By Daniel Hunter

Global manufacturing executives rank the UK as one of the top destinations for future profit growth, ahead of established manufacturing economies such as Japan and Germany, as well as emerging economies like India and Brazil.

KPMG’s 4th annual Global Manufacturing Outlook, which surveyed 335 executives globally, also reveals that companies are increasingly looking to the UK to provide key skills and resources in the supply chain, with the UK being the third most popular destination for increased sourcing.

Asked where they expect to derive the majority of their profit growth from over the next two years, the majority of respondents named the US (40%) and China (27%), followed by the UK (14%) Brazil (12%), Japan (12%) and Germany (11%).

“There are a number of things that make the United Kingdom attractive to foreign investors. We have a relatively low corporate tax rate and our legal system provides good IP protection for businesses trading in the UK," Stephen Cooper, KPMG UK Head of Industrial Manufacturing, commented.

"The latter may not be said with the same degree of confidence for a number of other emerging economies. In addition, over the past few years, the weak pound has made UK goods relatively cheaper in the global marketplace. These advantages have contributed to the year on year increase in exports since 2009.”

The survey also reveals that the UK is the top three most popular sourcing destinations. Some 16% of respondents said they expect to source more in the UK, higher than Germany, India and Brazil. China and the US still lead, with global manufacturers seeking to increase sourcing in those countries by 34% and 37% respectively.

Of those who expect to increasingly source from the UK, 92% said this would involve research and development (R&D) and 81% said the investment would include product design and development. The majority of respondents said the goods would involve significant intellectual property (75%).

In addition, when asked what the most important factors determining the geographic location of R&D investment were, unsurprisingly global companies cited IP rights protection and financing options as primary concerns. The availability of skilled talent (33%) was more than twice as important as government and tax incentives (15%).

According to the report, the top strategic priority for global manufacturing companies was reducing cost structure, ahead of sales growth. When asked about which priority areas of cost-control they would be pursuing, 40% of global companies and 45% of UK manufacturers cited reducing labour force costs.

“There is a tension between a desire to cut labour force costs and maintaining the UK’s strength in high end manufacturing. Technological innovations in robotics could provide the opportunity to drive labour costs down, while maintaining high quality output," Stephen continued.

"Yet, the UK lags behind other counties in robotics, using just 622 robots per 10,000 workers, half that of Italy and Germany.” (Source: International Federation of Robotics)

The report found that, in spite of cost pressures, investment in R&D is rising. 27% of global companies will spend 4-5% of their revenue on R&D, an increase in ten percentage points in the number of global companies spending this amount over the last two years. Moreover, the number of companies spending little to nothing on R&D over the past two years has more than halved, with only 13% projecting to spend 0-1% of their revenue on R&D in the future. At the higher end of R&D spend where companies are committing more than 6% of their revenue on R&D; more UK manufacturers (19%) have made this higher level of commitment than their global counterparts (15%).

In addition, 51% of global manufacturing companies said partnerships rather than in-house efforts will characterise the future of innovation, reflecting that the supply chain will increasingly be at the forefront of driving innovation.

“It is encouraging to see supply chains play a more active role in innovation. Yet, managing supplier performance remains a prominent concern, with half of UK and global manufacturers saying the reliability, quality and risk of suppliers was their top supply chain challenge," Cooper added.

"For instance, in the automotive sector, prior to a product launch, manufacturers must audit the readiness of suppliers to meet lead times and quality standards in time for launch deadlines. Failure to do so may incur both severe reputational and financial costs.

“An emerging issue is the illicit use of conflict minerals in the supply chain. SEC registrants or suppliers to SEC registrants will soon be required to verify whether their materials are ethically sourced. Yet this may be impeded by the lack of supply chain visibility, with half of those surveyed having only limited Tier 1 supplier visibility, but not beyond.

“Despite challenging conditions faced by UK manufacturers, it is encouraging that global markets are increasing their focus on the UK for growth in sales, profit and sourcing. The UK has signalled that it is ‘Open for Business’."

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