Original content provided by BDO United Kingdom
Volatility has become the new normal – perhaps that explains why manufacturers remain stoic and even confident about the coming year. Our latest Rethinking the Economy survey of 500 mid-sized businesses reveals that 79% of manufacturers feel more optimistic about 2023 than they did about 2022, with 22% of respondents significantly more so. Just 10% feel less optimistic about 2023 than they did about 2022.
The survey discovers the steps businesses plan to take to bolster operations and drive growth: investment, funding and M&A are all avenues to be explored to increase resilience and align with emerging opportunities.
Invest to save: innovating for long-term resilience
Unsurprisingly, manufacturers consider rising costs to be their greatest challenge. Energy prices and raw material prices remain high, and although inflation is expected to ease during the year, margins and budgets will still require keen attention. Rising costs of suppliers and rent have been cited as the two biggest causes for concern. Add to this the high cost of borrowing, the prospect of rising interest rates and tax increases, it’s clear that achieving growth is going to be more challenging than usual.
Clarity on the Energy Bill Discount scheme is welcome and will at least help businesses plan, although some manufacturers remain concerned that the lower relief rates will put them at a disadvantage with European competitors.
Businesses are adopting a variety of methods to increase resilience. Interestingly, only a few manufacturers plan to downsize or reduce their operational scope; instead, most are focused on seeking investment to acquire new systems or measures to increase efficiency, such as automation. Some businesses are looking to invest to align with net zero ambitions, which will provide long-term resilience, while others are embracing opportunities in the circular economy. These proactive strategies are preferred to pausing expansion plans, which shows underlying confidence in the future and a strong desire to reduce costs.
Funding for supply chain strategies
Supply chain issues – both as a result of Brexit, and as a standalone issue – are another major concern cited by manufacturers. While supply chain difficulties have eased somewhat, helped by reduced container and falling energy costs, some subsectors continue to face considerable challenge. The sourcing of certain raw materials such as electronic components has been extremely difficult, with many manufacturers needing to invest in working capital to manage their operations effectively. Points of instability and disruption that will need to be navigated in 2023 include the abrupt changes to China’s COVID-19 policy, the impact of climate change on the availability of commodities and the war in Ukraine, with significant potential disruptions from each, while ongoing sanctions add another layer of uncertainty.
Increasing numbers of businesses are on-shoring or near-shoring their suppliers to help mitigate these impacts: 34% of manufacturers surveyed are looking to near-shore and 24% are looking to on-shore to boost supply chain security.
Further down the supply chain, the increased costs of export have led some smaller businesses to pull-back their operations to focus on the domestic market, but the welcome stabilisation of sterling is now allowing better planning with international customers. We also hope to see trade relationships with the EU develop positively as part of a strategy for long-term economic growth.
More funding to shore up the supply chains of UK businesses and back our best innovations will be required to ensure their long-term viability on the global stage. With the US Inflation Act, EU subsidies and state intervention from China, the prospect of a new era of protectionism is very real, requiring careful consideration by investors and UK Government.
Manufacturers are seeking investment for growth
64% of manufacturers surveyed have changed their approach to seeking or raising funding in the last quarter due to the economic climate. The vast majority are seeking funding earlier than planned, with 28% planning to ease inflationary pressures on the business and 23% seeking funding to support growth plans. Only 17% are delaying investment as they pause expansion plans. Private equity and debt funding are the two top finance types sought.
Debt-funding has become more expensive and there is high scrutiny by investors across the board in the current market. But investment appetite remains, and we see plenty of opportunities in the M&A market attracting high levels of interest, investment and value.
Our recent involvement as advisers on the sale of Syrinix to Badger Meter is indicative of the investment available for innovative businesses. As a provider of intelligent water technology solutions, Syrinix is firmly rooted in growth trends including automation, sustainability, and data-led predictive maintenance – all of which are in high demand.
Expert navigation skills will be required yet again this year as manufacturers brace themselves for a rough ride. But undeterred by economic conditions, manufacturers remain both optimistic and ambitious. Having steered through crisis after crisis in recent years, it seems manufacturers find a way to reach their goals. While there may be some challenges to raising debt finance in the near term, there remains a steadfast cohort of investors who are ready and waiting to help.