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While the pandemic and the UK’s new trade relationship with the EU remain clear challenges for manufacturers in 2021, new technologies and investment from the government also present potential for growth.
In this article we will explore the challenges and opportunities the UK manufacturing sector can expect to see in 2021.
Key challengesThe lingering impact of the pandemic
According to research by Make UK and business advisory firm BDO, the disruption caused by the pandemic saw the UK’s manufacturing sector suffer a 10% fall in output in 2020.
While things started to improve towards the end of last year, with more firms starting to bring back staff and seeking to operate closer to capacity, the latest national lockdown imposed at the start of 2021 has reversed some of this recovery.
Make UK’s latest Manufacturing report, published in early February, revealed that 44% of manufacturers currently have no staff furloughed, fewer than the report’s previous publication in late October when it was just over half.
The report reads:
‘The latest results report the number of manufacturers that have furloughed staff has increased slightly since the end of last year.
‘Now, 44.3% of manufacturers have no workers furloughed whilst there has been a marginal rise in the share of manufacturers furloughing more than three-quarters of their workforce, emphasising the impact the longevity of the pandemic has had on business activity.’
On a more positive note, the same report also shows that over half the firms surveyed now believe that they will achieve full operating levels by the end of 2021, with only 6.5% of manufacturers planning further redundancies in the next six months.
The collapse of trade with the EU
Another major challenge facing UK manufacturers in 2021 is the apparent collapse in demand for UK exports from the EU.
Recent data published by the Office for National Statistics (ONS) revealed that UK goods exports to the EU plunged a record 40.7% in January, the first month of trade under the new UK-EU post-Brexit trade agreement.
While Prime Minister Boris Johnson promised the deal would allow for ‘friction-free’ trade between the UK and EU, firms have found it to be anything but, as they face severe disruption due to increased paperwork and delays at ports.
Make UK highlighted the issue in its latest Manufacturing Monitor report, warning:
‘Our new trade deal with the EU has resulted in a major downgrade from the status quo of frictionless trade as manufacturers now face up to the cost of bureaucracy resulting in increased lead times and a breakdown of some customer-supplier relationships across borders.’
Some business leaders have also warned that the new barriers to trade are likely to result in EU supply chains ‘permanently restructure’ away from the UK.
Potential opportunitiesSuper deductible tax regime
In his Budget statement early in March, Chancellor Rishi Sunak outlined a support package for the UK’s economic recovery.
A key part of this and perhaps the most impactful for the manufacturing sector was the announcement of his new ‘super deduction’ tax regime to encourage investment in the UK.
From 1 April 2021 until 31 March 2023, firms investing in new machinery and equipment will be offset up to 130% of the cost against their tax, this will allow companies to cut their tax bill by 25% for every £1 they invest.
The supertax deduction presents a major opportunity for UK manufacturers to invest in new technologies which will power their long-term recovery.
Industry 4.0 and the rise of automation
UK manufacturers lag well behind their counterparts in countries such as Germany, Sweden, and Japan when it comes to investing in digital and green technologies. But the new supertax deduction provides a great opportunity for firms to catch up.
According to Make UK, up to 80% of companies surveyed seek to begin using Industrial Digital Technologies (IDTs) within their business by 2025.
Automation and AI are set to play a major part in Industry 4.0, with smarter machines set to boost productivity but also drastically change human-machine interaction and have a major impact on the job roles necessary within the manufacturing sector.
Increased investment in robotics will allow businesses to move employees into more skilled roles, and it will be vital for firms to invest in the development of basic digital skills for their workforce as the interactions between humans and technology become increasingly complex.
Selling directly to consumers
As a consequence of the pandemic closing most high street shops, many manufacturers have experimented with switching to a direct-to-consumer (D2C) model over the past year.
But while shops are expected to begin reopening in the coming months, businesses may find that the D2C model might be worth sticking with.
According to a report by Barclays, D2C sales were worth £96bn for the UK manufacturing sector in 2020 and this is estimated to provide a £24bn boost by 2023.
The report suggests that over 50% of consumers will now choose to purchase directly from manufacturers as they believe they can get a lower price and better customer service.
With these new-found shopping habits likely to remain in place after the pandemic, the D2C business model could prove to be a major avenue for future growth for manufacturers willing to invest in building a team to handle direct sales.
Seeking new markets to expand
In light of the disruption of trade between the UK and EU under the post-Brexit trade relationship, it would be prudent for UK manufacturers to more seriously explore other markets for their products.
Countries such as China and India have seen their middle-class populations swell in size in recent years, and with this comes a huge rise in demand for high-quality products such as those manufactured in the UK.
However, while this could open up the potential for massive overseas growth, the profitability of such ventures will depend on the UK’s government’s success in negotiating new free-trade agreements.
Nonetheless, manufacturers in the UK should keep an eye on trade deal developments to see if any new markets could provide new opportunities for growth in the future.
The last 12 months have been a turbulent time for the manufacturing industry and there is no doubt more challenges lie ahead. However, 2020 has also proved that the sector is more adaptable than previously thought.
Embracing change will be a key theme for UK manufacturers in 2021, and there are clear opportunities for growth for those companies which are most willing to invest and prepare for a post-pandemic world.
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