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!

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 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.

UK Manufacturing: Suddenly it’s sexy again!

Take a look at the advertisement on the right. Now look again. No, your eyes are not deceiving you, this is actually an advertisement taken out by a financial institution to boast about supporting an SME manufacturing business based in the North of England!

What’s more it’s a true story, will wonders never cease? I wasn’t aware that most banks knew where Rochdale is let alone would actually support a business based there!

Fair play to GE Capital on this one, where most banks fear to tread they’ve gone in and backed a British manufacturer when far too many doors in our big UK banks are at best barely ajar and at worst are slammed in manager’s faces, despite the assurances given with Project Merlin.

What’s more GE Capital are telling the world about it with a series of advertisements. In fact this one is running across national newspapers including the FT, business publications and regional newspapers. It is next due to run in the Birmingham Post on 7th July.

If anything proves the extraordinary performance, resilience and all round “just get on with it” spirit of British manufacturers surely this it. As John Hanson, son of the managing director quoted in the advertisement, told me yesterday: “People want to know us [manufacturers] again. We’re hot.” Yes, even the banks!

The UK Economy: Tales from the frontline

In a sort of 21st Century version of Cobbett’s Rural Rides I have been meeting senior managers at companies across the UK. Some were clients, others were suppliers to clients, some were merely acquaintances, but the common denominator amongst them all was an almost desperate desire to talk about the state of the UK economy. Unlike Cobbett my trusty steed was a Seat Altea and my rides were more urban than rural but you get the gist - I’ve been out a lot.

I personally have three tests of economic vibrancy, namely traffic levels, “sold” signs and skips on my street. All three have been giving off conflicting messages recently, hence my interest in gauging the opinion of those on the front line with real P&L responsibility.

So what is going on out there? My first conversation was with a managing director of a premium priced organic healthcare products company which sells directly to consumers and through retailers. In his words, “we’ve dropped off a cliff”. Ahhh not good then!

In Solihull a chief executive of a financial services company which is strongly aligned to consumer spending patterns, admitted to me last week that things had slackened off but he remains optimistic, despite some inflationary fears. “The thing I have noticed is the price of eating out” he told me. “I draw the line at £25 for a steak. I told the wife to get the BBQ out instead.” However his view is that, rather than not buying at all due to increasing prices or concerns over the economy, consumers will take advantage of the vast range of different price points for products and trade down to cheaper items.

That’s the down-ish side, but a trip to Bedfordshire to meet the managing director of a drainage products company with strong ties to the construction sector painted a different picture. I naively offered the opinion that things were presumably difficult at the moment. “Oh no” he said, “we’ve just had a record-breaking 2010 and we are ahead of target for this year.” Noticing my double-take he went on, “we supply to commercial developments and they’re doing fine.”

I finished my grand tour in Worcestershire at a global machine tool builders which manufactures metal cutting machines for anything from £60k through to £2 million (big ticket items then!). Rarely have I seen a factory so busy. In the words of the harassed looking production manager, “we can’t make ’em fast enough.”

And this is not just a result of the weak pound sucking out exports. I’m told that UK sales are going great guns as well. One of his colleagues in sales offered this opinion: “I think a lot of our customers are taking the view “let’s just get on with it!”

What is clear is that the closer you are to the consumer the more difficult life is likely to be at the moment. If the UK economy is to stop flat-lining and return to growth we need more of that can-do attitude I saw in Worcestershire.

Manufacturing proves that we can be “all in this together”

Another cracking set of manufacturing output numbers yesterday from the CBI, a report on which can be read HERE on the Guardian’s website.

The CBI has reported that the orders balance has jumped to 5% in March from -8% in February, well above expectations of a reading of -6%. Manufacturing firms are expecting to increase output in coming months, with that measure rising to 27% from 23%, the highest level since February 2007.

All of which begs the question, how is manufacturing doing it when another one of my clients more aligned to the current vagaries of the consumer sector says he is feeling a definite slackening in demand?

Previously, I have put this down to a more favourable exchange rate environment which is making UK manufactured goods more competitive than we historically have been, but the CBI figures are beginning to show that there may be more to this than meets the eye. Apparently, the export orders balance fell back 11% to 5% during the period. This is still high by historical standards but does point that there more to this than just exchange rates.

A conversation with a manufacturing client a few weeks ago may offer a clue. He believes that manufacturing’s response to the downturn has been far more flexible than other sectors. Instead of laying people off, short time working, pay freezes and cuts, were used to drive cost out of businesses without, crucially, losing the skills necessary to take advantage of any upturn.

All of this demonstrates a rare maturity from both management and workforce and is truly a case of “we are all in this together”. It is certainly a far cry from the days of Red Robbo when a previous client told me he wasn’t sure if he was in the business of manufacturing or just providing jobs.

Lucky George, manufacturing points the way for UK economy!

Two sets of figures released in the last week have provided a tremendous boost for UK manufacturing.

For those who missed the stories the main points are these. The Manufacturing Purchasing Managers' Index rose to 58 in November, the highest the index has been since September 1994. Essentially, any number above 50 signifies growth rather than contraction.

The hiring part of the index was particularly strong, showing that manufacturers took on employees at their fastest rate since the survey began 18 years ago. Wait, there’s more. Backlogs of work (yes backlogs!) increased for the first time in five months, the data revealed, while new orders rose at their fastest pace since April.

This was followed yesterday by even more positive numbers from the Engineering Employers Federation. Strong positive output and order balances for third quarter running across all sectors of manufacturing, good investment and training numbers, a significant jump in price balances and increasing optimism.

All in all these both these sets of figures seem to suggest that private sector growth could be quite a bit stronger than the doom-mongers at the IMF are currently predicting which means that the Coalition Government’s economic bet could come good.

The key issue now is, will this continue into 2011. It’s probably still too early to say, but the Government badly needs business, and manufacturing in particular, to take up the baton and drive growth forward as we slowly deleverage consumer debt without tipping ourselves into another recession.

Napoleon used to say that he wanted ‘lucky’ generals. If it carries on like this for George Osborne, our Prime Minister might well have found himself one.

That sound you can hear is a script being torn up!

Today’s ONS statistics which detail a better than expected 0.8 per cent growth in the UK economy during July, August and September only confirms I suspect what most of us in the private sector have been quietly thinking for some time, namely “things are going quite well aren’t they?”

I’ve had chance to talk to a number of companies in the manufacturing sector (traditionally the poor relation of the British economy behind the financial and service sectors) in the last few weeks and the message has been very positive. Strong order book, good sales pipeline, nobody is getting ahead of themselves, but almost everyone is feeling good about their prospects. All this is confirmed by the ONS today which shows industrial production grew by 0.6 per cent in the third quarter. Now if manufacturing is doing well we must be doing something right!

Of course the elephant in the room is the potential impact of the Comprehensive Spending Review. As a subcontract manufacturer said to me last week “we’re doing well, but it’s fragile”. Like everyone else he is hoping that George’s cost cutting does not damage this upturn.

One last point and it is a topic I am unashamedly returning to, namely the fact that we could talk ourselves into another dip. The media has a negative news bias and I suspect many prepared doom and gloom scripts from correspondents standing outside the Treasury are being ripped up as I write this. Let’s hope they have to keep on ripping in the months ahead!