By Marcus Leach

The ongoing flow of bad news from key economies and markets and the lack of access to capital will make 2012 a very difficult year for the majority of the manufacturing sector.

However, government initiatives to promote innovation and export opportunities in emerging markets and growth sectors like the automotive industry will provide some rays of hope; according to expectations for the UK manufacturing sector in 2012 from accountants and business advisors BDO LLP.

“After 30 years of decline there is now widespread consensus that a strong and vibrant manufacturing sector is fundamental to the UK economy. The task of rebuilding the manufacturing sector will not be easy and we must accept that it may take years. However, a renewed focus on manufacturing is vital for growth," Tom Lawton, Head of Manufacturing at BDO, said.

“In 2012 we expect that the Government will continue to focus attention on the rebuilding of manufacturing. But in order to emphasise the importance of this sector to economic recovery and to enable long term sustained growth the Government must develop a clearer and more explicit medium to long-term framework and strategy for the sector.”

BDO LLP’s expectations for UK manufacturing sector

Continued economic turmoil in international markets and lack of capital will negatively impact growth

BDO expects that the combination of a continued reduction in demand from the UK’s largest markets, as they battle through political and economic turmoil, and a lack of access to capital will make 2012 a very challenging year for most manufacturers. Despite good intentions by banks and the Government, the huge pressures on sovereign debt, bank debt and bank balance sheets will continue to make access to growth capital very difficult, particularly for SMEs.

2011 was a relatively good year for manufacturing but the latest UK and global PMI indices are showing a significant deterioration in confidence in the manufacturing sector. Manufacturers will need to keep a very careful watch on cash flow, working capital and funding facilities in 2012.

Positive investment and recruitment spending unlikely, particularly by SME’s

Following a sustained fall in the balance of firms taking on new workers throughout 2011, from a high of 30% in Q1 to just 5% in Q4 and the continuing difficult economic backdrop, BDO expects to see little positive recruitment through 2012 and anticipates that manufacturers in certain sectors may be forced to shed labour to balance the books in 2012.

While some larger companies such as Caterpillar, JCB and Michelin will continue to invest in R&D in 2012, smaller firms will need reassurance to invest. A recent CBI survey showed that SME firms were planning to cut spending on plant and equipment next year and the number planning to merely invest in replacing existing capital in 2012 was at the highest level (58%) since the survey began in 1988.

Firms should continue to invest in innovation and access important government initiatives

In 2011 the Government announced a number of promising initiatives to spur innovation in the UK. These include the reform of the R&D tax credit system, an increase in the tax relief from £200 to £225 for each £100 of R&D activity, the new “patent box” scheme reducing the rate of corporation tax on income derived from patents to 10%, and a £125m fund to encourage growth in established UK advanced manufacturing supply sectors such as aerospace, automotive and chemicals.

The key to unlocking the full potential of UK innovation in 2012 lies with helping manufacturers to understand and access the raft of initiatives. In the shorter-term, BDO would urge companies to increase their awareness of new government innovation initiatives and to use the various support schemes available to them.

Exports to be a vital lifeline compensating for low demand in home market

The UK provides a relatively small market for manufacturers, meaning exporting is becoming ever more important. In 2012, despite economic turmoil, Europe and the USA will continue to be foundation markets, but companies looking for significant new market opportunities should focus on the rapidly emerging giants (China, India and Brazil) in addition to looking towards the fast developing new emerging markets such as the “CIVETS” (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa).

Automotive renaissance to fuel manufacturing sector

The motor industry is predicted to register an 11% rise overall in output in 2011 and expects modest growth of 4% in 2012. Despite wider economic gloom, the focus on quality products is expected to contribute to a continued bounce back making it a core foundation sector for UK manufacturing in 2012.

As the UK automotive industry supports a large and mostly UK-based supply chain, this continuing good news should help underpin many UK manufacturing order books through 2012. Jaguar Land Rover, Aston Martin and Lotus expect their export success in 2011 to continue through the year. In addition, Nissan UK plans to build on its export success with the start of production on the LEAF electric car from 2013 onwards.

Despite hopes for a slight ease, input prices will continue to be volatile

Commodity prices are finally showing some signs of balance or reduction, which should ease margin pressures for manufacturers. In November 2011, manufacturers reported lower costs of certain commodities. In addition, the problems in the US and Europe and the slight slowdown in the growth of the emerging giants may slow the demand for commodities and energy in 2012.

However, whilst 2012 may show marginally more stability than 2011, demand and pricing for commodities and energy is likely to remain volatile. A focus on sustainability as a business tool to redesign manufacturing processes to become more resource and energy efficient will be important for manufacturers in the coming year.

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