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Manufacturing & Engineering (M&E): cautious optimism for the future

MTA Associate Members Moore Stephens have conducted a survey on Manufacturing and Engineering in the UK and have asked us to share the results of their findings with you all. Please see below for full details of their research.

Owner Managed Businesses (OMBs) in the Manufacturing & Engineering (M&E) sector have multiple strategies in play for 2015, but their optimism is tempered by concerns over employee skills shortages.

M&E OMBs are less confident about 2015 than OMBs generally

Just over half (55%) of M&E OMBs are confident about the general outlook for 2015, compared to 70% of all OMBs surveyed. Over two-thirds (69%) of M&E OMBs are confident about hitting revenue targets (compared to 75% overall), but only 58% are confident about hitting profit targets in 2015 (70% overall).

How confident are M&E OMBs about the general outlook for 2015?

18%        Very confident

37%        Somewhat confident

24%        Neither confident nor pessimistic

18%        Somewhat pessimistic

3%          Very pessimistic

How confident are M&E OMBs about hitting revenue targets in 2015?

16%        Very confident

53%        Somewhat confident

18%        Neither confident nor pessimistic

13%        Somewhat pessimistic

0%          Very pessimistic

How confident are M&E OMBs about hitting profit targets in 2015?

13%        Very confident

45%        Somewhat confident

26%        Neither confident nor pessimistic

16%        Somewhat pessimistic

0%          Very pessimistic

M&E OMBs appear more cautious than OMBs generally – at least in relation to 2015

A majority (58%) of M&E OMBs expect 2015 to be better than last year – but a smaller percentage than OMBs overall (68%). M&E OMBs perhaps have a more cautious outlook than entrepreneurs in other sectors: 53% say that 2014 was better than expected – a higher proportion than the 45% of OMBs overall whose expectations were surpassed.

However, looking ahead to the next three to five years, M&E OMBs seem relatively optimistic about their opportunities, certainly in relation to generating increased revenues. A large majority (87%) expect turnover to increase over the next three to five years (compared to 80% of OMBs overall).

Do M&E OMBs expect 2015 to be better or worse than 2014?

26%        Much better

32%        A little better

29%        About the same

10%        A little worse

3%          Much worse

Looking back at 2014, how did M&E businesses perform overall?

16%        Much better than expected

37%        Somewhat better than expected

34%        As expected

13%        Somewhat worse than expected

M&E OMBs are highly focused on expanding their UK customer base in 2015, and over half are also seeking cost reductions

A strong majority (71%) of M&E OMBs plan to expand their UK customer base in 2015 (compared to 62% of OMBs generally). Just under half, 47% have a strategy that includes expanding overseas (compared to 20%  of OMBs overall). For M&E businesses, this could include setting up operations in locations that have lower costs, a skilled workforce or closer proximity to overseas customers. Over the next five years, 60% of M&E OMBs expect to increase the proportion of their customer base in Europe, with 31% aiming for proportionately more customers in North America. Around a third (32%) of M&E OMBs expect the proportion of customers in Asia to increase (24% in China specifically), and 29% expect to see an increasing proportion of customers coming from South America and also from Africa.

M&E OMBs are more likely to build cost reduction into their 2015 strategies than OMBs generally, with 55% planning to do so (compared to 40% overall). Such focus on cost reduction is surprising given the recent recession and the substantial cost-cutting that has already taken place. But M&E businesses face continued cost pressure: 53% of M&E OMBs expect the cost of supplies to increase over the next three to five years, and just 31% anticipate an increase in gross margins (compared to 41% overall). Perhaps as a result of their cost-reduction strategies, 61% of M&E OMBs do expect net profitability to rise over the next three to five years, in line with the expectations of OMBs generally (60% overall).

Investment is also in many M&E OMB strategies for 2015: 50% plan to develop new production techniques or other innovation (compared to 27% of OMBs overall), and 47% of M&E OMBs are investing in new technology or IT systems (44% overall). Just under half (47%) plan to launch new products or services (40% overall), benefiting from past investments in developmental activity. Most M&E OMBs are funding such activities out of cash and existing finance arrangements. Only one in five M&E OMBs (21%) expect to increase their use of external finance over the next three to five years.

M&E OMBs are also planning for considerable change in their businesses, with 32% undertaking succession planning in 2015, 26% including acquisition in their strategy (15% overall) and 18% the sale of their business (12% overall).

