Understanding the future of the manufacturing industry requires an acute awareness of its recent past and how several key factors have impacted the sector. Oliver Bridge explains why the recent PMI results were a source of assurance for the sector.
Last week, we held a webinar for the leaders of manufacturing businesses across the Midlands and East of England. Unsurprisingly, a common theme was the impact of recent events such as COVID-19 and subsequent lockdowns, as well as the knock-on effects of Brexit.
The Purchasing Managers Index (PMI) provides an overview of the general level of optimism in the market and it's a useful tool to gauge the state of the sector in 2020 as well as where it’s at now. Despite the PMI recording one of the biggest dips in several decades last year, currently it's at a 321-month high, which indicates a lot of growth in the pipeline for manufacturing and its output.
While some sectors are likely to be further ahead of the curve than others, with building products and consumer goods having more reason for optimism than aerospace and automotive, most businesses should see this as a positive outlook.
Deal volumes are picking up
Another significant impact of COVID-19 was that it curtailed mergers and acquisitions (M&A) activity for much of last year. But deal volumes picked up towards the back end of 2020 and Q1 2021 was actually on a par with Q1 2020.
This recovery was driven by a number of factors, including the widespread rumours that the spring Budget would include a change to capital gains tax, a backlog of transactions being actioned and because there’s a lot of capital still to be deployed for many funders, which is increasing transactional volumes.
At our webinar, Lawrence Davies MBE, a manufacturing and procurement expert who spent 30 years as Director of purchasing at General Motors, before joining the Department for International Trade (DIT) warned that – while lockdown-related slowdown is easing – supply chain and pricing concerns need to be tackled if the manufacturing sector’s recovery rate is to substantially improve.
One of the main problems these issues have created, which is especially evident with metals and crude oil, is that input prices are growing faster than output prices . This will impact margins for many businesses.
This is an unsustainable situation, as companies are being hit by higher prices and not passing these on to customers. This trend is likely to continue into the short term, but should flatten out eventually. Until it does, buyers are advised to be alert to pricing increases and to investigate long-term agreements with suppliers.
Looking to tax relief and government support
While there are obstacles, a combination of trade deals, government backing and recovery incentives mean that there are a number of opportunities that manufacturers should be capitalising on. These include government support to grow exports, solving point of origin and logistics hurdles and helping connect businesses to overseas markets.
Businesses also need to be aware of the latest rules on tax relief. R&D is a good example, as there are a lot of different types of activity that could fit under the umbrella of tax relief in this area.
In addition, the chancellor changed the rules around loss carrybacks in the spring Budget, extending the window of time to claim losses to three years. With tax relief, it’s important to consider how certain decisions could lead to a higher or lower tax bill, so getting advice when exploring these options is beneficial.
While there are challenges still to overcome, the manufacturing industry can be buoyed by recent sector results, as well as policies and approaches designed to soften the impact of last year’s upheavals, while simultaneously supporting further growth and development.
For support in managing today's challenges and planning for the future of the manufacturing industry, get in touch with Oliver Bridge.