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Manufacturing FDs: Driving the recovery

Car makers have emerged as a bright spot in the economy. Richard Crump asks FDs in the sector how they are outperforming manufacturing as a whole

22 Feb 2012

By Richard Crump

Car production line

THE GOVERNMENT'S decision to pin its hopes on the manufacturing industry to lead the UK’s economic recovery is better than mere blind faith, but not by much. Chancellor George Osborne has placed the sector at the heart of many of the government’s policies aimed at rebalancing the economy towards exports and away from the country’s domestic debt-fuelled consumer market. Naturally this puts the emphasis firmly on the performance of the UK’s manufacturers, which account for about 10% of national output.

Latest figures have gone some way to vindicating Osborne’s faith. Hopes that the latest downturn will be short-lived were boosted by figures that show the sector experienced a strong start to 2012, as output grew at the fastest pace in almost a year. The Purchasing Managers’ Index (PMI) survey for January revealed that output increased to 52.1 in January from 49.7 in December on the Markit/CIPS UK manufacturing PMI - any score under 50 represents a contraction - while orders also rose for the first time in seven months.

However, performance has been volatile at best. The outlook at the end of 2011 was much darker than it is now. Output in the last quarter fell at the fastest pace since the height of the financial crisis in 2009, and jobs were cut at the sharpest rate in two years.

John Cridland, director general of the Confederation of British Industry (CBI), is in little doubt about how difficult it will be for the industry to build up a head of steam.

“The watchword continues to be uncertainty. The crisis in the eurozone is still hanging over the UK, threatening future growth,” says Cridland as the CBI revealed sentiment among UK manufacturers took a nosedive at the end of 2011.

Yet one particular area of the industry has emerged as a bright spot in the economy. Motor manufacturers - a once maligned sector of the UK’s industrial economy - weighed in last year with their best performance since the start of the financial crisis in 2008.

The Society of Motor Manufacturers and Traders (SMMT) said that car production in the UK rose by 5.8% in 2011, producing a total of 1.3 million vehicles over the course of the year.

“There is no doubt that as an industry we worked very hard over a long period of time to improve our competitiveness and ensure our facilities are more productive and raise the quality level of what we produce,” says Paul Everitt, chief executive of the SMMT.

Keep it lean

The good news for British motor manufacturers has continued with Jaguar Land Rover reporting that revenues soared by 40.9% to £3.76bn in the final three months of 2011, while the Nissan factory in Sunderland turned out record production numbers in 2011.

But why is the automotive industry succeeding where the wider manufacturing industry continues to struggle? And what, if anything, can manufacturing FDs learn from their car-making counterparts?

Everitt says much of the industry’s success is down to car makers’ lean manufacturing processes.

“It is wildly acknowledged that auto manufacturing sets the benchmark,” he says. “We spend time working with other sectors to share information and approaches. The key strength we have as a sector is that we keep getting better. The notion of continuous improvement is ingrained in the industry.”

Mark Palethorpe, CFO of Cosworth Group - which in 2010 reported a 50% growth in revenue and a 300% year-on-year increase in profit to £4.9m - says the company spends as much as £3m a year on its manufacturing processes.

“We invest in leading-edge technology and buy machines that are a bit more expensive than our competitors but give us more flexibility,” he says. “We look to build that flexibility into our processes.”

That approach can be seen all the way through the motor manufacturing supply chain. Spending £3m on high-end kit compared to profits of £4.9m may seem like a big capital-expenditure investment at a time when the economic environment is tough, but it is money well spent, says Shatish Dasani, CFO of TT Electronics, a global electronics company supplying components to the likes of VW and BMW.

“You need to make the cap-ex to get the cost savings,” Dasani says. “We automate a lot of the production lines. You think ‘where are the people’ but it means things are more accurate and you keep the costs down. Being lean makes you reduce inventory, improve reliability and reduce defects on the line.”

This approach can be seen by how Dasani improved the business operationally by stripping costs out. This was mainly about addressing long-term cost issues and taking tough decisions to close down facilities. Working capital was reduced by dealing with the supply chain, adopting lean manufacturing practices and extending supplier terms, while sharpening debt collection processes. Net debt reduced from more than £120m to £24m at June 2011 through improving working capital, managing cap-ex and proceeds from disposals.

Driving exports

Manufacturing as a whole has struggled to make the most of the weak pound by capitalising on export sales, but according to the SMMT’s figures exports have been the main driver of growth for car makers, with more than 80% of vehicles exported.

By nature, the automotive industry is generally global and demand for its products is increasing globally. There is no reason that other manufacturers cannot tap into similar demand.

“High growth markets are starting to produce motorised consumers and there is demand for premium brands,” says Everitt at the SMMT. “The value is that our product knowledge is understood in these markets and the very Britishness of some brands is known. Even in volume products we are benefiting from the helpful exchange rate.”

Cosworth had its recession in 2006/07 when a number of key contracts were lost. But the company implemented a diversification programme that saw it expand its engineering offering to sectors outside its traditional motorsport market. As a result, Cosworth engineering can now be seen not only in the UK, but in India and the US.

When the recession hit, Cosworth had already been through the dips and hurdles that many companies were just approaching. It had reshaped the business and invested time and money in innovation.

Palethorpe says that one of the things that can be forgotten when the company is expanding is to keep on innovating.

“When you go back to where Cosworth started, innovation was part of the DNA of its founders and that remains in the company’s DNA,” he says.

“We look for new technological trends and the big issues that need fixing. The green agenda is important and fuel economy is important so we apply R&D to the problems that need addressing quickly. That spurs innovation.

“We spend about 10% of our budget on R&D. We have had two years of the toughest business environment but have had R&D spend nearer to 15%.”

Palethorpe also knows the importance of education, and says the company has a responsibility to educate the UK’s future engineers. Having an “engineering team who do what they say they are going to do and do it when they say they’re going to” has allowed the business to build record-breaking engines for Aston Martin, and launch a Subaru that is as quick as a Ferrari.

A strong supply chain

The overall performance of manufacturing in 2011 was understandably hit by supply chain disruptions as a result of the Japanese earthquake and tsunami. This only served to emphasise the importance of a strong supply chain.

Everitt says the idea of a lengthy global supply chain has become less attractive. Transport costs are increasing and many of the perceived benefits from outsourcing to low-cost suppliers in emerging markets have not materialised.

“Extended supply chains are more risky, while wage inflation has accelerated and the quality has not been as good as hoped,” he says.

But the domestic supply chain still needs to be stronger, according to Everitt.

“We have got a lot of tier one manufacturers that operate in the UK but only a small proportion of what they buy stays in the UK,” he says.

“While vehicle manufacturers spent £7bn in the UK, only 36% of that stays here. There is a big opportunity for our industry to capture more value of vehicles made here.”

Flexible friends

As a supplier, Dasani at TT Electronics says one of the benefits they receive by being close to their clients is that they “can work closely with engineers. We can offer flexibility to ups and downs in terms of production.”

“We look to have long-term relationships with our suppliers. We have a large base of local suppliers but we see it as a global supply chain. We source from low-cost countries but we make sure we have a reliable supplier,” he says.

Everitt adds that collaboration among competitors is also key to the sector’s success. Sharing information with competitors seems self-defeating, but it helps create a vibrant industry and that feeds back into the performance of the individual businesses.

“It is very much about how companies that operate in the UK look at how they work together to improve the business proposition in the UK,” he says. “All vehicle manufacturers come together to create a technology road map about how vehicles and technology will be developed, structured and researched. Collaborative investment is part of creating technology for future development.” ■

 

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