M&E OMB strategies for 2015:

71%        Expanding UK customer base

55%        Cost reduction

50%        New production techniques/innovation

47%        Launching new products or services/diversification

47%        Investment in new technology/IT systems

47%        Expanding overseas

32%        Succession planning

26%        Acquisition

18%        Sale of business

13%        Supply chain restructuring

The top three risks perceived by M&E OMBs in 2015 are employee skills shortages, domestic competition and the strength of the UK economy

M&E OMBs are more concerned about employee skills shortages than OMBs overall: 53% of M&E respondents see this as a risk, compared to 39% of all OMBs surveyed. M&E OMB concerns may be linked to the fact that many are planning to take on more staff over the next few years. Around two-thirds (68%) of M&E OMBs expect headcount to increase in the next three to five years (compared to 58% overall).

While 50% of M&E OMBs see domestic competition as a risk, 29% are worried about international competition. The strength of the UK economy is a concern for 42% of M&E OMBs in 2015, while just under a quarter (24%) are concerned about the global economy.

Around one in five M&E OMBs (21%) are concerned about the tax environment. 

This may reflect uncertainty over the outcome of the General Election. When asked about tax risks following the election, M&E OMBs identify a mix of business and personal concerns. Topping the list are an increase in business rates (identified by 76%), restoration of the 50% band of income tax (61%), environmental levies (50%) and the abolition of entrepreneurs’ relief (45%). Additional post-election risks perceived by M&E OMBs include pension reform (34%), a rise in capital gains tax rates, freezing of inheritance tax thresholds (26%) and direct recovery of debt by HMRC (26%).  

Risks concerning M&E OMBs in 2015:

53%        Employee skills shortages

50%        Domestic competition

42%        Strength of UK economy

29%        International competition

24%        Global economy

21%        Tax environment

18%        Pension auto enrolment

16%        Exchange rate fluctuations

11%        Technological change

8%          Interest rate fluctuations

10 tips for M&E OMB success in 2015

Manufacturing & Engineering OMBs have numerous strategies for  2015, but substantial challenges to overcome. Here are our 10 tips for success in 2015. 

1.       Make sure you make maximum use of current tax incentives, as appropriate to your business and its lifecycle.

2.       If skills shortages are driving up salaries and putting margins under pressure, consider alternative remuneration approaches including profit-related pay and share option schemes.

3.       Look out for opportunistic acquisitions that could eliminate a competitor, bring in complementary products or services, or give you access to skilled personnel.

4.       When seeking bank funding, ask for what you really need, prepare a clear business case and negotiate.

5.       Analyse your whole trade cycle to identify any cash pinchpoints, then look for a finance product to match.

6.       Make sure current IT systems and processes are working as efficiently and effectively as possible so that higher paid staff can focus on value-adding and revenue-generating work.

7.       Maximise sales from existing customers by enhancing existing products and services or offering complementary new ones – and make sure you really understand your customers’ needs.

8.       Innovate to stay ahead of the competition – continuing to spend on research and development (perhaps funded through grants and tax credits), delivering services in new ways or increasing your staff training budget to enhance in-house skills.

9.       Get maximum advice and support when planning to increase overseas sales – in particular, make good use of the government’s UK Trade & Investment services.

10.   Plan well ahead of any desired exit from your business, particularly in relation to developing your management team: the business needs to be able to run successfully without you.

About Moore Stephens

Moore Stephens is the UK’s 10th largest independent accounting and consulting network, comprising over 1,300 partners and staff in 34 locations.

 Moore Stephens LLP is an independent member firm of Moore Stephens International Limited, one of the world's major accounting and consulting networks with 667 offices in 105 countries. 

Our Manufacturing and Engineering team understands the challenges that are faced in dealing with the day-to-day running of a business whilst trying to build for the future. As experienced advisers to the sectors, we focus on helping our clients to run their businesses efficiently, take advantage of opportunities and stay one step ahead in a demanding and dynamic environment.

As a demonstration of our desire to set the pace in this sector, Moore Stephens is thrilled to have partnered with the Bloodhound Super Sonic Car, an ambitious project, using research and innovation to set a new world land speed record of over 1,000mph in 2015.

If you would like a copy of the full report please contact marketing@moorestephens.com.

Or for more information please contact:

Richard Willis

Partner, Manufacturing & Engineering Sector Head

Richard.willis@moorestephens.com

M. 07943 923542