Shannon Murphy, assistant head of risk underwriting and manufacturing expert at trade credit insurer Euler Hermes, voices client concerns about payments risk in the sector.
Businesses across the manufacturing sector have been upbeat throughout 2018, with many reporting healthy order books up to the end of this year. Many are also citing the improvements in Britain’s digital infrastructure and the promise of further advances, specifically through 5G, artificial intelligence (AI) and automation, as reasons for optimism.
On top of this, firms have also benefited from greater demand from abroad, driven by the low exchange rate and healthy global economic growth, which is set to hit 3.3% this year compared with 3.1% in 2017. According to KPMG’s latest outlook report, 75% of the country’s manufacturing CEOs feel confident about the growth prospects for the UK in general.
But 2018 has still been a difficult year for the UK’s manufacturing firms, with growth slowing considerably since January and output levels falling sharply over the last three months, according to the CBI’s latest survey.
The shadow of Brexit will loom ever larger large next year, which raises a number of issues for manufacturers. The threat of a ‘no deal’ is anticipated to have a big impact on the value of sterling, which will see input costs rise further. Add to this the issue of foreign export partners seeking new markets to source their goods and services, and firms are understandably concerned that their order books and turnovers will begin to feel the pinch.
We already see some evidence of this in late payment claims from our clients in the sector, which are up by 20% on the same period last year. We anticipate the overdue payments trend will continue in 2019, which will lead to a greater strain on a firm’s cash flow and working capital and could lead to a tightening of its credit terms for goods supplied. Finance teams will need to pay close attention to these issues.
Looking at UK manufacturing as a whole, firms are adopting a wait-and-see approach and have kept the vast majority of investment decisions on hold for most of this year. It’s also becoming clear that most UK manufacturers, in particular small businesses with integrated supply chains such as those in aerospace, chemicals and food production, have done little contingency planning for life outside of the EU. With manufactured goods crossing the channel multiple times in the production process, any tariffs could significantly increase costs, and many have no UK-based supply chain to fall back on.
The automotive industry - the jewel in the crown of the UK’s manufacturing sector - is expected to be hit particularly hard. Our forecasts show insolvency levels will increase by up to five per cent this year, which is largely due to waning consumer demand and falling diesel sales. Given its integrated supply chain, the industry will feel the bite of rising input costs more than most and is certainly not keeping schtum about the effects a ‘no deal’ Brexit could potentially have. Toyota recently stated that a hard Brexit would temporarily halt output at its plant in the East Midlands. Nearly 150,000 cars were produced at the site last year, 90% of which were exported to the EU.
Uncertainty is having a big impact on the sector. Firms can only have confidence in their investment decisions if they have clarity on the UK’s future relationship with the bloc, particularly in terms of trade tariffs and maintaining the ‘just-in-time’ supply chain across borders.