By Daniel Hunter

Britain’s manufacturers are stepping up their expenditure on a wider range of more sophisticated investments to determine their business strategies, according to a new report published today by EEF, the manufacturers’ organisation and Lombard Asset Finance.

In addition to investing, on average, £1million annually on plant and machinery, the report shows that companies are increasing essential and complementary investment in ‘intangibles’ such as staff training, recruitment, R&D, software and marketing in order to derive a competitive advantage.

However the report, which will be the first in a series tracking investment trends also shows that, despite the majority of companies saying they plan to maintain or increase their expenditure on new plant and machinery in the next two years, this is only at moderate levels and, mainly to replace obsolete technology.

A significant number of companies also continue to face hurdles to raising levels of investment citing uncertain demand and, for smaller companies in particular, access to internal and external finance.

EEF Chief Economist Ms Lee Hopley, said:
“Making progress towards better balanced growth remains a top economic priority and investment by manufacturers is and, must continue to be, a contributor to this process. Conditions have been aligning to support more investment with companies reporting revenue growth, improved profitability and improving confidence. Manufacturers are also facing increasingly complex decisions on how to spread their resource across a range of business priorities.

“However, we’re not yet seeing the step change in investment plans we need. Plans continue to be held back by uncertainty, resources and factors that tilt the decision in favour of other locations. The planned growth in investment in a range of business areas is welcome, but industry and government policies need to be striving for more.”

Richard Hemsley, Managing Director, Lombard, said:
“Following a sharp decline in total fixed capital growth investment during the recession, it is great to see a more positive picture now emerging. Although it appears that manufacturers are taking a somewhat cautious approach, they are also feeling bolstered by a growing confidence in the economic climate.

According to EEF, raising the UK’s level of investment will be essential in tackling its longstanding position as an underperformer compared to competitors. In terms of the share of GDP accounted for by capital expenditure, despite levels falling across most of the developed world the UK share stood at 13% in 2013 compared to the EU28 and OECD average of 18%.

Investment in plant and machinery was undertaken by over 95% of manufacturers in the survey in the past two years, with investment levels averaging £1m. Looking forward, one in three companies are planning to invest the same on plant and machinery over the next two years as they did in the previous two, although these spending plans are moderate in scale.

A better economic outlook, the need to replace equipment and expansion into new areas of activity are the driver of greater investment. But, with half the companies surveyed not planning to scale up their expenditure on plant and machinery, this raises fears as to whether the recent rise in investment can be sustained.

However, the survey shows 70% of companies plan to increase their investment in staff training and recruitment, with one in six targeting a significant increase. Furthermore, three in five companies plan to increase expenditure on marketing and branding and a similar proportion on R&D, highlighting the need for government to continue to support applied research . The increasing role of intangible investment is highlighted by the fact 60% of companies plan to increase investment in three or more categories.

Investment in these business priorities is becoming more important for more than half the companies in our survey, but the value of plant and machinery investment is greater for a balance of 25% manufacturers.

Where companies were cautious about investing, uncertainty over demand was cited by one in three companies, with a similar number citing constraints on internal finance. One in eight companies identified the availability of external finance, the majority of whom were SMEs. According to EEF, cracking the long-standing challenge of accelerating investment growth will require concerted and continuous efforts to bring down the two main hurdles to more ambitious investment plans, confidence and cash constraints.

While the primary responsibility for investment strategies sits with companies, government has a key role to play in setting the environment in which these decisions are made. While some supportive measures have been introduced, such as the extension of the R&D tax credit and temporary increase in the Annual Investment Allowance, government can go further by implementing the following recommendations:

1. Setting out a clear vision for the economy towards 2020 and the policy and spending priorities that will achieve cross government growth objectives

2. Increasing the diversity of the finance landscape by creating a more competitive and dynamic banking environment, especially for SMEs

3. Ensuring the British Business Bank has a long term future and is able to invest in new and innovative funding options such as patent growth capital, mezzanine finance and those supporting supply chain expenditure.

4. Implement a consultation on the UK capital allowance regime to ensure there is a competitive and stable regime in place by 2016

5. Maintain funding for the Technology Strategy Board in real terms over the next spending review period

6. Increase funding for the Catapult Centres

7. Maintain the stable and broad definition of qualifying expenditure for the R&D tax credit

Do you run a manufacturing firm? Are you stepping up your investment? You can email your reactions to editor@freshbusinessthinking.com

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