise. However, I thought that interest rates were more likely to rise in order to underpin UK Government bonds which are coming under increased pressure. Now I’m not so sure.

Certainly the minutes of the Monetary Policy Committee meeting will be very interesting reading in thirteen days time. Up until now the MPC has been voting as a solid block in favour of holding interest rates at historically low levels in order to help re-inflate the economy, but I wonder whether we will see anyone break rank in turn causing a domino effect on the MPC which could ultimately lead to an interest rate rise.

The danger of course is that in trying to control inflation and support Government bonds we reduce household consumption and send us back into recession by making us all pay more for our mortgages. This is what the late Iain Macleod called a stagflation situation.

I’ll let him describe it in his own words. Speaking in the House of Commons on November 17, 1965, Macleod, later to become Ted Heath’s first Chancellor before his untimely death after only a month in office, said: "We now have the worst of both worlds — not just inflation on the one side or stagnation [of the economy] on the other, but both of them together. We have a sort of 'stagflation' situation.”

PS: There was a very interesting interview with Nouriel Roubini the American economist which can be viewed HERE. Roubini’s view is that the crisis is not yet over but has metamorphosed from a private sector debt problem into a sovereign debt (ie. Government debt) problem directly due to the bailout of the banks.

The Age of Austerity

At some stage in the next week to ten days I expect George Osborne to emerge from No.11 Downing Street, looking even paler than he usually does, to announce that the nation’s finances are in even worse shape than he feared.

Deep down we all know it is bad, but it is still not clear what our new Coalition Government is going to do about it and, ahead of the late June Emergency Budget, mixed messages abound. I expressed some doubts in this blog during the Election campaign that Cameron & Co could squeeze efficiencies on the scale outlined from public services such as the NHS. I was also sceptical that capping top executive pay in the public sector would bring in more than a pittance. It appears that current estimates suggest such a cap would bring down the debt by a whopping £15 million next year. Yes, million not billion.

The International Monetary Fund (IMF) in its United Kingdom survey last year said this, and bear in mind that this was before the Greek crisis struck. “Should fiscal sustainability come into question, interest rates would rise despite monetary easing efforts, the ability of the government to provide support to the financial sector would be severely limited, and pressures on the currency could emerge. To limit such risks and increase resilience to shocks, there needs to be a credible commitment to reverse the deterioration of the fiscal position in the medium term.”

The key word here is ‘credible’. The international financial markets are looking for a robust plan to reduce UK debt. Tokenism will not cut it, we need clearly identified areas to reduce spending and increase revenue, without damaging the recovery (talk about balancing acts). My own view is that there is now a compelling argument to raise VAT as the UK has one of the lowest rates of VAT in Europe at 17.5% compared to 19% in Germany, 19.6% in France and 25% in Norway and Denmark.

Again however, Cameron, at the weekend, appeared to rule this out. Is there news management going on here? Deny a rise in VAT until the full state of our finances become clear and then say “we had no choice.” I suspect this is the case.

In the background lies the IMF and the secret fear of all Chancellors that they will be forced to do a Denis Healey and have to turn around at Heathrow Airport in full glare of the cameras for emergency meetings with them, as in 1976. Ultimately, it is far better we deal with this ourselves rather than let these slash and burn merchants in the door. Just ask the Greeks.

Don't panic, it's not a double dip!

Yesterday's statistics from the Office of National Statistics which illustrate a 23,500 rise in jobseekers claimants in January will inevitably spark fears of a double dip recession.

This would be a misreading of what is going on. Our labour market is now much closer to the American rather than the European model, in other words highly flexible, which is bad in the bad times as company's can lay people off quickly. However, the reverse is also true, in that when things start picking up company's can quickly pick up the phone and get people in rapidly.

How flexible are we compared to others? Well, if you want to get rid of employees in Germany it takes on average nine months while you consult with the Works Councils. In France, it's even worse. This was one of the major contributors (along with the astonishingly laid back attitude of the European Central Bank towards interest rate intervention) to sluggish European economic growth in the Noughties when the UK economy was roaring ahead.

So why the increase when we are supposed to be coming out of this downturn? Two factors immediately spring to mind. Firstly, many seasonal workers will have been taken on for Christmas and then let go again in the New Year. Secondly, I suspect the weather has had a one-off impact which has to be factored in.

Where do we go from here? Regular readers of my postings (he knows who he is!) will know that I have been cautiously optimistic about our economy even at the start of 2009 when it looked as if the entire country was about to go belly up. My belief is that from March/April unemployment will start a downward trajectory with economic growth picking up speed from the middle of the year with good strong growth from 2011 onwards.

Clearing out the dead wood

The demise of LDV yesterday is a bitter blow to both the van manufacturer, its workforce and the company’s supply chain, but it was probably inevitable. I had hoped that Weststar had a plan for the company’s future, niche green or biofuel vans or something, but in all honesty it was always going to be a long shot.

However, as we begin what is likely to be the long and tortuous process of lifting ourselves out of recession, one or two things are becoming increasingly clear, namely that this recession will probably be more cleansing than catastrophic. The fear, as little as 3-4 months ago, was that good businesses of all sizes would be forced to the wall because of the dire economic news. That concern is now beginning to lift as the credit markets thaw and lending begins again as banks get used to their new status of being publicly owned.

With hindsight, we may therefore look back on this recession as being a cathartic clearing out of dead wood companies that have teetered on the brink, even in the good times. LDV will now unfortunately go into history alongside another acronym, MFI, and other companies which have failed to keep pace with the times, such as Woolworths and Whittards of Chelsea.

The path to insolvency for each of these companies was eerily familiar. A gradual loss of market share and consumer confidence, management buy-outs promising to resurrect the brands, fierce competition from massive, often global companies, able to exploit huge economies of scale, failure to adapt to changing market dynamics and an inability to identify and seize opportunities.

A former colleague of mine who advised Whittards told me once that the company really missed the boat with the explosion of the coffee shop culture of the late 90s and the rise of Starbucks. It limped on for a while, but the end was inevitable. The same goes for LDV.